Security Bank & Trust Company vs. Court of Appeals

A contractual stipulation that makes an adjustment to the contract price dependent on the "mutual agreement" of the parties is void if it constitutes a potestative condition that leaves the obligation's fulfillment to the sole will of the debtor (the party obliged to pay). Consequently, where a contractor incurs and proves additional costs due to a supervening, no-fault increase in material prices, the owner who benefits from the completed work is liable for such costs to avoid unjust enrichment, notwithstanding the absence of the stipulated mutual agreement.

Private respondent Ysmael C. Ferrer entered into a construction contract with petitioner Security Bank & Trust Company (SBTC) and its officer, Rosito C. Manhit, to build SBTC's Davao City building for a fixed price of P1,760,000.00. The contract contained a clause (Article IX) providing that if construction costs increased through no fault of the contractor, the owner would "equitably make the appropriate adjustment on mutual agreement of both parties." Ferrer completed the construction within the 200-day period but incurred approximately P300,000.00 in additional expenses due to a drastic, unexpected rise in material costs. Despite timely demands and verification of the claims by SBTC's representatives, the bank refused to pay beyond the original price, citing the absence of the required mutual agreement.

• Nature of the Action: The case originated from a complaint for breach of contract with damages filed by contractor Ysmael C. Ferrer against Security Bank & Trust Company (SBTC) and its officer, Rosito C. Manhit.
• The Contract and Its Terms: The parties executed a building contract on 4 February 1980 for a fixed price of P1,760,000.00, with a completion period of 200 working days. Article IX of the contract provided that if construction costs increased through no fault of the contractor, the owner would "equitably make the appropriate adjustment on mutual agreement of both parties."
• Incurrence of Additional Costs: Ferrer completed the building on 15 August 1980, within the contracted period. However, due to a drastic and unexpected increase in the cost of construction materials, he incurred additional expenses of about P300,000.00. He informed SBTC of these increases as early as March 1980 and made timely demands for payment, supported by receipts, invoices, and payrolls.
• Verification and Refusal to Pay: In March 1981, SBTC officials and its architectural consultant verified Ferrer's claims and recommended a settlement of P200,000.00. SBTC, however, denied authorizing any settlement and refused to pay any amount beyond the original contract price, arguing that the lack of a "mutual agreement" precluded any liability.
• Lower Court Findings: The trial court found Ferrer's claim for P259,417.23 in additional costs to be adequately proven and ruled in his favor. This was affirmed on appeal by the Court of Appeals.

• Contractual Condition Precedent: Petitioners argued that under Article IX of the contract, any price adjustment required a "mutual agreement." Since no such agreement was reached, their obligation to pay beyond the original price never arose.
• Interpretation of Clear Contract: They maintained that the contract provision was clear and unambiguous, and the lower courts erred in effectively rewriting it by imposing liability absent the stipulated mutual agreement.
• Non-Impairment of Contracts: Petitioners contended that disregarding the express mutual agreement clause violated their constitutional guarantee against impairment of contractual obligations.

• Unjust Enrichment: Respondent countered that petitioners benefited from the completed building and that allowing them to retain it without paying for the actual, proven increased cost would constitute unjust enrichment.
• Void Potestative Condition: Implicit in the lower courts' reasoning (which the Supreme Court adopted) was the argument that the "mutual agreement" clause was a condition dependent solely on the will of the debtor (SBTC), and thus void under Article 1182 of the Civil Code.
• Proof of Additional Costs: Respondent asserted that the additional expenses were proven by preponderance of evidence through receipts, invoices, and other documents, and were even verified by the petitioner's own representatives.

• Liability for Additional Costs: Whether petitioner SBTC is liable to pay the contractor for additional construction costs incurred due to a supervening increase in material prices, notwithstanding the contract's requirement for "mutual agreement" on price adjustments.
• Validity of the Contractual Condition: Whether the "mutual agreement" clause in Article IX of the contract constitutes a valid condition or is a void potestative condition under Article 1182 of the Civil Code.
• Award of Attorney's Fees: Whether the award of attorney's fees equivalent to 25% of the principal amount due is proper and reasonable.

• Liability for Additional Costs: Petitioner SBTC is liable for the proven additional costs. The contractual clause requiring "mutual agreement" was a potestative condition whose fulfillment depended upon the sole will of the debtor (SBTC), as the contractor would naturally consent to an agreement that allowed recovery. Such a condition is void under Article 1182 of the Civil Code. Furthermore, to allow SBTC to acquire the building at a price below its actual cost would constitute unjust enrichment prohibited by Article 22 of the Civil Code.
• Validity of the Contractual Condition: The "mutual agreement" stipulation is a void potestative condition. The obligation to adjust the price became unconditional upon the occurrence of the stipulated event (the no-fault increase in costs), and SBTC's liability attached.
• Award of Attorney's Fees: The award of attorney's fees is reduced from 25% of the principal amount (at least P60,000.00) to a fixed sum of P10,000.00. The issues were not complex, and the diligence and legal skill exhibited by respondent's counsel did not justify the original high percentage.

• Unjust Enrichment (Article 22, Civil Code) — This principle prohibits a person from unjustly benefiting at the expense of another. It is a fundamental norm of human relations designed to approach the ideal of justice. The Court applied it here to prevent SBTC from acquiring a building whose actual construction cost exceeded the contract price, at the contractor's expense.
• Potestative Condition (Article 1182, Civil Code) — A conditional obligation is void if its fulfillment depends exclusively upon the will of the debtor. The Court found that making the price adjustment contingent on SBTC's "mutual agreement" rendered the condition potestative, as the contractor's consent to recover his costs could be presumed. Thus, the condition was void, and the obligation to pay the adjusted cost became pure and demandable.

• "Under Article 1182 of the Civil Code, a conditional obligation shall be void if its fulfillment depends upon the sole will of the debtor. In the present case, the mutual agreement... is in effect a condition dependent on petitioner bank's sole will, since private respondent would naturally and logically give consent to such an agreement which would allow him recovery of the increased cost." — This passage articulates the core ratio decidendi for voiding the contractual condition.
• "Hence, to allow petitioner bank to acquire the constructed building at a price far below its actual construction cost would undoubtedly constitute unjust enrichment for the bank to the prejudice of private respondent." — This succinctly states the equitable principle underpinning the decision.

• Roldan v. Court of Appeals, G.R. No. 97006, 9 February 1993, 218 SCRA 713 — Cited to support the reduction of attorney's fees. The precedent established that courts may reduce attorney's fees fixed in a contract if the amount appears unconscionable or unreasonable, even in the presence of an agreement.

• Article 22, Civil Code — Embodies the principle against unjust enrichment. Applied to hold that SBTC must return the value of the benefit (the building constructed at higher cost) to the contractor.
• Article 1182, Civil Code — Renders void a conditional obligation whose fulfillment depends exclusively on the will of the debtor. Applied to invalidate the "mutual agreement" clause in the construction contract.
• Article IX, Building Contract (4 February 1980) — The specific contractual provision at issue. Its interpretation and validity were central to the case.

Justices Davide, Jr., Bellosillo, Kapunan, and Hermosisima, Jr. concurred with the decision of Justice Padilla.