PAN PACIFIC SERVICE CONTRACTORS, INC. AND RICARDO F. DEL ROSARIO, PETITIONERS, VS.

EQUITABLE
PCI BANK (FORMERLY THE PHILIPPINE COMMERCIAL INTERNATIONAL BANK), RESPONDENT.

The Case

Pan Pacific Service Contractors, Inc. and Ricardo F. Del Rosario (petitioners) filed this Petition for Review [1] assailing the
Court of Appeals' (CA) Decision [2] dated 30 June 2005 in CA-G.R. CV No. 63966 as well as the Resolution [3] dated 5
October 2005 denying the Motion for Reconsideration. In the assailed decision, the CA modified the 12 April 1999
Decision [4] of the Regional Trial Court of Makati City, Branch 59 (RTC) by ordering Equitable PCI Bank [5] (respondent) to
pay petitioners P1,516,015.07 with interest at the legal rate of 12% per annum starting 6 May 1994 until the amount is
fully paid.

The Facts

Pan Pacific Service Contractors, Inc. (Pan Pacific) is engaged in contracting mechanical works on airconditioning system.
On 24 November 1989, Pan Pacific, through its President, Ricardo F. Del Rosario (Del Rosario), entered into a contract of
mechanical works (Contract) with respondent for P20,688,800. Pan Pacific and respondent also agreed on nine change
orders for P2,622,610.30. Thus, the total consideration for the whole project was P23,311,410.30. [6] 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 70.1 [7] and 70.2 [8] of the "General Conditions for the Construction of PCIB Tower II
Extension" (the escalation clause). [9]

Pursuant to the contract, Pan Pacific commenced the mechanical works in the project site, the PCIB Tower II extension
building in Makati City. The project was completed in June 1992. Respondent accepted the project on 9 July 1992. [10]

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 P5,165,945.52. 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 P4,858,548.67. [11]

On 28 April 1992, TCGI Engineers recommended to respondent that the price adjustment should be pegged at
P3,730,957.07. TCGI Engineers based their evaluation of the price adjustment on the following factors:

1. Labor Indices of the Department of Labor and Employment.

2. Price Index of the National Statistics Office.

3. PD 1594 and its Implementing Rules and Regulations as amended, 15 March 1991.

4. Shipping Documents submitted by PPSCI.

5. Sub-clause 70.1 of the General Conditions of the Contract Documents. [12]

Pan Pacific contended that with this recommendation, respondent was already estopped from disclaiming liability of at
least P3,730,957.07 in accordance with the escalation clause. [13]

Due to the extraordinary increases in the costs of labor and materials, Pan Pacific's operational capital was becoming
inadequate for the project. However, respondent withheld the payment of the price adjustment under the escalation
clause despite Pan Pacific's repeated demands. [14] Instead, respondent offered Pan Pacific a loan of P1.8 million. Against
its will and on the strength of respondent'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 P1.8 million as a requirement for the
loan. Pan Pacific also posted a surety bond. The P1.8 million was released directly to laborers and suppliers and not a
single centavo was given to Pan Pacific. [15]

Pan Pacific made several demands for payment on the price adjustment but respondent merely kept on promising to
release the same. Meanwhile, the P1.8 million loan matured and respondent 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 P1.8 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. [16]

Respondent 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 P3,226,186.01, representing the loan, interests, penalties and
collection charges. [17]

Pan Pacific refused the offsetting but agreed to receive the reduced amount of P3,730,957.07 as recommended by the
TCGI Engineers for the purpose of extrajudicial settlement, less P1.8 million and P414,942 as advance payments. [18]
On 6 May 1994, petitioners filed a complaint for declaration of nullity/annulment of the promissory note, sum of money,
and damages against the respondent with the RTC of Makati City, Branch 59. On 12 April 1999, the RTC rendered its
decision, the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs and against the defendant as
follows:

1. Declaring the promissory note (Exhibit "B") null and void;

2. Ordering the defendant to pay the plaintiffs the following amounts:

a. P1,389,111.10 representing unpaid balance of the adjustment price, with interest thereon at the legal
rate of twelve (12%) percent per annum starting May 6, 1994, the date when the complaint was filed,
until the amount is fully paid;

b. P100,000.00 representing moral damages;

c. P50,000.00 representing exemplary damages; and

d. P50,000.00 as and for attorney's fees.

3. Dismissing defendant's counterclaim, for lack of merit; and

4. With costs against the defendant.

SO ORDERED. [19]

On 23 May 1999, petitioners partially appealed the RTC Decision to the CA. On 26 May 1999, respondent appealed the
entire RTC Decision for being contrary to law and evidence. In sum, the appeals of the parties with the CA are as follows:

1. With respect to the petitioners, whether the RTC erred in deducting the amount of P126,903.97 from the balance
of the adjusted price and in awarding only 12% annual interest on the amount due, instead of the bank loan rate
of 18% compounded annually beginning September 1992.

2. With respect to respondent, whether the RTC erred in declaring the promissory note void and in awarding moral
and exemplary damages and attorney's fees in favor of petitioners and in dismissing its counterclaim.

