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Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 160972 March 9, 2010

LEIGHTON CONTRACTORS PHILIPPINES, INC., Petitioner,

vs.
CNP INDUSTRIES, INC., Respondent.

DECISION

CORONA, J.:

This petition for review on certiorari1 assails the May 31, 2000 decision2 and November 20, 2003 resolution3 of the
Court of Appeals (CA) in CA-G.R. SP No. 52090.

In 1997, Hardie Jardin, Inc. (HJI) awarded the contract for site preparation, building foundation and structural steel
works of its fibre cement plant project in Barangay Tatalon in San Isidro, Cabuyao, Laguna to petitioner Leighton
Contractors Philippines, Inc.4

On July 5, 1997, respondent CNP Industries, Inc. submitted to petitioner a proposal to undertake, as subcontractor,
the construction of the structural steelworks5 of HJI’s fibre cement plant project. It estimated the project to require
885,009 kgs. of steel costing ₱44,223,909.6

On July 15, 1997, petitioner accepted respondent’s proposal specifying that the project cost was for the fixed lump
sum price of ₱44,223,909.7 Respondent agreed and petitioner instructed it to commence work.

Meanwhile, petitioner revised the fabrication drawings of several of the structure’s columns necessitating adjustments
in the designs of roof ridge ventilation8 and crane beams.9 Petitioner communicated the said revisions to respondent
on July 16, 1997. Respondent estimated that the said revisions required an additional 8,132 kgs. of steel costing
₱13,442,882. However, it did not re-negotiate the fixed lump-sum price with petitioner.

On July 28, 1997, petitioner and respondent signed a sub-contract10 providing:

(B) Subcontract works.

To carry out complete structural steelworks11 outlined in the Sub-contract Lump Sum Price [of ₱44,223,909]12 in
accordance with the Main Drawing13 and Technical Specifications14 and in accordance with the Main Contract,
all of which are available on Site.

(c) Special Conditions of the Sub-Contract.

xxx xxx xxx

2. Notwithstanding the provisions of Clause 11(4)15 of the General Conditions of the Sub-contract, this Sub-contract
is on a Fixed Lump Sum basis and is not subject to re-measurement. It is the responsibility of [respondent] to
derive his own quantities for the purpose of the Lump Sum Sub-contract price. No additional payments will be made

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 to [respondent] for any errors in quantities that may be revealed during the Sub-contract period. (emphasis supplied)
16

xxx xxx xxx

Moreover, the contract required respondent to finish the project within 20 weeks from the time petitioner was allowed
access to the site on June 20, 1997,17 that is, on or before November 6, 1997.

On July 29, 1997, petitioner paid respondent 10% of the project cost amounting to ₱4,422,390.90.18

Thereafter, in a letter dated July 31, 1997, respondent informed petitioner that, due to the revisions in the designs of
the roof ridge ventilation and crane beams, it incurred "additional costs" amounting to ₱13,442,882.

Respondent submitted its weekly progress report including the progress billing. Petitioner, on the other hand, paid the
billings.

In its August 12, 1997 progress report,19 respondent reiterated that the roof ridge ventilation and crane beams were
not included in the scope of work and consequently were not part of the sub-contract price. It likewise presented the
cost estimates in the progress report.

Because respondent was unable to meet the project schedule, petitioner took over the project on April 27, 1998. At
the time of the takeover, respondent had already accomplished 86% of the project20 for which petitioner paid
₱42,008,343.69.21

Thereafter, respondent again asked petitioner to settle the "outstanding balance" of ₱12,364,993.94, asserting that
the roof ridge ventilation and crane beams were excluded from the project cost. Petitioner refused to pay as the July
28, 1997 subcontract clearly stated that the sub-contract price was a fixed lump sum.

The parties submitted the matter to the Construction Industry Arbitration Commission (CIAC) for arbitration.22 The
principal issue submitted thereto was whether the cost of the additional steel used for the roof ridge ventilation and
crane beams was included in the fixed lump-sum price.

