G.R. No. 169975 - Pan Pacific Service Contractors, Inc. vs. Equitable PCI Bank

Pan Pacific Service Contractors, Inc. (Pan Pacific) and its President, Ricardo F. Del Rosario, entered into a contract with Equitable PCI Bank (formerly the Philippine Commercial International Bank) on November 24, 1989, to perform mechanical works for the PCIB Tower II Extension project in Makati City.
The original contract price was set at P20,688,800, with additional nine change orders amounting to P2,622,610.30, thereby making the total project consideration P23,311,410.30.
The contract contained an escalation clause under paragraphs 70.1 and 70.2 of the “General Conditions for the Construction of PCIB Tower II Extension,” which allowed for price adjustments in the event of increases in labor and material costs.

Due to significant escalations in labor and material costs in 1990, Pan Pacific claimed a price adjustment as allowed under the contractual escalation clause.
On April 5, 1991, Pan Pacific initially claimed an adjustment of P5,165,945.52, which was later reduced to P4,858,548.67 in a display of goodwill when respondent’s project engineer, TCGI Engineers, intervened.
On April 28, 1992, based on evaluations that included labor indices, price indices, and relevant regulations, TCGI Engineers recommended pegging the price adjustment at P3,730,957.07.
Pan Pacific contended that this recommendation estopped the respondent from disputing liability for at least the recommended amount, in accordance with the escalation clause.

Despite repeated demands for the release of the price adjustment, the respondent withheld the payment and instead offered Pan Pacific a P1.8 million loan.
Under pressure and relying on an assurance that the price adjustment would be released soon, Pan Pacific executed a promissory note for P1.8 million and posted a surety bond; however, the funds were disbursed directly to laborers and suppliers rather than to Pan Pacific.
Pan Pacific subsequently insisted that the promissory note did not represent the true agreement, arguing that the P1.8 million should be considered an advance payment on the price adjustment and that, in effect, the note was void and without consideration.

On May 6, 1994, Pan Pacific filed a complaint with the RTC of Makati City, Branch 59, seeking declaration of nullity/annulment of the promissory note, the recovery of the unpaid price adjustment, and payment of damages.
The RTC rendered a decision on April 12, 1999, declaring the promissory note null and void, and ordering respondent to pay various amounts including the unpaid balance of the price adjustment, damages, and attorney’s fees.
Both parties appealed: Petitioners partially appealed certain points (including deductions and the interest rate) while the respondent appealed the whole RTC decision.
The Court of Appeals, in its decision dated June 30, 2005, modified the RTC ruling by removing certain deductions and fixing the interest rate at the legal rate of 12% per annum, effective from May 6, 1994.
Subsequent motions for reconsideration by both parties were denied on October 5, 2005, leading petitioners to elevate the case to the Supreme Court.

The core dispute centers on whether the interest on the unpaid balance of the price adjustment should be computed at the legal rate of 12% per annum or at the bank lending rate of 18% per annum, as provided in parts of the contract.
Petitioners argued that the contract, through Section 2.5 of the Agreement and Section 60.10 of the General Conditions, mandates the application of the bank lending rate (18%) on any delayed payment.
Conversely, the respondent maintained that such an interest rate imposition required the respondent’s consent, contending that while price adjustment on the basic contract price was agreed upon, the imposition of the 18% interest was not separately approved.

Whether the Court of Appeals erred in fixing the interest rate at 12% per annum for the delay in the payment of the price adjustment instead of applying the bank lending rate of 18% per annum as stipulated by the contract.
Whether the imposition of the bank lending rate for delayed payments requires the respondent’s prior consent, or if the contractual provisions automatically trigger its application upon default.