# 30 STRONGHOLD INSURANCE CO. INC. V REPUBLIC ASAHI GLASS CORP., G.R., # 147561, 22 JUNE 2006

FACTS

On May 24, 1989, [respondent] Republic-Asahi Glass Corporation (Republic-Asahi)entered into a contract with x x x Jose D. Santos, Jr., proprietor of JDS Construction(JDS), for the construction of roadways and a drainage system in Republic-Asahi’scompound in Barrio Pinagbuhatan, Pasig City, where [respondent] was to pay x x xJDS P5,300,000.00 inclusive of value added tax for said construction, which wassupposed to be completed within a period of 240 days beginning May 8, 1989. Inorder ‘to guarantee the faithful and satisfactory performance of its undertakings’ x x xJDS, shall post a performance bond of P795,000.00. x x x JDS executed, jointly andseverally with [petitioner] Stronghold Insurance Co., Inc. (SICI) Performance BondNo. SICI-25849/g(13)9769. On November 24, 1989, dissatisfied with the progress of the work undertaken by x x xJDS, [respondent] Republic-Asahi extrajudicially rescinded the contract pursuant toArticle XIII of said contract, and wrote a letter to x x x JDS informing the latter ofsuch rescission. Such rescission, according to Article XV of the contract shall not beconstrued as a waiver of [respondent’s] right to recover damages from x x x JDS andthe latter’s sureties. [Respondent] alleged that, as a result of x x x JDS’s failure to comply with theprovisions of the contract, which resulted in the said contract’s rescission, it had to hireanother contractor to finish the project, for which it incurred an additional expense ofP3,256,874.00. Respondent filed a claim with Stronghold under the bond for not less thanP795,000.00.

Since the claim was unheeded, respondent filed a complaint against x x x JDS andSICI, seeking from JDS payment of P3,256,874.00 representing the additionalexpenses incurred by respondent for the completion of the project using anothercontractor, and from JDS and SICI, jointly and severally, payment of P750,000.00 asdamages in accordance with the performance bond; exemplary damages in the amountof P100,000.00 and attorney’s fees in the amount of at least P100,000.00. Summons were duly served on defendant-appellee SICI. However, Jose D. Santos, Jr.died the previous year (1990), and JDS Construction was no longer at its address at 2nd

Floor, Room 208-A, San Buena Bldg. Cor. Pioneer St., Pasig, Metro Manila, and itswhereabouts were unknown. On July 10, 1991, petitioner SICI filed its answer, alleging that the respondent’smoney claims against petitioner and JDS have been extinguished by the death of JoseD. Santos, Jr. Even if this were not the case, petitioner SICI had been released from itsliability under the performance bond because there was no liquidation, with the activeparticipation and/or involvement, pursuant to procedural due process, of herein suretyand contractor Jose D. Santos, Jr., hence, there was no ascertainment of thecorresponding liabilities of Santos and SICI under the performance bond.

On August 16, 1991, the lower court issued an order dismissing the complaint of[respondent] against JDS and SICI, on the ground that the claim against JDS did notsurvive the death of its sole proprietor, Jose D. Santos, Jr.

On September 4, 1991, respondent filed a Motion for Reconsideration seekingreconsideration of the lower court’s August 16, 1991 order dismissing its complaint.

On October 15, 1991, the lower court issued an Order, giving due course to the MR.The lower court reconsidered its Order dated 16 August 1991 for the dismissal of thecase against Stronghold Insurance Company, Inc. and reinstated the case againstStronghold. However, the case against Jose D. Santos, Jr. (deceased) remainedundisturbed. On June 4, 1992, SICI filed its ‘Memorandum for Bondsman/Defendant SICI (Re:Effect of Death of defendant Jose D. Santos, Jr.)’ reiterating its prayer for the dismissalof [respondent’s] complaint. On January 28, 1993, the lower court issued the assailed Order reconsidering its Orderdated October 15, 1991, and ordered the case, insofar as SICI is concerned, dismissed. [Respondent] filed its motion for reconsideration, which was denied by the lowercourt. On appeal, the CA ruled that SICI’s obligation under the surety agreement was notextinguished by the death of Jose D. Santos, Jr. Consequently, Republic-Asahi couldstill go after SICI for the bond. The CA also found that the lower court had erred in pronouncing that the performanceof the Contract in question had become impossible by respondent’s act of rescission. The Contract was rescinded because of the dissatisfaction of respondent with the slowpace of work and pursuant to Article XIII of its Contract with JDS. The CA ruled that “[p]erformance of the [C]ontract was impossible, not because of[respondent’s] fault, but because of the fault of JDS Construction and Jose D. Santos,Jr. for failure on their part to make satisfactory progress on the project, whichamounted to non-performance of the same. x x x [P]ursuant to the [S]urety [C]ontract,SICI is liable for the non-performance of said [C]ontract on the part of JDSConstruction.

ISSUE (Effect of death on the surety’s liability)

Whether or not petitioner’s liability under the performance bond was automaticallyextinguished by the death of Santos, the principal.

HELD The Petition has no merit. Petition is denied and the CA decision affirmed.

Petitioner contends that the death of Santos, the bond principal, extinguished hisliability under the surety bond. Consequently, it says, it is automatically released fromany liability under the bond. As a general rule, the death of either the creditor or the debtor does not extinguish theobligation. Obligations are transmissible to the heirs, except when the transmission isprevented by the law, the stipulations of the parties, or the nature of the obligation.Only obligations that are personal or are identified with the persons themselves areextinguished by death.

Section 5 of Rule 86 of the Rules of Court expressly allows the prosecution of moneyclaims arising from a contract against the estate of a deceased debtor. Evidently, thoseclaims are not actually extinguished. What is extinguished is only the obligee’s actionor suit filed before the court, which is not then acting as a probate court.

In the present case, whatever monetary liabilities or obligations Santos had under hiscontracts with respondent were not intransmissible by their nature, by stipulation, or byprovision of law. Hence, his death did not result in the extinguishment of thoseobligations or liabilities, which merely passed on to his estate. Death is not a defensethat he or his estate can set up to wipe out the obligations under the performance bond. Consequently, petitioner as surety cannot use his death to escape its monetaryobligation under its performance bond.

The liability of petitioner is contractual in nature, because it executed a performancebond worded as follows:

“That we, JDS CONSTRUCTION of 208-A San BuenaBuilding, contractor, of Shaw Blvd., Pasig, MM Philippines, asprincipal and the STRONGHOLD INSURANCE COMPANY,INC. a corporation duly organized and existing under and by virtueof the laws of the Philippines with head office at Makati, as Surety,are held and firmly bound unto the REPUBLIC ASAHI GLASSCORPORATION and to any individual, firm, partnership,corporation or association supplying the principal with labor ormaterials in the penal sum of SEVEN HUNDRED NINETY FIVETHOUSAND (P795,000.00), Philippine Currency, for the paymentof which sum, well and truly to be made, we bind ourselves, ourheirs, executors, administrators, successors and assigns, jointly andseverally, firmly by these presents. x x x

As a surety, petitioner is solidarily liable with Santos in accordance with Art. 2047 andArt. 1216 of the Civil Code,

Under the law and jurisprudence, respondent may sue, separately or together, theprincipal debtor and the petitioner herein, in view of the solidary nature of theirliability. The death of the principal debtor will not work to convert, decrease or nullifythe substantive right of the solidary creditor. Evidently, despite the death of theprincipal debtor, respondent may still sue petitioner alone, in accordance with the

solidary nature of the latter’s liability under the performance bond.

#33 General Insurance & Surety Corp. v Republic of the Phils. AndCentral Luzon Educational Foundation, Inc. (CLEFI), 31 January1963, G.R. No. L-13873

FACTS

On May 15, 1954, CLEFI and the General Insurance and Surety Corporation (GISC)posted in favor of the Department of Education a bond to guarantee the adequate andefficient administration of said school or college and the observance of all regulationsprescribed by the Secretary of Education and compliance with all obligations,including the payment of the salaries of all its teachers and employees, past, present,and future, and the payment of all other obligations incurred by, or in behalf of saidschool.

The bond provides that CLEFI (as principal) and GISC (as surety) are held and firmlybound, jointly and firmly, unto the Department of Education of the Republic of thePhilippines in the sum of P10,000.00. It also provides that when the Secretary ofEducation is satisfied that said institution of learning had defaulted in any of theforegoing particulars, the bond may immediately be declared forfeited.

Expiry of the LIABILITY of the Surety under the bond was on June 15, 1955, unlesssooner revoked.

Also on May 15, 1954, Teofilo Sison and Jose M. Aruego executed an indemnityagreement binding themselves jointly and severally to indemnify the surety of "anydamages, prejudices, loss, costs, payments, advances and expenses of whatever kindand nature, including attorney's fees and legal costs, which the COMPANY may, at anytime sustain or incur, as well as to reimburse to said COMPANY all sums and amountsof money which the COMPANY or its representatives shall or may pay or cause to bepaid or become liable to pay, on account of or arising from the execution of the abovementioned Bond."

On June 25, 1954, the surety advised the Secretary of Education that it waswithdrawing and cancelling its bond.

It appears that on the date of execution of the bond, the Foundation was indebted totwo of its teachers for salaries, to wit: to Remedios Laoag, in the sum of P685.64, andto H.B. Arandia, in the sum of P820.00, or a total of P1,505.64.

Demand for the above amount having been refused, the Solicitor General, in behalf ofthe Republic of the Philippines, filed a complaint for the forfeiture of the bond, in the

Court of First Instance of Manila on July 11, 1956.

The surety filed its answer and set up special defenses and a cross-claim against theFoundation and prayed that the complaint be dismissed and that it be indemnified bythe Foundation of any amount it might be required to pay the Government, plusattorney's fees.

The Foundation (CLEFI) denied the cross-claim and contended that, because RemediosLaoag owed Fr. Cinense the amount of P820.65, there was no basis for the action; thatthe bond is illegal and that the Government has no capacity to sue.

