Title
Romago Electric Co., Inc. vs. Court of Appeals
Case
G.R. No. 130721
Decision Date
May 26, 2005
NPC granted ROMAGO a CPA for increased costs; BICC Construction claimed 70% share. Courts ruled BICC entitled to CPA under subcontract, affirming P175,545.05 award.
dispute
contract price adjustment
ruling
A

Case Summary (G.R. No. 130721)

Parties, Projects, and Governing Contract Provisions

In 1982, NPC entered into an agreement with ROMAGO under Contract No. Sp80DLC-502 for the erection and installation of NPC’s 69 KV 3-Phase Transmission Lines from Santiago-Jones, Jones-Saguday and Cauayan-Roxas, Isabela, for an agreed consideration of P2,657,856.40. On 07 June 1982, ROMAGO subcontracted the project to BICC Construction, an unregistered loose partnership composed of the private respondents, for consideration of P1,614,387.99.

The subcontract agreement incorporated, as part of the “Contract Documents,” among others: National Power Corporation’s Specification No. Sp80DLC-502, “any and all plans, drawings, and schedules prepared by National Power Corporation,” and the subcontractor’s proposal dated March 8, 1982. The subcontract also defined the subcontractor’s obligations by reference to the “provisions of the x x x contract entered into between NPC and ROMAGO” and, in particular, stated that except as otherwise provided, “all provisions of the National Power Corporation’s Specifications No. Sp80DLC-502, with reference to obligations, responsibilities of Contractor thereunder are hereby made applicable to the SUB-CONTRACTOR.”

A significant feature of the NPC project was the CPA granted to ROMAGO in the course of construction. The CPA provisions were embodied in GP-08 of the “Plans and Specifications,” which addressed adjustments in contract prices depending on increases or decreases in construction costs and, as embodied in P.D. No. 454 as amended by P.D. No. 459, applied a mechanism based on official indices issued by the Central Bank of the Philippines. The CPA was thus not framed as a discretionary concession, but as a contractual adjustment triggered by objective cost and index conditions.

Factual Background Leading to the Claims

When the project was completed, there appeared to be an outstanding balance due from ROMAGO to BICC Construction. Among the items claimed was BICC Construction’s supposed share in the CPA amounting to P175,545.05, representing seventy percent (70%) of the NPC-ROMAGO contract CPA of P250,778.65. The record showed that Mrs. Soledad Cac wrote NPC to hold ROMAGO’s payment of the CPA, then in the amount of P250,778.65. Despite this, payment to ROMAGO was released by virtue of a sworn affidavit executed by ROMAGO’s Vice President for Finance, Eduardo Cruz, certifying that “there does not exist any lien or encumbrances against” the NPC-ROMAGO contract.

The record further established that on 04 October 1983, Mariano Cac, the authorized representative and husband of Soledad Cac, was paid P38,712.70 “in full payment of accounts including retention of various works at NPC-Isabela” under Cash Disbursement Voucher No. 23162 dated 03 October 1983.

When ROMAGO ignored BICC Construction’s demands for payment, the partners—through Mrs. Soledad Cac as lone plaintiff—filed a complaint for collection of sum of money with damages, seeking, among others, the CPA share they alleged was owed under the subcontract.

Trial Court Decision

In its pre-trial order dated 23 November 1988, the Regional Trial Court (RTC), Branch 19, Cauayan, Isabela, framed the issues as: first, whether the plaintiffs, as subcontractors, were entitled to price cost adjustment under the NPC contract obtained by ROMAGO; and second, whether all obligations and/or indebtedness of the defendant to the plaintiffs were already paid and/or released upon the execution and receipt connected to Exh. A (misstated in the pre-trial order as “Exh. 4”).

On 29 June 1990, the trial court rendered a decision which, in substance, declared that the CPA inured to the benefit of the plaintiffs and ordered ROMAGO to pay P250,778.65 as CPA (excluding any lawfully paid tax supported by authentic official receipts), with legal interest from 12 August 1983 until fully paid, plus P10,000.00 as attorney’s fees and costs.

Appellate Review and Court of Appeals Ruling

ROMAGO appealed. The Court of Appeals affirmed the finding of liability but modified the amount. It ruled that the private respondents’ claim to the CPA was meritorious and ordered ROMAGO to pay P175,545.05, representing seventy percent (70%) of the total CPA of P250,778.65, with interest at the legal rate from 12 August 1983 until fully paid, and deducting any lawful tax ROMAGO may have paid to the government. The appellate court also affirmed in all other respects and dismissed the appeal with costs against ROMAGO.

