Philippine Realty and Holdings Corporation vs. Ley Construction and Development Corporation

A construction manager vested with apparent authority may validly bind the project owner to an escalation agreement that novates the original fixed-price contract, and the owner is estopped from denying such authority or the agreement’s validity when it knowingly permits the contractor to infuse substantial funds into the project. Liquidated damages for delay cannot be collected where the delay results from force majeure and where the owner’s authorized representatives assured the contractor that no such damages would be imposed, thereby raising promissory estoppel.

Between April 1988 and October 1989, Philippine Realty & Holdings Corporation (PRHC), as project owner, and Ley Construction and Development Corporation (LCDC), as contractor, entered into four fixed-price construction agreements for the Alexandra buildings (Projects 1, 2, and 3) and the Tektite Building. The agreements contained a no-escalation clause and provisions for time extensions and liquidated damages. Construction of the Tektite Building encountered severe delays because of an unexpected spike in cement prices and shortages of construction materials. LCDC informed PRHC’s construction manager, Engineer Dennis Abcede, that it could not complete the project without a price escalation. Abcede obtained LCDC’s commitment to advance funds for completion, with the understanding that an escalation of the contract price by ₱36 million would be sought from PRHC’s board. The board allegedly denied the request, but no formal notice was given to LCDC. Instead, Abcede sent LCDC a letter-agreement dated August 9, 1991, confirming the ₱36 million escalation, which LCDC signed but which PRHC never signed. Relying on the agreement and on assurances that no liquidated damages would be charged, LCDC infused ₱38,248,463.92 into the project from August to December 1991, paid directly to suppliers. Monthly reports were submitted to PRHC’s general manager without objection. After the building reached 96.43% completion, PRHC informed LCDC that the ₱36 million escalation would be applied against claimed liquidated damages. LCDC demanded payment; PRHC denied liability for the escalation and sought liquidated damages for delay.

• Nature of the dispute: LCDC, as contractor, and PRHC, as project owner, entered into four fixed-price construction agreements for the Alexandra buildings (Projects 1, 2, and 3) and the Tektite Building between April 1988 and October 1989. The agreements uniformly prohibited escalation, except for specific work additions and official minimum wage increases, and provided for liquidated damages in case of delay. A time-extension mechanism required the contractor to request extensions; the parties would then execute signed extension agreements stipulating the approved number of days.

• The escalation arrangement: During construction of the Tektite Building, LCDC faced a sudden, severe increase in cement prices and material shortages, making completion at the fixed price impossible. LCDC’s president met with PRHC’s construction manager, Engineer Dennis Abcede, and general manager, Joselito Santos. Abcede asked LCDC to advance the necessary funds to complete the project. LCDC agreed on the absolute condition that the contract price be escalated, and Abcede undertook to present the proposal to PRHC’s board. The board turned down the request, but LCDC was never formally notified. On August 9, 1991, Abcede sent LCDC a letter stating that should LCDC infuse ₱36 million into the project, an escalation for the same amount would be granted. The letter was signed by Abcede as “Construction Manager” and by LCDC; the signature block for PRHC remained blank. LCDC proceeded to infuse funds from August to December 1991, totaling ₱38,248,463.92, paid directly to suppliers upon Santos’s instruction. LCDC submitted monthly reports to PRHC detailing the infusion; PRHC never responded or objected.

• Post-completion claims: After the Tektite Building reached substantial completion, PRHC, by letter dated December 7, 1992, declared that the ₱36 million escalation would be applied to liquidated damages of ₱39,326,817.15. LCDC demanded payment of the escalation price, the unpaid balances for Projects 1, 2, and 3, and other amounts. PRHC denied liability and counterclaimed for liquidated damages and expenses for corrective waterproofing works. Pre-trial stipulations narrowed the issues but left certain balances for Project 3, the drivers’ quarters, and concreting works for the Tektite Building unresolved.

• Validity of escalation agreement: PRHC maintained that no valid escalation agreement existed because its board never approved it and Abcede lacked authority to bind the corporation. It argued that the letter-agreement was unsigned on its behalf and thus unenforceable under the Statute of Frauds.

• Liquidated damages: PRHC insisted LCDC was liable for liquidated damages as computed, because the signed time-extension agreements fixed the allowable extensions and LCDC confirmed the delays.