The surety also filed a third-party complaint against Teofilo Sison and Jose M. Aruegoon the basis of the indemnity agreement. While admitting the allegations of the third-party complaint, Sison and Aruego claimed that because of the cancellation andwithdrawal of the bond, the indemnity agreement ceased to be of force and effect.

The CFI rendered judgment holding the principal and the surety jointly and severallyliable to the Government in the sum of P10,000.00 with legal interest from the date offiling of the complaint, until the sum is fully paid and ordering the principal toreimburse the surety whatever amount it may be compelled to pay to the Governmentby reason of the judgment, with costs against both principal and the surety.

The surety filed a motion for reconsideration and a request to decide the third-partycomplaint which the CFI denied.

On appeal, the Court of Appeals rendered a decision (a) Ordering CLEFI and GISC topay jointly and severally the Republic of the Philippines the sum of P10,000.00, pluscosts and legal interests from July 11, 1956 until fully paid; and

(b) Ordering CLEFI, Teofilo Sison and Jose M. Aruego to reimburse, jointly anseverally, the GISC of all amounts it may be forced to pay the Republic of thePhilippines by virtue of this judgment, plus costs and P2,000.00 for counsel's fees.

From this decision, the surety appealed to this Court by way of certiorari, raisingquestions of law.

ISSUE

1. Whether or not the surety was liable on its bond after August 24, 1954 (when the 60-day notice of cancellation and withdrawal ended), or, at the latest, after June 15, 1955.

2. Whether or not forfeiting the bond for the amount of the unpaid salaries of theteachers is contrary to public policy

HELD

1. The Court agreed with the contention of the Government.

The Government contends that since the salaries of the teachers were due and payablewhen the bond was still in force, the surety has become liable on its bond from the

moment of its execution on May 15,1954.

By the terms of the bond the surety guaranteed to the Government "compliance (by theFoundation) with all obligations, including the payment of the salaries of its teachersand employees, past, present and future, and the payment of all other obligationsincurred by, or in behalf of said school." It is not disputed that even before theexecution of the bond the Foundation was already indebted to two of its teachers forpast salaries. From the moment, therefore, the bond was executed, the right of theGovernment to proceed against the bond accrued because since then, there has beenviolation of the terms of the bond regarding payment of past salaries of teachers at theSison and Aruego Colleges. The fact that the action was filed only on July 11, 1956does not militate against this position because actions based on written contractsprescribe in ten years. (Art. 1144, par. 1, Civil Code).

2. Obligation with Penal Clause

This case is not an action filed by the teachers against the surety. This is an actionbrought by the Government, of which the Department of Education is aninstrumentality, to hold the surety liable on its bond for the same has been violatedwhen the principal failed to comply "with all obligations, including the payment ofsalaries of its teachers, past, present and future."

There is nothing against public policy in forfeiting the bond for the amount. The bondis penal in nature. Article 1226 of the Code states that in obligation with a penalclause, the penalty shall substitute the indemnity for damages and the payment ofinterests in case of non-compliance, if there is no stipulation to the contrary, and theparty to whom payment is to be made is entitled to recover the sum stipulated withoutneed of proving damages because one of the primary purposes of a penalty clause is toavoid such necessity. The mere non-performance of the principal obligation gives riseto the right to the penalty.

3. Whether the surety can be made to answer for more than the unpaid salaries of H.B. Arandia, which it claimed amounted to P720.00 only, because Article 2054 statesthat —

A guarantor may bind himself for less, but not for more than the principal debtor, bothas regards the amount and the onerous nature of the conditions.

Should he have bound himself for more, his obligations shall be reduced to the limitsof that of the debtor.

What the Court said about the penal nature of the bond would suffice to dispose of thisclaim. For whatever may be the amount of salaries due the teachers, the fact remainsthat the condition of the bond was violated and so the surety became liable for thepenalty provided for therein.

The decision of the Court of Appeals is affirmed.

#34 LAND BANK OF THE PHILIPPINES V. YOLANDA DAVID 563SCRA 172 (2008)

Whether an interest rate or penalty charge is reasonable or iniquitous is addressed tothe sound discretion of the courts. In determining what is an iniquitous andunconscionable, courts must consider the circumstances of each case, for what may bejust in one case may be iniquitous and unconscionable in another.

FACTS: Yolanda David, proprietor of David Poultry Farm, obtained a loan fromLandbank of the Philippines. The loan shall bear an interest ―based on the prevailinglender‘s rates/special financing rate‖ and penalty charge of 12% per annum in case ofdefault in the settlement thereof. As security for the payment of the aforesaid loan,David mortgaged a parcel of land registered under her name in favor of Landbank. Dueto serious business reverses, David was not able to pay although there were initialpayments made. A Restructured Loan Agreement was subsequently executed. TheRestructured Loan Agreement provided that the interest rate shall be adjusted to 17%per annum.

David defaulted in the payment of her monthly amortizations; hence, the whole amountbecame due and demandable. Demands for payment were made but David failed tosettle her loan obligations, prompting Landbank to initiate foreclosure proceedings.

David filed a complaint seeking the nullification of the interest rates imposed byLandbank. The trial court however dismissed David‘s complaint and instead grantedLandbank‘s counterclaim. On appeal, the Court of Appeals modified the lower court‘sdecision by reducing the interest and penalty rates, and nullifying the extra-judicialforeclosure of David‘s property and deleting the award of damages and attorney‘s fees.Landbank moved for a reconsideration of the appellate court‘s decision, but the samewas denied.

ISSUES: Whether or not the interest rate is exorbitant and unconscionable and if such, whether or not the foreclosure proceedings can be nullified

HELD: Jurisprudence empowers courts to equitably reduce interest rates. And the lawempowers them to reduce penalty charges. Whether an interest rate or penalty charge isreasonable or iniquitous is addressed to the sound discretion of the courts. In determining what is an iniquitous and unconscionable, courts must consider the circumstances of each case, for what may be just in one case may be iniquitous and unconscionable in another.

While the nullity of the interest rate and penalty charge does not affect Landbank‘sright to recover the principal amount of the loan, the public auction of the mortgagedproperty is nevertheless void, the amount indicated as mortgage indebtedness havingincluded excessive, iniquitous, and exorbitant interest rate and penalty charge.

# 35 COMPAGNIE FRANCO-INDOCHINOISE, plaintiff-appellant, vs.DEUTSCH AUSTRALISCHE DAMPSCHIFFS GESELLSCHAFT,defendant-appellant. G.R. No. L-11169, March 31, 1917

FACTS: On the 9th day of June, 1914, plaintiff Compagnie Franco-Indochinois anddefendant Deutsch-Australische Dampschiffs Gesellschaft, executed in writing acontract of charter party whereby defendant undertook that the German steamshipEsslingen should proceed to the port of Saigon, in the French colony of Indo-China,and there load a cargo of rice-meal, belonging to plaintiff, not exceeding seventhousand tons. In August, 1914, while the steamship was in Saigon, the defendantreceived telegraphic instructions from the defendant to proceed to the port of Manila inthe Philippine Islands and there await further orders, the instructions being given onaccount of the threatening aspect of war between Germany and France. Aftercompleting the loading the rice, the steamship was given permission by Frenchauthorities to leave for Liverpool, England, and Hamburg, Germany, or either of them.However, the steamship proceeded to Manila instead to seek refuge in a neutral port.The cargo remained in Manila thereafter because it was not able to resume the voyagebecause of the war and thereby incurring expenses in the amount of P26,116.98. InSeptember, 2014, the plaintiff demanded the delivery of the cargo but the defendantrefused unless the plaintiff will deposit P70,000.00 for the freight. Upon the filing of acomplaint by the plaintiff, the court appointed a receiver who took possession and soldthe cargo consisting of 126,028 sacks of rice-meal and 600 wooden ventilators. Thecargo were sold for only P61,154.58 because of the damage suffered by such cargowhile in Manila. Less expenses, the net proceeds of the sale was P57,823.35. Thedefendant claimed a lien for the amount of costs and expenses and the freightamounting to P68,376.04 or a total sum of P94,493.02 against the proceeds of the saleof the cargoa. The trial court ordered the delivery of the net proceeds of the sale in theamount of P57,823.25 to the plaintiff.

a. Is the shiponwer and the master liable for the damage to the cargo and for how muchare they liable?

ANWER: Yes, they are liable because it does not appear that the master took anymeasures whatever looking to the protection of the interests of the cargo owners whilein Manila. However, the owners of the Esslingen are not liable for losses resulting fromthe flight of that vessel from Saigon and the carrying of the cargo to Manila. It shouldbe noted that demand upon the master for delivery of the cargo was made onSeptember 14, 1914 but the master refused to deliver the same unless a deposit ismade. The master persisted in that refusal until legal proceedings were instituted afterthe perishable cargo had lain in the hold of the vessel for more than two months underthe rays of a tropical sun, and as was admitted in argument, without adequateventilation, it being impossible to secure such ventilation while the vessel lay atanchor.

However, the Court ruled that it was unable to determine the actual loss in the absenceof any evidence of record to base such determination. Hence, the Court reversed theruling of the trial court and ordered a new trial wherein the inquiry will be limited tothe determination of the amount which could have been gotten for the cargo taken on

board in Saigon, is such cargo had been offered for sale in an undamaged condition inManila Bay at the time when the damages cargo was sold, judgment to be entered,thereafter, in conformity with the doctrine of liability hereinbefore announced, withoutcosts in both instances.