Issues Raised by ROMAGO Before the Supreme Court

ROMAGO presented five issues before the Supreme Court. In essence, ROMAGO argued: (one) that the Court of Appeals erred in interpreting the subcontract in relation to NPC’s “Plans and Specification” by finding that the CPA granted to ROMAGO inured to the benefit of the subcontractors; (two) that equity should not have been applied because the subcontract’s terms and the law precluded such application; (three) that the payment acknowledged in Cash Disbursement Voucher No. 23162 extinguished or released all claims, including the CPA; (four) that Mariano Cac possessed authority to renounce or waive such claims; and (five) that even if the subcontractors were entitled to share in the CPA, the amount awarded was erroneous given ROMAGO’s computation and the alleged amount the subcontractors claimed.

Central Legal Issue: Whether the Subcontractors Were Entitled to the CPA

The Court treated the first two issues together: whether the private respondents were entitled to the CPA accorded to ROMAGO by NPC. ROMAGO took the position that, under its contract with the subcontractors, it was exclusively entitled to the CPA and that the subcontract did not extend the CPA to the subcontractors. It argued that only the NPC-ROMAGO contract provisions pertaining to ROMAGO’s “obligations and responsibilities” were made applicable to the subcontractors, and that any inclusion of CPA would be contrary to the subcontract’s terms. ROMAGO emphasized that Article I of the subcontract incorporated the Contract Documents “as though fully written out” only “insofar as they are not inconsistent with the terms thereof,” and it claimed that the subcontract’s silence on CPA meant CPA was not intended to be applicable to the subcontractors.

The Court of Appeals rejected ROMAGO’s construction. It observed that the CPA was not located in the NPC-ROMAGO contract, but in NPC’s “Plans and Specifications.” It also held that the subcontractor’s obligations and responsibilities referred to the main contract’s obligations, while the Contract Documents incorporated into the subcontract included the “Plans and Specifications” that contained the CPA provisions.

The Supreme Court agreed with the appellate approach. The Court held that ROMAGO and the subcontractors had expressly agreed on which documents would be incorporated into the subcontract. It then concluded that the qualifying phrase “obligations and responsibilities” in the subcontract applied only to the NPC-ROMAGO contract. More importantly, the Court noted that the CPA was not found in the NPC-ROMAGO contract; it was found in NPC’s “Plans and Specifications,” particularly paragraph GP-08, which was expressly included among the Contract Documents incorporated into the subcontract.

The Court further reasoned that even if the phrase “obligations and responsibilities” were construed to qualify the incorporated Contract Documents, the CPA provision still created mutual obligations and consequences for both ROMAGO and the subcontractors. It explained that the CPA clause did not merely provide for potential additional payment. It required that if costs decreased, the contract price reduction would be for the account of the petitioner, and by contractual design, any excess received under the adjustment scheme would have to be returned in accordance with the CPA mechanism. Thus, the Court found ROMAGO’s claim of inconsistency to be unsupported by the subcontract’s text. The parties had made a sweeping incorporation of documents, and the Court ruled that they would have expressly restricted the CPA’s application had they intended to exclude it.

Rejection of ROMAGO’s Reliance on MC Engineering, Inc. v. Court of Appeals

ROMAGO invoked MC Engineering, Inc. v. Court of Appeals, et al. (G.R. No. 104047, 03 April 2002, 380 SCRA 116) to support its argument that a subcontractor should not demand a higher profit than what the subcontractor bargained for, and that Article 22 of the Civil Code did not insure every party receives profit proportionate to its effort.

The Supreme Court found ROMAGO’s reliance misplaced because the facts and contractual provisions in MC Engineering were materially different. In MC Engineering, the Court had found that price increases could not be based on the “true valuation” requirement because the parties did not undertake the valuation expressly required by both the main contract and the subcontract as a condition precedent to any upward or downward adjustment. In contrast, in the case at bar, the CPA in GP-08 depended on the application of official indices and not on discretionary acts of the contracting parties. The Court noted that there was no controversy as to the occurrence of the scenarios envisioned under GP-08 that would trigger the adjustment. Hence, the contractual framework did not parallel the valuation defect that underlay MC Engineering.

Payments, Alleged Waiver, and the Cash Disbursement Voucher

ROMAGO’s third and fourth issues asserted that the private respondents’ claims—including the CPA—were extinguished by the receipt by Mariano Cac of P38,712.70 under Cash Disbursement Voucher No. 23162, which stated “full payment of accounts including retention for various works at NPC-Isabela.” ROMAGO argued that Mariano Cac had authority to bind the subcontractors, and that by receiving the amount, he released the petitioner from all connected claims.

The Supreme Court rejected this position. It emphasized that the basis for ROMA

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