G.R. No. 169975 ; March 18, 2010
PAN PACIFIC SERVICE CONTRACTORS, INC. and RICARDO F. DEL ROSARIO, Petitioners, vs. EQUITABLE PCI BANK (formerly THE PHILIPPINE COMMERCIAL INTERNATIONAL BANK), Respondent.

FACTS

Petitioner Pan Pacific Service Contractors, Inc., through its President Ricardo F. Del Rosario, entered into a contract with respondent Equitable PCI Bank for mechanical works amounting to ₱20,688,800, with subsequent change orders bringing the total contract price to ₱23,311,410.30. The contract included an escalation clause allowing for price adjustments in case of increases in labor and material costs. Due to such increases in 1990, Pan Pacific claimed a price adjustment of ₱5,165,945.52, later reduced to ₱4,858,548.67. The project engineer, TCGI Engineers, recommended a price adjustment of ₱3,730,957.07. Respondent withheld payment of the adjustment. Due to financial strain, Pan Pacific was constrained to execute a promissory note for a ₱1.8 million loan from respondent, with the amount released directly to laborers and suppliers. Upon completion and acceptance of the project in 1992, respondent refused to release the price adjustment and instead sought to offset it against the loan balance. Petitioners filed a complaint for annulment of the promissory note and for sum of money. The Regional Trial Court declared the promissory note null and void and ordered respondent to pay the unpaid balance of the price adjustment with 12% interest. Both parties appealed to the Court of Appeals, which modified the RTC decision by ordering respondent to pay ₱1,516,015.07 with 12% interest per annum from the date of judicial demand. Petitioners filed a Motion for Partial Reconsideration, seeking the application of an 18% bank lending rate as stipulated in the contract, which the CA denied.

ISSUE

Whether the Court of Appeals erred in fixing the interest rate on the unpaid balance of the price adjustment at 12% per annum instead of the 18% bank lending rate stipulated in the contract.

RULING

The Supreme Court granted the petition. The Court held that the applicable interest rate is the bank lending rate as stipulated in the contract, not the legal rate of 12%. The contract consisted of an Agreement and General Conditions. Section 2.5 of the Agreement provided that if any payment is delayed, the contractor may charge interest at the current bank lending rates. Section 60.10 of the General Conditions similarly stipulated that in the event of the owner’s failure to make payment within the stated times, the owner shall pay interest at the rate based on banking loan rates prevailing at the time of the signing of the contract. The Court found that these provisions were clear and required no further consent from the respondent for their application. The respondent’s obligation to pay the price adjustment was already established and overdue. Therefore, the stipulated bank lending rate of 18% per annum, not the legal rate, should be applied to the unpaid balance from the time it became due. The CA decision was modified accordingly.