G.R. No. 117009 October 11, 1995
Security Bank & Trust Company and Rosito C. Manhit, petitioners, vs. Court of Appeals and Ysmael C. Ferrer, respondents.

FACTS

Private respondent Ysmael C. Ferrer entered into a contract with petitioner Security Bank and Trust Company (SBTC) to construct a building in Davao City for a fixed price of P1,760,000.00. Ferrer completed the construction within the stipulated period but was compelled to incur approximately P300,000.00 in additional expenses due to a drastic and unforeseen increase in the cost of construction materials. Ferrer promptly informed SBTC of this increase, and his subsequent demands for payment were supported by receipts and other documents. SBTC, through its officers and a consulting architect, even verified the claims and internally recommended a settlement of P200,000.00.
Despite this recommendation, SBTC refused payment, denying any liability. It invoked Article IX of the contract, which stipulated that adjustments for cost increases due to factors beyond the contractor’s control would be made “upon mutual agreement of both parties.” SBTC argued that since no such mutual agreement was reached, its obligation to pay the extra amount never materialized. Ferrer thus filed a complaint for breach of contract with damages.

ISSUE

Whether petitioner SBTC is liable for the additional construction costs incurred by Ferrer despite the contract clause requiring “mutual agreement” for any price adjustment.

RULING

Yes, the Supreme Court affirmed the liability of SBTC. The Court rejected the bank’s literal interpretation of the “mutual agreement” clause. Applying Article 1182 of the Civil Code, the Court held that a conditional obligation dependent solely upon the will of the debtor is void. The requirement of “mutual agreement” effectively placed the fulfillment of the condition within SBTC’s sole discretion, as Ferrer would logically agree to any adjustment allowing him to recover his legitimate costs. To allow SBTC to evade payment would permit unjust enrichment at Ferrer’s expense, which is prohibited under Article 22 of the Civil Code. The bank admitted the cost increase was valid and derived benefit from the completed building; thus, it was obligated to equitably compensate the contractor. However, the Court found the awarded attorney’s fees of 25% of the principal amount unconscionable and reduced it to P10,000.00, noting the case’s issues were not complex and counsel’s work was subpar. The decision of the Court of Appeals was affirmed with this modification.