By itself, building your dream house poses innumerable challenges. From selecting a competent and trustworthy contractor to project cost estimation, clients are mostly faced with missed turn-over date caused by weather unpredictability, subcontractor issues, fluctuation of the prices of supplies, difficulty in hiring skilled-manpower, and uncontrolled revisions of project scope. Name it and you'll have it. 

But what if the prices of the construction projects went beyond the contract price? Who shall bear the costs?

This issue has been resolved by the Supreme Court resolved in the case of Security Bank & Trust Company and Rosito C. Manhit versus Court of Appeals and Ysmael C. Ferrer (G.R. No. 117009, October 11, 1995). 

Back in February 4, 1980, petitioners Security Bank & Trust Company and Rosito C. Manhit (the Clients) contracted private respondent Ysmael C. Ferrer (the Contractor) to construct a building of the bank in Davao City within 200 days for the price of P1,760,000.00. Beating his deadline, the Contractor was able to finish the construction on August 15, 1980. Unfortunately, the inevitable increase of the cost of construction materials forced him to incur additional expenses of about P300,000.00 on top of the original contract price. With the aim of shifting this burden, the Contractor notified the Clients regarding the contract price escalation, furnishing the latter of the supporting receipts. Sometime in March 1981, the Clients engaged an independent architectural firm to confirm the additional cost, which recommended to lower it to P200,000.00. Instead of paying, the Clients denied the liability since they did not authorize payment beyond the original price without their consent, citing Article IX of the construction agreement, which provides: 

"If any 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 whosoever 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." 

Aggrieved, the Contractor filed against the Clients a complaint for breach of contract with damages before the Regional Trial Court Branch 62 in Makati City. After trial on merits, RTC ruled in favor of the Contractor. The Clients challenged such directly to the Supreme Court.

The issue to be resolved was whether the Clients are liable to pay the construction cost escalation despite the absence of any mutual agreement of the parties. 

The Supreme Court ruled in the affirmative.

Quoting the construction agreement, the Clients argued that the liability to pay any price escalation has been made subject to a condition that the "appropriate adjustment" shall be made upon mutual agreement of both parties. Since there has been no consent from the Clients to shoulder the price increase, then, they are not liable to pay. 

Is there a legal basis or bases in collecting cost escalation on account of drastic and unexpected increase in construction cost?

Demanding payment of the price increase would have been an easy feat had there been a prior agreement between the parties. But in this case, there was none. Just the same, the Supreme Court invoked the equity principle of unjust enrichment under Article 22 of the Civil Code on Human Relations. To quote:

"Article 32. Every person who through an act of performance by another, or any other means, acquires or comes into possession of something at the expense of the latter without just or legal ground, shall return the same to him."
To allow the Clients to acquire the constructed building at a price far below its actual construction cost would undoubtedly constitute unjust enrichment to the prejudice of the Contractor. 

Is mutual agreement (or consent of the client) necessary to collect a price escalation?

Answer: No. Can the Clients be made to pay beyond what the agreed contract price in case of a drastic and unexpected increase in the construction cost? This tricky question has been answered applying Article 1182 of Republic Act No. 386, otherwise known as the New Civil Code of the Philippines, which states that: "[w]hen the fulfillment of the condition depends upon the sole will of the debtor, the conditional obligation shall be void." Additionally, the Supreme Court said that a mutual agreement, the absence of which the Clients cannot be held liabile to pay the increase is in effect a condition dependent on their sole will, since the Contractor would naturally and logically give consent to such an agreement which would allow him recover of the increased cost. In other words, the Clients' consent to a price increase was considered as a condition subject to their sole will, meaning, it can only be held liable to pay if and when it agrees to pay. Applying Article 1182, such condition is null and void, as if it does not exist.

In sum, the complexities in the management of a construction project may result to risks both to the clients and the contractors. While the contract may assist the parties in terms of costs and expectations, a thorough plan can still go off-track. As when the clients would be benefitted from the successful completion of the project beyond the estimated price at the onset, both the law and equity allows recovery on reasonable amount, as long as it can be justified.

For more information, you may reach us through our email address (attynarcisoreyesjr@gmail.com), or call our landline number (049 5011 720), or call our mobile number (0977 318 6192). Our office is located at 3rd Floor, Ventura Center Building, Santa Rosa-Tagaytay Road, Done Jose, Santa Rosa City.