• Limitation by Stipulation: PRHC contended that the Joint Stipulation of Facts limited the issues, so the RTC and CA had no jurisdiction to award amounts for Project 3, the drivers’ quarters, and concreting works that were not included in the stipulation.

• Attorney’s fees and costs: PRHC argued LCDC was not entitled to attorney’s fees, as it was not the aggrieved party but the one that breached the construction agreements.

• Apparent authority and estoppel: LCDC argued that Abcede and Santos were clothed with apparent authority to negotiate and bind PRHC, and that PRHC was estopped from denying the escalation after accepting the benefits and receiving monthly reports without objection.

• Novation: LCDC posited that the escalation agreement novated the original no-escalation clause, extinguishing the old obligation and creating a new one.

• Force majeure and promissory estoppel on liquidated damages: LCDC contended that the delays were due to cement shortages, power failures, water interruptions, and typhoons—events constituting force majeure under Article 1174 of the Civil Code. It further claimed that Abcede and Santos had assured it that no liquidated damages would be imposed, giving rise to promissory estoppel.

• Defective waterproofing: LCDC submitted that it was not liable for the defective waterproofing because the sub-contractor, Vulchem Corporation, was recommended and effectively designated by PRHC; thus, under agency principles, the principal bears responsibility for a designated sub-agent.

• Unpaid balances not in stipulation: LCDC argued that the omission of certain claims from the Joint Stipulation did not constitute a waiver, and because evidence on those claims was admitted without objection, the courts could validly award them.

• Attorney’s fees: LCDC asserted entitlement to attorney’s fees under Article 2208(5) of the Civil Code and under the penal clause of the construction agreements.

• Escalation Agreement: Whether the escalation agreement, signed only by PRHC’s construction manager and not by PRHC, is binding on PRHC.

• Novation: Whether the escalation agreement extinguished the original no-escalation clause by novation.

• Estoppel against PRHC: Whether PRHC is estopped from denying the escalation agreement after LCDC infused funds and submitted monthly reports without objection.

• Excess Infusion: Whether LCDC is entitled to reimbursement of the ₱2,248,463.92 infused beyond ₱36 million.

• Liquidated Damages — Force Majeure: Whether the delays in construction were caused by force majeure exempting LCDC from liquidated damages.

• Liquidated Damages — Promissory Estoppel: Whether PRHC’s representatives’ assurance that no liquidated damages would be imposed precludes PRHC from claiming them.

• Unpaid Balances Not in Stipulation: Whether the trial and appellate courts could award amounts for claims not listed in the Joint Stipulation of Facts but proven during trial without objection.

• Defective Waterproofing Liability: Whether LCDC is liable for corrective works arising from its sub-contractor’s defective waterproofing.

• Attorney’s Fees: Whether LCDC is entitled to attorney’s fees and whether the amount awarded should be reduced.

• Escalation Agreement: The escalation agreement was binding on PRHC. Abcede, as construction manager, possessed apparent authority akin to that of a general manager, having continuously and publicly exercised authority to negotiate and sign documents on behalf of PRHC. PRHC sanctioned these acts and thus clothed him with the authority to enter into the escalation agreement. The lack of board approval and the unsigned corporate acceptance do not defeat the agreement when the agent acted within the scope of apparent authority upon which LCDC reasonably relied in good faith.

• Novation: All requisites of novation under Article 1292 were present: a prior valid obligation (the no-escalation clause), agreement to a new contract (the escalation arrangement), extinguishment of the old obligation, and creation of a valid new obligation to pay an additional ₱36 million.

• Estoppel against PRHC: PRHC was estopped from denying the escalation agreement. Despite receiving monthly reports detailing LCDC’s infusions, and knowing that LCDC was continuing to fund the construction in reliance on the promised escalation, PRHC remained silent. Only after the building was substantially completed did it disavow the agreement. The elements of estoppel under Article 1431 of the Civil Code and Rule 131, Section 2(a) of the Rules of Court were fully satisfied.

• Excess Infusion: LCDC’s claim for the excess of ₱2,248,463.92 was denied. The escalation agreement was limited to ₱36 million, and LCDC voluntarily infused the excess with full knowledge that PRHC had no obligation to reimburse it. No unjust enrichment resulted because the benefit was not conferred by mistake, fraud, coercion, or request.

