R.G. Palanca Construction, Inc. v. Solco

FIRST DIVISION

[G.R. No. 168284. September 2, 2015.]

R.G. PALANCA CONSTRUCTION, INC., petitioner, vs. DR. FRANCIS C. SOLCO, respondent.

NOTICE

Sirs/Mesdames :

Please take notice that the Court, First Division, issued a Resolution datedSeptember 2, 2015 which reads as follows:

"G.R. No. 168284 — R.G. PALANCA CONSTRUCTION, INC., Petitioner, v. DR. FRANCIS C. SOLCO, Respondent.

In this collection suit, the petitioner — the contractor of the residential house of the respondent — has sued the latter to recover the costs of additional works. The Regional Trial Court (RTC) in Quezon City (Branch 226) allowed recovery by the petitioner, directing him to pay P950,831.00, plus interest of 12% per annum from the filing of the complaint, and P100,000.00 as attorney's fees. 1 On appeal, the Court of Appeals (CA) reversed, and instead ordered the petitioner to pay to him liquidated damages of P427,000.00. The petitioner now seeks the review and reversal of the judgment of the CA promulgated on February 28, 2005. 2

The CA narrated the antecedents in its assailed judgment, as follows:

On September 15, 1992, appellee R.G. Palanca Construction, Incorporated, represented by its President, Romeo G. Palanca, and appellant Dr. Francis Solco entered into a contract for the construction of the latter's two-storey residence at Ayala Heights Subdivision, Balara, Quezon City for and in consideration of the amount of P7,000,000.00.

As per contract stipulation, appellant made a downpayment equivalent to 20% of the contract price on September 15, 1992. Thereafter, construction of the proposed two-storey residence immediately commenced. In the course of the construction, there were additional construction works not specified in the plan but were nonetheless agreed upon by the parties. As a result, the parties agreed to extend the period of construction from 150 days to 180 days.

As was the practice, appellant paid in installments the balance of the contract price, the amount of which depends on the scope of work accomplished every after installment period. Palanca would personally furnish appellant a billing statement and thereafter, appellant would issue a check in satisfaction of (sic) thereof. To evidence receipt of the payment, appellee would sign a cash voucher prepared by appellant.

On May 15, 1993, appellee completed the construction of the residence and delivered the same to appellant. For his part, appellant had paid a total amount of P7,147,216.05 from September 17, 1992 to June 1, 1993. The last two payments made by appellant were on May 19 and June 1, 1993 in the amounts of P200,000.00 and P282,117.88, respectively. As was the practice, Palanca signed on June 1, 1993 a cash voucher, marked as Exhibit "2," acknowledging full payment for the construction of appellant's residence.

About a year thereafter, appellee demanded the satisfaction of the additional construction works. Palanca tried to contact appellant personally but appellant was always unavailable. Thus, on October 1, 1997, appellee instituted a collection suit against appellant, asking the trial court to order appellant to pay appellee the amount of P950,831.00 representing the alleged unpaid balance on the additional construction works plus interests and attorney's fees. The amount was based on exhibit "C," which is a two-page listing of the alleged additional works and their corresponding values offset by payments made by appellant. 3

In the decision rendered on August 1, 2000, the RTC found that although there had been no written agreement on the additional works done by the plaintiff (petitioner), as required by their construction agreement, the parties had a verbal agreement to that effect; that such verbal agreement was valid because contracts were binding on the parties in whatever form they were entered into; and that based on the direct and unequivocal testimonies of the petitioner's witnesses and Architect Henry Sun Lu, as well as of the respondent himself, the latter should pay the petitioner the cost of the additional works. Accordingly, the RTC disposed: cEaSHC

WHEREFORE, judgment is hereby rendered against the defendant and in favor of the plaintiff for the amounts of money claimed under the Complaint. Defendant is ordered to pay plaintiff the following:

1. Nine Hundred Fifty Thousand Eight Hundred Thirty-One (P950,831.00) Pesos as principal amount of indebtedness worth (sic) interest of 12% per annum computed from the date of the filing of this Complaint;

2. One Hundred Thousand (P100,000.00) Pesos as (sic) and for Attorney's Fees;

3. The cost of the suit.

SO ORDERED. 4

On appeal, the CA reversed the RTC, 5 decreeing:

WHEREFORE, the instant appeal is GRANTED. The August 1, 2000 Decision of the Regional Trial Court, Branch 226, Quezon City in Civil Case No. Q97-32332 is REVERSED and SET ASIDE AND A NEW ONE IS RENDERED ORDERING APPELLEE TO PAY APPELLANT LIQUIDATED DAMAGES IN THE AMOUNT OF P427,000.00.

SO ORDERED. 6

The CA observed that Exhibit 2, the cash voucher, showed the petitioner's receipt of the full amount of the contract price; that the cash voucher, albeit signed in blank, was valid, and constituted evidence of the extinguishment of the respondent's obligation; that with the full payment having been thus acknowledged, the effect under the law was the extinguishment of the respondent's obligation; that it was undisputed that the construction of the respondent's house had a 61-day delay, which was over and beyond the 180-day modified period the parties had agreed upon; and that the petitioner was liable for liquidated damages for that reason.

