FILINVEST ALABANG, INC., PETITIONER, VS. CENTURY IRON WORKS, INC., RESPONDENT.

Filinvest Alabang versus Century Iron Works

The Case

This is a petition for review on certiorari brought by Filinvest Alabang, Incorporated, the project owner, against Century Iron Works, Incorporated, the contractor, arising from a complaint for sum of money with damages. Century Iron Works sued to recover three amounts that Filinvest withheld or refused to pay after the metal works for the Filinvest Festival Supermall were finished: the balance of the retention fee, an additional deduction taken on account of alleged substandard workmanship, and the cost of an additional scenic elevator enclosure built beyond the original scope. The case matters because it pairs two rules a practitioner must keep apart: the estoppel that arises from a Certificate of Completion and Acceptance, and the strict written requirements that govern extra work under a fixed lump sum contract.

Procedural History

Century Iron Works filed the complaint for sum of money with damages before the Regional Trial Court of Pasig City, assigned in the City of San Juan. The trial court granted the claim for the additional deduction of 227,500 pesos with legal interest, holding that Filinvest was estopped from asserting substandard workmanship because it had issued a Certificate of Completion and Acceptance. The trial court denied the rest, holding that the contract was fixed lump sum in nature, so Filinvest's liability could not exceed the stipulated contract price of 29,000,000 pesos, and it could not be held liable for the additional scenic elevator enclosure.

Century Iron Works appealed to the Court of Appeals. The appellate court affirmed with modification. It agreed that Filinvest was estopped, and ordered it to pay not only the 227,500 pesos but also the retention balance of 40,880 pesos, which the trial court had overlooked. On the elevator enclosure, however, the Court of Appeals disagreed with the trial court: it held that the contract was not fixed lump sum, so the parties could stipulate on additional works, and that Filinvest would be unjustly enriched if it did not pay the 1,123,708 pesos cost of the additional elevator.

Filinvest moved for reconsideration, which was denied. Filinvest then elevated the matter to the Supreme Court by petition for review on certiorari under Rule 45.

Facts

Sometime in 1997 and 1998, Filinvest awarded several contracts to Century Iron Works. Among them was a contract for the completion of the metal works requirement of the Filinvest Festival Supermall, amounting to 29,000,000 pesos, embodied in an Agreement for Construction, supplemented by the General Conditions of Contract. The Agreement described the price as a lump sum contract price.

After the project was completed, Century Iron Works tried to collect what it believed was still owed. Filinvest, despite demands, withheld an aggregate of 1,392,088 pesos, broken down into the balance of the retention fee of 40,880 pesos, an additional deduction of 227,500 pesos, and the cost of an additional scenic elevator enclosure of 1,123,708 pesos. Filinvest justified the first two amounts as damages for substandard workmanship, and resisted the third on the ground that the contract was lump sum, so it could not be liable for work outside the stipulated price absent any instruction authorizing it.

The records show, however, that Filinvest had issued a Certificate of Completion and Acceptance, signifying that it accepted the work as up to par. They also show that Filinvest issued two Site Instructions, dated the first of August 1997 and the twenty-third of January 1998, covering the construction of the additional scenic elevator enclosure, and that the valuation of that work was drawn from a Bill of Quantities previously agreed upon by the parties and put in writing in a Cost Breakdown for Claim of Change Orders and a Material Quantity Breakdown for Scenic Elevator Enclosure submitted by the contractor.

Issues

• Whether or not the Court of Appeals correctly ordered Filinvest to pay the balance of the retention fee of 40,880 pesos and the additional deduction of 227,500 pesos, in light of the Certificate of Completion and Acceptance it had issued.
• Whether or not the contract between the parties is fixed lump sum in nature, such that Filinvest's liability is limited to the stipulated contract price.
• Whether or not Filinvest is liable for the cost of the additional scenic elevator enclosure amounting to 1,123,708 pesos.

Applicable Provisions

Article 1724 of the Civil Code governs fixed lump sum contracts and provides:

Article 1724. 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 landowner, 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 provision fixes the owner's liability at the stipulated price, yet expressly allows recovery for additional work when the two written requisites are met, which is the very question in this case.

On the estoppel point, the Court invokes the rule now found in Section 2, Rule 131 of the Rules of Court, which it quotes:

Whenever a party has, by his own declaration, act, or omission, intentionally and deliberately led another to believe a particular thing true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act or omission, be permitted to falsify it.

This rule bars Filinvest from denying the quality of work it had already accepted in writing.

Ruling

On the first issue, the Court ruled in favor of Century Iron Works. A petition for review under Rule 45 covers only questions of law, and findings of fact of the trial court, especially when affirmed by the Court of Appeals, are binding absent a clear showing of abuse. Both lower courts found that Filinvest had issued a Certificate of Completion and Acceptance. That finding estops Filinvest from withholding the amounts due to purported substandard workmanship, applying the rule quoted above. Hence, Filinvest must remit both the 40,880 pesos retention balance and the 227,500 pesos deduction.

On the second issue, the Court held that the contract is indeed fixed lump sum in nature. The Agreement required the contractor to furnish all materials, labor, equipment, supervision and all other accessories necessary to complete the supply and installation of the metal works, in exchange for the lump sum contract price of 29,000,000 pesos. But the Court clarified that the fixed lump sum character of the contract does not preclude the parties from agreeing on additional works.

On the third issue, the Court ruled that Filinvest is liable for the 1,123,708 pesos. Article 1724 allows a contractor to recover additional costs provided there is a written authority from the owner ordering or allowing the changes, and a written agreement of the parties on the increase in price. Compliance with both is a condition precedent, and neither may be proved by evidence other than the written authority and agreement. Here, both requisites were present: the two Site Instructions constituted the written authority, and the Cost Breakdown and Material Quantity Breakdown, drawn from the agreed Bill of Quantities, constituted the written agreement on valuation. The Court also corrected the interest: twelve percent per annum from extrajudicial demand until the thirtieth of June 2013, and six percent per annum thereafter until full payment.

Doctrine

First, a project owner who issues a Certificate of Completion and Acceptance is estopped from later asserting that the contractor's work was substandard, and cannot withhold retention or other amounts on that ground.

Second, in a fixed lump sum contract, the owner's liability is generally limited to the stipulated price, but the parties may still agree on additional works. Under Article 1724 of the Civil Code, the contractor may recover the cost of changes only if two requisites concur: a written authority from the owner ordering or allowing the change, and a written agreement on the additional price. Both are conditions precedent, and neither may be proved by any evidence other than the written authority and agreement.

Disposition

The petition was denied, and the Court of Appeals decision and resolution were affirmed with modification, ordering Filinvest to pay Century Iron Works the aggregate of 1,392,088 pesos with legal interest at twelve percent per annum from extrajudicial demand until the thirtieth of June 2013 and six percent per annum thereafter until full payment.

Remember This

Memorize this line: a fixed lump sum contract limits the owner's liability to the stipulated price, but written site instructions plus a written valuation open the door to recovery for extra work under Article 1724. Examiners use this case to test the two written requisites for change orders and the estoppel created by a Certificate of Completion and Acceptance.