Chilean Supreme Court accepts that a lump sum is not an obstacle to the payment of additional works

Elina Mereminskaya
Independent Arbitrator, Santiago

In the judgment of 15 October 2024, ‘Ingeniería Eléctrica Eramus Limitada con Fundación Integra’ Docket No 102.906-2023, the Chilean Supreme Court ruled on the cassation appeals filed by both parties in the case.

The project in question was a kindergarten, whose construction was assumed by Ingeniería Eléctrica Eramus Limitada (‘Eramus’). A single, global and fixed lump sum price was agreed, determined in accordance with the estimate submitted by the contractor, based on the unit prices for various items. The parties were required to enter into special agreements in the event of any alterations and/or modifications to the works entrusted. Under such an agreement, any extension or modification of the contracted works had to be carried out with the order or consent of the principal, and a special price for such works had to be established on the basis of the unit prices of the contractor’s original estimate.

The trial court ordered the owner to pay the construction company for increased costs for over-excavation and increased costs for the construction of an orchard. However, it rejected the claim for consequential and moral damages resulting from Eramus’s recourse to the financial system to improve its weakened financial situation, caused by Integra Foundation’s (‘Integra’s’) alleged breaches. It also rejected the reimbursement of the delay liquidated damages collected by Integra due to the two-month delay in completion. The judgment was upheld on appeal.

Integra challenged the second instance ruling before the Supreme Court by way of cassation on the merits.

First, it pointed out that the orchard did not constitute additional work, contrary to the decision of the first instance. It argued that the claim for an additional payment for the work described in the contract went against the claimant’s own acts because it consented to a lump sum contract, which expressly provided for a single price for the total construction, without being able to allege increases or decreases at a later date.

Second, it claimed that the challenged judgment partially accepted the claim without interpreting the contract with the true intention of the contracting parties, in accordance with Article 1560^[1] of the Civil Code. Indeed, the contract was agreed under the lump sum modality in order to not incur additional expenses. Therefore, it argued that the judgment violated the law of the contract, provided in Article 1545 of the Civil Code.^[2]

Third, it claimed that the contested judgment contravened Articles 1708^[3] and 1709^[4] of the Civil Code, by ordering the payment of sums for increased costs for over-excavation and the construction of an orchard; obligations that were deemed to be accredited only with the witnesses’ testimony, that is, the stipulations of a lump sum contract were modified, despite the existence of an express rule that prohibited it.

The Supreme Court considered that Integra was seeking to alter the facts established in the judgment, while insisting that the claim should have been rejected based on factual circumstances that were not established in the trial.

Because the cassation appeal before the Supreme Court did not allow altering the facts established by the lower courts, the cassation appeal filed by the respondent was rejected.

In turn, Eramus challenged the judgment of the second instance because, in its opinion, it violated Article 1545 of the Civil Code, which establishes the binding force of contracts for the parties.

It claimed that the delay in the delivery of the works was due, first, to the fact that the respondent deliberately failed to sign the contractual addendum, whereby the extension of time in the execution of the work was to be acknowledged as a consequence of the performance of additional work; despite the fact that such work had been previously authorised by the respondent and, likewise, approved once it had been completed. Second, the claimant argued that the delay was due to the fact that the respondent did not comply with its duty to obtain essential and vital permits for the proper progress of the work, which slowed down the completion of the overall work for a period of at least two months. Consequently, the delay was not attributable to the claimant and the application of the delay liquidated damages was unjustified.

Likewise, it alleged that Article 1546^[5] of the Civil Code, which establishes the obligation to fulfil contracts in good faith, had been violated. It stated that the collection of liquidated damages for delay was contrary to good faith, the delay not being attributable to the contractor.

Finally, it stated that the judgment was wrong in rejecting the claim for consequential and moral damages. It stated that the judges erroneously interpreted the rule in question, when the judgment concluded that there was no causal relationship between the breach of contract by the respondent, and the claimed consequential and moral damages because these were due to the claimant’s decision making. However, in the claimant’s opinion, the theory of the necessary and adequate cause of the damages suffered by it should have been applied, as it was the non-payment of large sums to a small company that would inevitably force it to cover the deficit caused by resorting to the banking financial system, with all the costs that this implied.

The Supreme Court ruled as follows: ‘From the foregoing, it is clear that the claimant’s allegations seek to establish new factual assumptions not established by the judges, such as the cause or reason for the delay in the delivery of the works by the claimant, which would enable it to request the refund of the fine and compensation for consequential and moral damages arising from the breach of contract; allegations that are based primarily on a fact not established in the case.’

The Supreme Court pointed out that only the judges of the merits are empowered to establish the facts of the case, and once this task has been carried out correctly, in view of the merits of the evidence provided, they are immutable, and cannot be reviewed by means of the cassation, unless the violation of the laws regulating the evidence has been denounced in an effective manner, which was not the case here.

For these considerations, the cassation appeal on the merits was rejected. The positive effect of this decision is to recognise that the lump sum agreement is not a blank cheque to cover any additional or extraordinary work. The lump sum does not constitute an approval of such work, which must be compensated separately. As obvious as this conclusion may seem to construction professionals, its confirmation by the Supreme Court is valuable for the Chilean construction industry.