#36 FILINVEST LAND, INC., Petitioners, vs.HON. COURT OFAPPEALS, PHILIPPINE AMERICAN GENERAL INSURANCECOMPANY, and PACIFIC EQUIPMENT CORPORATION,Respondent. G.R. No.138980 September 20, 2005

FACTS: On 26 April 1978, Filinvest Land, Inc. ("FILINVEST"), a corporationengaged in the development and sale of residential subdivisions, awarded to defendantPacific Equipment Corporation ("PACIFIC") the development of its residentialsubdivisions consisting of two (2) parcels of land located at Payatas, Quezon City, theterms and conditions of which are contained in an "Agreement". To guarantee itsfaithful compliance and pursuant to the agreement, defendant Pacific posted two (2)Surety Bonds in favor of plaintiff which were issued by defendant Philippine AmericanGeneral Insurance ("PHILAMGEN").

Pacific failed to finish the contracted works. Thus, plaintiff advised Pacific of itsintention to takeover the project and to hold said defendant liable for all damageswhich it had incurred and will incur to finish the project.

Plaintiff submitted its claim against defendant Philamgen under its performance andguarantee bond but Philamgen refused to acknowledge its liability for the simplereason that its principal, defendant Pacific, refused to acknowledge liability therefore.Hence, this action.

Upon agreement of the parties to appoint a commissioner to assist the court inresolving the issues confronting the parties, on 7 July 1981, an order was issued bynaming Architect Antonio Dimalanta as Court Commissioner.

On 28 November 1984, the Court received the findings made by the CourtCommissioner.

On the basis of the commissioner’s report, the trial court dismissed Filinvest’scomplaint as well as Pecorp’s counterclaim. It held:

In resolving this case, the court observes that the appointment of a Commissioner wasa joint undertaking among the parties. The findings of facts of the Commissionershould therefore not only be conclusive but final among the parties. The court thereforeagrees with the commissioner’s findings with respect to

1. Cost to repair deficiency or defect – P532,324.02

2. Unpaid balance of work done by defendant - P1,939,191.67

3. Additional work/change order (due to defendant) – P475,000.00

The unpaid balance due defendant therefore is P1,939,191.67. To this amount shouldbe added additional work performed by defendant at plaintiff’s instance in the sum ofP475,000.00. And from this total of P2,414,191.67 should be deducted the sum ofP532,324.01 which is the cost to repair the deficiency or defect in the work done bydefendant. The amount due to defendant per the commissioner’s report is thereforeP1,881,867.66.

Defendant Pacific became liable for delay when it did not finish the project on the dateagreed on October 15, 1979. The court however, finds the claim of P3,990,000.00 inthe form of penalty by reason of delay (P15,000.00/day from April 25, 1979 to Jan. 15,1980) to be excessive. A forfeiture of the amount due defendant from plaintiff appearsto be a reasonable penalty for the delay in finishing the project considering the amountof work already performed and the fact that plaintiff consented to three priorextensions.

The foregoing considered, this case is dismissed. The counterclaim is likewisedismissed.

The Court of Appeals, finding no reversible error in the appealed decision, affirmed thesame.

ISSUE: whether or not the liquidated damages agreed upon by the parties should bereduced [considering that: (a) time is of the essence of the contract; (b) the liquidateddamages was fixed by the parties to serve not only as penalty in case Pecorp fails tofulfill its obligation on time, but also as indemnity for actual and anticipated damageswhich Filinvest may suffer by reason of such failure; and (c) the total liquidateddamages sought is only 32% of the total contract price, and the same was freely andvoluntarily agreed upon by the parties].

HELD: There is no question that the penalty of P15,000.00 per day of delay wasmutually agreed upon by the parties and that the same is sanctioned by law. A penalclause is an accessory undertaking to assume greater liability in case of breach.10 It isattached to an obligation in order to insure performance11 and has a double function: (1)to provide for liquidated damages, and (2) to strengthen the coercive force of theobligation by the threat of greater responsibility in the event of breach.12 Article 1226of the Civil Code states:

Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnityfor damages and the payment of interests in case of noncompliance, if there is nostipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses topay the penalty or is guilty of fraud in the fulfillment of the obligation.

The penalty may be enforced only when it is demandable in accordance with theprovisions of this Code.

As a general rule, courts are not at liberty to ignore the freedom of the parties to agreeon such terms and conditions as they see fit as long as they are not contrary to law,morals, good customs, public order or public policy.13 Nevertheless, courts mayequitably reduce a stipulated penalty in the contract in two instances: (1) if theprincipal obligation has been partly or irregularly complied; and (2) even if there hasbeen no compliance if the penalty is iniquitous or unconscionable in accordance withArticle 1229 of the Civil Code.

In herein case, the trial court ruled that the penalty charge for delay – pegged atP15,000.00 per day of delay in the aggregate amount of P3,990,000.00 -- wasexcessive and accordingly reduced it to P1,881,867.66 "considering the amount ofwork already performed and the fact that [Filinvest] consented to three (3) priorextensions." The Court of Appeals affirmed the ruling but added as well that thepenalty was unconscionable "as the construction was already not far from completion."

The Court finds no fault in the cost estimates of the court-appointed commissioner asto the cost to repair deficiency or defect in the works which was based on the averagebetween plaintiff’s claim of P758,080.37 and defendant’s P306,567.67 considering thefollowing factors: that "plaintiff did not follow the standard practice of joint surveyupon take over to establish work already accomplished, balance of work per contractstill to be done, and estimate and inventory of repair". As for the cost to finish theremaining works, plaintiff’s estimates were brushed aside by the commissioner on thereasoned observation that "plaintiff’s cost estimate for work (to be) done by theplaintiff to complete the project is based on a contract awarded to another contractor(JPT), the nature and magnitude of which appears to be inconsistent with the basiccontract between defendant PECORP and plaintiff FILINVEST."14

As it is settled that the project was already 94.53% complete and that Filinvest didagree to extend the period for completion of the project, which extensions Filinvestincluded in computing the amount of the penalty, the reduction thereof is clearlywarranted.

Filinvest contends that the subject penalty clause falls under the second type, i.e., theprincipal purpose for its inclusion was to provide for payment of actual anticipated andliquidated damages rather than the penalization of a breach of the contract. Thus,Filinvest argues that had Pecorp completed the project on time, it (Filinvest) couldhave sold the lots sooner and earned its projected income that would have been usedfor its other projects.

In cases where there has been partial or irregular compliance, as in this case, there willbe no substantial difference between a penalty and liquidated damages insofar as legalresults are concerned.18 The distinction is thus more apparent than real especially in thelight of Articles 2226 and 2227 of the Civil Code of the Philippines:

Art. 2226. Liquidated damages are those agreed upon by the parties to a contract to bepaid in case of breach thereof.

Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall beequitably reduced if they are iniquitous or unconscionable.

The settled rule is that there is no difference between penalty and liquidated damagesinsofar as legal results are concerned and either may be recovered without the necessityof proving actual damages and both may be reduced when proper."

Finally, Filinvest advances the argument that while it may be true that courts maymitigate the amount of liquidated damages agreed upon by the parties on the basis ofthe extent of the work done, this contemplates a situation where the full amount ofdamages is payable in case of total breach of contract. In the instant case, as the penaltyclause was agreed upon to answer for delay in the completion of the projectconsidering that time is of the essence, "the parties thus clearly contemplated thepayment of accumulated liquidated damages despite, and precisely because of, partialperformance."20 In effect, it is Filinvest’s position that the first part of Article 1229 onpartial performance should not apply precisely because, in all likelihood, the penaltyclause would kick in in situations where Pecorp had already begun work but could notfinish it on time, thus, it is being penalized for delay in its completion.

The above argument, albeit sound,21 is insufficient to reverse the ruling of the Court ofAppeals. The Court of Appeals affirmed the reduction of the penalty not simplybecause there was partial compliance per se on the part of Pecorp with what wasincumbent upon it but, more fundamentally, because it deemed the penaltyunconscionable in the light of Pecorp’s 94.53% completion rate.

In herein case, there has been substantial compliance in good faith on the part ofPecorp which renders unconscionable the application of the full force of the penaltyespecially if we consider that in 1979 the amount of P15,000.00 as penalty for delayper day was quite steep indeed. Nothing in the records suggests that Pecorp’s delay inthe performance of 5.47% of the contract was due to it having acted negligently or inbad faith. Finally, we factor in the fact that Filinvest is not free of blame either as itlikewise failed to do that which was incumbent upon it, i.e., it failed to pay Pecorp forwork actually performed by the latter in the total amount of P1,881,867.66. Thus, allthings considered, we find no reversible error in the Court of Appeals’ exercise ofdiscretion in the instant case.

#37 LAUREANO V. KILAYCO (1915)

The Court held that:

. . . [I]n any case wherein there has been a partial or irregular compliance with theprovisions in a contract for special indemnification in the event of failure to complywith its terms, courts will rigidly apply the doctrine of strict construction againstthe enforcement in its entirety of the indemnification, where it is clear from theterms of the contract that the amount or character of the indemnity is fixed withoutregard to the probable damages which might be anticipated as a result of a breach ofthe terms of the contract; or, in other words, where the indemnity provided for isessentially a mere penalty having for its principal object the enforcement ofcompliance with the contract. But the courts will be slow in exercising thejurisdiction conferred upon them in article 115417 so as to modify the terms of anagreed upon indemnification where it appears that in fixing such indemnification theparties had in mind a fair and reasonable compensation for actual damages anticipatedas a result of a breach of the contract, or, in other words, where the principal purpose ofthe indemnification agreed upon appears to have been to provide for the payment ofactual anticipated and liquidated damages rather than the penalization of a breach ofthe contract.

The Supreme Court also stated that a distinction between a penalty clause imposedessentially as penalty in case of breach and a penalty clause imposed as indemnity fordamages should be made in cases where there has been neither partial nor irregularcompliance with the terms of the contract.

#38 Pamintuan vs. Court of Appeals, 94 SCRA 556

FACTS: This case is about the recovery compensatory damages for breach of a

contract of sale in addition to liquidated damages.

