In Pan Pacific Service Contractors, Inc. v. Equitable PCI Bank, the Supreme Court ruled that when a contract clearly stipulates an interest rate for delayed payments, such as a bank lending rate, it must be enforced without requiring additional consent from the paying party. This decision reinforces the principle of upholding contractual agreements and ensures that parties are bound by the terms they initially agreed upon, fostering predictability and fairness in commercial transactions.

Enforcing Contractual Obligations: When Is Bank Lending Rate Applicable?

Pan Pacific Service Contractors, Inc. (Pan Pacific) entered into a contract with Equitable PCI Bank (respondent) for mechanical works on an extension building. The contract included an escalation clause allowing for price adjustments due to increased labor and material costs. A dispute arose when the respondent delayed payment of the price adjustment, leading Pan Pacific to seek interest at the prevailing bank lending rate, as stipulated in the contract. The central legal question was whether the bank could be compelled to pay interest at the higher bank lending rate without having given additional consent specifically for that rate.

The case originated from a construction agreement where Pan Pacific was contracted for mechanical works. As labor and material costs increased, Pan Pacific sought a price adjustment under the contract’s escalation clause. Despite recommendations from its project engineer, TCGI Engineers, the respondent delayed payment. This delay prompted Pan Pacific to demand interest on the unpaid balance, citing specific provisions in the agreement that mandated interest at the current bank lending rate for any delayed payment.

The Regional Trial Court (RTC) initially ruled in favor of Pan Pacific, declaring a promissory note related to a loan (offered by the bank instead of the price adjustment) null and void, and ordering the bank to pay the unpaid balance with legal interest. Both parties appealed to the Court of Appeals (CA). The CA modified the RTC decision by adjusting the principal amount due but maintained the legal interest rate of 12% per annum, denying Pan Pacific’s claim for the higher bank lending rate. The CA reasoned that Pan Pacific had not obtained separate consent from the bank to impose the 18% interest rate on the adjusted price, thus invoking the principle of mutuality of contracts.

The Supreme Court disagreed with the CA’s interpretation, emphasizing that the clear terms of the contract should govern. The Court referenced Section 2.5 of the Agreement and Section 60.10 of the General Conditions, which explicitly stated that delayed payments would incur interest at the current bank lending rates. The Court highlighted that once the price adjustment was agreed upon, it effectively amended the original contract, obligating the respondent to pay the adjusted costs. Failure to pay within the stipulated 28 days triggered the interest clause.

The Supreme Court referred to the importance of upholding contractual stipulations. The Court underscored that clear contractual terms should be interpreted literally when there is no ambiguity, stating,

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 Court found that requiring separate consent for the imposition of interest would render the original intentions of the parties meaningless.

Building on this principle, the Court noted that Article 1956 of the Civil Code mandates that

no interest shall be due unless it has been expressly stipulated in writing.

The Court clarified that for monetary interest to apply, there must be an express written agreement. In this case, such an agreement existed within the contract, thus satisfying the requirement.

Regarding the applicable interest rate, the Court cited Article 2209 of the Civil Code, which dictates that damages for delay in paying a sum of money should be the penalty interest rate agreed upon in the contract. In the absence of a specific rate, additional interest equal to the regular monetary interest becomes payable. Since the contract stipulated a bank lending rate and the promissory note prepared by the bank itself indicated a rate of 18%, the Court found this rate applicable.

The Court also addressed the argument that there was no prior consultation with the respondent regarding the imposition of the 18% interest rate. The Court dismissed this argument, explaining that the consent for the price adjustment inherently included consent to the stipulated interest for delayed payments. This interpretation aligns with the principle that contracts are the law between the parties, and courts must enforce them as written, absent any evidence of fraud or coercion.

The Supreme Court ultimately granted the petition, setting aside the CA’s decision. The Court ordered the respondent to pay Pan Pacific P1,516,015.07 with interest at the bank lending rate of 18% per annum from May 6, 1994, until fully paid. This decision underscores the importance of clear contractual language and adherence to agreed-upon terms, especially concerning interest rates in commercial agreements.

FAQs

What was the key issue in this case?	The central issue was whether a bank should pay interest at the higher bank lending rate stipulated in a construction contract for delayed payments, without giving additional consent specifically for that rate.
What did the contract between Pan Pacific and Equitable PCI Bank stipulate?	The contract included an escalation clause for price adjustments due to rising costs and specified that delayed payments would incur interest at the current bank lending rate.
How did the Court of Appeals rule on the interest rate?	The CA modified the RTC decision by adjusting the principal amount due but maintained the legal interest rate of 12% per annum, denying Pan Pacific’s claim for the higher bank lending rate.
What was the Supreme Court’s ruling on the applicable interest rate?	The Supreme Court ruled that the bank must pay interest at the bank lending rate of 18% per annum, as stipulated in the contract, from the date the complaint was filed until the amount is fully paid.
What is the significance of Article 1956 of the Civil Code in this case?	Article 1956 mandates that no interest shall be due unless it has been expressly stipulated in writing, which the Court found was satisfied by the contract between the parties.
How did the Supreme Court interpret the escalation clause in relation to the interest rate?	The Court interpreted the escalation clause in conjunction with the provisions on time of payment, holding that once the price adjustment was agreed upon, the stipulated interest for delayed payments automatically applied.
What evidence did Pan Pacific present to support its claim for the 18% bank lending rate?	Pan Pacific presented the promissory note prepared by the bank itself, which indicated an interest rate of 18% per annum, as substantial proof of the prevailing bank lending rate.
What principle of contract law did the Supreme Court emphasize in its decision?	The Court emphasized the principle that contracts are the law between the parties and must be enforced as written, absent any evidence of fraud or coercion.
What practical impact does this ruling have on construction contracts?	This ruling reinforces the importance of clear contractual language and adherence to agreed-upon terms, especially concerning interest rates, in construction agreements.

The Supreme Court’s decision in Pan Pacific Service Contractors, Inc. v. Equitable PCI Bank reinforces the principle of upholding clear contractual agreements and ensures that parties are bound by the terms they initially agreed upon. This promotes predictability and fairness in commercial transactions, emphasizing the importance of precise contractual language, particularly regarding interest rates for delayed payments.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Pan Pacific Service Contractors, Inc. v. Equitable PCI Bank, G.R. No. 169975, March 18, 2010