• Liquidated Damages — Force Majeure: LCDC was not liable for liquidated damages. The shortage of cement, typhoons, power failures, and water supply interruptions constituted force majeure under Article 1174, as these events were independent of LCDC’s will, unforeseeable or unavoidable, rendered normal performance impossible, and involved no participation or aggravation by LCDC. The construction agreements did not impose liability for force majeure.

• Liquidated Damages — Promissory Estoppel: Independently, PRHC was barred by promissory estoppel from claiming liquidated damages. Abcede and Santos expressly and uncontradictedly assured LCDC’s president that no liquidated damages would be charged, inducing LCDC to continue working without complaint.

• Unpaid Balances Not in Stipulation: The RTC and CA could rule on claims not listed in the Joint Stipulation because evidence supporting them was presented at trial without objection from PRHC. Under the rule that issues tried by express or implied consent are treated as if raised in the pleadings, the awards for Project 3, the drivers’ quarters, and the concreting works were proper.

• Defective Waterproofing Liability: LCDC was liable for the ₱2,006,000 corrective works. The relationship between PRHC and LCDC was one of independent contractor, not agent-principal; thus Article 1892 on substitution of agents did not apply. The Project 2 Agreement (Article XIV) expressly provided that subcontracting, even with the owner’s consent, did not relieve the contractor of full responsibility. LCDC had the right to reject Vulchem but proceeded to hire it, assuming the attendant risks.

• Attorney’s Fees: LCDC was entitled to attorney’s fees based on the penal clause in the construction agreements, which stipulated reasonable attorney’s fees equivalent to 20% of the total amount claimed plus costs. However, the amount of ₱750,000 was equitably reduced to ₱200,000, as courts may temper contractual attorney’s fees when found excessive.

• Apparent Authority — A corporation is bound by the acts of an officer or agent who acts within the scope of apparent authority with which the corporation has clothed him, by holding him out or permitting him to appear as possessing such authority, in favor of a person who deals with him in good faith. Apparent authority may be derived from (1) the general manner in which the corporation holds out the officer or agent, or (2) its acquiescence in his acts with actual or constructive knowledge. (Applied to Abcede and Santos, whose roles and conduct justified LCDC’s reliance.)

• Novation (Article 1292, Civil Code) — Novation requires: (1) a previous valid obligation; (2) agreement of the parties to a new contract; (3) extinguishment of the old contract; and (4) validity of the new contract. (Found established when the no-escalation clause was replaced by the ₱36 million escalation agreement.)

• Estoppel by Conduct (Article 1431, Civil Code; Rule 131, Sec. 2(a), Rules of Court) — A party who, by his declaration, act, or omission, intentionally and deliberately leads another to believe a particular thing true and to act upon such belief cannot be permitted to falsify it in litigation. Elements: (1) misleading communication by words, conduct, or silence with knowledge of the true facts; (2) reasonable reliance by the other party; (3) material harm if the actor is permitted to assert a contrary claim; and (4) the actor knows or foresees the reliance. (PRHC’s silence upon receipt of infusion reports estopped it from denying the escalation.)

• Force Majeure (Article 1174, Civil Code) — To exempt an obligor from liability, the event must be (a) independent of the debtor’s will; (b) unforeseeable or unavoidable; (c) such as to render normal fulfillment impossible; and (d) free from any participation or aggravation by the debtor. (Cement shortages, typhoons, power failures, and water interruptions met these criteria.)

• Promissory Estoppel — A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee, and which does induce such action or forbearance, is binding if injustice can be avoided only by its enforcement. (Abcede and Santos’s assurances that no liquidated damages would be assessed bound PRHC.)

• Trial of Issues Not Pleaded — When issues not raised in the pleadings are tried by express or implied consent of the parties, they are treated as if raised. Evidence submitted without objection may form the basis of a court’s award, as the defect in the pleadings is cured by the absence of objection. (Applied to the claims for Project 3, drivers’ quarters, and concreting works.)

• Contractual Attorney’s Fees — Judicial Reduction — Courts have the power to reduce stipulated attorney’s fees when found excessive, based on quantum meruit, to prevent a premium on the right to litigate.

