Case Summary (G.R. No. 117009)
Contract Terms (Article IX)
The written contract (dated 4 February 1980) provided that the contractor would finish within two hundred working days and contained Article IX, which states: “If at any time prior to the completion of the work to be performed hereunder, increase in prices of construction materials and/or labor shall supervene through no fault on the part of the contractor whatsoever or any act of the government and its instrumentalities which directly or indirectly affects the increase of the cost of the project, OWNER shall equitably make the appropriate adjustment on mutual agreement of both parties.”
Performance and Additional Expenses
Respondent Ferrer completed the work on 15 August 1980. Due to a drastic increase in the cost of construction materials and labor, Ferrer incurred additional expenses of about P300,000.00 beyond the original contract price. He informed SBTC of these increases as early as March 1980 through SBTC officers (Vice-President Fely Sebastian and Supervising Architect Rudy de la Rama) and made timely demands for payment, supported by receipts, invoices, payrolls and other corroborating documents.
Verification, Recommendation and SBTC’s Position
In March 1981 SBTC, through Assistant Vice-President Susan Guanio and a representative of an architectural firm consulted by SBTC, verified Ferrer’s claims for additional cost. A recommendation was made to settle Ferrer’s claim for P200,000.00. SBTC, however, denied ever authorizing payment beyond the original contract price and denied liability, relying on Article IX’s requirement that any adjustment be made “on mutual agreement of both parties,” and asserting that no such mutual agreement existed.
Trial Court Judgment
Ferrer filed a complaint for breach of contract with damages. The Regional Trial Court, Branch 63, Makati, ruled in favor of Ferrer and ordered SBTC and Rosito C. Manhit to pay: (a) P259,417.23 for the increase in price of labor and materials plus 12% interest per annum from 15 August 1980 until fully paid; (b) P24,000.00 as actual damages; (c) P20,000.00 as moral damages; (d) P20,000.00 as exemplary damages; (e) attorney’s fees equivalent to 25% of the principal amount due; and (f) costs of suit.
Court of Appeals and Issues on Review
The Court of Appeals affirmed the trial court decision. Petitioners sought review under Rule 45, assigning errors including: that the Court of Appeals erred in holding that Ferrer proved his claim by preponderance of evidence; that the lower courts misinterpreted the unambiguous contract provision (Article IX); and that the courts disregarded the contract’s express condition, thereby violating petitioners’ constitutional guaranty against impairment of contract obligations (invoking the non-impairment clause under the 1987 Constitution).
Supreme Court’s Procedural Observation
On review, the Supreme Court noted that counsel for respondent filed pleadings that largely repeated portions of the Court of Appeals decision and lacked substantive discussion of the merits. Observing the inadequate advocacy, the Court undertook a full review of the record to evaluate the legal and factual issues presented.
Application of Civil Code Principles — Article 22 and Unjust Enrichment
The Supreme Court applied Article 22 of the Civil Code (Nemo ex alterius incommodo debet lecupletari), stressing that a person who acquires at another’s expense without just or legal ground must return the same. The Court found that SBTC derived benefit when Ferrer completed the building despite increased costs. Given Ferrer’s proof (receipts, invoices and related documents) and SBTC’s verification and recommended settlement, allowing SBTC to retain the building without paying the increased cost would amount to unjust enrichment contrary to Article 22.
Conditional Obligation Analysis — Article 1182
The Court analyzed the contract condition requiring “mutual agreement” for any adjustment and invoked Article 1182 of the Civil Code: “a conditional obligation shall be void if its fulfillment depends upon the sole will of the debtor.” The Court concluded that the mutual-agreement condition, insofar as SBTC could withhold assent unilaterally, effectively made the condition depend on the bank’s
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Case Citation and Panel
- Recorded as 319 Phil. 312, First Division, G.R. No. 117009, decided October 11, 1995.
- Decision authored by Justice Padilla; Justices Davide, Jr., Bellosillo, Kapunan, and Hermosisima, Jr., concurred.
- Lower court decision (Regional Trial Court, Branch 63, Makati, Civil Case No. 42712) was penned by Judge Julio R. Logarta.
