Can a contractor claim an increase in the contract price for design changes?

In any construction project, it is not unusual for a developer or project owner to issue "change orders" authorizing a variation in the works covered under the original plans and specifications. As design changes invariably affect the contract price, an interesting question arises: is a contractor, under all conditions, entitled to claim an increase in the contract price for every change order?

Most would probably answer in the affirmative. However, the answer is not as obvious and simple as it seems. A careful perusal of our laws and jurisprudence would show that the contractor must strictly comply with certain conditions before he can claim an adjustment in the contract price.

Under the law, the contractor who undertakes to build a structure or any other work for a stipulated price cannot demand an increase in the price on account of higher cost of labor or materials except when there has been a change in the plans and specifications; provided that two conditions are present: (1) such change has been authorized by the owner in writing and (2) the additional price to be paid has been determined in writing by both parties. (Article 1724 of the Civil Code)

Article 1724 is a modification of Article 1593 of the Civil Code of Spain, which states that the architect or contractor may demand an increase of the contract price only if "the owner has given his consent [to the change order]." Under the New Civil Code, instead of merely proving authorization, the authorization by the owner must be made in writing. The evident purpose of the amendment is to prevent litigation for additional costs incurred by reason of additions or changes in the original plans. (San Diego v. Sayson, 45 Phil. 707)

In Weldon Construction Corp. v. Court of Appeals (154 SCRA 618, 633 [1987]), the Supreme Court denied the contractor’s claim to recover costs for additional works in a theater building for the latter’s failure to prove any written authority to make changes and for the latter’s failure to prove any written agreement on the additional price to be paid. The High Court held that "compliance with the two requisites in Article 1724, a specific provision governing additional works, is a condition precedent to recovery. The absence of one or the other bars the recovery of additional cost. Neither the authority for changes made nor the additional price to be paid therefore may be proved by any other evidence for purposes of recovery."

As explained in the recent case of Powton Conglomerate, Inc. v. Agcolicol (400 SCRA 523, 531 [2003]), the owner’s written consent to the increased costs is not a mere formal requisite, but a vital precondition to the validity of a subsequent contract authorizing a higher or additional contract price. Moreover, the safeguards enshrined in Article 1724 are not only intended to obviate future misunderstandings but also to give the parties a chance to decide whether to bind one’s self to or withdraw from a contract.

Article 1724 must be read in every construction contract. The parties may stipulate on any terms and conditions as they may deem convenient provided that they are not contrary to law. In this connection, Article 1724 should be read into Article 20.07 (C) of the Construction Industry Authority of the Philippines (CIAP) Document 102, a document embodying uniform general conditions of contract which parties to a private construction contract may freely adopt.

The said provision states that "if changes [due to change orders] shall cause an increase or decrease in the amount due under the contract, an equitable adjustment shall be made and the contract modified accordingly." Thus, any adjustment in the contract price must still comply with the two conditions provided under Article 1724.

One may ask: would it be unfair for the contractor to bear the costs for additional work done in case the parties fail to agree on the price? Will the owner be unjustly enriched at the expense of the contractor?

This author submits that there is no inequity. After all, the contractor can always insist, before undertaking the work, that the owner send him a written change order and that they agree in writing on the additional price to be paid. In cases where it is not feasible to wait for an agreed price, the parties may agree in writing on the manner of computing the additional price based on, for instance, an itemized cost breakdown from the bid documents. This will dispense with the need for a subsequent written agreement since the additional price has already been agreed upon, albeit the exact value is yet to be computed.

Well-settled is the rule that courts cannot yield to principles of equity, such as "unjust enrichment", in the presence of a clearly applicable law. Our courts, though also possessing equity jurisdiction, are first and foremost courts of law. The Supreme Court declared in Valdeviesco v. Damalerio (G.R. No. 133303, February 17, 2005) that, while equity might tilt on the side of one party, the same cannot be enforced so as to overrule positive provisions of law in favor of the other. Equity cannot supplant or contravene the law. Thus, the rule under Article 1724 of the Civil Code must stand no matter how harsh it may seem. Dura lex sed lex.

(The author is a licensed civil engineer and an Associate of Angara Abello Concepcion Regala & Cruz Law Office (ACCRALAW). He may be contacted at tel. no. 830-8000 or e-mail at [email protected]. Website: www.accralaw.com)