Mariano C. Pamintuan appealed from the judgment of the Court of Appeals wherein hewas ordered to deliver to Yu Ping Kun Co., Inc. certain plastic sheetings and, if he could not do so, to pay the latter P100,559.28 as damages with six percent interest fromthe date of the filing of the complaint. The facts and the findings of the Court of Appeals are as follows:

In 1960, Pamintuan was the holder of a barter license wherein he was authorized to export to Japan one thousand metric tons of white flint corn valued at forty-seven thousand United States dollars in exchange for a collateral importation of plastic sheetings of an equivalent value.

By virtue of that license, he entered into an agreement to ship his corn to Tokyo MenkaKaisha, Ltd. of Osaka, Japan in exchange for plastic sheetings. He contracted to sell theplastic sheetings to Yu Ping Kun Co., Inc. for two hundred sixty-five thousand five hundred fifty pesos. The company undertook to open an irrevocable domestic letter of credit for that amount in favor of Pamintuan.

It was further agreed that Pamintuan would deliver the plastic sheetings to the company at its bodegas in Manila or suburbs directly from the piers "within one month upon arrival of" the carrying vessels. Any violation of the contract of sale would entitlethe aggreived party to collect from the offending party liquidated damages in the sum of ten thousand pesos (Exh. A).

On July 28, 1960, the company received a copy of the letter from the Manila branch of Toyo Menka Kaisha, Ltd. confirming the acceptance by Japanese suppliers of firm offers for the consignment to Pamintuan of plastic sheetings valued at forty-seven thousand dollars. Acting on that information, the company lost no time in securing in favor of Pamintuan an irrevocable letter of credit for two hundred sixty-five thousand five hundred fifty pesos.

Pamintuan was apprised by the bank on August 1, 1960 of that letter of credit which made reference to the delivery to Yu Ping Kun Co., Inc. on or before October 31, 1960 of 336, 360 yards of plastic sheetings (p. 21, Record on Appeal).

On September 27 and 30 and October 4, 1960, the Japanese suppliers shipped to Pamintuan, through Toyo Menka Kaisha, Ltd., the plastic sheetings in four shipments to wit: (1) Firm Offer No. 327 for 50,000 yards valued at $9,000; (2) Firm Offer No. 328 for 70,000 yards valued at $8,050; (3) Firm Offers Nos. 329 and 343 for 175,000 and 18,440 yards valued at $22,445 and $2,305, respectively, and (4) Firm Offer No. 330 for 26,000 yards valued at $5,200, or a total of 339,440 yards with an aggregate value of $47,000 (pp. 4-5 and 239-40, Record on Appeal).

The plastic sheetings arrived in Manila and were received by Pamintuan. Out of the

shipments, Pamintuan delivered to the company's warehouse only the following quantities of plastic sheetings:

November 11, 1960 ? 140 cases, size 48 inches by 50 yards. November 14, 1960 ? 258 cases out of 352 cases. November 15, 1960 ? 11 cases out of 352 cases. November 15, 1960 ? 10 cases out of 100 cases. November 15, 1960 ? 30 cases out of 100 cases.

Pamintuan withheld delivery of (1) 50 cases of plastic sheetings containing 26,000 yards valued at $5,200; (2) 37 cases containing 18,440 yards valued at $2,305; (3) 60 cases containing 30,000 yards valued at $5,400 and (4) 83 cases containing 40,850 yards valued at $5,236.97. While the plastic sheetings were arriving in Manila, Pamintuan informed the president of Yu Ping Kun Co., Inc. that he was in dire need of cash with which to pay his obligations to the Philippine National Bank. Inasmuch as the computation of the prices of each delivery would allegedly be a long process, Pamintuan requested that he be paid immediately.

Consequently, Pamintuan and the president of the company, Benito Y.C. Espiritu, agreed to fix the price of the plastic sheetings at P0.782 a yard, regardless of the kind, quality or actual invoice value thereof. The parties arrived at that figure by dividing thetotal price of P265,550 by 339,440 yards, the aggregate quantity of the shipments.

After Pamintuan had delivered 224,150 yards of sheetings of interior quality valued at P163,.047.87, he refused to deliver the remainder of the shipments with a total value ofP102,502.13 which were covered by (i) Firm Offer No. 330, containing 26,000 yards valued at P29,380; (2) Firm Offer No. 343, containing 18,440 yards valued at P13,023.25; (3) Firm Offer No. 217, containing 30,000 yards valued at P30,510 and (4)Firm Offer No. 329 containing 40,850 yards valued at P29,588.88 (See pp. 243-2, Record on Appeal).

As justification for his refusal, Pamintuan said that the company failed to comply with the conditions of the contract and that it was novated with respect to the price.

On December 2, 1960, the company filed its amended complaint for damages against Pamintuan. After trial, the lower court rendered the judgment mentioned above but including moral damages.

The unrealized profits awarded as damages in the trial court's decision were computed as follows (pp. 248-9, Record on Appeal):

(1) 26,000 yards with a contract price of Pl.13 per yard and a selling price at the time of delivery of Pl.75 a yard........................................................... P16,120.00

(2) 18,000 yards with a contract price of P0.7062 per yard and selling price of Pl.20 peryard at the time of delivery......................................... 9,105.67

(3) 30,000 yards with a contract price of Pl.017 per yard and a selling price of Pl.70 peryard. 20,490.00

(4) 40,850 yards with a contract price of P0.7247 per yard and a selling price of P1.25 a yard at the time of delivery.............................................. 21,458.50 Total unrealized profits....................... P67,174.17

The overpayment of P12,282.26 made to Pamintuan by Yu Ping Kun Co., Inc. for the 224,150 yards, which the trial court regarded as an item of damages suffered by the company, was computed as follows (p. 71, Record on Appeal):

Liquidation value of 224,150 yards at P0.7822 a yard .............................................................................. P175,330.13

Actual peso value of 224,150 yards as per firm offers or as per contract............................................ 163,047.87

Overpayment................................................................ P 12,282.26

To these two items of damages (P67,174.17 as unrealized profits and P12,282.26 as overpayment), the trial court added (a) P10,000 as stipulated liquidated damages, (b) P10,000 as moral damages, (c) Pl,102.85 as premium paid by the company on the bondof P102,502.13 for the issuance of the writ of preliminary attachment and (d) P10,000 as attorney's fees, or total damages of P110,559.28) p. 250, Record on Appeal). The Court of Appeals affirmed that judgment with the modification that the moral damages were disallowed (Resolution of June 29, 1966).

Pamintuan appealed. The Court of Appeals in its decision of March 18, 1966 found thatthe contract of sale between Pamintuan and the company was partly consummated. Thecompany fulfilled its obligation to obtain the Japanese suppliers' confirmation of their acceptance of firm offers totalling $47,000. Pamintuan reaped certain benefits from thecontract. Hence, he is estopped to repudiate it; otherwise, he would unjustly enrich himself at the expense of the company.

The Court of Appeals found that the writ of attachment was properly issued. It also found that Pamintuan was guilty of fraud because (1) he was able to make the companyagree to change the manner of paying the price by falsely alleging that there was a delay in obtaining confirmation of the suppliers' acceptance of the offer to buy; (2) he caused the plastic sheetings to be deposited in the bonded warehouse of his brother andthen required his brother to make him Pamintuan), his attorney-in-fact so that he could control the disposal of the goods; (3) Pamintuan, as attorney-in-fact of the warehouseman, endorsed to the customs broker the warehouse receipts covering the plastic sheetings withheld by him and (4) he overpriced the plastic sheetings which he delivered to the company.

The Court of Appeals described Pamintuan as a man "who, after having succeeded in getting another to accommodate him by agreeing to liquidate his deliveries on the basisof P0.7822 per yard, irrespective of invoice value, on the pretense that he would deliver what in the first place he ought to deliver anyway, when he knew all the while that he had no such intention, and in the process delivered only the poorer or cheaper kind or those which he had predetermined to deliver and did not conceal in his brother's name and thus deceived the unwary party into overpaying him the sum of P 1 2,282.26 for the said deliveries, and would thereafter refuse to make any further delivery in flagrant violation of his plighted word, would now ask us to sanction his actuation".

ISSUE: whether or not there can be recovery of compensatory (actual?) damages for breach of a contract of sale in addition to liquidated damages.

HELD: The main contention of appellant Pamintuan is that the buyer, Yu Ping Kun Co., Inc., is entitled to recover only liquidated damages. That contention is based on the stipulation "that any violation of the provisions of this contract (of sale) shall entitlethe aggrieved party to collect from the offending party liquidated damages in the sum of P10,000 ".

Pamintuan relies on the rule that a penalty and liquidated damages are the same (Lambert vs. Fox 26 Phil. 588); that "in obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of non-compliance, if there is no stipulation to the contrary " (1st sentence of Art. 1226, Civil Code) and, it is argued, there is no such stipulation to the contrary in this case and that "liquidated damages are those agreed upon by the parties to a contract, to be paid in case of breach thereof" (Art. 2226, Civil Code).

The Court held that appellant's contention cannot be sustained because the second sentence of article 1226 itself provides that “nevertheless, damages shall be paid if the obligor ... is guilty of fraud in the fulfillment of the obligation". "Responsibility arising from fraud is demandable in all obligations" (Art. 1171, Civil Code). "In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for an damages which may be reasonably attributed to the non-performance of the obligation" (Ibid, art. 2201).

The trial court and the Court of Appeals found that Pamintuan was guilty of fraud because he did not make a complete delivery of the plastic sheetings and he overpriced the same. That factual finding is conclusive upon this Court.

There is no justification for the Civil Code to make an apparent distinction between penalty and liquidated damages because the settled rule is that there is no difference between penalty and liquidated damages insofar as legal results are concerned and that either may be recovered without the necessity of proving actual damages and both maybe reduced when proper (Arts. 1229, 2216 and 2227, Civil Code. See observations of Justice J.B.L. Reyes, cited in 4 Tolentino's Civil Code, p. 251).

