FLAVIO K. MACASAET & ASSOCIATES, INC., PETITIONER, VS. COMMISSION ON AUDIT AND PHILIPPINE TOURISM AUTHORITY, RESPONDENTS.

Flavio K. Macasaet and Associates versus Commission on Audit and Philippine Tourism Authority

The Case

This is a petition for certiorari brought by Flavio K. Macasaet and Associates, Incorporated against the Commission on Audit and the Philippine Tourism Authority. The petitioner asks the Supreme Court to overturn the ruling of the Commission on Audit, which denied its claim for the completion of payment of professional fees under a contract for project design and management services. The case matters because it fixes the rule on how a professional fee pegged to a percentage of the final actual project cost is computed, and it shows that a price escalation awarded to the main contractor forms part of that cost base even without any additional work by the consultant.

Procedural History

The petitioner first sought payment from the Philippine Tourism Authority, which denied the claim. The petitioner then sought reconsideration, and the matter reached the Commission on Audit, which likewise denied the claim. The Commission on Audit reasoned that to allow the claim, absent a showing that extra or additional services had been rendered, would result in overpayment to the prejudice of the Government. From that ruling, the petitioner filed this petition for certiorari before the Supreme Court under the constitutional provision allowing decisions of the constitutional commissions to be brought to the Court on certiorari. The Supreme Court gave due course to the petition and decided it on the merits.

Facts

On 15 September 1977, the Philippine Tourism Authority entered into a contract for project design and management services for the development of the proposed Zamboanga Golf and Country Club in Calarian, Zamboanga City. The contract was originally with Flavio K. Macasaet alone and later with his company. Under the contract, the Authority obligated itself to pay a professional fee of seven percent of the actual construction cost. A schedule of payments provided for periodic payments based on a reasonable estimated construction cost, with the balance computed on the final actual project cost upon completion and acceptance of the work.

Pursuant to the schedule, the Authority made periodic payments of the stipulated professional fees. Upon completion of the project, the Authority paid what it perceived to be the balance of the professional fees. It later turned out, however, that after the project was completed, the Authority paid the main contractor an additional sum of 3,148,198.26 pesos representing the escalation cost of the contract price due to the increase in the price of construction materials.

Upon learning of the price escalation, the petitioner requested an additional professional fee of 219,302.47 pesos, representing seven percent of that escalation amount. The Authority denied payment on the ground that the price escalation referred to the increased cost of construction materials and did not entail additional work on the part of the petitioner. Reconsiderations, up to the Commission on Audit, were to no avail. Hence the petition.

Issues

• Whether or not the petitioner is entitled to additional professional fees based on the price escalation awarded to the main contractor.
• Whether or not the price escalation should be included in the final actual project cost on which the balance of the professional fee is computed.

Applicable Provisions

Article 1370 of the Civil Code provides:

If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control.

This provision governs the Court's reading of the contract terms actual construction cost and final actual project cost, whose literal meaning was held to control.

Article 1159 of the Civil Code provides:

Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.

This provision supports the holding that the contract, as the law between the parties, must be complied with in good faith, including payment of the balance of the professional fee.

Ruling

On the first issue, the Court ruled in favor of the petitioner. The Court held that the very terminologies used in the contract call for affirmative relief in the petitioner's favor. Under Article IV, the petitioner was entitled to seven percent of the actual construction cost. Under paragraphs 1, 2, 3, and 4 of Article V, periodic payments were based on a reasonable estimated construction cost. Ultimately, under paragraph 5 of Article V, the balance of the professional fee was to be computed on the basis of the final actual project cost. The Court found significance in the use of the terms actual construction cost, gradating into final actual project cost. The real intendment of the parties was to base the ultimate balance not on actual construction cost alone but on the final actual project cost, and not on construction cost alone but on project cost. By so providing, the contract allowed for flexibility based on actuality and as a matter of equity. The final actual project cost covers the totality of all costs as actually and finally determined, and logically includes the escalation cost of the contract price.

On the second issue, the Court likewise ruled for the petitioner. It held that it matters not that the price escalation awarded to the construction company did not entail additional work for the petitioner, since neither did it for the main contractor, and the increased cost of materials was not the doing of either contracting party. That an escalation clause was not specifically provided for in the contract was of no moment, for it may be considered as already built in and understood from the very terms actual construction cost and eventually final actual project cost. Article VI of the contract, which speaks of a major change in the planning and engineering aspects necessitating additional compensation, had no bearing, because the petitioner's claim was for the balance of its professional fees based on the final actual project cost and not for additional compensation under Article VI. The Court applied Article 1370 of the Civil Code, holding that the terminologies being clear, their literal meaning controls, and applied Article 1159, holding that obligations arising from contract have the force of law between the parties and should be complied with in good faith.

Doctrine

A professional fee stipulated as a percentage of the final actual project cost is computed on the totality of all costs as actually and finally determined, and logically includes the escalation cost of the contract price. The escalation cost need not entail additional work by the consultant, and the absence of a specific escalation clause is of no moment, because escalation is deemed built in and understood from the terms actual construction cost and final actual project cost. Where the terms of a contract are clear and leave no doubt upon the intention of the parties, their literal meaning controls under Article 1370 of the Civil Code, and obligations arising from contract have the force of law between the parties and must be complied with in good faith under Article 1159.

Disposition

The Court set aside the ruling of the Commission on Audit and ordered the Philippine Tourism Authority to pay the petitioner the additional amount of 219,302.47 pesos to complete the payment of its professional fee under the contract.

Remember This

The single line worth memorizing is that the final actual project cost covers the totality of all costs as actually and finally determined and logically includes the escalation cost of the contract price. Examiners use this case to test the literal meaning rule in Article 1370 of the Civil Code and the force of contracts under Article 1159, especially where a consultant claims a percentage fee on a cost escalation without rendering additional work.