In construction contracts, especially those with a fixed lump-sum price, contractors bear the risk of unforeseen costs. The Supreme Court ruled that contractors cannot demand additional payment for changes or extra work unless these changes are authorized in writing by the project owner, and there is a written agreement detailing the increased cost. This ruling protects project owners from unexpected expenses and emphasizes the importance of clear, written agreements in construction projects, ensuring both parties are aligned on scope and cost.

Unexpected Steel: Who Pays When Construction Plans Change in a Fixed-Price Deal?

Leighton Contractors Philippines, Inc. (Leighton) hired CNP Industries, Inc. (CNP) as a subcontractor for structural steelworks in a fiber cement plant project. The agreement was a fixed lump-sum contract for P44,223,909. However, revisions to the fabrication drawings required additional steel, leading CNP to claim extra costs. Leighton refused to pay, arguing the contract covered all steelworks for a fixed price. This dispute reached the Construction Industry Arbitration Commission (CIAC), which sided with CNP, ordering Leighton to pay the balance plus costs for additional work. The Court of Appeals affirmed the CIAC’s decision, leading Leighton to appeal to the Supreme Court, questioning whether it was liable for increased costs due to design adjustments under a fixed lump-sum agreement, especially without formal written approvals as required by law.

The Supreme Court emphasized the **parol evidence rule**, which generally prevents parties from introducing evidence of prior or contemporaneous agreements to contradict a written contract. According to Section 9, Rule 130 of the Rules of Court:

When the terms of an agreement have been reduced to writing, it is considered as containing all the terms agreed upon and there can be, between the parties and their successors in interest, no evidence of such terms other than the contents of the written agreement.

The Court acknowledged exceptions to this rule, such as subsequent modifications to the original agreement. However, it found that the additional work claimed by CNP did not meet the legal requirements for modifying a fixed-price construction contract. The original subcontract defined the scope of work as completing structural steelworks according to the main drawing, technical specifications, and the main contract. These documents included the roof ridge ventilation and crane beams, meaning those specific items were already part of the fixed price.

CNP argued that a signed progress report by Leighton’s quantity surveyor, Simon Bennett, constituted approval of the additional costs, thus modifying the original agreement. The Supreme Court disagreed, citing **Article 1724 of the Civil Code**, which governs the recovery of additional costs in fixed-price contracts:

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 land-owner, 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 emphasized that compliance with both requisites of Article 1724 is a condition precedent for recovering additional costs. The absence of either written authority for the changes or a written agreement on the increased price bars the recovery of additional costs. Neither the authority for the changes nor the additional price can be proven by other evidence.

In this case, CNP failed to provide written authorization from Leighton for the changes. Although Bennett signed the progress report, CNP knew that Bennett lacked the authority to approve changes or costs, as demonstrated by their correspondence with Leighton’s project manager, Michael Dent. Furthermore, Bennett signed the subcontract as a witness, not as an authorized representative with the power to modify the agreement. This absence of written authority and agreement meant that the original subcontract remained unmodified, and Leighton was not liable for the additional costs claimed by CNP.

The Supreme Court pointed out that in a **fixed lump-sum contract**, the contractor agrees to complete a specified scope of work for a predetermined amount, regardless of the actual costs incurred. The contractor estimates the project cost based on the scope of work, schedule, and potential errors or price changes. By entering into such a contract, CNP assumed the risk of measurement errors or cost overruns.

The subcontract explicitly stated that the price was not subject to re-measurement. Because the roof ridge ventilation and crane beams were included in the scope of work, CNP was presumed to have estimated the required steel quantity when submitting its offer. Therefore, Leighton was only obligated to pay the stipulated subcontract price. This ruling reinforces the principle that fixed lump-sum contracts allocate the risk of unforeseen costs to the contractor, absent specific written agreements to the contrary.

FAQs

What was the key issue in this case?	The key issue was whether Leighton Contractors was liable for additional costs incurred by CNP Industries due to design changes in a fixed lump-sum construction contract, without written authorization as required by Article 1724 of the Civil Code.
What is a fixed lump-sum contract?	A fixed lump-sum contract is an agreement where the contractor agrees to complete a specified scope of work for a predetermined amount, regardless of the actual costs incurred during the project.
What does Article 1724 of the Civil Code say?	Article 1724 states that a contractor cannot demand an increase in price for changes in plans or specifications unless the changes are authorized in writing by the owner, and the additional price is determined in writing by both parties.
What is the parol evidence rule?	The parol evidence rule prevents parties from introducing evidence of prior or contemporaneous agreements to contradict a written contract, assuming the written agreement contains all the agreed-upon terms.
Why did the Supreme Court rule in favor of Leighton Contractors?	The Supreme Court ruled in favor of Leighton because CNP failed to provide written authorization for the design changes and a written agreement on the increased price, as required by Article 1724 of the Civil Code.
What was CNP Industries’ main argument for claiming additional costs?	CNP argued that a progress report signed by Leighton’s quantity surveyor constituted approval of the additional costs, modifying the original fixed lump-sum agreement.
Why was the signed progress report not sufficient to claim additional costs?	The progress report was insufficient because the quantity surveyor lacked the authority to approve changes or costs, and CNP was aware of this limitation. The contract was not properly modified as the report was not a formal modification.
What is the practical implication of this ruling for contractors?	Contractors must ensure they obtain written authorization for any changes in the scope of work and a written agreement on the increased price to recover additional costs in fixed lump-sum contracts.
What is the practical implication of this ruling for project owners?	Project owners can rely on the terms of a fixed lump-sum contract, protected from unexpected expenses. Still, project owners need to remember that proper documentation is still key.

This case underscores the importance of adhering to the specific requirements of Article 1724 of the Civil Code in construction contracts. Contractors entering into fixed lump-sum agreements bear the risk of cost overruns unless they secure written authorization and agreement for any changes. Project owners, on the other hand, are protected by the fixed price but must be diligent in documenting and approving any changes in scope.

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: Leighton Contractors Philippines, Inc. vs. CNP Industries, Inc., G.R. No. 160972, March 09, 2010