SPOUSES VICTORIANO CHUNG AND DEBBIE CHUNG, PETITIONERS, VS. ULANDAY CONSTRUCTION, INC., RESPONDENT.

Chung versus Ulanday Construction

The Case

This is a petition for review on certiorari filed by Spouses Victoriano Chung and Debbie Chung against Ulanday Construction, Incorporated, arising from a construction contract for the concrete structural shell of the spouses' two-storey residence in Urdaneta Village, Makati City. The contractor sued to collect the unpaid balance of the contract price and the unpaid change orders, while the spouses countered with claims for delay, defects, and damages. The case matters because it is the Supreme Court's clearest statement that Article 1724 of the Civil Code is a condition precedent, not a mere guideline: a contractor who performs change orders without the owner's prior written approval cannot recover the added cost, and the owner's partial payments and silence do not amount to estoppel in pais.

Procedural History

Ulanday Construction filed a complaint for collection with the Regional Trial Court of Makati City, Branch 145. In a decision dated December 11, 1997, the trial court held that both parties failed to comply strictly with the contract. Applying Article 1724 of the Civil Code, it ruled that the contractor performed the change orders at its own risk and could not compel payment, except for the 130,000 pesos that petitioner Debbie Chung had ratified and acknowledged. It also found the contractor not at fault for the delay, since the spouses delayed their progress payments, but held the spouses liable for the roof leak traceable to a shallow concrete gutter, and ordered the contractor to repair it at its expense. Both parties appealed by ordinary appeal under Rule 41.

The Court of Appeals decided the appeal on June 28, 2002. It found Article 1724 inapplicable, reasoning that the provision concerns disputes over higher costs of labor and materials, and applied instead the principle of estoppel in pais, holding that the spouses impliedly consented to or tacitly ratified the change orders by paying several of them and by not objecting. It affirmed the trial court but increased the award for change orders to 740,587.11 pesos, imposed 6 percent interest from formal demand and 12 percent after finality, and awarded 50,000 pesos in exemplary damages. On reconsideration, it denied the spouses' motion but granted the contractor's, adding attorney's fees equal to 10 percent of the total award. Hence the petition for review on certiorari before the Supreme Court.

Facts

In February 1985, the spouses contracted Ulanday Construction to build the concrete structural shell of their house within a 150-day period for a contract price of 3,291,142 pesos. The contract required the contractor to supply all materials, labor, and equipment, and required the spouses to pay a downpayment of 987,342.60 pesos with the balance in progress payments based on actual work completed. Crucially, the contract provided that the contractor could make no change or alteration in the plans, specifications, and works without the owner's prior written approval, and that a mere act of tolerance would not constitute approval. The parties later excluded the roofing and flushing work, reducing the price to 2,969,804 pesos, and the spouses paid the downpayment on March 17, 1995.

As construction proceeded, the contractor submitted twelve progress billings. The spouses paid the first seven, amounting to 1,270,641.59 pesos, though always beyond the seven-day period, and later granted a 100,000-peso cash advance. During the works, the contractor effected nineteen change orders without the spouses' prior written approval, totaling 912,885.91 pesos. The spouses paid 42,298.61 pesos for Change Order Number 1 and partially paid 130,000 pesos for Change Order Numbers 16 and 17, with Debbie Chung acknowledging in writing that the balance would be paid upon completion.

The contractor sent follow-up letters from July 1995 to February 1996, then demanded full payment. The spouses refused, asserting that the contractor violated the contract by failing to finish within 150 days, by not complying with the change order provisions, and by overstating its billings. The contractor then sued in May 1996.

Issues

• Whether or not the Court of Appeals erred in affirming the trial court's award for unpaid progress billings.
• Whether or not the Court of Appeals erred in increasing the amount due for change orders by applying estoppel in pais instead of Article 1724 of the Civil Code.
• Whether or not the Court of Appeals erred in awarding exemplary damages and attorney's fees to the contractor.

