The Supreme Court ruled that when a construction project is not completed, the contractor is only entitled to payment for the services actually rendered up to the point of termination, invoking the principle of solutio indebiti for any excess payment received. This decision clarifies the rights and obligations of parties in construction contracts, particularly concerning payments made in advance for unfinished work and underscores the need for precise documentation and valuation of completed work to avoid disputes. It also underscores that the basis for proper compensation rests on the actual amount of accomplishment, safeguarding both parties from unjust enrichment.

Construction Stalled: Who Bears the Cost When a Swap Deal Goes Sour?

In 1992, Primetown Property Group, Inc. (Primetown) hired Titan-Ikeda Construction & Development Corporation (Titan-Ikeda) for the structural work on the Makati Prime Tower (MPT). In 1994, they entered into a supplemental agreement for the architectural work, valued at P130,000,000. Crucially, payment was structured as a “full swap,” meaning Titan-Ikeda would receive condominium units in lieu of cash. Primetown transferred condominium units valued at P112,416,716.88 to Titan-Ikeda. However, due to disputes, Primetown took over the project’s supervision. After an inventory, Titan-Ikeda sought payment for a supposed balance. Subsequently, Primetown demanded reimbursement for costs to finish the project. This prompted Titan-Ikeda to file a case for specific performance and Primettown filed a separate action for collection of money, eventually reaching the Supreme Court after conflicting rulings from the lower courts.

The Supreme Court addressed the conflicting factual findings of the Regional Trial Court (RTC) and the Court of Appeals (CA). The RTC had favored Titan-Ikeda, while the CA sided with Primetown. The Supreme Court emphasized that when parties agree to extinguish a contract, they are no longer required to fully perform their obligations. Because the parties agreed to effectively terminate the supplemental agreement, Titan-Ikeda was only entitled to compensation for the services rendered until the termination date. Receiving payment beyond what was earned, obligates Titan-Ikeda to return the excess, adhering to the principle of solutio indebiti. Article 2154 of the Civil Code provides that:

Article 2154. If something is received when there is no right to demand it and it was unduly delivered through mistake, the obligation to return it arises.

For solutio indebiti to apply, it must be proven that there was no right to collect the sums paid and the payment was made by mistake. Here, Titan-Ikeda acknowledged overpayment. Because the supplemental agreement had been terminated with mutual consent, Titan-Ikeda became entitled only to the cost of its services actually rendered. Article 2163 states:

Article 2163. It is presumed that there was a mistake in the payment if something which had never been due or had already been paid was delivered; but, he from whom the return is claimed may prove that the delivery was made out of liberality or for any other just cause.

The Supreme Court clarified that Primetown made advance payments assuming Titan-Ikeda would complete the project within the agreed-upon timeframe. Article 2160 addresses situations where undue payment is made:

Article 2160. He who in good faith accepts an undue payment of a thing certain and determinate shall only be responsible for the impairment or loss of the same or its accessories and accessions insofar as he has thereby been benefited. If he has alienated it, he shall return the price or assign the action to collect the sum.

Ultimately, Titan-Ikeda must return to Primetown the condominium units and parking slots equivalent to the excess value it received above its proportionate accomplishment as of the termination date. This approach contrasts with a scenario where a party completes their obligations as agreed, entitling them to full payment, even if circumstances change.

Regarding the matter of delay, the Court found that Primetown did not properly notify Titan-Ikeda to accelerate work as required by the construction contract. Article XIV outlines procedure for handling delays:

15.1. If at any time during the effectivity of this contract, [PETITIONER] shall incur unreasonable delay or slippages of more than fifteen percent (15%) of the scheduled work program, [RESPONDENT] should notify [PETITIONER] in writing to accelerate the work and reduce, if not erase, slippage. If after the lapse of sixty (60) days from receipt of such notice, [PETITIONER] fails to rectify the delay or slippage, [RESPONDENT] shall have the right to terminate this contract except in cases where the same was caused by force majeure.

Therefore, no delay was attributable to Titan-Ikeda because the requirement for written notification was not satisfied by PrimeTown. For a claim to recover costs associated with changes, two conditions must be present based on Article 1724 of the Civil Code:

1. written authority from the developer/owner ordering/allowing the changes in work; and
2. written agreement of parties with regard to the increase in cost (or price) due to the change in work or design modification.

The Supreme Court ordered the records to be remanded to the lower court for determination of exact amounts due.

FAQs

What was the central issue in this case?	The main issue revolved around determining the proper compensation due to a contractor when a construction project was terminated before completion, and the mode of payment was a full-swapping agreement involving condominium units.
What does “full swapping” mean in this context?	“Full swapping” means that instead of cash payments, the contractor receives condominium units in exchange for the construction work they perform on a property development.
What is solutio indebiti and why is it relevant here?	Solutio indebiti is a legal principle that arises when someone receives something without having the right to demand it, and it was delivered through mistake; it’s relevant because the contractor received excess units beyond the value of work completed.
Why couldn’t the contractor recover additional costs due to changes in the project?	The contractor couldn’t recover these costs because they lacked written authorization from the property owner for the changes and a written agreement on the increased costs due to these modifications, as required by Article 1724 of the Civil Code.
What procedure should the property owner have followed if the contractor was delaying the project?	The property owner was obligated to issue a written notice to accelerate the project before acting on an alleged breach of contract
What did the Supreme Court ultimately order in this case?	The Supreme Court ordered the contractor to return the condominium units and parking slots that represented payment in excess of the work actually completed and nullified the prior award of damages.
What should the lower court consider during the retrial of this case?	The lower court needs to determine the precise percentage of architectural work completed, determine the number of units sold to third parties, then calculate if there are actual liabilities between contractor and client.
Is ITI Report admissable as evidence?	No. Given that there was a designated project manager, ITI report will not be given weight

This case demonstrates the critical importance of clear contracts and proper procedures in construction agreements, especially regarding payment terms and project management. It serves as a reminder to document everything, communicate effectively, and adhere strictly to contractual terms to avoid potential legal disputes arising from unforeseen circumstances.

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: Titan-Ikeda Construction & Development Corporation vs. Primetown Property Group, Inc., G.R. No. 158768, February 12, 2008