In construction contracts, modifications to the original plans, known as change orders, often lead to disputes. The Supreme Court, in SPOUSES VICTORIANO CHUNG AND DEBBIE CHUNG, PETITIONERS, VS. ULANDAY CONSTRUCTION, INC., clarified that contractors cannot demand payment for change orders implemented without the prior written approval of the property owner, as explicitly stipulated in the contract and required under Article 1724 of the Civil Code. This ruling reinforces the principle that contracts are the law between the parties, and deviations from agreed-upon terms must adhere to the specified procedures. The decision emphasizes the importance of adhering to contractual stipulations to avoid disputes over payment for construction changes.

Building Without Permission: Whose Bill Is It Anyway?

The case revolves around a construction contract between Spouses Chung and Ulanday Construction, Inc. for the construction of a two-story house. The contract, signed in February 1985, set a 150-day completion period at a price of P3,291,142.00. Subsequently, the parties agreed to exclude roofing and flushing work, reducing the contract price. During construction, Ulanday Construction implemented 19 change orders without the Chungs’ prior written approval, leading to a dispute over payment for these modifications. This situation raised the central legal question of whether the contractor could recover costs for changes made without the owner’s explicit written consent, as required by both the contract and the Civil Code.

The Supreme Court emphasized the fundamental principle that contracts constitute the law between the parties. As such, stipulations within the contract, provided they are not contrary to law, morals, good customs, public order, or public policy, are binding and must be complied with in good faith. The Court reiterated that neither party can unilaterally alter or disregard the agreed-upon terms to the detriment of the other. In this context, both the Chungs and Ulanday Construction failed to fully adhere to the contractual stipulations regarding progress billings and change orders, which ultimately contributed to delays in the project’s completion.

Regarding the unpaid progress billings, the Court found that the amount awarded by the lower courts was not entirely supported by the evidence. While the Chungs had failed to pay progress billings nos. 8 to 12, the Court noted that the awarded amount did not accurately reflect deductions, such as a discount granted by Ulanday Construction and a cash advance provided by the Chungs. The Court, therefore, adjusted the amount owed for progress billings to P445,922.13, based on the actual evidence presented.

A critical aspect of the case centered on the applicability of Article 1724 of the Civil Code, which addresses the recovery of additional costs in contracts with a stipulated price when changes are made to the original plans and specifications. The Court clarified that Article 1724 requires two conditions precedent for the recovery of added costs: (1) written authorization from the property owner for the changes, and (2) a written agreement between the parties regarding the increase in price due to the changes. Failure to comply with either of these requirements bars the contractor from recovering additional costs. The Court quoted Article I, paragraph 6, of the contract, which mirrored this provision:

The CONTRACTOR shall make no change or alteration in the plans, and specifications as well as in the works subject hereof without the prior written approval of the OWNER. A mere act of tolerance shall not constitute approval.

The Supreme Court determined that Ulanday Construction had not obtained the necessary written approval from the Chungs before implementing the change orders. Consequently, the contractor could not claim additional costs for these unauthorized changes, except for those that the Chungs had explicitly accepted and paid for.

The Court also addressed the argument that the Chungs’ payment of certain change orders and their lack of objection to others created an estoppel that bound them to pay for all the changes. Estoppel in pais, or equitable estoppel, arises when a party’s actions or silence induces another party to believe certain facts exist, leading them to act on that belief to their detriment. The Court explained that estoppel cannot override explicit requirements of the law or supplant positive law. Since Article 1724 and the contract itself required written consent for changes, the Chungs’ actions could not be interpreted as waiving this requirement. The Court clarified that payments made for specific change orders were merely acts of tolerance that did not modify the contract’s terms.

As a result, the Court held that the Chungs were only liable for the P130,000.00 balance on Change Order Nos. 16 and 17, which they had acknowledged and partially paid. Combining this with the unpaid progress billings, the Chungs’ total outstanding liabilities amounted to P575,922.13.

The Court also overturned the Court of Appeals’ award of exemplary damages and attorney’s fees to Ulanday Construction. Exemplary damages require evidence of bad faith or wanton, fraudulent, or malevolent conduct, while attorney’s fees are typically awarded when a party is compelled to litigate due to the unjustified actions of the other party. The Court found no evidence of such circumstances in this case, as the Chungs’ refusal to pay the change orders was based on a valid contractual ground: the lack of prior written approval. Therefore, the award of exemplary damages and attorney’s fees was deemed unwarranted.

The Supreme Court addressed the issue of the defective concrete gutter in the Chungs’ house. Instead of ordering Ulanday Construction to repair the gutter, as the lower courts had done, the Court recognized that the considerable time that had passed since the filing of the complaint made such an order impractical. Instead, the Court ordered a set-off of the Chungs’ contractual liabilities against the cost of repairing the defective gutter, which was estimated at P717,524.00. This set-off resulted in Ulanday Construction owing the Chungs P141,601.87, support for this ruling for partial legal compensation proceeds from Articles 1278, 1279, 1281, and 1283 of the Civil Code.

In accordance with the established jurisprudence in Eastern Shipping Lines, Inc. v. Court of Appeals, the Court held that the amount of P141,601.87 would be subject to a legal interest of 6% per annum from the date the Regional Trial Court rendered its judgment on December 11, 1997, until the finality of the decision. After the decision becomes final, the judgment award, including the accrued interest, would bear interest at a rate of 12% per annum until fully satisfied.

FAQs

What was the key issue in this case?	The key issue was whether a contractor could claim payment for construction change orders that were implemented without the prior written approval of the property owner, as required by the contract and Article 1724 of the Civil Code.
What is a change order in construction?	A change order is a modification to the original plans and specifications of a construction project, typically involving alterations to the scope of work, materials used, or construction methods.
What does Article 1724 of the Civil Code say?	Article 1724 of the Civil Code states that a contractor cannot demand an increased price for changes in plans and specifications unless the changes were authorized by the owner in writing and the additional price was determined in writing by both parties.
What is estoppel in pais?	Estoppel in pais, or equitable estoppel, prevents a party from denying a fact that they have previously asserted, if another party has relied on that assertion to their detriment. However, estoppel cannot override explicit legal requirements.
Why were exemplary damages and attorney’s fees denied in this case?	Exemplary damages and attorney’s fees were denied because there was no evidence that the Chungs acted in bad faith when they refused to pay for the unauthorized change orders. Their refusal was based on a valid contractual defense.
What was the court’s decision regarding the defective gutter?	Instead of ordering the contractor to repair the defective gutter, the Court ordered a set-off, reducing the amount the Chungs owed by the estimated cost of the repairs, as ordering the repair was deemed impractical due to the passage of time.
What interest rates apply to the monetary award in this case?	The principal amount bears a legal interest of 6% per annum from the date of the RTC decision until the Supreme Court’s decision becomes final. After finality, the total judgment award, including interest, accrues interest at 12% per annum until full satisfaction.
What is the practical takeaway from this case for property owners?	Property owners should ensure that any changes to the original construction plans are documented in writing and approved by them before the work is carried out, to avoid disputes over payment.

The Supreme Court’s decision underscores the critical importance of adhering to the terms of construction contracts, particularly the requirement for written consent for change orders. By enforcing these stipulations, the Court aims to provide clarity and predictability in construction disputes, ensuring that both contractors and property owners are bound by their agreements. The ruling serves as a reminder that verbal agreements or implied consent are insufficient when the contract explicitly requires written approval.

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: SPOUSES VICTORIANO CHUNG AND DEBBIE CHUNG, VS. ULANDAY CONSTRUCTION, INC., G.R. No. 156038, October 11, 2010