Case Summary (G.R. No. 169975)
Parties, Contract Setting, and Applicable Legal Provisions
Pan Pacific was engaged in contracting mechanical works on airconditioning systems. On 24 November 1989, Pan Pacific, through its President Del Rosario, entered into a contract of mechanical works with respondent for P20,688,800. The parties further agreed on nine change orders totaling P2,622,610.30, making the total consideration for the project P23,311,410.30. The contract provided for a price adjustment in case of increase in labor costs and prices of materials under paragraphs 70.1 and 70.2 of the contract’s “General Conditions for the Construction of PCIB Tower II Extension” (the escalation clause).
Factual Background: Escalation Claim and the Promissory Note
Pan Pacific commenced the mechanical works at the PCIB Tower II extension site in Makati City. The project was completed in June 1992 and was accepted by respondent on 9 July 1992. In 1990, labor costs and material prices escalated beyond prior levels. On 5 April 1991, in accordance with the escalation clause, Pan Pacific claimed a price adjustment of P5,165,945.52. Respondent’s project engineer, TCGI Engineers, asked for a reduction. As an act of goodwill, Pan Pacific reduced its claim to P4,858,548.67.
On 28 April 1992, TCGI Engineers recommended that the price adjustment be pegged at P3,730,957.07, basing the evaluation on labor indices of the Department of Labor and Employment, a National Statistics Office price index, PD 1594 and its implementing rules as amended on 15 March 1991, shipping documents submitted by PPSCI, and sub-clause 70.1 of the general conditions. Pan Pacific argued that with that recommendation respondent was estopped from disclaiming liability of at least P3,730,957.07 under the escalation clause. Despite repeated demands, respondent withheld payment of the price adjustment.
Faced with a lack of operational capital due to extraordinary increases in labor and materials, Pan Pacific agreed—against its will and based on respondent’s promise that the price adjustment would be released soon—to execute a promissory note for a P1.8 million loan, and to post a surety bond. The P1.8 million was released directly to laborers and suppliers, and none was given to Pan Pacific. As Pan Pacific demanded the release of the price adjustment, respondent continued to promise release but did not do so, while the loan matured and respondent demanded payment plus interest and penalty. Pan Pacific refused to pay the loan, contending that it would not have incurred it if respondent had released the price adjustment on time. It also asserted that the promissory note did not express the true agreement of the parties; it maintained that the P1.8 million should be considered an advance payment on the price adjustment, so there was no consideration for the promissory note and it was therefore null and void from the beginning.
Dispute Before Suit: Offset and Refusal of Extrajudicial Settlement
Respondent maintained it would not release any portion of the price adjustment to Pan Pacific but would instead offset the price adjustment against Pan Pacific’s outstanding balance of P3,226,186.01, representing the loan, interests, penalties, and collection charges. Pan Pacific refused the offsetting. Still, Pan Pacific agreed to an extrajudicial settlement by receiving the reduced amount of P3,730,957.07 recommended by TCGI Engineers, less P1.8 million and P414,942 as advance payments.
Trial Court Proceedings: RTC Declaration of Nullity and Monetary Awards
On 6 May 1994, petitioners filed a complaint for declaration of nullity/annulment of the promissory note, sum of money, and damages before the Regional Trial Court of Makati City, Branch 59 (RTC). On 12 April 1999, the RTC ruled in favor of petitioners. It declared the promissory note (Exhibit “B”) null and void. It ordered respondent to pay: P1,389,111.10 as the unpaid balance of the adjustment price, with interest at the legal rate of twelve percent (12%) per annum starting 6 May 1994 (the date of filing) until fully paid; P100,000.00 as moral damages; P50,000.00 as exemplary damages; and P50,000.00 as attorney’s fees. The RTC dismissed respondent’s counterclaim for lack of merit.
Appeals to the CA: Interest Rate and Damages Issues
Both parties appealed. Petitioners partially appealed on the issues of the RTC’s deduction of P126,903.97 from the balance of the adjusted price and the RTC’s award of only 12% interest instead of the bank loan rate of 18% compounded annually beginning September 1992. Respondent appealed the entire RTC decision, arguing that it was contrary to law and evidence, specifically challenging (a) the declaration that the promissory note was void, (b) the award of moral and exemplary damages and attorney’s fees, and (c) the dismissal of its counterclaim.
