Construction Contracts and Legal Interest: Determining Liability in Government Projects

The Supreme Court's 2015 ruling in WT Construction, Inc. v. Province of Cebu clarifies an important point for contractors and government agencies alike: unpaid construction claims are not treated as loans or forbearances of money, and therefore attract legal interest at 6% per annum, not the higher rate once applied to monetary obligations. The case arose from the construction of the Cebu International Convention Center (CICC) for the 12th ASEAN Summit, and it offers practical guidance on how courts determine liability and interest in government infrastructure projects.

The Facts of the Case

In 2005, the Province of Cebu was chosen to host the 12th ASEAN Summit. It decided to construct the CICC at the New Mandaue Reclamation Area in Mandaue City. WT Construction, Inc. (WTCI) won the public bidding for Phase I of the project in February 2006, and later won Phase II in July 2006.

As Phase II neared completion, the Province directed WTCI to perform additional works, including site development and extra structural, architectural, electrical, and plumbing works. Despite the lack of public bidding for these extras, WTCI agreed to proceed, relying on the Province's assurances of prompt payment given the tight deadline for the ASEAN Summit.

WTCI completed the project in November 2006 and billed the Province for the additional works in February 2007. The Province refused to pay, prompting WTCI to file a collection suit in January 2008. The parties later agreed the value of the additional works was P263,263,261.41, though the trial court eventually reduced this to P257,413,911.73 based on government cost standards.

The Legal Issues

Two main questions reached the Supreme Court: first, whether the Province's liability was a forbearance of money (which would justify a higher interest rate), and second, whether interest should run from the filing of the complaint or from an earlier extrajudicial demand.

The Court's Ruling

The Supreme Court affirmed the Court of Appeals' decision, holding that the Province of Cebu was liable for the additional works. The Court refused to revisit the factual finding that a contract existed, noting that factual determinations affirmed by the CA are generally conclusive in a Rule 45 petition.

On the interest question, the Court ruled that liability arising from construction contracts does not partake of a loan or forbearance of money. Rather, it is in the nature of a contract of service. The Court applied the doctrine from Eastern Shipping Lines, Inc. v. Court of Appeals, which distinguishes between obligations to pay money (loans or forbearance) and other breached obligations. For the latter, the applicable rate is 6% per annum.

The Court also noted that the Nacar v. Gallery Frames ruling, which adopted the Bangko Sentral ng Pilipinas Circular No. 799 reducing the rate for loans and forbearance from 12% to 6%, did not change the rate for construction-related claims, which remained at 6%.

As for the reckoning point, WTCI argued that interest should run from its extrajudicial demand letters of February 2007. However, the Court pointed out that WTCI never appealed the trial court's ruling that interest ran from the filing of the complaint. Since a party who does not appeal a judgment cannot later question it, the Court upheld the original reckoning date.

Practical Takeaways

• Construction claims are service contracts, not loans. Contractors should expect 6% legal interest on unpaid construction claims, not the higher rate applicable to forbearance of money.
• The 12% rate is effectively obsolete for most obligations after Nacar; the 6% rate now applies uniformly to both loans and service-based claims.
• Extrajudicial demand matters, but appeal deadlines matter more. A party that fails to appeal an unfavorable interest reckoning point cannot later challenge it.
• Government entities can be liable for unauthorized works under quantum meruit, even without public bidding, to prevent unjust enrichment.
• Documentation is critical. The Province's delay was attributed partly to lack of documentation, which also supported the award of attorney's fees for bad faith refusal to pay.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.