Respondent argued that the proposal it submitted (accepted by petitioner on July 15, 1997) excluded the roof ridge
ventilation and crane beams as the fabrications drawings were "clouded" or had not been finalized when the
subcontract was executed on July 28, 1997. Furthermore, respondent claimed that petitioner approved the cost
estimates when Simon Bennett, petitioner’s quantity surveyor, signed the August 12, 1997 progress report. This
proved that the said portions were "additional works" excluded from the fixed lump-sum price.

Petitioner, on the other hand, asserted that the subcontract explicitly included the aforementioned works in the scope
of work. Furthermore, it was not liable for the "additional costs" incurred by respondent as the subcontract clearly
provided that the project was for the fixed lump-sum price of ₱44,223,909. It likewise denied approving respondent’s
additional cost estimates as Bennett signed the August 12, 1997 progress report only to acknowledge its receipt.

The CIAC found that the subcontract was perfected when petitioner accepted respondent’s proposal on July 15, 2009.
Thus, because the fabrication drawings for the roof ridge ventilation and crane beams had not yet been finalized then,
the same were deemed "additional works" not included in the lump-sum price. In a decision dated March 19, 1999,23
the CIAC rendered judgment in favor of respondent and ordered petitioner to pay the balance of the contract price
plus additional works, the cost of arbitration and attorney’s fees.

Aggrieved, petitioner assailed the CIAC decision via a petition for review in the CA.24 Aside from disputing the CIAC’s
interpretation of the sub-contract, petitioner likewise argued that the arbitral body disregarded Article 1724 of the Civil
Code.25

In a decision dated May 31, 2000, the CA dismissed the petition and affirmed the CIAC decision in toto.26 Petitioner
moved for reconsideration but it was denied in resolution dated November 20, 2003.27

Hence, this recourse.

Petitioner insists that it was not liable to pay for the increase in cost due to the adjustments in the design of the roof

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 ridge ventilation and crane beams. The subcontract clearly defined the scope of work as the construction of the
structural steel works and stated that it was for a fixed lump-sum price. Furthermore, assuming arguendo that the said
adjustments were indeed additional works, petitioner was not liable to pay for incremental cost since respondent did
not observe the procedure mandated by Article 1724 of the Civil Code.

The petition is meritorious.

The parties entered into a contract for a piece of work28 whereby petitioner engaged respondent as contractor to build
and provide the necessary materials for the construction of the structural steel works of HJI’s fiber cement plant for a
fixed lump-sum price of ₱44,223,909.

The parol evidence rule, embodied in Section 9, Rule 130 of the Rules of Court29 holds that when the terms of an
agreement have been reduced into writing, it is considered as containing all the terms agreed upon and there can be,
between the parties and their successors in interest, no evidence of such terms other than the contents of the written
agreement.30 It, however, admits of exceptions such as when the parties subsequently modify the terms of their
original agreement.

The scope of work was defined in the subcontract as the completion of the structural steel works according to the
main drawing, technical specifications and the main contract.31 Thus, to determine whether the roof ridge ventilation
and crane beams were included in the scope of work, reference to the main drawing, technical specifications and
main contract is necessary. The main contract32 stated that the structural steel works included Drawing Nos. P302-
6200-S-405 and P302-6200-S-402.33 This, according to petitioner and respondent,34 referred to the roof ridge
ventilation and crane beams. Hence, the said works were clearly included in the sub-contract works.

Nevertheless, respondent contends that when Bennett signed the August 12, 1997 progress report, petitioner
approved the additional cost estimates, in effect modifying the original agreement in the subcontract. Respondent
therefore claims an exception to the parole evidence rule.

In contracts for a stipulated price like fixed lump-sum contracts, the recovery of additional costs is governed by Article
1724 of the Civil Code.35 Settled is the rule that a claim for the cost of additional work arising from changes in the
scope of work can only be allowed upon the:

(1) written authority from the developer or project owner ordering or allowing the written changes in work and

(2) written agreement of parties with regard to the increase in price or cost due to the change in work or design
modification.

