Chung v. Ulanday Construction
REITERATIONFacts
The Antecedents: Petitioners Spouses Victoriano and Debbie Chung contracted with respondent Ulanday Construction, Inc. for the construction of a two-storey house. The contract stipulated a 150-day completion period and a contract price of ₱3,291,142.00, later reduced to ₱2,969,804.00 after excluding roofing and flushing work. The contract required written approval for any changes to plans and specifications, and stipulated penalties for delay and a warranty period for defects. Construction began on March 7, 1995. Respondent submitted 12 progress billings, of which petitioners paid the first seven but with delayed payments. Petitioners also granted a cash advance. Respondent effected 19 change orders without prior written approval, amounting to ₱912,885.91, though petitioners paid for some and acknowledged a balance for others. Respondent notified petitioners of delays caused by delayed payments and demanded full payment. Petitioners denied liability, citing respondent's failure to finish on time, non-compliance with change order provisions, and overstating billings. Procedural History: Respondent filed a collection case with the RTC. The RTC found both parties non-compliant with the contract, holding that change orders without written agreement were at the contractor's risk. It ordered petitioners to pay ₱629,819.84 for progress billings and ₱130,000.00 for ratified change orders, while ordering respondent to repair defects. Both parties appealed. The CA affirmed the RTC but increased the change order payment to ₱740,587.11, awarded interest, and exemplary damages. The CA denied motions for reconsideration, adding attorney's fees. The Petition: Petitioners argued the CA should have quantified repair costs, awarded liquidated damages for delay, questioned the progress billings amount, asserted set-off for construction errors, and claimed the CA misinterpreted Article 1724 and misapplied estoppel in pais.
Issue(s)
Whether the Court of Appeals erred in affirming the RTC decision for payment of progress billings. Whether the Court of Appeals erred in increasing the amount due for change orders, and whether Article 1724 of the Civil Code and estoppel in pais were correctly applied. Whether the Court of Appeals erred in awarding exemplary damages and attorney's fees to the respondent. Whether the petitioners' liability should be set-off by the respondent's construction defects.
Ruling
The petition is meritorious. The assailed decision and resolution of the Court of Appeals are reversed and set aside. The respondent is ordered to pay the petitioners ₱141,601.87 representing the balance of the repair costs for the defective gutter in the petitioners’ house, with interest at 6% per annum to be computed from the date of the filing of the complaint until finality of this decision and 12% per annum thereafter until full payment.
Ratio Decidendi
On the payment of progress billings: The Court found that while petitioners failed to pay progress billings nos. 8 to 12, the amount awarded by the RTC and affirmed by the CA was unsupported by evidence. Deducting a cash advance and considering only the amounts supported by progress billings, the unpaid progress billings amounted to ₱445,922.13. The Court emphasized that parties must comply strictly with their contractual stipulations. On the payment of change orders and the application of Article 1724 of the Civil Code and estoppel in pais: The Court ruled that Article 1724 of the Civil Code, which requires written authority and written agreement for increased costs due to changes in plans and specifications, applies. The respondent failed to secure the required written approval from the petitioners for the change orders. Therefore, the respondent could not claim additional costs incurred for these unauthorized changes. The Court clarified that mere acts of tolerance do not constitute approval, and the principle of estoppel in pais cannot override explicit contractual terms and legal provisions. The Court found that the CA erred in ruling Article 1724 inapplicable and in misapplying the principle of estoppel in pais. The contract explicitly required prior written approval for any changes, and Article 1724 governs recovery of additional costs in fixed-price contracts. The petitioners' partial payments and non-objection to some change orders were considered acts of tolerance, not ratification that would waive the requirement for written consent. The Court reiterated that estoppel should not supplant positive law and explicit contractual provisions. On the award of exemplary damages and attorney's fees: The Court disallowed the award of exemplary damages and attorney's fees. It stated that exemplary damages require bad faith or malicious intent, and attorney's fees are awarded when a party is compelled to litigate due to the unjustified act of the other. The Court found that the petitioners' refusal to pay the change orders was based on a valid ground (lack of written approval), and the issue of defective construction also weighed against the award. On the set-off of construction defects: The Court deemed the RTC's order to repair the defective gutter impractical due to the lapse of time and the contract's warranty provision, which applies after final acceptance. Instead, the Court ordered the set-off of petitioners' contractual liabilities (₱575,922.13) against the repair cost for the defective gutter (₱717,524.00), resulting in a net amount due from the respondent to the petitioners.
Main Doctrine
In construction contracts, compliance with written authority and written agreement for changes in plans and specifications is a condition precedent for the recovery of additional costs. Mere acts of tolerance do not constitute approval, and the principle of estoppel in pais cannot supplant explicit contractual terms and legal provisions requiring written consent for modifications.