Leighton Contractors Philippines, Inc. v. CNP Industries, Inc.
REITERATIONFacts
The Antecedents: CNP Industries, Inc. (CNP) submitted a proposal to Leighton Contractors Philippines, Inc. (Leighton) to undertake the structural steelworks for a fibre cement plant project, estimating 885,009 kgs. of steel for a cost of P44,223,909. Leighton accepted this proposal, and the parties subsequently signed a subcontract for the structural steelworks at a fixed lump-sum price of P44,223,909. The subcontract explicitly stated it was on a fixed lump-sum basis and not subject to re-measurement, with CNP responsible for deriving its own quantities and bearing the risk of errors. Procedural History: Following revisions to fabrication drawings by Leighton, CNP claimed additional costs for steel required for roof ridge ventilation and crane beams, which it asserted were not included in the original scope. Leighton refused to pay, citing the fixed lump-sum nature of the subcontract. The dispute was submitted to the Construction Industry Arbitration Commission (CIAC), which ruled in favor of CNP, finding the revised elements to be additional works. Leighton appealed to the Court of Appeals (CA), which affirmed the CIAC decision. This led to the present petition before the Supreme Court. The Petition: Leighton filed a petition for review on certiorari under Rule 45 of the Rules of Court, assailing the CA's decision. Leighton argued that the subcontract clearly included the roof ridge ventilation and crane beams within its scope and that the fixed lump-sum price was not subject to re-measurement. Furthermore, Leighton contended that even if these were considered additional works, CNP failed to comply with Article 1724 of the Civil Code, which requires written authorization and a written agreement on the increased price for additional work. Leighton maintained it was not liable for the additional costs claimed by CNP.
Issue(s)
Whether the cost of additional steel for the roof ridge ventilation and crane beams was included in the fixed lump-sum price of the subcontract. Whether CNP Industries, Inc. complied with the requirements of Article 1724 of the Civil Code for the recovery of additional costs, considering the nature of fixed lump-sum contracts and assumption of risk.
Ruling
The Supreme Court reversed and set aside the decision of the Court of Appeals and the ruling of the Construction Industry Arbitration Commission. It held that petitioner Leighton Contractors Philippines, Inc. is not liable for the additional costs incurred by respondent CNP Industries, Inc.
Ratio Decidendi
On the inclusion of roof ridge ventilation and crane beams in the scope of work: The Court found that the subcontract clearly defined the scope of work as the completion of structural steelworks according to the main drawing, technical specifications, and main contract. Reference to the main contract indicated that the structural steelworks included Drawing Nos. P302-6200-S-405 and P302-6200-S-402, which both parties acknowledged referred to the roof ridge ventilation and crane beams. Therefore, these works were unequivocally included in the subcontracted scope. The Court emphasized that the parol evidence rule generally bars evidence of terms other than those in the written agreement, unless an exception applies, such as a subsequent modification. However, the Court found no valid modification in this instance. On compliance with Article 1724 of the Civil Code for recovery of additional costs, considering the nature of fixed lump-sum contracts and assumption of risk: The Court reiterated that in fixed lump-sum contracts, recovery of additional costs is governed by Article 1724 of the Civil Code, which requires two conditions precedent: (1) written authority from the project owner for the changes, and (2) a written agreement on the increase in price due to the changes. The Court found that CNP failed to present the required documents. While CNP presented the August 12, 1997 progress report signed by Bennett, it was established that Bennett lacked the authority to order changes or approve costs. CNP was aware of Bennett's lack of authority, having directed other project-related correspondences to the project manager. Consequently, the subcontract was never validly modified to include additional payments for these works. The Court stressed that neither the authority for changes nor the additional price can be proven by other evidence besides the written documents required by Article 1724. The Court explained that in a fixed lump-sum contract, the contractor agrees to complete a defined scope of work for a specified price without a cost breakdown. The contractor is responsible for estimating project costs, considering potential errors in measurement and material price fluctuations. By entering into such a contract, CNP undertook the risk of incurring losses due to measurement errors. The subcontract explicitly stated it was not subject to remeasurement. Since the roof ridge ventilation and crane beams were included in the scope, CNP was presumed to have estimated the steel quantities for these portions when making its offer. Therefore, Leighton was only liable to pay the stipulated subcontract price.
Main Doctrine
In fixed lump-sum contracts, recovery for additional costs due to changes in the scope of work requires both written authority from the project owner and a written agreement on the increased price, as mandated by Article 1724 of the Civil Code. The contractor assumes the risk of errors in measurement and changes in material prices.