Issues

The petitioner contends that the CA erred in ruling in favor of the respondent; and assails the award of liquidated damages.

Ruling of the Court

The appeal is partly meritorious.

The Court notes that both the RTC and the CA did not correctly appreciate the import of the parties' construction agreement, 7 which reveals that the parties agreed to a fixed lump sum contract. In a fixed lump sum contract, the project owner agrees to pay to the contractor a specified amount for completing the scope of work involving a variety of unspecified items of work without requiring a cost breakdown. 8 This arrangement was evident from Article 1.0 and paragraph 3.01, Article 3.0 of the construction agreement, viz.: IAETDc

ARTICLE 1.0: SCOPE OF THE WORK

1.01 The Contractor, in consideration of the payment to be made by the Owner to the Contractor of the sum of money hereinafter named, agrees to furnish all labor, materials, equipment, plants, tools, supervisions and other facilities and the satisfactory and faithful performance of all the work necessary to commence and complete the Project, ready for use (except the works to be done by other parties as are specifically excluded herefrom by agreement of the parties hereto) as shown on the Drawings and described in the Specifications, instructions and other related documents, as prepared by HENRISON T. LU & ASSOCIATES, Architects, acting as and in these Contract Documents entitled the Architect.

xxx xxx xxx

ARTICLE 3.0: THE CONTRACT AMOUNT

3.01 The Owner agrees that for and in consideration of the faithful performance by the Contractors of this Contract, he shall pay to the Contractor, in manner provided hereinafter, the amount of exactly PESOS: SEVEN MILLION ONLY (P7,000,000.00). 9

With the construction agreement being a lump sum contract, any demand for payment of the additional costs, as well as of the increase in price for additional work resulting from a change in the original plans and specifications, was governed by Article 1724 of the Civil Code, 10 under which the contractor could recover the cost of additional works arising from changes in the scope of work provided: (1) there was a written authority from the developer or project owner ordering or allowing the written changes; and (2) there was a written agreement of the parties on the increase in price or costs due to the change in work or design modification. 11 The absence of either condition bars the recovery of the additional costs. 12

Inasmuch as laws are deemed incorporated in all contracts, 13 Article 1724 should be read as incorporated in the fixed lump sum contract of the parties. It is notable, too, that in this case the requirement of the agreement on the additional works was itself written in paragraph 3.03 of the construction agreement, viz.:

Article 3.0: THE CONTRACT AMOUNT

xxx xxx xxx

3.03 Should the Owner require the Contractor to perform work over and above that required by this Agreement, the additional cost shall be added to the Contract Amount and, likewise, should he be ordered to omit work as required by this agreement, the cost of work omitted shall be deducted from the Contract Amount. In either case, the cost of additions or reductions shall previously be mutually agreed upon in writing by both Owner and Contractor upon recommendation of the Architect before execution. 14 (Emphasis supplied)

By signing the construction agreement, the petitioner agreed to comply with the stipulations contained therein, including that on securing the separate written agreement on the additional works and the accompanying costs. In proceeding to do the additional works without such writing, however, it assumed the risk of not being paid. It consequently had no one else to blame but itself.

Neither could we allow the petitioner to base its demand for payment for the additional works on the verbal agreement or on the respondent's testimony during trial. As earlier mentioned, Article 1724 of the Civil Code allows recovery of added costs arising from changes in plans and specifications only upon proof of the written agreement between the owner and the contractor. Compliance with the two requisites was a condition precedent for recovery. It is emphasized that under Art. 1724 the petitioner as the contractor could not insist on the payment of additional works without the required written agreement. 15 In that regard, no other form of proof could prove the authority to effect the changes and the additional price to be paid therefor. 16 The Court has stated in San Diego v. Sayson17 that the Legislature, by requiring written evidence of the authorization for additional works or changes in the original plan, has intended to prevent misunderstandings and litigations between contractors and owners. 18 The requirement serves not only as a safeguard or substantive condition precedent to recovery, 19 but also gives to the parties the chance to decide whether to bind themselves to or to withdraw from the contract. 20

In view of the petitioner having no right to demand payment for the costs of the additional works, the CA justifiably set aside the ruling by the RTC that the respondent still had to pay P950,831.00 to the petitioner. DcHSEa

Furthermore, the cash voucher dated June 1, 1993 submitted by the respondent in evidence sufficiently established the fact of full payment by him. The petitioner itself admitted being paid a total of P7,147,216.05 despite its obligation under the construction agreement being only for P7,000,000.00.

We declare that the respondent could not demand the refund of the excess he had voluntarily paid to the petitioner. Article 1724 of the Civil Code nowhere precludes the owner from deciding to pay to the contractor the costs of additional works even if done without the prior written agreement on the price for such works. 21

The remaining issue is whether the CA properly awarded liquidated damages to the respondent for the delayed completion of the project.