Applicable Provisions

Article 1724 of the Civil Code provides:

The contractor who undertakes to build a structure or any other work for a stipulated price, in conformity with plans and specifications agreed upon with the land-owner, can neither withdraw from the contract nor demand an increase in the price on account of the higher cost of labor or materials, save when there has been a change in the plans and specifications, provided: (1) Such change has been authorized by the proprietor in writing; and (2) The additional price to be paid to the contractor has been determined in writing by both parties.

This is the decisive provision: it bars recovery of added costs absent both the owner's written authorization and a written agreement on the additional price.

Article 2208 of the Civil Code provides, in its relevant portion:

In the absence of stipulation, attorney's fees and expenses of litigation, other than judicial costs, cannot be recovered, except: (1) When exemplary damages are awarded; (2) When the defendant's act or omission has compelled the plaintiff to litigate with third persons or to incur expenses to protect his interest; (5) Where the defendant acted in gross and evident bad faith in refusing the plaintiff's plainly valid, just, and demandable claim.

This governs whether the contractor may recover attorney's fees, which the Court found unwarranted.

Ruling

On the first issue, the Court held that the award of 629,819.84 pesos for progress billings had no basis. Only 545,922.13 pesos was actually supported by progress billings numbered 8 to 12, and after deducting the 100,000-peso cash advance, the unpaid progress billings amounted to only 445,922.13 pesos.

On the second issue, the Court ruled that the Court of Appeals erred in discarding Article 1724. The provision governs recovery of additional costs in contracts for a stipulated price and the increase in price for additional work due to changes in plans and specifications. Compliance with the two requisites is a condition precedent, and the absence of either bars recovery; neither the authority for the changes nor the additional price may be proved by any other evidence. The contract itself incorporated this rule, providing that the contractor shall make no change or alteration without the owner's prior written approval, and that a mere act of tolerance shall not constitute approval. Since the contractor did not secure that written approval, it could not claim the added costs, save for the change orders the spouses accepted and paid for.

The Court also held that estoppel in pais was misapplied. Its real office is limited to supplying a deficiency in the law, not supplanting positive law. The written-consent requirement is explicit in Article 1724 and deemed written in the contract, and the contract expressly provided that tolerance is not approval. The payments for Change Order Numbers 1, 16, and 17 were at best acts of tolerance that could not modify the contract, though the spouses remained liable for the 130,000-peso balance on Change Order Numbers 16 and 17.

On the third issue, the Court disallowed exemplary damages and attorney's fees, since the spouses' refusal rested on a valid ground, the lack of prior written approval. Finally, the Court declined to order repair of the defective gutter given the lapse of time, and instead set off the spouses' liabilities of 575,922.13 pesos against the repair cost of 717,524 pesos, leaving 141,601.87 pesos due from the contractor, subject to 6 percent interest per annum from the trial court's judgment and 12 percent after finality.

Doctrine

Under Article 1724 of the Civil Code, a contractor under a contract for a stipulated price cannot recover additional costs for change orders unless two requisites concur as a condition precedent: the change was authorized by the owner in writing, and the additional price was determined in writing by both parties. Neither requisite may be proved by any other evidence, and the absence of either bars recovery. Estoppel in pais cannot supplant this positive law; an owner's partial payments and silence are mere acts of tolerance that do not modify the contract, especially where the contract itself states that tolerance is not approval. Exemplary damages require bad faith or wanton conduct, and attorney's fees require gross and evident bad faith in refusing a plainly valid claim; a refusal grounded on a valid contractual objection is neither.

Disposition

The petition was granted; the Court of Appeals decision and resolution were reversed and set aside, and the contractor was ordered to pay the spouses 141,601.87 pesos representing the balance of the repair costs, with 6 percent interest per annum from filing of the complaint until finality and 12 percent thereafter until full payment.

Remember This

Memorize this line: under Article 1724, no prior written approval and no written agreement on price means no recovery for change orders, and tolerance is not approval. Examiners use this case to test the condition precedent rule for change orders and the limits of estoppel in pais against positive law.