In the CA Decision dated 30 June 2005, the CA modified the RTC decision only as to the principal amount due. It removed the deduction of P126,903.97, finding it represented the final payment on the basic contract price. Accordingly, the CA ordered respondent to pay petitioners P1,516,015.07, with interest at the legal rate of 12% per annum starting 6 May 1994. Both petitions for reconsideration were denied in a CA Resolution dated 5 October 2005.
The Issue Before the Supreme Court
Petitioners elevated the matter to the Supreme Court, raising a single issue: whether the CA erred in fixing the interest rate at 12% instead of the 18% bank lending rate.
Supreme Court Disposition: No Challenge to the Principal, but Interest Rate Was Erroneously Limited
The Court granted the petition. It noted that respondent did not appeal the CA decision. Consequently, there was no longer any issue as to the principal amount of the unpaid balance of the price adjustment, which the CA correctly computed as P1,516,015.07. The Court therefore treated the only remaining controversy as the interest rate applicable to respondent’s delay in paying the balance.
The Court examined the CA’s reasoning for maintaining 12% interest. The CA held that although the contract provided for interest at the current bank lending rate in case of delay in payment by the owner, the proviso did not authorize petitioners to unilaterally raise the interest rate without respondent’s consent. The CA reasoned that petitioners never informed or sought approval for the imposition of the 18% interest on the adjusted price. It further reasoned that mutuality of contracts would be violated if the interest rate were unilaterally increased. The CA thus maintained the legal rate of 12% per annum from the date of judicial demand.
Petitioners’ Contractual Basis for 18% Bank Lending Rate
Petitioners argued that the contract consisted of two parts, the Agreement and the General Conditions, both of which provided for interest at the bank lending rate on any unpaid amount due under the contract. They emphasized that nothing required respondent’s consent as a condition to charging that interest.
Petitioners specifically invoked Agreement Section 2.5, which stated that if any payment was delayed, the contractor may charge interest at the current bank lending rates, without prejudice to the owner’s recourse to other remedies. They also invoked General Conditions Section 60.10, which stated that upon the owner’s failure to pay within the contract’s periods, the owner shall pay interest at the rate based on banking loan rates prevailing at the time of signing on all sums unpaid from the date by which they should have been paid.
Petitioners contended that, once their entitlement to the price adjustment was established, the bank lending interest rate necessarily followed due to respondent’s delay.
Respondent’s Position: Consultation Required for Adjusted Costs and Imposition of Interest
Respondent, in contrast, argued that under General Conditions 70.1 and 70.2, additional cost due to labor and material escalation would be determined by the engineer and added to the contract price only after due consultation with the owner. Respondent asserted that because there was no prior consultation regarding imposition of the 18% compounded annual interest on the adjusted price, respondent was never consulted or informed of that rate. The CA had adopted this distinction by treating respondent’s consent to the price adjustment liability as different from any consent required for the higher interest rate.
Supreme Court’s Ruling on Contract Interpretation and the Need for Consent
The Supreme Court disagreed with the CA’s added requirement of respondent’s separate consent for the bank lending interest rate. The Court reiterated that the written contract is the formal expression of the parties’ rights, duties, and obligations, and it contains all terms agreed upon. Courts cannot alter a contract by construction or supply stipulations that the parties did not include. Construction is proper only when the contract is vague or ambiguous.
The Court read the escalation clause together with Agreement Section 2.5 and General Conditions Section 60.10, both of which pertained to time of payment and interest upon delay. It stressed that the CA had already settled that petitioners had consulted respondent on the price adjustment and had held respondent liable for the balance of P1,516,015.07. Respondent, having not appealed from that CA determination, was estopped from contesting that factual and legal finding. However, the CA erred by requiring separate consent before respondent could be held liable for interest at the current bank lending rate.
The Supreme Court found that the contract language did not require respondent’s consent for interest at the bank lending rate to attach upon delay. Once the parties agreed to the price adjustment through due consultation in compliance with the escalation clause provisions, the agreement operated as an amendment to the original contract as to the adjusted costs. That amendment generated respondent’s obligation to pay the adjusted costs w
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Case Syllabus (G.R. No. 169975)
Parties and Procedural Posture
- Pan Pacific Service Contractors, Inc. (Pan Pacific) and Ricardo F. Del Rosario (Del Rosario) filed a Petition for Review under Rule 45 of the Rules of Court to assail the Court of Appeals (CA) Decision and Resolution.
