Allen vs. Province of Tayabas

The certificate of acceptance by the Director of Public Works or his authorized representative is a condition precedent to a contractor's right to payment on public works contracts, and the findings of such officials are conclusive in the absence of fraud or bad faith; however, where the government has already accepted the work, it is estopped from contesting the contractor's right to the contract price.

The Province of Tayabas, acting through the Director of Public Works, entered into a public works contract with Arthur F. Allen, a contractor, for the construction of five reinforced concrete bridges. The contract incorporated by reference advertisements, instructions to bidders, general conditions, plans, specifications, and the agreement itself, and was governed by Act No. 1401 (as amended by Act No. 1752) and later the Administrative Code of 1917, both of which mandated a certificate of acceptance by the district engineer or Director of Public Works before any payment could be made on public works.

On April 18, 1914, the Province of Tayabas, represented by the Director of Public Works, and Arthur F. Allen, a contractor, entered into a contract whereby Allen agreed to construct five reinforced concrete bridges for P39,200. The contract was in the usual form, providing that the bridges were to be constructed "in accordance with the said advertisements, instructions to bidders, general conditions, plans, specifications, proposal, and this agreement." Other paragraphs of the contract concerned the method and rate of payment for extras. The instructions to bidders, forming part of the contract, contained clauses requiring monthly payments based on estimates of work satisfactorily completed and accepted by the Director, and providing that the Director would certify final estimates and acceptance upon complete performance, subject to his reserved right to reject work found to have been constructed in violation of the contract.

Four of the bridges were accepted by the Government and paid for. The dispute arose as to the fifth bridge, No. 53.3, and as to certain extras. The Province of Tayabas paid the contractor P4,360 on account of the contract price for this bridge but refused to pay the balance of P2,840, asserting that the contractor had deviated from the specifications and that the work was defective. The province further refused to pay for certain extras.

To recover the balance upon the contract and the cost of extras, the contractor brought an action for P9,685 (amended complaint). The complaint alleged the parties' residence, the contract, faithful compliance with all its terms and conditions, and the defendant's refusal to pay despite frequent requests. The defendant demurred, arguing that the complaint failed to state a cause of action because the Governor-General's approval had not been obtained as required by section 2 of the Provincial Government Act (No. 83), and because the certificate of payment had not been accomplished by the Director of Public Works or the district engineer as provided by section 6 of Act No. 1401, as amended. The demurrer was overruled.

The defendant then answered, renewing the demurrer grounds as a special defense, alleging defective work by the plaintiff, and admitting a total of P2,454.78 — the amount certified by the Director of Public Works and the district engineer as due to the plaintiff. The trial court rendered judgment for the plaintiff-contractor for P4,905, with legal interest from July 14, 1914, and costs. The defendant moved for a new trial, which was denied, and perfected a bill of exceptions to the Supreme Court.

On the factual dispute, the contractor was supported by one expert insisting that the work and materials conformed to the specifications, while competent Government engineers resolutely denied this. Substantial performance was proved to the satisfaction of the trial court but not to the satisfaction of the Government's technical adviser. The trial judge noted in the course of his decision that there appeared to have been a great deal of ill-feeling between the plaintiff and the engineer in charge of the construction. The Province of Tayabas had accepted bridge No. 53.2, for which the balance of P2,840 remained unpaid.

• Governor-General's Approval: Appellant contended that the Province of Tayabas was not obligated to pay the contractor anything because the contract was not approved by the Governor-General, as contemplated by section 2 of the Provincial Government Act (No. 83).
• Certificate as Condition Precedent: Appellant argued that the certificate by the district engineer and the Director of Public Works must be obtained before suit can be brought on a contract, that the findings of these officials are conclusive, and that the complaint must contain an averment to this effect.
• Defective Work: Appellant alleged defective work and deviation from specifications on the part of the contractor.
• Improper Overruling of Demurrer: Appellant contended that the demurrer to the complaint was improperly overruled, as the complaint failed to allege fulfillment of the condition precedent or a legal excuse for its non-fulfillment.

• No Arbitration Required: Appellee replied that neither the law nor the contract requires the submission to arbitration of disputes between the Government and the contractor, and that a mere administrative procedure incident to payment has been established.

