ASG Law

Tag: Additional Work

  • Beyond the Contract: Recovering Costs for Extra Work in Construction Agreements

    In Filinvest Alabang, Inc. v. Century Iron Works, Inc., the Supreme Court ruled that even in fixed lump sum contracts, contractors can recover costs for additional work if properly authorized and agreed upon in writing. This decision clarifies the scope and limitations of fixed lump sum agreements in the construction industry, providing a framework for resolving disputes over extra work and ensuring fair compensation for contractors. It highlights the importance of adhering to contractual provisions regarding change orders and documenting all agreements related to additional work.

    Building Bridges Beyond the Blueprint: Can Contractors Claim Extra Pay?

    This case revolves around a dispute between Filinvest Alabang, Inc. (Filinvest), a property developer, and Century Iron Works, Inc. (Century Iron), a construction company. In 1997 and 1998, Filinvest awarded several contracts to Century Iron, including one for metal works at the Filinvest Festival Supermall, valued at P29,000,000.00. After completing the project, Century Iron sought full payment but Filinvest withheld P1,392,088.68, citing substandard workmanship and disputing the cost of an additional scenic elevator enclosure.

    Century Iron then filed a lawsuit to recover the unpaid amount. Filinvest countered that it was justified in retaining funds due to damages caused by Century Iron’s poor work and that the lump sum nature of the contract precluded additional claims for the elevator enclosure. The central legal question was whether Century Iron could recover the withheld amounts, particularly the cost of the additional elevator enclosure, despite the fixed lump sum contract.

    The Regional Trial Court (RTC) partially ruled in favor of Century Iron, awarding P227,500.00 plus legal interest, finding that Filinvest was estopped from claiming damages due to its issuance of a Certificate of Completion and Acceptance. However, the RTC denied the claim for the additional elevator enclosure, citing the lump sum nature of the contract. Century Iron appealed to the Court of Appeals (CA).

    The CA affirmed the RTC’s ruling with modification, ordering Filinvest to pay the full amount claimed by Century Iron, including the cost of the additional elevator enclosure. The CA agreed that Filinvest was estopped from claiming substandard workmanship and held that the contract was not strictly fixed lump sum, allowing for additional work to be compensated. This led Filinvest to petition the Supreme Court, arguing against the CA’s decision.

    The Supreme Court denied Filinvest’s petition, upholding the CA’s decision with a modification on the interest rates. The Court emphasized that factual findings of the lower courts, particularly when affirmed by the CA, are binding unless there is a clear showing of abuse or arbitrariness. Both the RTC and the CA found that Filinvest had issued a Certificate of Completion and Acceptance, estopping it from later claiming substandard workmanship.

    Concerning the additional scenic elevator enclosure, the Supreme Court acknowledged the conflicting findings between the RTC and the CA, which necessitated its own determination of whether the contract was indeed fixed lump sum. The Court then cited Article 1724 of the Civil Code, which governs fixed lump sum contracts:

    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, provided:

    (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.

    The Court clarified that while fixed lump sum contracts generally limit the project owner’s liability to the stipulated amount, Article 1724 does not preclude parties from agreeing to additional work. The Court emphasized that to recover costs for such additional work, the contractor must demonstrate:

    1. A written authority from the project owner ordering or allowing the changes; and
    2. A written agreement on the increase in price or cost due to the change.

    According to the High Court, compliance with these two requisites is a condition precedent for recovery, and neither the authority for the changes nor the additional price can be proven by any evidence other than the written authority and agreement. In this case, the Court found that the contract was indeed a fixed lump sum agreement, where Century Iron agreed to provide all materials, labor, and equipment necessary for the metal works, and Filinvest agreed to pay a lump sum of P29,000,000.00. However, this did not prevent the parties from agreeing on additional work.

    The Court noted that Filinvest issued two Site Instructions pertaining to the construction of the additional scenic elevator enclosure. The valuation of this additional work was derived from the Bill of Quantities and documented in the Cost Breakdown for Claim of Change Orders and the Material Quantity Breakdown for Scenic Elevator Enclosure submitted by Century Iron to Filinvest. Because there was a written authority from Filinvest for the additional work and a written agreement on its valuation, Century Iron was entitled to recover the cost of the additional elevator enclosure.

    The Supreme Court, in its decision, also addressed the applicable interest rates on the amounts due to Century Iron. The Court cited Nacar v. Gallery Frames, which provides a guideline for imposing legal interest. Specifically, the Court stated that the amounts due to Century Iron should be subject to legal interest at the rate of twelve percent (12%) per annum from extrajudicial demand until June 30, 2013, and six percent (6%) per annum thereafter until full payment, in accordance with the prevailing jurisprudence.

    This case underscores the importance of clear and comprehensive contract documentation, especially when dealing with construction agreements. While fixed lump sum contracts offer certainty, they do not preclude modifications or additional work. However, to ensure enforceability and avoid disputes, any changes or additional work must be authorized in writing by the project owner, and the parties must have a written agreement on the associated costs.

    FAQs

    What was the key issue in this case? The central issue was whether a contractor could recover costs for additional work performed under a fixed lump sum contract without explicit written agreements.
    What is a fixed lump sum contract? A fixed lump sum contract is an agreement where a contractor agrees to complete a project for a specified amount, regardless of the actual costs incurred.
    What did the Supreme Court decide? The Supreme Court ruled that even in fixed lump sum contracts, contractors can recover costs for additional work if there is written authorization and agreement on the price.
    What is the significance of the Certificate of Completion and Acceptance? The Certificate of Completion and Acceptance signifies that the project owner accepts the contractor’s work as satisfactory, estopping them from later claiming substandard workmanship.
    What are the requirements for recovering costs for additional work? To recover costs for additional work, there must be a written authority from the project owner and a written agreement on the price or cost due to the changes.
    What is Article 1724 of the Civil Code? Article 1724 of the Civil Code governs fixed lump sum contracts, stating that contractors cannot demand an increase in price unless changes are authorized in writing.
    What interest rate applies to the monetary awards? The monetary awards are subject to legal interest at 12% per annum from extrajudicial demand until June 30, 2013, and 6% per annum thereafter until full payment.
    What is a Site Instruction? A Site Instruction is a formal directive issued by the project owner or engineer, instructing the contractor to perform additional or changed work.

    In conclusion, Filinvest Alabang, Inc. v. Century Iron Works, Inc. serves as an important reminder of the necessity for clear documentation and adherence to contractual provisions in construction agreements. While fixed lump sum contracts offer simplicity, they do not eliminate the possibility of additional work. By ensuring that all changes are properly authorized and agreed upon in writing, parties can mitigate the risk of disputes and ensure fair compensation for all work performed.

    For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

    Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
    Source: FILINVEST ALABANG, INC. VS. CENTURY IRON WORKS, INC., G.R. No. 213229, December 09, 2015

  • Breach of Construction Contract: Understanding Liability for Additional Works

    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.