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

Pan Pacific Service Contractors, Inc. (Pan Pacific) engaged in contracting mechanical works on airconditioning systems.
Ricardo F. Del Rosario (Del Rosario) acted for Pan Pacific as President in transactions relevant to the controversy.
Equitable PCI Bank (formerly the Philippine Commercial International Bank) (respondent) accepted and paid for mechanical works under a construction contract, and later disputed the payment of a price adjustment and the applicable interest rate.

On 24 November 1989, Pan Pacific, through Del Rosario, entered into a contract of mechanical works (Contract) with respondent for P20,688,800.
Pan Pacific and respondent agreed on nine change orders for P2,622,610.30.
The total consideration for the whole project was P23,311,410.30.
The Contract stipulated an escalation clause granting price adjustment in case of increase in labor costs and prices of materials under:

Paragraph 70.1; and
Paragraph 70.2 of the “General Conditions for the Construction of PCIB Tower II Extension” (General Conditions).

Pursuant to the Contract, Pan Pacific commenced mechanical works on the PCIB Tower II extension building in Makati City.
The project was completed in June 1992.
Respondent accepted the project on 9 July 1992.

In 1990, labor costs and prices of materials escalated.
On 5 April 1991, under the escalation clause, Pan Pacific claimed a price adjustment of P5,165,945.52.
Respondent’s appointed project engineer, TCGI Engineers, asked for a reduction of the price adjustment.
To show goodwill, Pan Pacific reduced the price adjustment to P4,858,548.67.
On 28 April 1992, TCGI Engineers recommended to respondent that the price adjustment be pegged at P3,730,957.07.
TCGI Engineers based their evaluation on:

Labor Indices of the Department of Labor and Employment.
Price Index of the National Statistics Office.
PD 1594 and its Implementing Rules and Regulations as amended, 15 March 1991.
Shipping documents submitted by PPSCI.
Sub-clause 70.1 of the General Conditions.

Pan Pacific contended that, with the recommendation, respondent was already estopped from disclaiming liability of at least P3,730,957.07 under the escalation clause.
Due to extraordinary increases in labor and materials costs, Pan Pacific’s operational capital became inadequate.
Respondent withheld payment of the price adjustment despite repeated demands by Pan Pacific.

Instead of paying the price adjustment, respondent offered Pan Pacific a loan of P1.8 million.
Against Pan Pacific’s will and upon respondent’s promise that the price adjustment would be released soon, Pan Pacific (through Del Rosario) executed a promissory note for the loan amount.
Pan Pacific posted a surety bond.
The P1.8 million was released directly to laborers and suppliers, and Pan Pacific received no centavo.
Pan Pacific made demands for payment of the price adjustment, while respondent kept promising release.
The P1.8 million loan matured.
Respondent demanded payment plus interest and penalty.
Pan Pacific refused to pay the loan, asserting:

It would not have incurred the loan if respondent released the price adjustment on time.
The promissory note did not express the true agreement between the parties.
The P1.8 million should be considered an advance payment on the price adjustment.
Hence, there was no consideration for the promissory note and it was null and void from the beginning.

Respondent’s position on offsetting and the proposed extrajudicial settlement

Respondent maintained it would not release any amount of the price adjustment but would offset the price adjustment with Pan Pacific’s outstanding balance of P3,226,186.01, representing the loan, interest, penalties, and collection charges.
Pan Pacific refused the offsetting.
Pan Pacific agreed to receive the reduced amount of P3,730,957.07 as recommended by TCGI Engineers for an extrajudicial settlement, less P1.8 million and P414,942 as advance payments.

On 6 May 1994, petitioners filed a complaint for declaration of nullity/annulment of the promissory note, sum of money, and damages against respondent with the RTC of Makati City, Branch 59.
On 12 April 1999, the RTC rendered judgment ordering, among others:

Declaration of the promissory note (Exhibit “B”) as null and void.
Payment by respondent of P1,389,111.10 representing unpaid balance of the adjustment price, with interest at 12% per annum starting 6 May 1994 until fully paid.
Moral damages of P100,000.00.
Exemplary damages of P50,000.00.
Attorney’s fees of P50,000.00.
Dismissal of respondent’s counterclaim for lack of merit.
Costs against respondent.

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