Liability for Unwritten Changes in Construction Contracts: Lessons from Guanellians vs. Jody King

TLDR: This case clarifies that construction companies can be compensated for additional work ordered by the client, even if not formally included in the original contract, especially when the client directly authorizes these changes. It emphasizes the importance of documenting all project modifications and seeking written agreements to avoid disputes.

G.R. NO. 141715, October 12, 2005

INTRODUCTION

Imagine you’re a contractor hired to build a house. Halfway through, the homeowner asks for a bigger garage, a sunroom, and a complete remodel of the kitchen – none of which were in the original plans. Can you expect to be paid for this extra work? This is the core issue in the case of Local Superior of the Servants of Charity (Guanellians), Inc. vs. Jody King Construction & Development Corporation. The Supreme Court tackled whether a construction company could recover payment for additional work verbally requested by the client, even without formal amendments to the original contract.

In this case, the Guanellians hired Jody King Construction for a construction project, but later requested numerous changes and additions outside the scope of the original contract. When disputes arose over payment for these extra works, the case landed in court, raising crucial questions about contractual obligations and fair compensation in the construction industry.

LEGAL CONTEXT

The Philippine Civil Code governs contracts and obligations. A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service. For a contract to be valid, there must be consent of the contracting parties, object certain which is the subject matter of the contract, and cause of the obligation which is established.

Article 1159 of the Civil Code states, “Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.” This principle underscores the binding nature of contracts. However, the law also recognizes that contracts can be modified or novated by subsequent agreements.

Relevant to this case is the concept of implied contracts or quasi-contracts. These arise from lawful, voluntary and unilateral acts which are enforceable to the end that no one shall be unjustly enriched or benefited at the expense of another. Article 2142 of the Civil Code discusses quasi-contracts:

“Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-contract to the end that no one shall be unjustly enriched or benefited at the expense of another.”

Prior Supreme Court decisions have established that a party who benefits from work performed by another, even without a formal contract, is obligated to compensate the performing party to avoid unjust enrichment. This principle is particularly relevant in construction disputes involving additional work.

CASE BREAKDOWN

The Guanellians, a religious corporation, contracted Jody King Construction to build structures for their apostolic mission. After the initial bidding process, the project’s scope was repeatedly reduced and altered, leading to confusion and disagreements.

Here’s a timeline of the key events:

• September 12, 1992: Jody King Construction was awarded the contract for Phase I of the project.
• October 14, 1992: The parties signed a building contract specifying the scope of Phase I, with a completion deadline of March 13, 1993.
• During Construction: The Guanellians requested 59 additional works for Phase I and initiated Phase II work even before a formal contract was signed.
• May 28, 1993: The contract for Phase II was signed.
• October 5, 1993: Jody King Construction submitted its 12th progress billing, which the Guanellians contested.
• September 19, 1994: Jody King Construction filed a complaint for breach of contract, specific performance, and damages.

The Regional Trial Court ruled in favor of Jody King Construction, ordering the Guanellians to pay for the additional works. This decision was appealed to the Court of Appeals, which affirmed the lower court’s ruling with modifications to the interest rates and deletion of attorney’s fees.

The Supreme Court upheld the Court of Appeals’ decision, emphasizing the factual findings of the lower courts. The Court highlighted that the additional works were indeed ordered by the Guanellians and were not covered by the original contracts. As the Court stated:

“After thorough studies of all the evidence on record, this Court finds and so holds that the foregoing two (2) building contracts do not govern or control 132 additional works that defendants required to accomplish.”

The Court further noted:

“It is unjust and unfair for the defendants to tie-up these 132 additional works which include the whole Building A to the aforesaid contracts most especially on the ‘no escalation clause’ and the duration of the construction works.”

The Supreme Court reiterated that it is not its function to re-evaluate factual evidence already assessed by the lower courts, especially when their findings are consistent. The petition was denied, and the Court of Appeals’ decision was affirmed in full.

PRACTICAL IMPLICATIONS

This case provides valuable guidance for contractors and clients in the construction industry. It underscores the importance of clear and comprehensive contracts that address potential changes and additional work. Here’s how this ruling might affect similar cases going forward:

• Contractors can seek compensation for additional work verbally requested by the client, especially if they can demonstrate that the client authorized the changes.
• Clients should be aware that they may be liable for additional costs if they request changes or additions to the original scope of work, even without a formal contract amendment.
• Both parties should prioritize documenting all project modifications and seeking written agreements to avoid disputes.

Key Lessons

• Document Everything: Keep detailed records of all communications, instructions, and changes to the project scope.
• Get it in Writing: Always seek written agreements for any additional work or modifications to the original contract.
• Understand Your Rights: Be aware of your rights and obligations under the Civil Code and relevant jurisprudence.

FREQUENTLY ASKED QUESTIONS

Q: What happens if a contractor performs extra work without a written agreement?

A: Even without a written agreement, the contractor may still be entitled to compensation if they can prove that the client requested or authorized the additional work and benefited from it. The principle of unjust enrichment may apply.

Q: Can a client refuse to pay for additional work if they didn’t sign a change order?

A: Not necessarily. If the client requested or authorized the work, they may still be liable, even without a formal change order. However, it’s always best practice to have a written change order signed by both parties.

Q: What is the best way to avoid disputes over additional work in construction projects?

A: The best way is to have a clear, comprehensive contract that addresses potential changes and additional work. All modifications should be documented in writing and signed by both parties before the work is performed.

Q: What is unjust enrichment?

A: Unjust enrichment occurs when one party unfairly benefits at the expense of another. In construction law, it means that a client cannot benefit from additional work performed by a contractor without compensating them for it.

Q: What evidence is needed to prove that additional work was authorized?

A: Evidence can include written communications (emails, letters), meeting minutes, oral testimonies, and any other documentation that demonstrates the client’s request or authorization of the additional work.

ASG Law specializes in construction law, contract disputes, and litigation. Contact us or email hello@asglawpartners.com to schedule a consultation.