Mabuhay Contractor (Mechanical Sub-contractor) (Complainant)

– versus –
Maharlika Construction (Gen. Contractor) (Respondent)

Case Study

I. Summary

Maharlika Construction (Gen. Contractor) hired Mabuhay Contractor as its subcontractor in a

project that started in July 2015. In November of the same year, the owner defaulted on payments
and the project was terminated so Maharlika advised all its subcontractors, including Mabuhay
Contractors, to cease work immediately. Mabuhay Contractor billed ₱2M for work done. Maharlika
Construction submitted a bill for ₱32M to the owners for work done, which included the ₱2M owed
to Mabuhay. The general contractor received no payment from the owners and in turn made no
payment to the mechanical subcontractor. Maharlika Construction asserted that it was stipulated
in their contract that they would not pay unless they received payment from the owner. Mabuhay.
Subsequently, Mabuhay filed a claim for a mechanic's lien against the project, but it was found
inferior and subordinate to another lien against the project by a banking organization in the amount
of ₱21M.

II. Point of View

For the purposes of this case study, we will be taking the point of view of Mabuhay Contractor.

III. Statement of the Problem

How can Mabuhay Contractor mitigate its loss following the closure of the project?

IV. Alternative Courses of Action (ACAs)

ACA 1: Drop the complaint against Maharlika Construction and accept that as per Articles 15 and 18
of its contract, they won’t receive payment since Maharlika Construction did not receive payment
from the owners of the project under the general contract as well.

Advantages Disadvantages

 Mabuhay Contractor will no longer  Mabuhay Contractor will not be able

need to produce further money to to recuperate from the P2M loss from
pursue legal charges against Maharlika the job they already completed.
Construction.
 Mabuhay Contractor will be able to
avoid long and tedious legal
proceedings which can further deplete
the resources of the company and
affect the company reputation.
 ACA 2: Press charges against Maharlika Construction and leverage on other clauses of their contract.
In the absence of a contingent payment clause, Mabuhay Contractor can pitch on unjust
enrichment. Furthermore, Mabuhay Contractor can cite that pay-if-paid contract clauses have been
unenforceable in other places such as in California when the Supreme Court ruled in William R. Clark
Corp. v. Safeco Ins. Co. (1997) 15 Cal. 4th 882 in 1997.

Advantages Disadvantages

 Mabuhay Contractor will have a  Mabuhay Contractor will need to pay

chance to be paid for the work they
have done for the project.
 If they win the case against Maharlika
Construction, the case can be a
landmark case regarding the
protection of subcontractors being
paid by general contractors regardless
of owner’s payment.
 If they win the case, Mabuhay
Construction will get the absolute or
part of the P2M they are claiming for
the work done on the project.
legal fees and expenses to press
charges against Maharlika
Construction.
 Mabuhay Contractor need to be ready
for a long and dragging case which can
affect not only its financial position,
but also its company resources and
reputation.
 If they lose the case, they will have a
far greater loss than just the P2M they
are claiming for.

ACA 3: Sue the owner of the project because it was the owner who failed on their primary
obligation to pay the general contractor, who in turn is supposed to pay Mabuhay Contractor.

Advantages Disadvantages

 Mabuhay Contractor will have a  Mabuhay Contractor will need to pay

chance to be paid for the work they legal fees and expenses to press
have done for the project. charges against the owners.
 The owners were determined to be
insolvent (inability to pay debts) so
they might not be able to pay
Mabuhay Construction even if they
win the case.

V. Recommendation

Based on the alternative courses of action, we recommend ACA 2, that is for Mabuhay Contractor
to press charges against Maharlika Construction. They should carefully study their contract with
Maharlika Construction and leverage on other clauses. There could be contingent payment clauses
 wherein the obligation of the general contractor to pay the subcontractors are stipulated. In the
absence of a contingent payment clause, Mabuhay Contractor can pitch on unjust enrichment.
Furthermore, Mabuhay Contractor can cite that pay-if-paid contract clauses have been
unenforceable in other places such as in California when the Supreme Court ruled in William R. Clark
Corp. v. Safeco Ins. Co. (1997) 15 Cal. 4th 882 in 1997. In this case, the Court reasoned that enforcing
such a clause would indirectly forfeit or waive a Subcontractor's lien rights; which is incompatible
with California Civil Code §3262's provision governing waiver of lien rights (Kiefer, 2018).1 Hence,
these clauses are unenforceable.

VI. Conclusion

This case serves as a learning point not only for subcontractors, but to the general contactor and
owners of the project as well. On the part of the subcontractor, it should not blindly enter into a
project without security. It should first conduct its due diligence in checking the credit score of the
owners of the project, as well as the reputation of the general contractor. It should also not blindly
accept a contract where there is no contingency clause about the payment for completed work it
has done on a certain project. It should not bear all the risk of unprecedented events such as default
payments of owners to subcontractors. On the part of the general contractor, it should also conduct
its due diligence in checking the credit score of the owners of a project before entering into an
agreement. It should secure that the owner has the ability to pay the project as a whole. If it found
that the owner of a project do not have the capacity to pay, then it should not accept the project.
It should also be careful when entering into contracts with subcontractors, especially on the
wordings of the stipulations within the contract. On the part of the owner, it should at least get
insurance on the projects for security in case of unprecedented unfortunate events. Overall, each
party should play its part and fulfill its responsibility when entering into agreements.

VII. Reference

Kiefer, M. (2018). Pay-If-Paid vs Pay-When-Paid. Castro and Associates. Retrieved from

https://www.defectlaw.com/blog/2018/04/pay-if-paid-vs-pay-when-paid.shtml

1
Kiefer, M. (2018). Pay-If-Paid vs Pay-When-Paid. Castro and Associates. Retrieved from
https://www.defectlaw.com/blog/2018/04/pay-if-paid-vs-pay-when-paid.shtml