Furthermore, compliance with the two requisites of Article 1724, a specific provision governing additional works, is a
condition precedent for the recovery. The absence of one or the other condition bars the recovery of additional costs.
Neither the authority for the changes made nor the additional price to be paid therefor may be proved by any other
evidence.36

Respondent, in this instance, presented the August 12, 1997 progress report signed by Bennett. However,
respondent knew that Bennett was not authorized to order any changes in the scope of works or to approve the cost
thereof. It addressed all correspondences relating to the project to (petitioner’s) project manager Michael Dent, not
Bennett.37 Moreover, Bennett did not sign the subcontract for and in behalf of respondent but only as a witness.38
Respondent was therefore aware of Bennett’s lack of authority.

In this respect, aside from respondent’s failure to present the documents required by Article 1724 of the Civil Code,
we find that the sub-contract was never modified. Petitioner therefore cannot be liable for the additional costs incurred
by respondent. 1avvphi1

In a fixed lump-sum contract, the project owner agrees to pay the contractor a specified amount for completing a
scope of work involving a variety of unspecified items of work without requiring a cost breakdown.39 The contractor
estimates the project cost based on the scope of work and schedule and considers probable errors in measurement
and changes in the price of materials.40

By entering into a fixed lump-sum contract, respondent undertook the risk of incurring a loss due to errors in

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 measurement. The sub-contract explicitly stated that the stipulated price was not subject to remeasurement. Since the
roof ridge ventilation and crane beams were included in the scope of work, respondent was presumed to have
estimated the quantity of steel (the minimum and maximum amount) needed on the said portions when it made its
formal offer on July 5, 1997. Concomitantly, by the very nature of a fixed lump-sum contract, petitioner was only liable
to pay the stipulated subcontract price.41

WHEREFORE, the May 31, 2000 decision and November 20, 2003 resolution of the Court of Appeals in CA-G.R. SP
No. 52090 affirming the March 19, 1999 decision of the Construction and Industry Arbitration Commission are hereby
REVERSED and SET ASIDE. New judgment is hereby entered declaring that petitioner Leighton Contractors
Philippines, Inc. is not liable for the additional costs incurred by respondent CNP Industries, Inc.

SO ORDERED.

RENATO C. CORONA
Associate Justice
Chairperson

WE CONCUR:

PRESBITERO J. VELASCO, JR. ANTONIO EDUARDO B. NACHURA

Associate Justice Associate Justice

DIOSDADO M. PERALTA JOSE CATRAL MENDOZA

Associate Justice Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to
the writer of the opinion of the Court’s Division.

RENATO C. CORONA
Associate Justice
Chairperson

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above Decision had been
reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

REYNATO S. PUNO
Chief Justice

Footnotes

1 Under Rule 45 of the Rules of Court.

2 Penned by Justice Ruben T. Reyes (retired) and concurred in by Justices Andres B. Reyes and Jose L.
Sabio, Jr. of the Former Special Fifteenth Division of the Court of Appeals. Rollo, pp. 108-127.

3 Id., pp. 129-130.

4 Contract No. P302-C-001. Id., pp. 363-531.

5 Contract No. P302-C-001, Part E, par. 5 delineated the scope of the structural steelworks as follows:

5.0. Structural Steelworks.

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 5.1. Supply, detailing where required, fabrication, surface preparation, painting and shop trial assembly
of structural steelwork and light-gauge steelwork associated with the steel building as shown on the
drawings such as columns, beams, girders, girts, purlins, crossbracings, fly braces, sag rods, bridgings,
base plates, crane railings and like items.

5.2. Supply of all field connection materials such as nuts, bolts, washers, screws, shims, packers,
gaskets, back-up bars and the like.

5.3. Non-destructive testing (NDT) of the Works, in accordance with the approved ITP. A minimum of 5%
of welds shall be tested using dye penetrant testing.

5.4. Field assembly and installation (including touch-up painting) of structural steelwork and light-gauge
steelwork.

5.5. Preparation of concrete surfaces and supply and installation of grouting after levelling, alignment
and tensioning of the structures’ bolted connections.

5.6. Supply and installation of cladding including gutters, ridge roll, flashings and other accessories and
items including but not limited to down pipes, roller doors, personnel doors and vents as shown in
drawings.

