Delaying consequences

If the obligation consists in the payment of a sum of money, is the stipulation providing for interest penalty in case of delay valid? This is the question raised in this case by AR Industries Inc. (ARI) against DCI Inc. (DCI).

ARI as owner engaged the services of DCI as contractor for the civil, structural and architectural works of its condominium in Greenhills. The contract price for the condominium project aggregated P20,800,000 payable on a "monthly progress billing" within 15 calendar days after receipt of the construction manager’s certificate. The agreement provides that "in the even the owner delays the payments of the monthly progress billing, the contractor shall have the option to either suspend the works on the project until such payments have been remitted by the owner, or continue the work but the owner shall be required to pay interest at a rate of two percent per month or the fraction thereof in days, of the amount due for payment by the owner. The same interest shall be reduced by a portion of the downpayment made by the owner corresponding to the value of the work completed".

After completion of the condominium project, the amount of P962,434.78 remained unpaid. And when repeated demands by DCI went unheeded, it was constrained to file a suit in court to recover the said balance of the contract price with interest of two percent per month or a fraction thereof, plus exemplary damages, attorney’s fees and costs of suit.

ARI disputed the claim of 2 percent interest. It contended that the provision in the agreement does not apply to DCI’s claim of P962,434.78 since this is not a monthly progress billing but the unpaid balance of the contract price.

Was ARI correct?

No.

The phrase "monthly progress billings" refers to a portion of the contract price payable by the owner to the contractor based on the percentage of completion of the project or on work accomplished at a particular stage. It refers to that portion of the contract price still to be paid as work progresses, after the downpayment is made. So the amount of P962,434.78 is clearly subject to the 2 percent interest per month.

The provision on the payment of monthly interest is included in the agreement the existence and validity of which were not objected to by ARI. Such agreement is the law between the parties and they should be bound by it.

Besides, even without such provision, payment of interest as penalty is a necessary consequence of ARI’s failure to exercise diligence in the discharge of its obligation under the contract. From the moment DCI completed the construction of the condominium project and ARI refused to pay in full, there was delay on its part. The delay was never disputed. When a party to a contract incurs in delay, the other party who performs his part of the contract suffers damages thereby. Obviously DCI suffered damages brought about by ARI’s failure to comply with its obligation on time. Under Article 2209 of the Civil Code, if the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is 6 percent per annum. Accordingly, the appropriate measure of damages in this case is the payment of interest at the rate agreed upon, which is 2 percent for every month of delay or a fraction thereof (Arwood Industries Inc. vs. D.M. Consunji, Inc. G.R. No. 142277 December 11, 2002)

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