In its decision dated 30 June 2005, the CA modified the RTC decision, with respect to the principal amount due to
petitioners. The CA removed the deduction of P126,903.97 because it represented the final payment on the basic
contract price. Hence, the CA ordered respondent to pay P1,516,015.07 to petitioners, with interest at the legal rate of
12% per annum starting 6 May 1994. [20]

On 26 July 2005, petitioners filed a Motion for Partial Reconsideration seeking a reconsideration of the CA's Decision
imposing the legal rate of 12%. Petitioners claimed that the interest rate applicable should be the 18% bank lending rate.
Respondent likewise filed a Motion for Reconsideration of the CA's decision. In a Resolution dated 5 October 2005, the CA
denied both motions.

AGGRIEVED BY THE CA'S DECISION, PETITIONERS ELEVATED THE CASE BEFORE THIS COURT.

The Issue

Petitioners submit this sole issue for our consideration: Whether the CA, in awarding the unpaid balance of the price
adjustment, erred in fixing the interest rate at 12% instead of the 18% bank lending rate.

Ruling of the Court

We grant the petition.

This Court notes that respondent did not appeal the decision of the CA. Hence, there is no longer any issue as to the
principal amount of the unpaid balance on the price adjustment, which the CA correctly computed at P1,516,015.07. The
only remaining issue is the interest rate applicable for respondent's delay in the payment of the balance of the price
adjustment.
The CA denied petitioners' claim for the application of the bank lending rate of 18% compounded annually reasoning, to
wit:

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, plaintiffs never informed nor sought the approval of
defendant 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. Although the contract provides for the period when
the recommendation of the TCGI Engineers as to the price adjustment would be binding on the parties, it was
established, however, that part of the adjusted price demanded by plaintiffs was already disbursed as early as 28
February 1992 by defendant bank to their suppliers and laborers for their account. [21]

In this appeal, petitioners allege that the contract between the parties consists of two parts, the Agreement [22] and the
General Conditions, [23] both of which provide for interest at the bank lending rate on any unpaid amount due under the
contract. Petitioners 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. [24] 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. [25]

General Conditions
60.10 Time for payment
The amount due to the Contractor under any interim certificate issued by the Engineer pursuant to this Clause, or to any
term of the Contract, shall, subject to clause 47, be paid by the Owner to the Contractor within 28 days after such
interim certificate has been delivered to the Owner, or, in the case of the Final Certificate referred to in Sub-Clause 60.8,
within 56 days, after such Final Certificate has been delivered to the Owner. 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. The provisions of this Sub-Clause are without prejudice to the Contractor's entitlement under Clause
69. [26] (Emphasis supplied)

Petitioners 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 respondent should have paid. Therefore, as petitioners have already proven their
entitlement to the price adjustment, it necessarily follows that the bank lending interest rate of 18% shall be applied. [27]

On the other hand, respondent 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 respondent. Hence, there being no prior consultation with the respondent 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. [28]

A perusal of the assailed decision shows that the CA made a distinction between the consent given by the owner of the
project for the liability for the price adjustments, and the consent for the imposition of the bank lending rate. Thus, while
the CA held that petitioners consulted respondent for price adjustment on the basic contract price, petitioners,
nonetheless, are not entitled to the imposition of 18% interest on the adjusted price, as petitioners never informed or
sought the approval of respondent for such imposition. [29]

We disagree.

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. [30]

The escalation clause of the contract provides:

CHANGES IN COST AND LEGISLATION

70.1 Increase or Decrease of Cost.

There shall be added to or deducted from the Contract Price such sums in respect of rise or fall in the cost of labor and/or
materials or any other matters affecting the cost of the execution of the Works as may be determined.

70.2 Subsequent Legislation

If, after the date 28 days prior to the latest date of submission of tenders for the Contract there occur in the country in
which the Works are being or are to be executed changes to any National or State Statute, Ordinance, Decree or other
Law or any regulation or bye-law (sic) of any local or other duly constituted authority, or the introduction of any such
State Statute, Ordinance, Decree, Law, regulation or bye-law (sic) which causes additional or reduced cost to the
contractor, other than under Sub-Clause 70.1, in the execution of the Contract, such additional or reduced cost shall,
after due consultation with the Owner and Contractor, be determined by the Engineer and shall be added to or deducted
from the Contract Price and the Engineer shall notify the Contractor accordingly, with a copy to the Owner. [31]

In this case, the CA already settled that petitioners consulted respondent on the imposition of the price adjustment, and
held respondent liable for the balance of P1,516,015.07. Respondent did not appeal from the decision of the CA; hence,
respondent 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 respondent 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 Court's duty is confined to the interpretation of the contract which the parties
have made for themselves without regard to its wisdom or folly as the court cannot supply material stipulations or read
into the contract words which it does not contain. It is only when the contract is vague and ambiguous that courts are
permitted to resort to construction of its terms and determine the intention of the parties. [32]

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 respondent shall pay such liability to the petitioner within 28 days from issuance of the interim certificate.
Upon respondent'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. [33]

We agree with petitioners' interpretation that in case of default, the consent of the respondent is not needed in order to
impose interest at the current bank lending rate.

Applicable Interest Rate

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. [34] 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. [35]
The written agreement entered into between petitioners and respondent 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 petitioners' entitlement to the 18% bank lending rate of interest, petitioners presented the promissory
note [36] prepared by respondent 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. [37]
WHEREFORE, we GRANT the petition. We SET ASIDE the Decision and Resolution of the Court of Appeals in CA-G.R.
CV No. 63966. We ORDER respondent to pay petitioners P1,516,015.07 with interest at the bank lending rate of 18%
per annum starting 6 May 1994 until the amount is fully paid. SO ORDERED.