Castan Tobeas notes that the penal clause in an obligation has three functions: "1. Una funcion coercitiva o de garantia, consistente en estimular al deudor al complimiento de la obligacion principal, ante la amenaza de tener que pagar la pena. 2. Una funcion liquidadora del da?o, o sea la de evaluar por anticipado los perjuicios que habria de ocasionar al acreedor el incumplimiento o cumplimiento inadecuado de la obligacion. 3. Una funcion estrictamente penal, consistente en sancionar o castigar dicho incumplimiento o cumplimiento inadecuado, atribuyendole consecuencias mas onerosas para el deudor que las que normalmente lleva aparejadas la infraccion contractual. " (3 Derecho Civil Espanol, 9th Ed., p. 128).

The penalty clause is strictly penal or cumulative in character and does not partake of the nature of liquidated damages (pena sustitutiva) when the parties agree "que el acreedor podra pedir, en el supuesto incumplimiento o mero retardo de la obligacion principal, ademas de la pena, los danos y perjuicios. Se habla en este caso de pena cumulativa, a differencia de aquellos otros ordinarios, en que la pena es sustitutiva de la reparacion ordinaria." (Ibid, Castan Tobenas, p. 130).

The Court held that justice would be adequately done in this case by allowing Yu Ping Kun Co., Inc. to recover only the actual damages proven and not to award to it the stipulated liquidated damages of ten thousand pesos for any breach of the contract. Theproven damages supersede the stipulated liquidated damages.

This view finds support in the opinion of Manresa (whose comments were the bases of the new matter found in article 1226, not found in article 1152 of the old Civil Code) that in case of fraud the difference between the proven damages and the stipulated penalty may be recovered (Vol. 8, part. 1, Codigo Civil, 5th Ed., 1950, p. 483).

Hence, the damages recoverable by the firm would amount to ninety thousand five hundred fifty-nine pesos and twenty-eight centavos (P90,559.28), with six percent interest a year from the filing of the complaint.

#39 Social Security System, petitioner vs. Moonwalk Development andHousing Corporation, et al, respondents.G.R. No. 73345. April 7, 1993221 SCRA 119

Obligations; Requisites in order that debtor may be in default;Necessity of demand.

To be in default “x x x is different from mere delay ingrammatical sense, because it involves the beginning of a special condition or status which has its own peculiar effects or results.” In order that the debtor may be in default it is necessary that the following requisites be present:(1) That the obligation be demandable and already liquidated;(2) That the debtor delays performance; and (3) That the creditor requires the performance judicially or extrajudicially.Default generally begins from the moment the creditor demands the performance of the obligation.

CASE:Petition for review on certiorari of the decision of the thenIntermediate Appellate Court affirming in toto the decision of the former Courtof First Instance of Rizal, Seventh Judicial District, Branch XXIX, Pasay City.

FACTS:On February 20, 1980, the petitioner Social Security System filed acomplaint in the Court of First Instance of Rizal against the respondentMoonwalk Development and Housing Corporation.The petitioner alleged that it had committed an error in failing tocompute the 12% interest due on delayed payments on the loan of therespondent and also in not reflecting in its statement of account an unpaidbalance on the said penalties for delayed payments.The respondent answered denying the claims and asserting that thepetitioner had the opportunity to ascertain the truth but it failed to do so.Decision of the Court of First Instance:The Court of First Instance dismissed the complaint on the ground thatthe obligation was already extinguished by the payment by the respondent of its indebtedness to the petitioner and by the latter’s cancellation of the realestate mortgages executed in its favor by the defendant.The Motion for Reconsideration filed by the petitioner was dismissedby the trial court.Decision of the Intermediate Appellate Court:The respondent court held that the respondent’s obligation wasextinguished and affirmed the decision of the trial court.

ISSUE:Whether or not respondent Moonwalk Development and HousingCorporation incurred delay in the performance of its obligation. RULING:Under the Civil Code, delay begins from the time the obligee judiciallyor extrajudicially demands from the obligor the performance of the obligation.(Article 1169 of the Civil Code)

Article 1169 of the Civil Code provides for three (3) instances whendemand in not necessary to render the obligation in default:(1) When the obligation or the law expressly so declares;(2) When from the nature and the circumstances of theobligation it appears that the designation of the timewhen the thing is to be delivered or the service to berendered was a controlling motive for the establishmentof the contract;(3) When demand would be useless, as when the obligor hasrendered it beyond his power to perform.The case at bar does not fall within any of the established exceptions.Hence, petitioner is not excused from making a demand.It is true that respondent has long been delinquent in meeting itsmonthly arrears and in paying the full amount of the loan itself as theobligation matured sometime in January, 1977.But mere delinquency in payment does not necessarily mean delay inthe legal concept. Default generally begins from the moment the creditordemands the performance of the obligation.In the present case, the petitioner never demanded from therespondents the payment of its monthly amortizations. It was clear thatrespondent was never in default because petitioner never compelledperformance.The petition was DISMISSED and the decision of theIntermediate Appellate Court was AFFIRMED.

#40 LO v CA 376 SCRA 560

#41 [G.R. No. 138677. February 12, 2002] TOLOMEO LIGUTAN andLEONIDAS DE LA LLANA, petitioners, vs. HON. COURT OFAPPEALS & SECURITY BANK & TRUST COMPANY, respondents.

Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained on 11 May 1981 aloan in the amount of P120,000.00 from respondent Security Bank and TrustCompany. Petitioners executed a promissory note binding themselves, jointly andseverally, to pay the sum borrowed with an interest of 15.189% per annum uponmaturity and to pay a penalty of 5% every month on the outstanding principal andinterest in case of default. In addition, petitioners agreed to pay 10% of the totalamount due by way of attorney’s fees if the matter were indorsed to a lawyer forcollection or if a suit were instituted to enforce payment. The obligation matured on 8September 1981; the bank, however, granted an extension but only up until 29December 1981.

Despite several demands from the bank, petitioners failed to settle the debtwhich, as of 20 May 1982, amounted to P114,416.10. On 30 September 1982, thebank sent a final demand letter to petitioners informing them that they had five dayswithin which to make full payment. Since petitioners still defaulted on their obligation,the bank filed on 3 November 1982, with the Regional Trial Court of Makati, Branch143, a complaint for recovery of the due amount.

After petitioners had filed a joint answer to the complaint, the bank presented itsevidence and, on 27 March 1985, rested its case. Petitioners, instead of introducingtheir own evidence, had the hearing of the case reset on two consecutive occasions. Inview of the absence of petitioners and their counsel on 28 August 1985, the thirdhearing date, the bank moved, and the trial court resolved, to consider the casesubmitted for decision.

Two years later, or on 23 October 1987, petitioners filed a motion forreconsideration of the order of the trial court declaring them as having waived theirright to present evidence and prayed that they be allowed to prove their case. The courta quo denied the motion in an order, dated 5 September 1988, and on 20 October 1989,it rendered its decision,[1] the dispositive portion of which read:

“WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants, ordering the latter to pay, jointly and severally, to the plaintiff, as follows:

"1. The sum of P114,416.00 with interest thereon at the rate of 15.189%per annum, 2% service charge and 5% per month penalty charge,commencing on 20 May 1982 until fully paid;

"2. To pay the further sum equivalent to 10% of the total amount ofindebtedness for and as attorney’s fees; and

"3. To pay the costs of the suit.”[2]

Petitioners interposed an appeal with the Court of Appeals, questioning therejection by the trial court of their motion to present evidence and assailing theimposition of the 2% service charge, the 5% per month penalty charge and 10%attorney's fees. In its decision[3] of 7 March 1996, the appellate court affirmed thejudgment of the trial court except on the matter of the 2% service charge which wasdeleted pursuant to Central Bank Circular No. 783. Not fully satisfied with thedecision of the appellate court, both parties filed their respective motions forreconsideration.[4] Petitioners prayed for the reduction of the 5% stipulated penalty forbeing unconscionable. The bank, on the other hand, asked that the payment of interest

and penalty be commenced not from the date of filing of complaint but from the timeof default as so stipulated in the contract of the parties.

On 28 October 1998, the Court of Appeals resolved the two motions thusly:

“We find merit in plaintiff-appellee’s claim that the principal sum of P114,416.00 with interest thereon must commence not on the date of filing of the complaint as we have previously held in our decision but on the date when the obligation became due.

“Default generally begins from the moment the creditor demands the performance of the obligation. However, demand is not necessary to render the obligor in default when the obligation or the law so provides.

“In the case at bar, defendants-appellants executed a promissory note where they undertook to pay the obligation on its maturity date 'without necessity of demand.' They also agreed to pay the interest in case of non-payment from the date of default.

“x x x x xx x x x

“While we maintain that defendants-appellants must be bound by the contract which they acknowledged and signed, we take cognizance of their plea for the application of the provisions of Article 1229 x x x.

“Considering that defendants-appellants partially complied with their obligation under the promissory note by the reduction of the original amount of P120,000.00 to P114,416.00 and in order that they will finally settle their obligation, it is our view and we so hold that in the interest of justice and public policy, a penalty of 3% per month or 36% per annum would suffice.