Although the agreement on the additional works was not reduced into writing, there was no dispute that the petitioner had really done additional works on the project. 22 The additional works became the reason why the parties mutually extended the duration of the project from 150 days to 180 days. 23 The respondent disputed the petitioner's insistence that there had been a further extension of the construction period, 24 and this was why the CA granted the liquidated damages to him. 25

We hold that the petitioner was not liable for liquidated damages. Even if its right to be paid for the additional works could not be validated on account of the absence of the written agreement thereon in accordance with Article 1724 of the Civil Code and paragraph 3.03 of the construction agreement, the carrying out of the additional works required extra days to complete the project. According to the petitioner, the original contract period of 150 days was extended to 180 days, 26 and its claim was corroborated by Architect Lu himself, as follows:

A. I think there is an extension granted by the owner of about thirty (30) days for the additional bedroom.

Q. Are you aware, Mr. Witness, of Construction Agreement between the plaintiff and the defendant?

A. Yes, sir.

Q. Have you seen that Construction Agreement?

A. I was the one who prepared it.

xxx xxx xxx

Q. Now, in the Construction Agreement, which you have prepared Mr. Witness, it says here in par. 2.0 particularly, 2.01 that the construction period would be for 150 calendar days, as you are saying now that it was between six (6) to seven (7) months and you said 150 calendar days, why is that so, Mr. Witness?

A. As far as I can remember, the additional days were due to the additional works.

Q. And the defendant knew of this extension?

A. I think, Dr. Solco, the defendant is the one who granted about this 30 to Romeo Palanca.

Q. For the construction?

A. Yes, for the bedroom. 27

Accordingly, the granting of liquidated damages is deleted.

WHEREFORE, the Court AFFIRMS the judgment promulgated on February 28, 2005 subject to the MODIFICATION that the award of P427,000.00 as liquidated damages is DELETED.

No pronouncement on costs of suit.

SO ORDERED." SCaITA

Very truly yours,

 

(SGD.) EDGAR O. ARICHETADivision Clerk of Court

Footnotes

1. Rollo, pp. 47-65.

2. Id. at 36-43; penned by Associate Justice Magdangal M. De Leon, with the concurrence of Associate Justice Salvador J. Valdez, Jr. (retired/deceased) and Associate Justice Mariano C. Del Castillo (now a Member of the Court).

3. Id. at 36-37.

4. Supra note 1, at 64.

5. Supra note 2.

6. Id. at 43.

7. RTC records, pp. 17-20.

8. Leighton Contractors Philippines, Inc. v. CNP Industries, G.R. No. 160972, March 9, 2010, 614 SCRA 645, 657.

9. RTC records, pp. 17-18.

10. Art. 1724. The contractor who undertakes to build a structure or any other work for a stipulated price, in conformity with plans and specifications agreed upon with the landowner, can neither withdraw from the contract nor demand an increase in the price on account of the higher cost of labor or materials, save when there has been a change in the plans and specifications, provide:

(1) Such change has been authorized by the proprietor in writing; and

(2) The additional price to be paid to the contractor has been determined in writing by both parties. (1593a)

11. The President of the Church of Jesus Christ of Latter Day Saints v. BTL Construction Corporation, G.R. No. 176439, January 15, 2014, 713 SCRA 455, 466.

12. Leighton Contractors Philippines, Inc. v. CNP Industries, Inc., supra note 8, at 656; Salvador v. Court of Appeals, G.R. No. 124899, March 30, 2004, 426 SCRA 433, 444.

13. Sulo sa Nayon, Inc. v. Nayong Pilipino Foundation, G.R. No. 170923, January 20, 2009, 576 SCRA 655, 666.

14. Records, p. 7.

15. Uniwide Sales Realty and Resources Corporation v. Titan-Ikeda Construction and Development Corporation, G.R. No. 126619, December 20, 2006, 511 SCRA 335, 349-350.

16. The President of the Church of Jesus Christ of Latter Day Saints v. BTL Construction Corporation, G.R. No. 176439, January 15, 2014, 713 SCRA 455, 466-467; Leighton Contractors Philippines, Inc. v. CNP Industries, Inc., supra note 8, at 657.

17. G.R. No. L-16258, August 31, 1961, 2 SCRA 1175.

18. Id. at 1178-1179.

19. Uy v. Public Estates Authority, G.R. Nos. 147925, 589 SCRA 1, 17.

20. Powton Conglomerate, Inc. v. Agcolicol, G.R. No. 150978, April 3, 2003, 400 SCRA 523, 531.

21. Uniwide Sales Realty and Resources Corporation v. Titan-Ikeda Construction and Development Corporation, supra note 15, at 349.

22. Rollo, p. 41.

23. Id. at 43.

24. Id.

25. Id. at 42.

26. Id. at 43.

27. TSN, August 31, 1998, pp. 12-14.