• Governor-General's Approval: Whether the approval of the Governor-General is a prerequisite to the validity of a public works contract between a province and a contractor.
• Certificate of Acceptance: Whether the certificate of the Director of Public Works or the district engineer is a condition precedent to a contractor's right to payment, and whether the findings of such officials are conclusive on the parties.
• Sufficiency of the Complaint: Whether the complaint was defective for failing to allege fulfillment of the condition precedent or a legal excuse for its non-fulfillment.

• Governor-General's Approval: No. The law in force made the Governor-General's approval a prerequisite only to the purchase and conveyance of real estate by a province, not to public works contracts.
• Certificate of Acceptance: Yes. The certificate is a mandatory condition precedent to payment, and the findings of the responsible engineer are conclusive absent fraud or bad faith, which the contractor failed to prove.
• Sufficiency of the Complaint: The demurrer was improperly overruled in principle, but the defect was cured by the issues tendered by the answer and the proof, and reversal would avail nothing but delay.

• Governor-General's Approval: The grammatical construction of the English text of section 2, Act No. 83, as amended by Act No. 1600, makes clear that the Governor-General's approval was required only for the purchase and conveyance of real estate by a province. The Administrative Code of 1917 (section 2068) further confirmed this by placing the requirement for the Governor-General's approval of transfers of real estate in a section separate and distinct from the section giving corporate powers to provinces, thereby revealing legislative intention.

• Certificate of Acceptance: Both the law (Act No. 1401, as amended by Act No. 1752; Administrative Code of 1917, sections 1917–1923) and the contract provide in mandatory language for a certificate of acceptance by the Director of Public Works or his representative before any payment shall be made on any public work. Contracts giving a third party or the purchaser the power of acceptance are valid and have been frequently upheld by courts. In the absence of fraud or such gross mistake as would necessarily imply bad faith, contractors with public corporations are concluded by the decisions of engineers or like officers where the contract contains such a stipulation. The contractor's expert testimony that the work conformed to specifications was denied by competent Government engineers. The trial judge's observation about ill-feeling between the plaintiff and the engineer, together with the testimony, was insufficient to demonstrate fraud or bad faith. The decision of the responsible engineer cannot be subjected to the revisory power of the courts without doing violence to the terms of the contract and the law. However, where the province had already accepted bridge No. 53.2, it was obligated to pay the balance of P2,840 and could not deduct the cost of testing the bridge (P900.12), as the contract contained no such stipulation. The findings of the Government engineers on all other points covered by causes of action 2, 3, 4, 5, and 6 were deemed conclusive, fraud or bad faith not having been proved. The doctrine of substantial performance allows a contractor who has in good faith made substantial performance to recover, but where the contract gives the government officer the absolute right to reject, the contractor must abide by that stipulation. Where the terms are doubtful, courts construe the contract as requiring performance "in such way as reasonably ought to satisfy the defendant."

• Sufficiency of the Complaint: The complaint should have alleged either the performance of the condition precedent (approval by the Director of Public Works or the district engineer) or a good and sufficient excuse for not obtaining it. However, the complaint contained the general averment that the plaintiff fully and faithfully complied with all terms and conditions of the contract, and the defendant had accepted the bridge after the filing of the complaint but before trial. A failure to allege a condition precedent or a legal reason for dispensing with it may be cured by the issues tendered by the answer and the proof.

• Condition Precedent in Public Works Contracts — The certificate of acceptance by the Director of Public Works or his authorized representative is a condition precedent to a contractor's right to payment on public works contracts. The condition is for the satisfaction of the Government. The contractor must allege and prove either the fulfillment of this condition or a legal excuse for its non-fulfillment. Failure to allege a condition precedent may be cured by the issues tendered by the answer and the proof.

• Conclusiveness of Engineer's Certificate — In the absence of fraud or such gross mistake as would necessarily imply bad faith, contractors with public corporations are concluded by the decisions of engineers or like officers where the contract contains a stipulation requiring their approval. The decision of the responsible engineer cannot be subjected to the revisory power of the courts without doing violence to the terms of the contract and the law. To set aside the action of the Director of Public Works or his authorized representative, fraud or bad faith on the part of these officials must be alleged and proved.

