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PAN PACIFIC SERVICE V Equitable PCI Bank

This case involves a dispute over the applicable interest rate between Pan Pacific, a contractor, and Equitable PCI Bank for unpaid costs from a construction project. The contract between the parties provided for an interest rate equal to the current bank lending rate for delayed payments. Pan Pacific claimed they were entitled to an 18% interest rate based on the rate in a promissory note signed with the bank. The court ruled in favor of Pan Pacific, finding that the 18% rate in the signed promissory note was binding and the contract clearly entitled Pan Pacific to the current bank lending rate without needing additional consent from the bank.

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60 views3 pages

PAN PACIFIC SERVICE V Equitable PCI Bank

This case involves a dispute over the applicable interest rate between Pan Pacific, a contractor, and Equitable PCI Bank for unpaid costs from a construction project. The contract between the parties provided for an interest rate equal to the current bank lending rate for delayed payments. Pan Pacific claimed they were entitled to an 18% interest rate based on the rate in a promissory note signed with the bank. The court ruled in favor of Pan Pacific, finding that the 18% rate in the signed promissory note was binding and the contract clearly entitled Pan Pacific to the current bank lending rate without needing additional consent from the bank.

Uploaded by

siyaon
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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PAN PACIFIC SERVICE v.

EQUITABLE PCI BANK


FACTS: Pan Pacific is engaged in contracting mechanical works on air-conditioning system. Pan
Pacific, through its President, Ricardo F. Del Rosario, entered into a contract of mechanical works
with Equitable PCI Bank.  The Contract stipulated, among others, that Pan Pacific shall be
entitled to a price adjustment in case of increase in labor costs and prices of materials
under paragraphs 70.17 and 70.28 of the "General Conditions for the Construction of PCIB
Tower II Extension" (the escalation clause).
In 1990, labor costs and prices of materials escalated. On 5 April 1991, in accordance with the
escalation clause, Pan Pacific claimed a price adjustment of ₱5,165,945.52. Respondent’s appointed
project engineer, TCGI Engineers, asked for a reduction in the price adjustment. To show goodwill,
Pan Pacific reduced the price adjustment to ₱4,858,548.67. TCGI Engineers recommended to
respondent that the price adjustment should be pegged at ₱3,730,957.07.
Pan Pacific contended that with this recommendation, respondent was already estopped from
disclaiming liability of at least ₱3,730,957.07 in accordance with the escalation clause.
Due to the extraordinary increases in the costs of labor and materials, Pan Pacific’s operational
capital was becoming inadequate for the project. However, Equitable PCI Bank withheld the payment
of the price adjustment under the escalation clause despite Pan Pacific’s repeated demands. Instead,
Equitable PCI Bank offered Pan Pacific a loan of ₱1.8 million. Against its will and on the strength of
Equitable PCI Bank’s promise that the price adjustment would be released soon, Pan Pacific, through
Del Rosario, was constrained to execute a promissory note in the amount of ₱1.8 million as a
requirement for the loan with an 18% interest.
Pan Pacific alleged that the contract between the parties consists of two parts, the
Agreement and the General Conditions, both of which provide for interest at the bank lending rate on
any unpaid amount due under the contract. Pan Pacific further claim that there is nothing in
the contract which requires the consent of the respondent to be given in order that
petitioners can charge the bank lending rate. Specifically, petitioners invoke Section 2.5 of the
Agreement and Section 60.10 of the General Conditions as follows:
Agreement
2.5 If any payment is delayed, the CONTRACTOR may charge interest thereon at the
current bank lending rates, without prejudice to OWNER’S recourse to any other remedy available
under existing law.
General Conditions
60.10 Time for payment
xxxxxxx In the event of the failure of the Owner to make payment within the times
stated, the Owner shall pay to the Contractor interest at the rate based on banking loan
rates prevailing at the time of the signing of the contract upon all sums unpaid from the
date by which the same should have been paid. Xxxxxxxx
Pan Pacific thus submit that it is automatically entitled to the bank lending rate of interest from
the time an amount is determined to be due thereto, which Equitable PCI Bank should have paid.
Therefore, as Pan Pacific have already proven their entitlement to the price adjustment, it
necessarily follows that the bank lending interest rate of 18% shall be applied.
Equitable PCI Bank insists that under the provisions of 70.1 and 70.2 of the General
Conditions, it is stipulated that any additional cost shall be determined by the Engineer and shall be
added to the contract price after due consultation with the Owner, herein Equitable PCI Bank.
Hence, there being no prior consultation with the Equitable PCI Bank regarding the
additional cost to the basic contract price, it naturally follows that respondent was never
consulted or informed of the imposition of 18% interest rate compounded annually on
the adjusted price. Thus, Pan Pacific are not entitled to the imposition of 18% interest on the
adjusted price, as Pan Pacific never informed or sought the approval of Equitable PCI Bank for such
imposition.
RTC ruled in favor of Pan Pacific ordering Equitable PCI Bank to pay the unpaid balance
with 12% interest.
CA denied Pan Pacific’s claim for the application of the bank lending rate of 18%
compounded annually reasoning that:
Anent the 18% interest rate compounded annually, while it is true that the contract provides
for an interest at the current bank lending rate in case of delay in payment by the Owner, and the
promissory note charged an interest of 18%, the said proviso does not authorize plaintiffs to
unilaterally raise the interest rate without the other party’s consent. Unlike their request for price
adjustment on the basic contract price, Pan Pacific never informed nor sought the approval of
Equitable PCI Bank for the imposition of 18% interest on the adjusted price. To
unilaterally increase the interest rate of the adjusted price would be violative of the
principle of mutuality of contracts. Thus, the Court maintains the legal rate of twelve percent
per annum starting from the date of judicial demand.

