ROMAGO ELECTRIC CO., INC., PETITIONER, VS. HONORABLE COURT OF APPEALS, SOLEDAD C. CAC, JOEPHIL BIEN, RENATO CUNANAN AND DELFIN INCIONG, RESPONDENTS.

Romago Electric versus Court of Appeals

The Case

This is a petition for review on certiorari under Rule 45 of the Rules of Court, brought by Romago Electric Company against the Court of Appeals and the partners of BICC Construction, namely Soledad Cac, Joephil Bien, Renato Cunanan and Delfin Inciong. The action below was one for collection of a sum of money with damages, and the central question is who is entitled to the contract price adjustment that the National Power Corporation granted to Romago. The case matters because it teaches how a subcontract incorporates by reference the plans and specifications of the main contract, and whether a subcontractor may share in a price adjustment obtained by the main contractor.

Procedural History

The private respondents, through Soledad Cac, filed a complaint for collection of a sum of money with damages before the Regional Trial Court of Cauayan, Isabela. After pre-trial, the trial court rendered judgment in favor of the private respondents, declaring that all contract price adjustments under the NPC contract inured to their benefit, ordering Romago to pay the adjustment of 250,778.65 pesos, with legal interest from August 12, 1983, plus 10,000 pesos in attorney's fees. Romago appealed to the Court of Appeals, which affirmed the trial court but modified the award, ordering Romago to pay 175,545.05 pesos, representing seventy percent of the total adjustment, with interest, less any lawful tax paid. Romago's motion for reconsideration was denied, so it filed this petition for review before the Supreme Court.

Facts

In 1982, the National Power Corporation entered into a contract with Romago Electric for the erection and installation of transmission lines in Isabela, for an agreed consideration of 2,657,856.40 pesos. On June 7, 1982, Romago subcontracted the project to BICC Construction, an unregistered loose partnership composed of the private respondents, for 1,614,387.99 pesos. The subcontract incorporated certain contract documents as though fully written out, including the NPC specifications and any and all plans, drawings and schedules prepared by the National Power Corporation.

In the course of the construction, the NPC granted Romago a contract price adjustment of 250,778.65 pesos. The provision governing this adjustment, paragraph GP-08 of the Plans and Specifications, was among the documents incorporated into the subcontract. When the project was completed, an outstanding balance appeared due to BICC from Romago, part of which was its claimed share in the adjustment. Soledad Cac wrote the NPC to hold its payment to Romago, but payment was released to Romago upon the sworn affidavit of its vice president for finance that no lien or encumbrance existed against the contract.

On October 4, 1983, Mariano Cac, husband of Soledad Cac and authorized representative of BICC, received 38,712.70 pesos, described in Romago's cash disbursement voucher as full payment of accounts including retention for various works at NPC-Isabela. When BICC's demands were ignored, the partners filed the complaint for collection. Romago insisted that the adjustment belonged exclusively to it and that the voucher receipt extinguished all claims.

Issues

• Whether or not the private respondents, as subcontractors, are entitled to share in the contract price adjustment obtained by Romago from the National Power Corporation.
• Whether or not the receipt by Mariano Cac of 38,712.70 pesos under the cash disbursement voucher extinguished all claims of the private respondents, including the contract price adjustment.
• Whether or not Mariano Cac was clothed with authority to renounce or waive the claims of the private respondents.
• Whether or not the private respondents are entitled to 175,545.05 pesos as their share in the adjustment.

Applicable Provisions

Article One of the subcontract, on the documents comprising the contract, provides:

The following documents are hereby incorporated and made part of this Contract as though fully written out and set forth herein insofar as they are not inconsistent with the terms thereof: National Power Corporation's Specification No. Sp80DLc – 502. Any and all plans, drawings, and schedules prepared by National Power Corporation. SUB-CONTRACTOR'S proposal dated March 8, 1982. The documents mentioned above shall collectively be referred to as "Contract Documents."

This clause is the gateway through which the NPC plans and specifications, including the adjustment provision, entered the subcontract.

Paragraph GP-08 of the Plans and Specifications, on contract price adjustment, provides:

Adjustment of contract prices will be made should any or both of the following conditions occur as embodied in P.D. No. 454 as amended by PD No. 459. (a) If during the effectivity of the contract, the cost of labor, materials, equipment rentals and supplies for construction should increase or decrease due to the direct acts of the Philippine Government. The increase of prices of gasoline and other fuel oils, and of cement shall be considered as direct acts of the Philippine Government. (b) If during the effectivity of the contract, the costs of labor, equipment rentals, construction materials and supplies used in the project should cause the sum total of the prices of bid items to increase or decrease by more than five percent (5%) compared with the total contract price.

This is the very provision that grants the adjustment, and it was incorporated into the subcontract, so it bears directly on the private respondents' entitlement.

Ruling

On the first issue, the Court held that the private respondents are entitled to the adjustment. The qualifying phrase obligations and responsibilities in the subcontract applied only to the NPC-Romago contract, not to the other contract documents. The adjustment is not found in the NPC-Romago contract but in the NPC Plans and Specifications, which were expressly included as contract documents. The Court stressed that had the parties intended to restrict the application of the adjustment provision, they would have stated so; their silence favored the private respondents. The Court also distinguished the MC Engineering case, because there the price increase depended on a true valuation that was never made, while here the adjustment depended on official indices issued by the Central Bank.

On the second and third issues, the Court held that the voucher receipt did not extinguish the claim. Romago's own petition admitted that the adjustment was not included in the computation, and the computation of its finance manager showed the 38,712.71 pesos was the balance due under the original contract, excluding the adjustment. Hence the release could not be construed as a release of the adjustment, and the question of Mariano Cac's authority became immaterial.

On the fourth issue, the Court held that the private respondents are entitled to 175,545.05 pesos, representing seventy percent of the adjustment, and that the 38,712.71 pesos should not be deducted from it. The Court closed with the rule that parties are bound by the terms of their contract, which is the law between them.

Doctrine

A subcontract that incorporates the plans and specifications of the main contract as though fully written out makes those provisions part of the subcontract. Where the contract price adjustment is granted not by the main contract but by the plans and specifications, and those plans are incorporated, the subcontractor shares in the adjustment. A receipt for full payment of accounts does not release a claim that was never included in the computation, and the unequivocal silence of the subcontract on non-applicability favors entitlement. Parties are bound by the terms of their contract, which is the law between them.

Disposition

The petition was denied for lack of merit, and the decision of the Court of Appeals and its resolution were affirmed, with costs against Romago.

Remember This

Memorize this line: the contract is the law between the parties, and what the subcontract incorporates as though fully written out binds the subcontractor. Examiners use this case to test incorporation by reference and the effect of a receipt that does not cover the disputed claim.