Mutuality of Contracts: No Unilateral Price Escalation Without Clear Basis

The Supreme Court has long protected the principle that contracts are the law between the parties — and that neither side may unilaterally change its terms. In Salvador v. Court of Appeals (G.R. No. 124899, March 30, 2004), the Court applied this principle to a construction dispute, ruling that a contractor cannot demand price escalation or payment for additional work without clear contractual basis and proper documentation. The decision offers practical guidance for anyone entering into construction or service contracts in the Philippines.

The Case

Renato Salvador, a licensed contractor, entered into a Development and Construction Contract with Maria Romayne Miranda, through her attorney-in-fact Gilbert Miranda, to develop a property into a memorial park. The contract price was set at P3,986,643.50. The contract contained an escalation clause allowing price adjustment in case of "substantial increase/s of prices of materials, like cement, G.I. corrugated sheets," but only as to the particular items affected.

When Salvador demanded a blanket 20% increase on all unpaid balances, plus payment for alleged additional works and a 20% fee on materials the owners themselves supplied, the owners refused. Salvador stopped work and sued. The trial court dismissed his complaint; the Court of Appeals reversed on the owners' counterclaims; and the Supreme Court ultimately reinstated the trial court's dismissal of both the complaint and the counterclaims.

The Issue

The central question was whether Salvador could validly claim additional compensation for (1) alleged additional works, (2) escalation of the contract price, and (3) a 20% charge on materials supplied by the owners.

The Ruling

The Supreme Court ruled against Salvador on all three claims, applying two key legal principles.

First, under Article 1724 of the Civil Code, a contractor who undertakes to build a structure for a stipulated price cannot demand an increase in price on account of higher cost of labor or materials, except when there has been a change in the plans and specifications, provided that: (1) the change was authorized by the proprietor in writing, and (2) the additional price was determined in writing by both parties. Both requirements are conditions precedent to recovery. Salvador presented no written authorization for any changes, no written agreement on additional prices, and no advance notice to the owners. His claim for P399,190.46 in additional works therefore had no legal basis.

Second, on the escalation claim, the Court examined the contract's escalation clause. The clause allowed adjustment only "as to the particular item/s or materials involved in the increase/s of prices." Salvador's computation merely imposed a uniform 20% increase on the outstanding balance of each service — a blanket increase not tied to any specific material price increase. He never presented receipts, supplier billings, or similar documents to substantiate his claim that material prices had risen substantially.

The Court emphasized that a contract is the law between the parties, and when its terms are clear, their literal meaning controls. The escalation clause did not give Salvador the right to determine arbitrarily the amount of escalation. His general claim that prices had increased by 40% was insufficient.

Mutuality of Contracts

The Court also addressed a broader principle. Even assuming the contract authorized Salvador to determine unilaterally the escalation, such a provision would be void for violating the principle of mutuality under Article 1308 of the Civil Code, which provides that contracts must bind both parties and their validity or compliance cannot be left to the will of one of them. Citing Philippine National Bank v. Court of Appeals, the Court explained that a contract containing a condition making its fulfillment depend exclusively upon the uncontrolled will of one party is void.

Shared Fault and Damages

On the owners' counterclaim for damages, the Court found that both parties breached their obligations. The owners failed to secure the required building permit, which the contractor had received a cease-and-desist order for. Under the contract, the owner was responsible for obtaining permits. The Court also noted that the contract treated stoppage due to legal authority as force majeure, suspending the completion period. Since the owners failed to prove they had fulfilled their obligation, the contractor's failure to complete could not be attributed solely to his voluntary work stoppage. The awards for moral damages, exemplary damages, and attorney's fees were deleted.

Practical takeaways

• Get it in writing. Under Article 1724 of the Civil Code, any change in plans or specifications must be authorized in writing, and the additional price must be agreed upon in writing by both parties. Verbal approvals will not support a claim for additional costs.
• Follow the contract's escalation clause precisely. If a contract allows price adjustment for material price increases, the contractor must prove the actual increase in specific materials — not just claim a blanket percentage increase. Keep receipts, supplier billings, and documentation.
• Mutuality protects both sides. A contract provision that lets one party unilaterally set prices or terms is void. Both parties must be bound on essentially equal footing.
• Both parties can be at fault. In a breach of contract case, damages may be reduced or denied if the complaining party also failed to perform its obligations, such as securing required permits.
• Do not stop work without legal basis. A contractor who abandons a project risks liability, but may have a defense if the owner's breach contributed to the stoppage.

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