- The Court of Appeals decision under review is CA-G.R. CV No. 40450, entitled "Ysmael C. Ferrer v. Security Bank and Trust Company, et. al.," dated August 31, 1994.
Parties and Posture of the Case
- Petitioner-plaintiffs: Security Bank and Trust Company (SBTC) and Rosito C. Manhit.
- Respondents: Court of Appeals (as respondent in the petition for review) and private respondent Ysmael C. Ferrer.
- Nature of proceeding before the Supreme Court: Petition for review under Rule 45 of the Rules of Court seeking reversal of the Court of Appeals decision affirming the trial court in a civil action for breach of contract with damages.
- Trial court initiated action: Civil Case No. 42712, a complaint for breach of contract with damages filed by Ysmael C. Ferrer against SBTC and Rosito C. Manhit.
Essential Facts
- Contracting parties: Private respondent Ysmael C. Ferrer was contracted by SBTC and Rosito C. Manhit to construct SBTC’s building in Davao City.
- Contract date and price: The contract was dated February 4, 1980, with a contract price of P1,760,000.00.
- Completion time: The contract provided 200 working days for completion; Ferrer completed construction on August 15, 1980, within the contracted period.
- Increased construction costs: Ferrer incurred additional expenses of about P300,000.00 due to a drastic increase in the cost of construction materials.
- Notice to SBTC: Ferrer informed SBTC of the additional expenses as early as March 1980 through Vice-President Fely Sebastian and Supervising Architect Rudy de la Rama.
- Supporting proof: Ferrer’s demands for payment were supported by receipts, invoices, payrolls, and other documents proving the additional expenses.
- Verification by SBTC: In March 1981, SBTC, through Assistant Vice-President Susan Guanio and a representative of an architectural firm consulted by SBTC, verified Ferrer’s claims.
- Recommendation to settle: A recommendation was made to settle Ferrer’s claim for P200,000.00.
- SBTC denial: SBTC denied authorizing any payment beyond the original contract price and contended it had no liability for additional cost, relying on Article IX of the contract.
Contract Provision at Issue (Article IX)
- Text of the contested clause as quoted in the source:
- "If at any time prior to the completion of the work to be performed hereunder, increase in prices of construction materials and/or labor shall supervene through no fault on the part of the contractor whatsoever or any act of the government and its instrumentalities which directly or indirectly affects the increase of the cost of the project, OWNER shall equitably make the appropriate adjustment on mutual agreement of both parties."
- Central contractual condition: Payment for increased cost is conditioned upon an "appropriate adjustment" made "on mutual agreement of both parties."
Procedural History and Lower Court Dispositions
- Trial court ruling: Found for Ferrer and ordered SBTC and Rosito C. Manhit to pay:
- P259,417.23 for increased price of labor and materials plus 12% interest per annum from August 15, 1980 until fully paid;
- P24,000.00 as actual damages;
- P20,000.00 as moral damages;
- P20,000.00 as exemplary damages;
- Attorney’s fees equal to 25% of the principal amount due;
- Costs of suit.
- Court of Appeals: Affirmed the trial court decision in CA-G.R. CV No. 40450, dated August 31, 1994.
- Present appeal: Petitioners sought review and reversal of the Court of Appeals’ decision on specified grounds.
Issues Assigned by Petitioners on Appeal
- Petitioners’ primary assignments of error as paraphrased from the source:
- That the Court of Appeals erred in holding that Ferrer proved his claim by a preponderance of evidence.
- That the appellate court misinterpreted an otherwise clear and unambiguous provision of the construction contract (Article IX).
- That the lower courts disregarded the express provision of the construction contract and thus violated petitioners’ constitutional guaranty against impairment of contractual obligations.
Petitioners’ Argument on Contract Interpretation
- Core contention:
- Under Article IX, any increase in price that results in increased construction cost above the stipulated contract price does not automatically entitle the contractor to additional payment.
- Payment above the stipulated contract price is made expressly subject to "mutual agreement of both parties."
- Petitioners argued that no mutual agreement was reached; hence, petitioners’ obligation to pay amounts above the original price never materialized.
Respondent’s Position and Pleadings
- Respondent Ferre