Breach of Contract: Defining Scope of Work and Assessing Damages in Construction Agreements

In construction contracts, disputes often arise not only from delays but from disagreements over what work was actually required. A 2017 Supreme Court decision provides clear guidance on how courts define the scope of work in a contract and how damages are computed when a contractor fails to complete the project. The case of Swire Realty Development Corporation v. Specialty Contracts General and Construction Services, Inc. (G.R. No. 188027) is instructive for both project owners and contractors.

The Facts of the Case

Swire Realty entered into an agreement with Specialty Contracts (Specserv) for waterproofing works on the Garden View Tower condominium project. The contract price was ₱2,000,000.00, with a completion period of 100 calendar days. Specserv was to be paid through a 20% down payment and monthly progress billings, subject to a 10% retention fee and 1% withholding tax.

Specserv completed only 90% of the work and failed to finish the remaining portion despite demands. Swire then hired another contractor, Esicor, to complete the unfinished work. Swire filed a complaint for sum of money and damages against Specserv for breach of contract.

The Issue: Was the Swimming Pool Waterproofing "Additional Work"?

The central dispute was whether the waterproofing of the swimming pool, which was done a second time after the pool's depth was changed, constituted additional work requiring extra payment. The Court of Appeals (CA) ruled that it did, but the Supreme Court disagreed.

The Supreme Court examined the Agreement's "Scope of Works" clause, which expressly listed the "Swimming Pool" with an approximate area of 234.20 square meters as a covered area. The Court held that a mere notation in a Site Instruction Form about "2nd waterproofing after lightweight concrete topping" did not automatically mean additional work. In the absence of evidence to the contrary, such work was deemed included in the scope of works already agreed upon.

The Court also noted that if Specserv truly believed the work was additional, it should have invoked the contract's Change Orders clause, which required written notice and agreement on new pricing before performing extra work.

The Ruling on Damages

The Supreme Court found that Specserv breached the contract by completing only 90% of the work. The Court then computed the damages as follows:

1. Actual damages of ₱420,000.00 — representing deductions from the contract price for the unfinished 10% (₱200,000.00), the 10% retention fee (₱200,000.00), and the 1% withholding tax (₱20,000.00).

2. ₱124,931.40 — the amount Swire paid to Esicor to complete the unfinished work, citing Article 1167 of the New Civil Code, which provides that if a person obliged to do something fails to do it, the same shall be executed at his cost.

3. ₱200,000.00 as liquidated damages — The contract provided for a penalty of ₱10,000.00 per day of delay. With 365 days of delay, the penalty would have been ₱3,650,000.00. However, citing Articles 1229 and 2227 of the New Civil Code, the Court reduced the penalty as iniquitous and unconscionable, considering that Specserv completed 90% of the project and there was no showing of bad faith.

The Court deleted the award of attorney's fees, holding that a mere statement that a party was forced to litigate is insufficient justification under Article 2208 of the Civil Code.

Practical Takeaways

• Define scope of work precisely. Contracts should clearly enumerate all areas and tasks covered. Vague descriptions invite disputes over whether certain work is "additional."
• Use change order procedures. If a contractor believes work is outside the original scope, it should formally invoke the contract's change order clause before performing the work. Performing first and claiming additional payment later is risky.
• Document everything. Site instruction forms and progress billings are critical evidence, but they must be read together with the contract's express terms.
• Courts may reduce penalties. Even when a contract specifies a daily penalty, courts can equitably reduce it if it is unconscionable, especially where there is partial performance and no bad faith.
• Attorney's fees are not automatic. To recover attorney's fees, a party must present specific factual and legal justification beyond merely being forced to litigate.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.