- The respondent was Equitable PCI Bank (formerly the Philippine Commercial International Bank) (Equitable PCI Bank).
- The CA modified the Regional Trial Court of Makati City, Branch 59 (RTC) decision and changed the computation of the principal balance, while maintaining a legal interest rate of twelve percent per annum.
- The CA denied the parties’ respective motions for reconsideration through a Resolution dated 5 October 2005.
- The Supreme Court granted the petition and set aside the CA’s ruling on the interest rate.
Key Factual Allegations
- Pan Pacific was engaged in contracting mechanical works on an airconditioning system.
- On 24 November 1989, Pan Pacific, through Del Rosario, entered into a contract for mechanical works with Equitable PCI Bank for P20,688,800.
- The parties agreed on nine change orders amounting to P2,622,610.30, yielding a total project consideration of P23,311,410.30.
- The contract contained an escalation clause granting price adjustment due to increases in labor costs and prices of materials under sub-clauses 70.1 and 70.2 of the General Conditions for the Construction of PCIB Tower II Extension.
- The project was completed in June 1992 and Equitable PCI Bank accepted it on 9 July 1992.
- In 1990, labor and material costs escalated, prompting Pan Pacific to claim price adjustment on 5 April 1991 under the escalation clause.
- Pan Pacific initially claimed P5,165,945.52, but it reduced the claim to P4,858,548.67 after the project engineer requested a reduction as an act of goodwill.
- On 28 April 1992, the project engineer recommended pegging the price adjustment at P3,730,957.07 based on specified evaluative factors including labor indices, price indices, PD 1594 and its Implementing Rules, shipping documents, and the relevant contract sub-clause.
- The CA had already settled that Pan Pacific consulted Equitable PCI Bank on the price adjustment and that the respondent was liable for the balance computed.
- Equitable PCI Bank withheld release of the price adjustment despite repeated demands, leading Pan Pacific to face inadequate operational capital for the project.
- To obtain a loan, Pan Pacific was compelled to execute a promissory note for P1.8 million as a loan requirement, and it also posted a surety bond.
- The P1.8 million loan was released directly to laborers and suppliers, and none was given to Pan Pacific.
- Pan Pacific refused to pay the loan, alleging that the promissory note did not express the true agreement and that the money should be treated as an advance on the price adjustment, leaving the promissory note without consideration and null and void.
- Equitable PCI Bank maintained that it would not release the price adjustment, and instead would offset it against Pan Pacific’s outstanding balance representing the loan, interests, penalties, and collection charges.
- For extrajudicial settlement purposes, Pan Pacific agreed to receive the reduced amount of P3,730,957.07 minus P1.8 million and P414,942 as advance payments.
- On 6 May 1994, Pan Pacific and Del Rosario filed a complaint for declaration of nullity/annulment of the promissory note, sum of money, and damages against Equitable PCI Bank.
Contract Provisions Invoked
- The Agreement contained Section 2.5, which provided that if payment was delayed, the contractor could charge interest at the current bank lending rates, without prejudice to the owner’s recourse to other remedies under existing law.
- The General Conditions contained Section 60.10 on Time for payment, requiring payment within 28 days after interim certificate delivery or within 56 days after final certificate delivery, and imposing interest at the rate based on banking loan rates prevailing at the time of the signing of the contract on unpaid sums after the payment deadline.
- The escalation clause included sub-clauses 70.1 and 70.2 addressing increases or decreases in costs and subsequent legislation causing additional or reduced costs, subject to due consultation with the owner and contractor and determination by the engineer with notification requirements.
- Pan Pacific argued that the contract, read together, made interest at the bank lending rate automatically chargeable in case of delay upon determination of the amount due.
- Equitable PCI Bank argued that the escalation clause required consultation for determining additional costs but not for separately approving the imposition of the 18% interest on the adjusted price.
Issues on Appeal
- The Supreme Court framed the sole issue as whether the CA erred in fixing the interest rate at twelve percent per annum instead of the eighteen percent bank lending rate.
- The Supreme Court treated the CA’s computation of the principal unpaid balance as settled bec