Contract No. P302-C-001, Part E, par. 14 referred to the following drawings:

P302-6200-S-401 0 FACTORY BUILDING

STRUCTURAL STEEL WORKS
FRAME ELEVATION AT LINE 2-6

P302-6200-S-402 0 FACTORY BUILDING

STRUCTURAL STEEL WORKS
FRAME ELEVATION AT LINE 7-17

P302-6200-S-403 0 FACTORY BUILDING

STRUCTURAL STEEL WORKS
FRAME ELEVATION AT LINE 1,18-24, A & B

P302-6200-S-404 0 FACTORY BUILDING

STRUCTURAL STEEL WORKS
ELEVATION AT LINE B, E, F, & G

P302-6200-S-405 0 FACTORY BUILDING

STRUCTURAL STEEL WORKS
ROOF FRAMING PLAN

P302-6200-S-406 0 FACTORY BUILDING

STRUCTURAL STEEL WORKS
ROOF BRACING LAYOUT PLAN

P302-6200-S-407 0 ADMINISTRATION BUILDING

MEZZANINE FLOOR FRAMING PLAN

P302-6200-S-408 0 FACTORY BUILDING

CRANE BEAM LAYOUT PLAN, SECTIONS & DETAILS

P302-6200-S-409 0 FACTORY BUILDING

STRUCTURAL STEEL WORKS
ELEVATION AT LINE C & D

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 P302-6200-S-410 0 FACTORY BUILDING
MISCELLANEOUS SECTIONS & DETAILS

P302-6200-S-411 0 FACTORY BUILDING

MISCELLANEOUS SECTIONS & DETAILS

P302-6200-S-412 0 FACTORY BUILDING

ROOF BEAM ARRANGEMENT
LAYOUT & DETAILS

6 Letter of respondent’s application engineer Joel O. Peñalosa to petitioner’s project manager Michael Dent.
Dated June 5, 1997. Annex "D," id., pp. 526-527.
7 Letter of Dent to respondent’s president Oscar A. Mitra.

8 P302-6200-S-405, supra note 5.

9 P302-6200-S-408, id.

10 Sub-Contract No. 68001 (June 1997). Id., pp. 532-551. The subcontract was signed by Dent and Mitra and
witnessed by respondent’s quantity surveyor Simon Bennett and Peñalosa.

11 Contract No. P302-C-001, Part E, par. 5, supra note 5.

12 Sub-Contract No. 68001 (June 1997), Third Schedule. Rollo, p. 595. The contract price was broken down as
follows:

Item No. Description Amount

1.0 Structural Steelworks

1.1 Supply and Fabrication

250 Mpa Steel ₱20,565,575.45

350 Mpa Light-Gauge 6,648,451.82

1.2 Painting

250 Mpa Steel 4,465,760.00

350 Mpa Light-Gauge 1,443,694.55

1.3 Delivery

250 Mpa Steel Included

350 Mpa Steel Included

1.4 Installation

250 Mpa Steel 5,350,400.00

350 Mpa Light-Gauge 1,729,671.82

TOTAL ₱40,203,553.64

Plus 10% Value Added Tax (VAT) 4,023,355.36

SUB-CONTRACT LUMP SUM PRICE ₱44,223,909.00

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 13 Contract No. P302-C-001, Part E, par. 14, supra note 5.

14 SPEC-P302-S-001/0. Rollo,pp. 471-486.

15 11. Valuation of Variations.

xxx xxx xxx

(2) The value of all the authorized variations shall be ascertained by [respondent] by reference to the
rates and prices (if any), specified in this subcontract for the like or analogous works, but if there are no
such rates and prices or if they are not applicable then such value shall be ascertained in the same
manner as specified in the main contract.

xxx xxx xxx

(4) Save where the quantity is expressly stated in any bill of quantities forming part of the sub-contract,
no quantity stated therein shall define or limit the extent of any work to be done by the sub-contractor in
the execution and completion of the sub-contract works, but any difference between the quantity so billed
and the actual quantity executed shall be ascertained by measurement, valued under this clause as if it
were an authorized variation and the necessary addition to or deduction from the [lump sum price of
₱44,223,909] shall be made accordingly.

16 Part II, Special Conditions of Subcontract, Second Schedule. Id., p. 545.

17 Part II, Special Conditions of Subcontract, Third Schedule, par. C. Id., p. 547. The paragraph provides:

Main Contract Site Access Date (S.A.D.) 19 June 1997

Structural Steelworks

Steel frame Grid 1 to 4 within 11 weeks of S.A.D.

