In Licomcen, Inc. v. Engr. Salvador Abainza, the Supreme Court ruled that a contractor could recover additional costs incurred due to changes in a construction project’s original plan, even though the initial contract was unsigned and the modifications weren’t formally documented. This decision emphasizes that parties cannot avoid obligations for work performed and approved, especially when they benefit from those changes. The ruling underscores the importance of good faith and fair dealing in contractual relations, preventing parties from unjustly enriching themselves at the expense of others.

When Unsigned Contracts and Verbal Changes Lead to Financial Disputes

This case revolves around a dispute between LICOMCEN, Inc. (petitioner), and Engr. Salvador Abainza (respondent) concerning payment for construction work. In 1997 and 1998, the respondent was hired to supply, fabricate, and install air-conditioning ductworks in petitioner’s commercial centers. The original plan was revised at the behest of the petitioner, leading to additional costs for labor, materials, and equipment. Despite completing the project, the respondent was not fully paid for the additional expenses, prompting him to file a case to recover the outstanding balance of P1,777,202.80.

The petitioner initially denied liability, arguing that the collection suit was not filed against the real party-in-interest. Later, the petitioner contended that it had fully paid the original contract amount. However, the trial court found that the petitioner had indeed ordered and approved the revisions in the original plan, resulting in additional costs that were not covered by the initial agreement. The trial court ruled in favor of the respondent, ordering the petitioner to pay the outstanding balance with interest, attorney’s fees, and litigation expenses. The Court of Appeals affirmed this decision, prompting the petitioner to elevate the case to the Supreme Court.

At the heart of the legal battle was the applicability of Article 1724 of the Civil Code, which states that a contractor cannot demand an increase in price due to higher costs unless changes to the plans are authorized in writing and the additional price is determined in writing by both parties. The petitioner argued that since the changes were not authorized in writing, the respondent could not recover the additional costs. However, the Supreme Court found this argument unpersuasive for several reasons. First, the Court noted that the petitioner had belatedly raised this defense in its memorandum before the trial court, after the period for presenting evidence had already concluded. According to Section 1, Rule 9 of the Rules of Court, defenses not pleaded in a motion to dismiss or in the answer are deemed waived, with limited exceptions not applicable in this case. The Court emphasized that parties are bound by the delimitation of issues during the pre-trial, and introducing new defenses after the trial has commenced would prejudice the adverse party.

Building on this principle, the Supreme Court cited Villanueva v. Court of Appeals, stating that pre-trial ensures that parties raise all necessary issues to dispose of a case. Issues not included in the pre-trial order may only be considered if impliedly included or inferable from the issues raised. The Supreme Court found that the petitioner’s attempt to invoke Article 1724 of the Civil Code was a departure from its original defense of full payment, and therefore, it could not be considered.

Furthermore, the Supreme Court held that Article 1724 of the Civil Code was not even applicable to the case, stating:

It is evident from the records that the original contract agreement, submitted by respondent as evidence, which stated a total contract price of P5,300,000, was never signed by the parties considering that there were substantial changes in the plan imposed by petitioner in the course of the work on the project.

The Court highlighted that the original contract agreement, which specified a total contract price of P5,300,000, was never signed by both parties due to the significant changes made to the plan during the project. Moreover, the petitioner admitted to paying P6,700,000 to the respondent, which was allegedly the agreed cost of the project. However, the petitioner failed to provide any written contract signed by both parties to substantiate this claim. Thus, the Supreme Court underscored that the lack of a signed contract, coupled with the admitted payment of an amount exceeding the original contract price, indicated that there were indeed additional costs incurred during the project. The Court reasoned that the petitioner could not rely on Article 1724 of the Civil Code to avoid paying its obligation, as the alleged original contract was never even signed due to the various changes imposed by the petitioner.

The Supreme Court emphasized the importance of upholding the factual findings of the trial court, which were also affirmed by the Court of Appeals. The trial court had found that the petitioner ordered the changes in the original plan, resulting in additional costs for labor and materials. The respondent’s work was closely monitored and supervised by the petitioner’s engineering consultant, and all the paperwork related to the project was approved by the petitioner through its representatives. Therefore, the Supreme Court concluded that there was no justifiable reason to deviate from these findings and held the petitioner liable for the additional costs incurred for labor, materials, and equipment on the revised project.

FAQs

What was the key issue in this case?	The key issue was whether LICOMCEN, Inc. was liable for additional costs incurred due to revisions in a construction project’s original plan, even though the initial contract was unsigned and the modifications weren’t formally documented.
What did the trial court rule?	The trial court ruled in favor of Engr. Abainza, ordering LICOMCEN, Inc. to pay the outstanding balance of P1,777,202.80, with interest, attorney’s fees, and litigation expenses.
How did the Court of Appeals rule?	The Court of Appeals affirmed the trial court’s decision, finding LICOMCEN, Inc. liable for the additional costs due to the revisions in the original project.
What was LICOMCEN’s defense?	LICOMCEN initially argued that the collection suit was not filed against the real party-in-interest. Later, they invoked Article 1724 of the Civil Code, claiming that the changes were not authorized in writing.
Why did the Supreme Court reject LICOMCEN’s defense?	The Supreme Court rejected the defense because it was raised belatedly, after the period for presenting evidence had concluded, and because the original contract was unsigned due to the substantial changes made.
What is Article 1724 of the Civil Code?	Article 1724 states that a contractor cannot demand an increase in price due to higher costs unless changes to the plans are authorized in writing and the additional price is determined in writing by both parties.
What is the significance of the pre-trial order?	The pre-trial order defines and limits the issues to be tried, and parties are bound by this delimitation. New defenses cannot be introduced after the trial has commenced without prejudicing the adverse party.
What evidence supported the ruling against LICOMCEN?	Evidence included the unsigned contract agreement, the petitioner’s admission of paying an amount exceeding the original contract price, and the supervision and approval of the changes by the petitioner’s engineering consultant.

In conclusion, the Supreme Court’s decision underscores that parties cannot avoid obligations for work performed and approved, especially when they benefit from those changes. The absence of a signed contract and written authorization for changes does not automatically negate the obligation to pay for additional costs incurred due to those changes. This ruling serves as a reminder of the importance of good faith and fair dealing in contractual relations.

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: LICOMCEN, INC. VS. ENGR. SALVADOR ABAINZA, G.R. No. 199781, February 18, 2013