ISSUE: W/N 18% is the applicable interest rate in the instant case.
HELD: YES, the applicable interest is 18%.
Under Article 2209 of the Civil Code, the appropriate measure for damages in case of
delay in discharging an obligation consisting of the payment of a sum of money is the payment of
penalty interest at the rate agreed upon in the contract of the parties. In the absence of a
stipulation of a particular rate of penalty interest, payment of additional interest at a rate
equal to the regular monetary interest becomes due and payable. Finally, if no regular
interest had been agreed upon by the contracting parties, then the damages payable will consist of
payment of legal interest which is 6%, or in the case of loans or forbearances of money, 12% per
annum. It is only when the parties to a contract have failed to fix the rate of interest or when such
amount is unwarranted that the Court will apply the 12% interest per annum on a loan or
forbearance of money.
The written agreement entered into between Pan Pacific and Equitable PCI Bank
provides for an interest at the current bank lending rate in case of delay in payment and
the promissory note charged an interest of 18%.
To prove Pan Pacific’s entitlement to the 18% bank lending rate of interest, Pan
Pacific presented the promissory note prepared by Equitable PCI Bank itself. This
promissory note, although declared void by the lower courts because it did not express the real
intention of the parties, is substantial proof that the bank lending rate at the time of default
was 18% per annum. Absent any evidence of fraud, undue influence or any vice of consent
exercised by petitioners against the respondent, the interest rate agreed upon is binding on them.

====================================

AS TO THE CONSENT OF EQUITABLE PCI BANK GIVEN IN ORDER THAT PAN PACIFIC CAN
CHARGE THE BANK LENDING RATE
It is settled that the agreement or the contract between the parties is the formal expression of
the parties’ rights, duties, and obligations. It is the best evidence of the intention of the parties.
Thus, when the terms of an agreement have been reduced to writing, it is considered as
containing all the terms agreed upon and there can be, between the parties and their
successors in interest, no evidence of such terms other than the contents of the written
agreement.
In this case, the CA already settled that Pan Pacific consulted Equitable PCI Bank on the
imposition of the price adjustment and held Equitable PCI Bank liable for the balance of
₱1,516,015.07. Equitable PCI Bank did not appeal from the decision of the CA; hence, Equitable PCI
Bank is estopped from contesting such fact.
However, the CA went beyond the intent of the parties by requiring respondent to give its
consent to the imposition of interest before petitioners can hold respondent liable for interest at the
current bank lending rate. This is erroneous. A review of Section 2.6 of the Agreement and
Section 60.10 of the General Conditions shows that the consent of the Equitable PCI
Bank is not needed for the imposition of interest at the current bank lending rate, which
occurs upon any delay in payment.
When the terms of a contract are clear and leave no doubt as to the intention of the
contracting parties, the literal meaning of its stipulations governs. In these cases, courts have no
authority to alter a contract by construction or to make a new contract for the parties.
The escalation clause must be read in conjunction with Section 2.5 of the Agreement and
Section 60.10 of the General Conditions which pertain to the time of payment. Once the parties
agree on the price adjustment after due consultation in compliance with the provisions
of the escalation clause, the agreement is in effect an amendment to the original
contract, and gives rise to the liability of respondent to pay the adjusted costs. Under
Section 60.10 of the General Conditions, the Equitable PCI Bank shall pay such liability to the
petitioner within 28 days from issuance of the interim certificate. Upon Equitable PCI Bank’s failure to
pay within the time provided (28 days), then it shall be liable to pay the stipulated interest.
This is the logical interpretation of the agreement of the parties on the imposition of interest.
To provide a contrary interpretation, as one requiring a separate consent for the imposition of the
stipulated interest, would render the intentions of the parties nugatory.
Article 1956 of the Civil Code, which refers to monetary interest, specifically
mandates that no interest shall be due unless it has been expressly stipulated in writing.
Therefore, payment of monetary interest is allowed only if:
(1) there was an express stipulation for the payment of interest; and
(2) the agreement for the payment of interest was reduced in writing. The
concurrence of the two conditions is required for the payment of monetary interest.
The court agree with Pan Pacific’s interpretation that in case of default, the consent of the
Equitable PCI Bank is not needed in order to impose interest at the current bank lending rate.

=============
Other contentions: (promissory note)

Pan Pacific made several demands for payment on the price adjustment but respondent
merely kept on promising to release the same. Meanwhile, the ₱1.8 million loan matured and
Equitable PCI Bank demanded payment plus interest and penalty. Pan Pacific refused to pay the loan.
Pan Pacific insisted that it would not have incurred the loan if respondent released the price
adjustment on time. Pan Pacific alleged that the promissory note did not express the true agreement
of the parties. Pan Pacific maintained that the ₱1.8 million was to be considered as an advance
payment on the price adjustment. Therefore, there was really no consideration for the promissory
note; hence, it is null and void from the beginning.
Equitable PCI Bank stood firm that it would not release any amount of the price adjustment to
Pan Pacific but it would offset the price adjustment with Pan Pacific’s outstanding balance of
₱3,226,186.01, representing the loan, interests, penalties and collection charges.

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