• Substantial Performance — The modern rule sanctions substantial performance of contractual relations, looking to the spirit of the contract rather than its letter. Even though a plaintiff is not entirely free from fault or omission, courts will not turn him away if he has in good faith made substantial performance. However, where the contract gives a party the absolute and unreviewable right to reject if not satisfied, the contractor must abide by that stipulation. When the terms are doubtful, courts will construe the contract as an "agreement to do the thing in such way as reasonably ought to satisfy the defendant." Acceptance and occupancy of the work by the owner amounts to an acknowledgment of substantial performance; partial payment also shows acquiescence.

• Estoppel of Public Corporation by Acceptance — The public corporation, in the absence of a showing of fraud or concealment, is estopped by the approval of its authorized officer from contesting the contractor's right to the contract price. Having accepted work, the public corporation must pay the balance due and may not deduct costs not stipulated in the contract.

• Validity of Arbitration or Approval Clauses as Conditions Precedent — Provisions in contracts requiring the approval or certificate of a designated officer as a condition precedent to suit are valid and will be upheld unless they absolutely close the doors of the courts against the parties, which would be void. Courts will look with favor upon such amicable arrangements and will only with great reluctance interfere to anticipate or nullify the action of the designated officer.

• "In the absence of fraud or of such gross mistake as would necessarily imply bad faith, contractors with public corporations are concluded by the decisions of engineers or like officers where the contract contains such a stipulation." — This passage states the ratio decidendi on the conclusiveness of the engineer's certificate and the limits of judicial review over administrative determinations in public works contracts.

• "The decision of the responsible engineer cannot be subjected to the revisory power of the courts without doing violence to the terms of the contract and the law." — This defines the boundary between judicial authority and contractual stipulations vesting acceptance power in government engineers, a formulation frequently cited in later government contract jurisprudence.

• "The law now looks to the spirit of the contract and not to its letter. Even though a plaintiff is not entirely free from fault or omission, the courts will not turn him away if he has in good faith made substantial performance." — This articulates the doctrine of substantial performance as adopted in Philippine jurisdiction, contrasting it with the old common law rule of strict or literal performance.

• Sweeney vs. United States, 109 U.S. 618 (1883) — Leading example of the rule that a contractor cannot recover where the designated government officer honestly refuses to certify work as conforming to contract specifications, absent fraud or grave mistake implying bad faith. Followed as persuasive authority.
• City of Elizabeth vs. Fitzgerald, 200 U.S. 611 (1902) — Held that a provision requiring a city engineer's certificate before payment does not deprive the contractor of the right to recover if work was done in substantial conformity and the city's officers arbitrarily or unreasonably refuse the certificate. Cited to illustrate the limits of the conclusiveness doctrine.
• Campbell and Go-Tauco vs. Behn, Meyer & Co., 3 Phil. 590 (1904) — Held that acceptance and occupancy of a building by the owner amounts to an acknowledgment of substantial performance. Cited as Philippine authority on substantial performance; affirmed by the U.S. Supreme Court.
• Chang vs. Royal Exchange Assurance Corporation of London, 8 Phil. 399 (1907) — Held that an arbitration clause as a condition precedent to suit is valid, and no action can be brought unless it is first complied with. Cited to support the validity of conditions precedent in contracts.
• Government of Philippine Islands vs. Inchausti & Co., 24 Phil. 315 (1913) — Approved the pleading principle that if a plaintiff's right of action depends upon a condition precedent, he must allege and prove its fulfillment or a legal excuse for its non-fulfillment. Cited on the sufficiency of the complaint.

• Section 2, Act No. 83 (Provincial Government Act), as amended by Act No. 1600 — Made the Governor-General's approval a prerequisite only to the purchase and conveyance of real estate by a province. The Court held this provision inapplicable to public works contracts.
• Section 6, Act No. 1401, as amended by Act No. 1752 — Required a certificate of acceptance signed by the district engineer or his authorized representative before any payment on public works. The Court treated this as a mandatory condition precedent to the contractor's right to payment.
• Section 1922, Administrative Code of 1917 — Re-enacted the certificate requirement, providing that no payment shall be made on any public work without a certificate that the work has been accomplished in accordance with the contract and duly inspected and accepted, signed by a duly authorized representative of the Director of Public Works.
• Section 2068, Administrative Code of 1917 — Placed the requirement for the Governor-General's approval of transfers of real estate by provinces in a separate section from the section giving corporate powers, confirming that such approval is not required for public works contracts.

Torres, Johnson, and Fisher, JJ., concurred. Carson and Street, JJ., concurred in the result.