Pan Pacific Service Contractors, Inc. v. Equitable Philippine Commercial International Bank
REITERATIONFacts
The Antecedents: Pan Pacific Service Contractors, Inc. (Pan Pacific), through its President Ricardo F. Del Rosario, entered into a contract with Equitable PCI Bank (respondent) for mechanical works on the PCIB Tower II extension building. The contract included an escalation clause allowing for price adjustments due to increases in labor costs and material prices. Pan Pacific completed the project and claimed a price adjustment of ₱5,165,945.52, later reduced to ₱4,858,548.67. TCGI Engineers, respondent's appointed project engineer, recommended a price adjustment of ₱3,730,957.07. Due to respondent's withholding of payment for the price adjustment, Pan Pacific accepted a loan of ₱1.8 million from respondent, which was released directly to laborers and suppliers, and executed a promissory note for this amount, with the understanding that it would be an advance payment on the price adjustment. Respondent later demanded payment of the loan with interest and penalties, and proposed to offset the price adjustment with Pan Pacific's outstanding balance. Pan Pacific filed a complaint for declaration of nullity of the promissory note, sum of money, and damages. Procedural History: The Regional Trial Court (RTC) declared the promissory note null and void and ordered respondent to pay petitioners ₱1,389,111.10 with interest at 12% per annum, plus moral damages, exemplary damages, and attorney's fees. Both parties appealed to the Court of Appeals (CA). The CA modified the RTC decision, ordering respondent to pay ₱1,516,015.07 with interest at the legal rate of 12% per annum, removing the deduction of ₱126,903.97. The CA denied both parties' motions for reconsideration. The Petition: Petitioners elevated the case to the Supreme Court, assailing the CA's decision to fix the interest rate at 12% instead of the 18% bank lending rate.
Issue(s)
Whether the Court of Appeals erred in fixing the interest rate at 12% instead of the 18% bank lending rate for the unpaid balance of the price adjustment, considering the contractual stipulations. Whether the consent of the respondent was required for the imposition of the bank lending rate of interest upon delay in payment, given the existing contractual agreement.
Ruling
The Supreme Court granted the petition, set aside the decision and resolution of the Court of Appeals, and ordered respondent to pay petitioners ₱1,516,015.07 with interest at the bank lending rate of 18% per annum starting 6 May 1994 until fully paid.
Ratio Decidendi
On the issue of the applicable interest rate: The Court found that the contract between the parties expressly stipulated for interest at the current bank lending rate in case of delay in payment. The CA erred in requiring a separate consent from the respondent for the imposition of this stipulated interest. When the terms of a contract are clear, the literal meaning of its stipulations governs, and courts cannot alter the contract. The escalation clause, read in conjunction with the provisions on the time for payment, means that upon failure to pay the adjusted costs within 28 days from the issuance of the interim certificate, the respondent becomes liable for the stipulated interest. To require a separate consent for the imposition of interest would render the parties' intention nugatory. Article 1956 of the Civil Code requires an express written stipulation for monetary interest, which was present in this case. The promissory note served as substantial proof that the bank lending rate at the time of default was 18% per annum. On the issue of consent for interest imposition: The Court disagreed with the CA's conclusion that the respondent's consent was needed for the imposition of the bank lending rate of interest. The contract clearly provided for such interest upon delay in payment. The parties' agreement is the best evidence of their intention, and when terms are reduced to writing, they are presumed to contain all agreed terms. The CA's distinction between consent for price adjustment and consent for interest imposition was deemed erroneous as it went beyond the clear intent of the parties as expressed in their written agreement. The stipulation for interest at the bank lending rate upon delay was automatic and did not require further consent from the respondent once the condition of delay in payment was met.
Main Doctrine
In cases of delay in payment for price adjustments under an escalation clause, where the contract expressly stipulates for interest at the current bank lending rate upon failure to pay within the stipulated period, the contractor is entitled to such bank lending rate, and the owner's consent is not required for the imposition of such interest upon default.