• "The rule is of course settled that 'although an officer or agent acts without, or in excess of, his actual authority if he acts within the scope of an apparent authority with which the corporation has clothed him by holding him out or permitting him to appear as having such authority, the corporation is bound thereby in favor of a person who deals with him in good faith in reliance on such apparent authority, as where an officer is allowed to exercise a particular authority with respect to the business, or a particular branch of it, continuously and publicly, for a considerable time.'" — On the doctrine of apparent authority.

• "What makes this Court believe that it is incorrect to allow PRHC to escape liability for the escalation price is the fact that LCDC was never informed of the board of directors’ supposed non-approval of the escalation agreement until it was too late. Instead, PRHC, for its own benefit, waited for the former to finish infusing the entire amount into the construction of the building before informing it that the said agreement had never been approved by the board of directors." — On estoppel.

• "Under Article 1174 of the Civil Code, to exempt the obligor from liability for a breach of an obligation due to an 'act of God' or force majeure, the following must concur: (a) the cause of the breach of the obligation must be independent of the will of the debtor; (b) the event must be either unforeseeable or unavoidable; (c) the event must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner; and (d) the debtor must be free from any participation in, or aggravation of the injury to the creditor." — Requisites of force majeure.

• Yao Ka Sin Trading v. Court of Appeals, G.R. No. 53820, June 15, 1992, 209 SCRA 763 — Cited for the rule on apparent authority: a corporation is bound by the acts of an officer acting within the scope of apparent authority when it clothes him with such authority.

• People’s Aircargo and Warehousing Co. Inc. v. Court of Appeals, et al., G.R. No. 1871447, October 7, 1998, 297 SCRA 170 — Enumerated the two modes of ascertaining apparent authority: general holding out or acquiescence in the agent’s acts.

• Agro Conglomerates, Inc. v. Court of Appeals, G.R. No. 117660, December 18, 2000, 348 SCRA 450; Security Bank and Trust Company, Inc. v. Cuenca, G.R. No. 138544, October 3, 2000, 341 SCRA 781 — Cited for the requisites of novation under Article 1292.

• Philippine National Bank v. Palma, G.R. No. 157279, August 9, 2005, 466 SCRA 307 — Defined estoppel as an equitable principle rooted in natural justice.

• Philippine Bank of Communications v. Court of Appeals, G.R. No. 109803, April 20, 1998, 289 SCRA 178 — Enumerated the elements of estoppel.

• Juan F. Nakpil & Sons v. Court of Appeals, 144 SCRA 596 (1986) — Cited for the requisites of force majeure under Article 1174.

• Phil. Export and Foreign Loan Guarantee Corp. v. Phil. Infrastructures, et al., G.R. No. 120384, January 13, 2004, 419 SCRA 55 — Applied for the rule that issues tried by consent are treated as if raised in the pleadings.

• New Sampaguita Builders Construction v. Philippine National Bank, G.R. No. 148753, July 30, 2004, 435 SCRA 565 — Cited on the power of courts to reduce excessive attorney’s fees.

• Article 1292, Civil Code — Requisites of novation: applied to find that the escalation agreement novated the original no-escalation clause.

• Article 1431, Civil Code — Estoppel by admission or representation: held that PRHC’s silence on the monthly infusion reports rendered its denial conclusive against it.

• Rule 131, Section 2(a), Rules of Court — Conclusive presumptions: an intentional misleading act or omission estops a party from falsifying it.

• Article 1174, Civil Code — Force majeure: exempted LCDC from liability for delays caused by cement shortages, typhoons, power failures, and water interruptions.

• Article 2208(5), Civil Code — Attorney’s fees in cases of gross and evident bad faith: deemed inapplicable because bad faith was not sufficiently established, but the contractual penal clause on attorney’s fees governed.

• Article XIV, Project 2 Construction Agreement — Subcontracting clause: provided that consent to subcontracting does not relieve the contractor of full responsibility; basis for LCDC’s liability for defective waterproofing.

Associate Justice Conchita Carpio Morales (Chairperson), Associate Justice Arturo D. Brion, Associate Justice Lucas P. Bersamin, Associate Justice Martin S. Villarama, Jr. — all concurred.