The difficulties of enforcing a poll automation contract can be gleaned from a consideration of the provisions on damages in the Smartmatic-TIM contract with Comelec. Said contract provides for a “performance security” (in effect, a bond) of 5% of the value of the contract, and also a cap on liquidated damages at 10% of the value of the contract. On the face of it, it looks like the Smartmatic-TIM joint venture can easily and readily make a clear guaranteed profit so long as their gross profit margin is more than 10% of the contract amount.
The reality may be a bit more complex.
The Smartmatic-TIM joint venture (known as the “Provider”) is liable for liquidated and other damages.
Liquidated damages are mentioned in Art. 11.1.1 in the event of default, but are to be computed on a daily basis on the basis of “delay in delivery.” Such damages are subject to a cap of not more than 10% of the total value of the contract. In other words, Smartmatic-TIM may “lose back” to Comelec 10% of what it would have received under the contract.
In case of extreme delay in delivery, the contract also provides for Comelec “to rescind” the contract. Rescission ordinarily means that Smartmatic-TIM would have to return all monies to Comelec, but it seems that the contract cap of 10% would prevail because of the way the contract is written.
Liability imposed by law
The contact also provides for liability as provided by law (and not by stipulation) in case Smartmatic-TIM were to commit an administrative or penal offense. Art. 11.1.2.
But what happens if, for example, the machines delivered were faulty owing to incompetence of Smartmatic-TIM and not something due to delay in delivery, administrative violation, or criminal act? Would Smartmatic-TIM be liable?
It is submitted that Smartmatic-TIM would be liable, and that the 10% cap in Art. 11.1.1 does not apply in this situation. The reason is based on the application of Art. 2228 of the Civil Code, which states:
When the breach of the contract … is not the one contemplated by the parties in agreeing upon the liquidated damages, the law shall determine the measure of damages, and not the stipulation.
In its presentations to Comelec, there is no suggestion by Smartmatic-TIM that somehow there would be any risk that it might breach the contract because of incompetence. In other words, it is not a situation “contemplated by the parties,” especially Comelec, when it agreed to the liquidated damages provision of the contract. In short, a failure of elections because of an inherent defect in the software or hardware provided by Smartmatic-TIM subjects the latter to liability by law. Comelec may recover on actual damages, moral damages, and exemplary damages.
Of course, if harm were caused not by incompetence on the part of Smartmatic-TIM but by Comelec, the former would not be liable. Thus, decisions made by Comelec at various points in the process of a poll automation exercise may cause problems for which Smartmatic-TIM would not be responsible. It is difficult to imagine what can go wrong, but certainly, the fact that poll automation is new to the electorate suggests the likelihood of the working of Murphy’s Law (“If something can go wrong, it will”). Murphy’s Law is of course another reason why there was a pilot test condition precedent embedded in the poll automation law (RA 9369). Those who argue that the pilot test is not or should not be a requirement for full nationwide automation are perhaps too sanguine about Murphy’s Law.
Joint or solidary liability of the principals?
A further provision in the contract makes the co-venturers Smarmatic and TIM solidarily liable with the Smartmatic-TIM joint venture in cases of breach and other defaults. Art. 24.
The fact that the principals in the joint venture (Smartmatic and TIM) are solidarily liable with the joint venture itself means that Comelec should have some way of attaching any of their assets in case of damages. That may be difficult in the case of a foreign corporation such as Smartmatic. Difficulty would also arise if the local co-venturer does not have sufficient assets to make good on damages.
Relevant contract stipulations
PENALTIES AND CHARGES
11.1 In the event of any default or any violation materially affecting the implementation of the Project, by the PROVIDER, COMELEC shall:
11.1.1 In the event of any default, deduct for every day of delay in delivery after the stipulated period,
liquidated damages in the amount of one-tenth of one per centum (1/10 of 0.01) of the total value of this Contract, or in the event of partial fulfillment of this Contract, of the total value of the unfulfilled portion thereof.
Such amount shall be deducted from any money due or which may become due to the PROVIDER, or
collected from any securities or warranties posted by the PROVIDER, the Performance Security provided for in Article 8.1 above included, whichever is convenient to COMELEC. In no case shall the total amount of the liquidated damages under this Contract exceed 10% of the Contract Amount. Once the cumulative amount of liquidated damages reaches said 10%) COMELEC may rescind this Contract;
11.1.2 In case the violation constitutes an administrative or penal offense and in addition to
Article 11.1.1 above, impose such other penalties or sanctions as may be prescribed under Republic Act No. 9184 (Government Procurement Reform Act) and other applicable laws.
11.2 The penalties for non-performance or incomplete service are provided for in the Service Level Agreement, attached hereto as Annex “N”.
8.1 Within three (3) days from receipt by the PROVIDER of the formal Notice of Award from COMELEC, the PROVIDER shall furnish COMELEC with a Performance Security in an amount equivalent to five percent (5%) of the Contract Amount; which Performance Security as of this date has been duly received by COMELEC.
24.1 TIM and SMARTMATIC bind themselves jointly and severally for all the obligations and all liabilities that might arise out of this Contract, and so the PROVIDER, TIM and SMARTMATIC commit to be solidarily liable individually or in combination for the entire obligation.