Steel frame Grid 4 to 8 within 15 weeks of S.A.D.

Steel frame, Grid 8 to 12 Within 17 weeks of S.A.D.

Steel frame, Grid 12 to 18 Within 20 weeks of S.A.D.

Steel frame, Grid 18 to 24 Within 20 weeks of S.A.D.

18 Part II, Special Conditions of Subcontract, Second Schedule, par. C(7). Id., p. 546. The paragraph provides:

(6) [Petitioner] shall pay [respondent] a downpayment amounting to 10% of the sub-contract price upon
issuance by [respondent] to [petitioner] a performance bond amounting to 10% of the sub-contract price
in accordance with Article 15 of the General Conditions of the Contract. The balance amounting to 90%
of the sub-contract price shall be paid through monthly progress billings.

19 Rollo, p. 691.

20 Petitioner’s liability should be proportionate to cost of the percentage completed in the project. Thus, it is
computed as follows:

Petitioner’s liability = fixed lump sum price x percentage completed

Petitioner’s liability = ₱44,223,909 x 86%

Petitioner’s liability = ₱38,032,561.74

21 Based on the previous computation, petitioner overpaid respondent by ₱397,578.95.

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 22 Docketed as CIAC Case No. 25-98.

23 Rollo, pp. 210-246.

24 Docketed as CA-G.R. SP No. 52090.

25 Civil Code, Art. 1724 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 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. (1593a)

26 Supra note 2.

27 Supra note 3.

28 Civil Code, Art. 1713 provides:

Article 1713. By the contract for a piece of work the contractor binds himself to execute a piece of work
for the employer, in consideration of a certain price or compensation. The contractor may either
employ only his labor or skill, or also furnish the material. (emphasis supplied)

29 Rules of Court, Rule 130, Sec. 9 provides:

Section 9. Evidence of written agreements. — When the terms of an, agreement have been
reduced to writing, it is considered as containing all the terms agreed upon and there can
be, between the parties and their successors in interest, no evidence of such terms other
than the contents of the written agreement.

However, a party may present evidence to modify, explain or add to the terms of the written
agreement if he puts in issue in his pleading:

(a) An intrinsic ambiguity, mistake or imperfection in the written agreement;

(b) The failure of the written agreement to express the true intent and agreement of the
parties thereto;

(c) The validity of the written agreement; or

(d) The existence of other terms agreed to by the parties or their successors in interest after
the execution of the written agreement.

The terms "agreement" includes wills. (emphasis supplied)

30 Roble v. Arbasa, 414 Phil. 343, 355-356 (2001) and Sabio v. International Corporate Bank Inc., 416 Phil.
785, 807 (2001).

31 See note 5 in relation to note 13.

32 Part II, Special Conditions of Subcontract, Second Schedule, par. C. Rollo., p. 545.

33 See notes 7 and 8 in relation to note 5.

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 34 Statement of admitted facts in the March 19, 1999 CIAC decision, par. 3. Rollo, p. 211.

35 Supra note 25.

36 Titan-Ikeda Construction & Development Corporation v. Primetown Properties Group, Inc., G.R. No. 158768,
12 February 2008, 544 SCRA 466, 489-490 citing Powton Conglomerate, Inc. v. Agcolicol, 448 Phil. 643
(2003).

37 Supra note 6.

38 Supra note 9.

39 Available online at http://www.businessdictionary.com/definition/lump-sum-contract.html.

In a unit price contract, on the other hand, project cost depends on the quantity of items needed to carry
out the work. The project cost is therefore provisional. See Hanjin Heavy Industries and Construction
Co., Inc. v. Dynamic Planners and Construction Corp., G.R. Nos. 169408 and 170144, 30 April 2008,
553 SCRA 541, 546.

40 Triad Electric and Controls, Inc. v. Power Systems Transport, Inc., No. 94-20783 (USCA, 5th Cir), 30 June
1997.

41 See Uniwide Sales Realty v. Titan-Ikeda Construction and Development Corporation, G.R. No. 122619, 20
December 2006, 511 SCRA 335.

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