“x x x x xx x x x

“WHEREFORE, the decision sought to be reconsidered is hereby MODIFIED. The defendants-appellants Tolomeo Ligutan and Leonidas dela Llana are hereby ordered to pay the plaintiff-appellee Security Bank and Trust Company the following:

“1. The sum of P114,416.00 with interest thereon at the rate of15.189% per annum and 3% per month penalty chargecommencing May 20, 1982 until fully paid;

“2. The sum equivalent to 10% of the total amount of the indebtednessas and for attorney’s fees.”[5]

On 16 November 1998, petitioners filed an omnibus motion for reconsiderationand to admit newly discovered evidence,[6] alleging that while the case was pendingbefore the trial court, petitioner Tolomeo Ligutan and his wife Bienvenida Ligutanexecuted a real estate mortgage on 18 January 1984 to secure the existing indebtednessof petitioners Ligutan and dela Llana with the bank. Petitioners contended that theexecution of the real estate mortgage had the effect of novating the contract betweenthem and the bank. Petitioners further averred that the mortgage was extrajudicially

foreclosed on 26 August 1986, that they were not informed about it, and the bank didnot credit them with the proceeds of the sale. The appellate court denied the omnibusmotion for reconsideration and to admit newly discovered evidence, ratiocinating thatsuch a second motion for reconsideration cannot be entertained under Section 2, Rule52, of the 1997 Rules of Civil Procedure. Furthermore, the appellate court said, thenewly-discovered evidence being invoked by petitioners had actually been known tothem when the case was brought on appeal and when the first motion forreconsideration was filed.[7]

Aggrieved by the decision and resolutions of the Court of Appeals, petitionerselevated their case to this Court on 9 July 1999 via a petition for review on certiorariunder Rule 45 of the Rules of Court, submitting thusly -

“I. The respondent Court of Appeals seriously erred in not holdingthat the 15.189% interest and the penalty of three (3%)percent per month or thirty-six (36%) percent per annumimposed by private respondent bank on petitioners’ loanobligation are still manifestly exorbitant, iniquitous andunconscionable.

“II. The respondent Court of Appeals gravely erred in not reducingto a reasonable level the ten (10%) percent award ofattorney’s fees which is highly and grossly excessive,unreasonable and unconscionable.

“III. The respondent Court of Appeals gravely erred in not admittingpetitioners’ newly discovered evidence which could not havebeen timely produced during the trial of this case.

“IV. The respondent Court of Appeals seriously erred in not holdingthat there was a novation of the cause of action of privaterespondent’s complaint in the instant case due to thesubsequent execution of the real estate mortgage during thependency of this case and the subsequent foreclosure of themortgage.”[8]

Respondent bank, which did not take an appeal, would, however, have it that thepenalty sought to be deleted by petitioners was even insufficient to fully cover andcompensate for the cost of money brought about by the radical devaluation anddecrease in the purchasing power of the peso, particularly vis-a-vis the U.S. dollar,taking into account the time frame of its occurrence. The Bank would stress that onlythe amount of P5,584.00 had been remitted out of the entire loan of P120,000.00.[9]

A penalty clause, expressly recognized by law,[10] is an accessory undertaking toassume greater liability on the part of an obligor in case of breach of an obligation. Itfunctions to strengthen the coercive force of the obligation[11] and to provide, ineffect, for what could be the liquidated damages resulting from such a breach. Theobligor would then be bound to pay the stipulated indemnity without the necessity ofproof on the existence and on the measure of damages caused by the breach.[12]Although a court may not at liberty ignore the freedom of the parties to agree on suchterms and conditions as they see fit that contravene neither law nor morals, goodcustoms, public order or public policy, a stipulated penalty, nevertheless, may beequitably reduced by the courts if it is iniquitous or unconscionable or if the principal

obligation has been partly or irregularly complied with.[13]

The question of whether a penalty is reasonable or iniquitous can be partlysubjective and partly objective. Its resolution would depend on such factors as, but notnecessarily confined to, the type, extent and purpose of the penalty, the nature of theobligation, the mode of breach and its consequences, the supervening realities, thestanding and relationship of the parties, and the like, the application of which, by andlarge, is addressed to the sound discretion of the court. In Rizal Commercial BankingCorp. vs. Court of Appeals,[14] just an example, the Court has tempered the penaltycharges after taking into account the debtor’s pitiful situation and its offer to settle theentire obligation with the creditor bank. The stipulated penalty might likewise bereduced when a partial or irregular performance is made by the debtor.[15] Thestipulated penalty might even be deleted such as when there has been substantialperformance in good faith by the obligor,[16] when the penalty clause itself suffersfrom fatal infirmity, or when exceptional circumstances so exist as to warrant it.[17]

The Court of Appeals, exercising its good judgment in the instant case, hasreduced the penalty interest from 5% a month to 3% a month which petitioner stilldisputes. Given the circumstances, not to mention the repeated acts of breach bypetitioners of their contractual obligation, the Court sees no cogent ground to modifythe ruling of the appellate court..

Anent the stipulated interest of 15.189% per annum, petitioners, for the first time,question its reasonableness and prays that the Court reduce the amount. Thiscontention is a fresh issue that has not been raised and ventilated before the courtsbelow. In any event, the interest stipulation, on its face, does not appear as being thatexcessive. The essence or rationale for the payment of interest, quite often referred toas cost of money, is not exactly the same as that of a surcharge or a penalty. A penaltystipulation is not necessarily preclusive of interest, if there is an agreement to thateffect, the two being distinct concepts which may separately be demanded.[18] Whatmay justify a court in not allowing the creditor to impose full surcharges and penalties,despite an express stipulation therefor in a valid agreement, may not equally justify thenon-payment or reduction of interest. Indeed, the interest prescribed in loan financingarrangements is a fundamental part of the banking business and the core of a bank'sexistence.[19]

Petitioners next assail the award of 10% of the total amount of indebtedness byway of attorney's fees for being grossly excessive, exorbitant and unconscionable vis-a-vis the time spent and the extent of services rendered by counsel for the bank and thenature of the case. Bearing in mind that the rate of attorney’s fees has been agreed toby the parties and intended to answer not only for litigation expenses but also forcollection efforts as well, the Court, like the appellate court, deems the award of 10%attorney’s fees to be reasonable.

Neither can the appellate court be held to have erred in rejecting petitioners' callfor a new trial or to admit newly discovered evidence. As the appellate court so held inits resolution of 14 May 1999 -

“Under Section 2, Rule 52 of the 1997 Rules of Civil Procedure, no second motion for reconsideration of a judgment or final resolution by the same party shall be entertained. Considering that the instant motion is already a second motion for reconsideration, the same must therefore be denied.

“Furthermore, it would appear from the records available to this court that the newly-discovered evidence being invoked by defendants-appellants have actually been existent when the case was brought on appeal to this court as well as when the first motion for reconsideration was filed. Hence, it is quite surprising why defendants-appellants raised the alleged newly-discovered evidence only at this stage when they could have done so in the earlier pleadings filed before this court.

“The propriety or acceptability of such a second motion for reconsideration is not contingent upon the averment of 'new' grounds to assail the judgment, i.e., grounds other than those theretofore presented and rejected. Otherwise, attainment of finality of a judgment might be stayed off indefinitely, depending on the party’s ingenuousness or cleverness in conceiving and formulating 'additional flaws' or 'newly discovered errors' therein, or thinking up some injury or prejudice to the rights of the movant for reconsideration.”[20]

At any rate, the subsequent execution of the real estate mortgage as security for theexisting loan would not have resulted in the extinguishment of the original contract ofloan because of novation. Petitioners acknowledge that the real estate mortgagecontract does not contain any express stipulation by the parties intending it tosupersede the existing loan agreement between the petitioners and the bank.[21]Respondent bank has correctly postulated that the mortgage is but an accessorycontract to secure the loan in the promissory note.

Extinctive novation requires, first, a previous valid obligation; second, theagreement of all the parties to the new contract; third, the extinguishment of theobligation; and fourth, the validity of the new one.[22] In order that an obligation maybe extinguished by another which substitutes the same, it is imperative that it be sodeclared in unequivocal terms, or that the old and the new obligation be on every pointincompatible with each other.[23] An obligation to pay a sum of money is notextinctively novated by a new instrument which merely changes the terms of paymentor adding compatible covenants or where the old contract is merely supplemented bythe new one.[24] When not expressed, incompatibility is required so as to ensure thatthe parties have indeed intended such novation despite their failure to express it incategorical terms. The incompatibility, to be sure, should take place in any of theessential elements of the obligation, i.e., (1) the juridical relation or tie, such as from amere commodatum to lease of things, or from negotiorum gestio to agency, or from amortgage to antichresis,[25] or from a sale to one of loan;[26] (2) the object orprincipal conditions, such as a change of the nature of the prestation; or (3) thesubjects, such as the substitution of a debtor[27] or the subrogation of the creditor. Extinctive novation does not necessarily imply that the new agreement should becomplete by itself; certain terms and conditions may be carried, expressly or byimplication, over to the new obligation.

WHEREFORE, the petition is DENIED.

# 42 G.R. No. 78315 January 2, 1989

COMMERCIAL CREDIT CORPORATION CAGAYAN DE ORO, petitioner, vs.THE COURT OF APPEALS and THE CAGAYAN DE ORO COLISEUM, INC., respondents.

GANCAYCO, J.:

In this petition for review of a decision of the Court of Appeals in CAG.R. SP No. 10888 1 the issue is whether or not a compromisejudgment which was found by the Court of Appeals to be lawful may bemodified by the same court.

Sometime in 1978 private respondent Cagayan De Oro Coliseum,Inc. executed a promissory note in the amount of P329,852.54 infavor of petitioner Commercial Credit Corporation of Cagayan deOro, payable in 36 monthly installments. The note is secured by areal estate mortgage duly executed by private respondent in favorof petitioner. As said respondent defaulted in the payment of themonthly installments due, petitioner proceeded with the extrajudicialforeclosure of the real estate mortgage in September, 1979.

Five minority stockholders of private respondent then institutedSpecial Civil Action No. 68111 in the then Court of First Instance(CFI) of Misamis Oriental questioning the power of the privaterespondent to execute the real estate mortgage without the consentof its stockholders. In due course a compromise agreement wasentered into by the parties on the basis of which a compromisejudgment was rendered by the trial court on March 11, 1980 whichreads as follows:

JUDGMENT

The parties in the above-entitled case assisted by their respectivecounsel, submitted for the approval of the Court the followingCompromise Agreement, to wit:

COMES NOW, Parties, Petitioners and Respondents, representedby their respective counsels, unto this Honorable Court, mostrespectfully submit for approval the following CompromiseAgreement:

1. That, Petitioners herein hereby state that they ratified andapproved the loan and real estate mortgage entered into and

assigned by the Cagayan de Oro Coliseum, Inc. to the CommercialCredit Corporation of Cagayan de Oro and as such therefore, theissue raised by the herein petitioners in the above entitled case hasbecome moot and academic;

2. That, by virtue of the aforementioned, the Cagayan de OroColiseum, Inc. thru its Board of Directors and represented by itsPresident, Mr. Johnny Wilson, hereby admits its total outstandingobligation to herein Respondent Commercial Credit Corporation ofCagayan de Oro in the amount of TWO HUNDRED FORTY NINETHOUSAND TWO HUNDRED SIXTY THREE & 23/100 PESOS (P249,263.23), as of February 15, 1980, including therein the sum ofP 10,000.00 representing attorney's fees for RespondentCommercial Credit Corporation of Cagayan de Oro;

3. That the Cagayan de Oro Coliseum, Inc. has agreed to pay theabove obligation plus interest on diminishing balance computedyearly at sixteen (16) percent per annum, thus:

Total Account.................... P 249,263.23

Total Interest...................... P 76,138.60

Total Payable ...................... P 325,401.83

4. That, the Cagayan de Oro Coliseum, Inc. hereby agrees to paythe aforegoing obligation in paragraph (3) hereof in equal monthlyinstallments of P11,000.00, the first installment shall be payable inFebruary, 1980 and every month thereafter until the whole accountpayable as aforementioned is fully paid;

5. That, failure on the part of Respondent Cagayan de OroColiseum, Inc. to pay any of the installments as they shall becomedue, the whole amount then outstanding and unpaid shallimmediately become due and payable in its entirety and shallrender the judgment herein to be immediately final, unappealableand executory; and the overdue and unpaid installments shall earna three (3%) per cent per month penalty charge until fully paid, plusfive percent (5%) of the outstanding balance as additional attorney'sfee;

6. That, Respondent Commercial Credit Corporation of Cagayan deOro hereby agrees to withdraw its application with Respondent CitySheriff of Cagayan de Oro for the extrajudicial foreclosure of the

real estate mortgage subject of this complaint;

7. That, the Parties herein waive in favor of each other any and allforms of damage arising out of, connected with and/or as a result ofthis action.

WHEREFORE, the Parties respectfully pray of this Honorable Courtthat judgment in accordance with the Compromise Agreement berendered. (Pages 25-27, Rollo)

However as private respondent failed to comply with the terms ofthe judgment for failure to pay several installments in the amount ofP70,152.65 which matured on July 13, 1982, petitioner filed an ex-parte motion for the issuance of a writ of execution on March 4,1983. The Court granted the said motion in an order dated March10, 1983. A notice of auction sale was issued on March 11, 1983.Private respondent filed a motion for reconsideration of said orderalleging that it had paid its obligation. The execution of the writ wassuspended pending consideration of said motion. An oppositionthereto was filed by petitioner to which a reply was filed by theprivate respondent and, in turn, the comment of the petitioner wasalso submitted. On November 26, 1986, the trial court denied saidmotion for reconsideration and, accordingly, a writ of execution wasissued on December 4, 1986. The Deputy Provincial Sheriff set theauction sale for January 23, 1987. However, said auction sale didnot take place as scheduled due to some internal problems in theoffice of sheriff.

Private respondent then filed a special civil action in the Court ofAppeals to annul said compromise-judgment, alleging that the trialcourt acted in serious violation of law and/or in grave abuse ofdiscretion. In due course, a decision was rendered by saidappellate court on February 13, 1987, the dispositive part of whichreads as follows:

WHEREFORE, the present petition is DENIED due course and ishereby DISMISSED. Effective March 16, 1983, the overdue andunpaid installments shall earn one half per cent (1/2%) per monthpenalty charge until fully paid, plus two per cent (2%) of theoutstanding balance as additional attorney's fees. (Page 33, Rollo)

A motion for reconsideration of the decision was filed by petitioner.On March 23, 1987 a resolution denying the motion was issued bythe respondent appellate court.

On the other hand, private respondent also filed a motion forreconsideration and comment on the petitioner's motion forreconsideration. On May 19, 1987, respondent Court issued aresolution, the dispositive part of which reads as follows:

Acting on the said first part of the petitioner's motion forreconsideration as well as the private respondent's commentthereon, the aforestated grounds for said motion having beenalready taken up by this Court in reaching the said February 13,1987 decision, and finding no reason to disturb the same, the saidmotion as to its said first part, is DENIED for lack of merit.

As to the said second part of petitioner's motion for reconsideration,for clarity, the dispositive portion of the February 13, 1987 decisionis re-worded to read as follows:

WHEREFORE, the present petition is GRANTED in the sense thateffective March 16, 1983, the overdue and unpaid installments shallearn one half per cent (1/2%) per month penalty charge until fullypaid, plus two per cent (2%) of the outstanding balance asadditional attorney's fees.

And in view of such disposition.

1) THE JUDGMENT DATED MARCH 11, 1980 AND THE ORDERDATED NOVEMBER 26, 1986 OF RESPONDENT DENT COURTARE HEREBY DECLARED MODIFIED CONFORMABLY WITHTHE FEBRUARY 13, 1987 DECISION OF THIS COURT; and

2) THE WRIT OF EXECUTION ISSUED BY RESPONDENT DENTCLERK OF COURT, AND THE SHERIFF'S NOTICE OF SALE,THE PUBLIC AUCTION SALE AND THE CERTIFICATE OF SALEARE DECLARED NULL AND VOID IN SO FAR AS THEY ARE NOTIN ACCORDANCE WITH AND IN EXCESS OF THE NOWMODIFIED JUDGMENT AND MODIFIED ORDER OF THERESPONDENT COURT DATED MARCH 11, 1980 ANDNOVEMBER 26, 1986, RESPECTIVELY

(Page 148, Rollo)

Hence, the herein petition for review on certiorari wherein petitioneralleges the following reasons as warranting the grant of the petition:

a) THE HONORABLE COURT OF APPEALS COMMITTED GRAVE

ABUSE OF DISCRETION AMOUNTING TO LACK OR IN EXCESSOF JURISDICTION WHEN IT MODIFIED THE TRIAL COURT'SCOMPROMISE JUDGMENT AFTER IT DENIED DUE COURSEAND DISMISSED THE PETITION FOR ANNULMENT OFRESPONDENT COLISEUM.

b) THE HONORABLE COURT OF APPEALS COMMITTED GRAVEAND REVERSIBLE ERROR IN APPLYING ARTICLE 1229 OF THECIVIL CODE IN THE CASE AT BAR.

c) THE HONORABLE COURT OF APPEALS COMMITTED GRAVEAND REVERSIBLE ERROR WHEN IT MODIFIED THE EFFECT'SOF THE 3% PENALTY INTEREST AND ATTORNEY'S FEES,AFTER IT UPHELD THE LEGALITY OF THE COMPROMISEJUDGMENT OF THE TRIAL COURT." (Page 14, Rollo)

The petition is impressed with merit. It is axiomatic that acompromise judgment is final and immediately executory. Once ajudgment becomes final and executory, the prevailing party canhave it executed as a matter of right and the execution becomes aministerial duty on the part of the court . 2 A judicial compromise hasthe force and effect of res judicata. 3

Such a final and executory judgment cannot be modified oramended. If an amendment is to be made, it may consist only ofsupplying an omission, striking out a superfluity or interpreting anambiguous phrase therein in relation to the body of the decisionwhich gives it life . 4 A compromise judgment should not be disturbedexcept for vices in consent or forgery. 5

In the present case, the compromise agreement was voluntarilyentered into by the parties assisted by their respective counsel andwas duly approved by the trial court. Indeed, it was confirmed bythe respondent appellate court to be lawful. There was, therefore,no cogent basis for the respondent appellate court to modify saidcompromise agreement by reducing the penalty and attorney's feesprovided for therein.

In spite of the protestation of private respondent that the penaltyand interests provided in the compromise agreement was violativeof the Usury Law, the respondent appellate court, applying theprovisions of Central Bank Circular No. 721, found no violationthereof as in fact the imposition of the penalty is sanctioned byArticle 1226 of the Civil Code. The respondent court cited the De

Venecia vs. Del Rosario 6 where this Court held that in the absence ofa stipulation to the contrary, recovery of both the penalty and the interestuntil full payment of the debt is allowed under existing laws.

The modification of said compromise judgment by the respondentappellate court is predicated on the provision of Article 1229 of theCivil Code which provides as follows:

ART. 1229. The Judge shall equitably reduce the penalty when theprincipal obligation has been partly or irregularly complied with bythe debtor. Even if there has been no performance, the penalty mayalso be reduced by the courts if it is iniquitous or unconscionable.

The foregoing provision of the law applies only to obligations orcontract, subject of a litigation, the condition being that the samehas been partly or irregularly complied with by the debtor. Theprovision also applies even if there has been no performance, aslong as the penalty is iniquituous or unconscionable. It cannot applyto a final and executory judgment.

When the parties entered into the said compromise agreement andsubmitted the same for the approval of the trial court, its terms andconditions must be the primordial consideration why the partiesvoluntarily entered into the same. The trial court approved itbecause it is lawful, and is not against public policy or morals. Eventhe respondent Court of Appeals upheld the validity of the saidcompromise agreement. Hence, the respondent court has noauthority to reduce the penalty and attorney's fees therein stipulatedwhich is the law between the parties and is res judicata.

WHEREFORE, the petition is GRANTED. The decision of therespondent Court of Appeals dated February 13, 1987 and itsresolutions dated March 23, 1987 and May 19, 1987 are herebySET ASIDE and another judgment is hereby rendered affirming intoto the compromise judgment of the trial court dated March 11,1980, with costs against private respondent. This decision isimmediately executory.

SO ORDERED.

#43

G.R. No. 82082 March 25, 1988

INSULAR BANK OF ASIA AND AMERICA,plaintiff-appellant, vs.SPOUSES EPIFANIA SALAZAR and RICARDO SALAZAR, defendants-appellees.

GUTIERREZ, JR., J.:

This is an appeal by the Insular Bank of Asia and America (IBAA)from the judgment of the Regional Trial Court of Leyte in Civil CaseNo. 6932 for collection of a sum of money with preliminaryattachment. The appeal was originally brought to the Court ofAppeals but was certified to us by that tribunal because it raisesonly a question of law.

The facts are not disputed.

On November 22, 1978, defendants-appellees Epifania Salazar andRicardo Salazar obtained a loan from the plaintiff-appellant in theamount of Forty Two Thousand and Fifty Pesos ( P42,050.00 )payable on or before December 12, 1980. This loan transactionwas evidenced by a promissory note where the defendants-appellees bound themselves jointly and severally to pay the amountwith interest at 19% per annum and with the express authority toincrease without notice the rate of interest up to the maximumallowed by law and subject further to penalty charges or liquidateddamages upon default equivalent to 2% per month on any amountdue and unpaid. In the event the account was referred to anattorney for collection, the defendants-appellees were also bound topay 25% of any amount due as attorney's fees plus expenses oflitigation and costs.

In accordance with the agreement, the plaintiff-appellant increasedthe rate of interest to 21% pursuant to Central Bank Circular No.705 dated December 1, 1979.

The promissory note matured but the defendants-appellees failed topay their account. It was only after several demands that thedefendants-appellees were able to make partial payment. As ofNovember 25, 1983, they were able to pay a total of P68,676.75

which payments were applied to partially satisfy the penalty andinterest charges.

On September 12, 1984, the plaintiff-appellant filed a complaint withthe Regional Trial Court alleging that the defendants-appelleeswere indebted to IBAA in the amount of P87,647.19 as ofSeptember 15, 1984. including interest at 21% per annum penaltycharges, and attorney's fees.

At the pre-trial on October 31, 1984, the parties and their counselsappeared. The defendant-spouses admitted the execution of thepromissory note in consideration of P48,050.00. The trial court thenrendered a summary judgment the dispositive portion of whichreads:

WHEREFORE, judgment is hereby ordered in favor of the plaintiffordering the defendant spouses Ricardo Salazar and EpifaniaSalazar to pay Insular Bank of Asia and America (IBAA) the sum ofEleven Thousand Two Hundred Fifty Three Pesos and Twenty FiveCentavos ( P11,253.25 ), with interest thereon at the rate of 19%per annum from the filing of the complaint on September 12, 1984until fully paid. The defendants are further ordered to pay theplaintiff-attorney's fees in the amount of one Thousand Pesos( P1,000.00 ) and to pay the costs. (p. 4, Plaintiff- Appellant's Brief).

Plaintiff-appellant now raises the following assigned errors:

I THE LOWER COURT ERRED IN NOT AWARDING TOPLAINTIFF-APPELLANT PENALTY CHARGES OR LIQUIDATEDDAMAGES IN THE AMOUNT OF 2% PER MONTH ON ALLAMOUNTS DUE AND UNPAID;

II THE LOWER COURT ERRED IN NOT AWARDING INTERESTON THE LOAN AT 21 % PER ANNUM.

III THE LOWER COURT ERRED IN THE COMPUTATION OF THEAMOUNT OF OBLIGATION DUE FROM DEFENDANTS-APPELLEES APPELLEES IN FAVOR OF PLAINTIFF-APPELLANT

III THE LOWER COURT ERRED IN NOT AWARDING PLAINTIFF-APPELLANT ATTORNEY'S FEES EQUIVALENT TO 25% OF THEAMOUNT DUE AND EXPENSES OF LITIGATION; and

IV THE LOWER COURT ERRED IN NOT ORDERING

DEFENDANTS-APELLEES TO JOINTLY AND SEVERALLY PAYTHE OBLIGATION. (pp. 4-5, Plaintiff-Appellant's Brief)

The Escalation Clause provided in the promissory note reads:

The interest herein charged shall be subject to in , without notice,depending on whatever policy IBAA may in the future adoptconformable to law, especially to compensate for any in CentralBank interests or rediscounting rates.

Finding strength in the argument that the promissory note is thecontract between the parties and, under the law, obligations arisingfrom contracts have the force of law between the parties, theplaintiff-appellant increased the interest rate to 21% per annumeffective December 1, 1979 pursuant to Central Bank Circular No.705.

In line with the Court's ruling in the case of Banco Filipino v.Navarro (G.R. No. L-46591, July 28,1987), the interest rate may notbe increased by the plaintiff-appellant in the instant case. It is thenile that escalation clauses are valid stipulations in commercialcontracts to maintain fiscal stability and to retain the value of moneyin long term contracts. However, the enforceability of suchstipulations are subject to certain conditions.

In the Banco Filipino case, the borrower questioned the additionalinterest charges on the loan of P41,300.00 she obtained when theinterest rates were increased from 12% to 17% per Central BankCircular No. 494, issued on January 2, 1976. In a letter written bythe Central Bank to the borrower, some clarifications were made.Pertinent portions of the letter read:

In this connection, please be advised that the Monetary Board, in itsResolution No. 1155 dated June 11, 1976 adopted the followingguidelines to govern interest rate adjustments by banks and non-banks performing quasi- banking functions on loans alreadyexisting as of January 3, 1976, in the light of Central Rank CircularsNos. 492-498:

1 Only banks and non-bank financial intermediaries performingquasi-banking functions may interest rates on I already existing asof January 2,1976, provided that:

a. The pertinent loan contracts/documents contain escalation

clauses expressly authorizing lending bank or non-bank performingquasi-banking functions to increase the rate of interest stipulated inthe contract, in the event that any law or Central Bank regulation ispromulgated increasing the maximum interest rate for loans; and

b. Said loans were directly granted by them and the remainingmaturities thereof were more than 730 days as of January 2, 1976,and

2. The increase in the rate of interest can be effective only as ofJanuary 2, 1976 or on a later date. (Emphasis supplied)

Moreover, in its comment and supplemental comment submit, tedupon orders of this Court, the Central Bank took the position thatthe issuance of its circulars is a valid exercise of its authority toprescribe maximum rates of interest and based on the generalprinciples of contract, the Escalation Clause is a valid provision inthe loan agreement provided that- 41) the increased rate imposedor charged by petitioner does not exceed the ceiling fixed by law orthe Monetary Board; (2) the increase is made effective not earlierthan the effectivity of the law or regulation authorizing such anincrease and (3) the remaining maturities of the loans are morethan 730 days as of the effectivity of the law or regulationauthorizing such an increase. (Emphasis supplied)

In the case at bar, the loan was obtained on November 21, 1978and was payable on or before November 12, 1980. Central BankCircular No. 705, authorizing the increase from 19% to 21% wasissued on December 1, 1979. Obviously, as of this date, December1, 1979, the remaining maturity of the loan was less than 730 days.Hence, the plaintiff-appellant's second assignment of error iswithout merit.

With respect to the penalty clause, we have upheld the validity ofsuch agreements in several cases. As the Court stated in the caseof Government Service Insurance System v. Court of appeals (145SCRA 311, 321):

In the Bachrach case (supra) the Supreme Court ruled that the CivilCode permits the agreement upon a penalty apart from the interest.Should there be such an agreement, the penalty does not includethe interest, and as such the two are different and distinct thingswhich may be demanded separately. Reiterating the same principlein the later case of Equitable Banking Corp. (supra), where this

Court held that the stipulation about payment of such additional ratepartakes of the nature of a penalty clause, winch is sanctioned bylaw.

In the case of Equitable Banking Corporation v. Liwanag (32 SCRA293, 297), the Court explained:

xxx xxx xxx

... We have not overlooked the 14% interest that appellant hasbeen sentenced to pay. This may appear to be usurious, but it is notso. The rate stipulated was 9%, subject, however, to an additionalrate of 5%, in the event of default. The stipulation about payment ofsuch additional rate partakes of the nature of a penalty clause,which is sanctioned by law, (Art. 1226, Civil Code of thePhilippines), although, the penalty may also be reduced by thecourts if it is iniquitous or unconscionable. (Art 1229, Civil Code ofthe Philippines). ...

Admittedly, the defendants-appellees in the instant case failed topay the loan on the due date. However, with earnest efforts, theytried to pay the loan little by little so that as of November 25, 1983,a total of P68,676.75 had been paid. The plaintiff-appellant, on theother hand, merely applied this amount to satisfy the penalty andinterest charges which it additionally imposed. We do not find anyevidence of bad faith on the part of the defendants-appellees intheir failure to pay the loan on time. Efforts were indeed made tomake good their promise. We note the trial court's observation thatthe plaintiff-appellant did not even state in the complaint that thedefendants-appellees had made partial payments, making it appearthat the spouses Salazars refused to pay the loan. In their answerwith counterclaim, the defendants-appellees alleged that the bankneglected to credit said payments in the defendant's account folioand subjected it as it did to the additional charges. Furthermore, weagree with the trial court that the bank has already profitedconsiderably from the loan. In a span of about six (6) years, thebank was enriched by P 26,626.75 (p. 17, Records). The penaltycharges of 2% a month are, therefore, out of proportion to thedamage incurred by the bank. In accordance with Article 1229 ofthe Civil Code, the Court is constrained to reduce the penalty forbeing highly iniquitous

With respect to the attorney's fees, the court is likewise empoweredto reduce the same if they are unreasonable or unconscionable

notwithstanding the express contract for attorney's fees. The awardof one thousand ( P1,000.00 ) pesos by the trial court appears to beenough.

The promissory note signed by the defendants-appellants statesthat the loan of P42,050.00 shall bear interest at the rate of 19%per annum. This would yield interest of P7,989.50 per annum or atotal of P 46,339.10 from November 22, 1978 to September 12,1984, the date of filing the complaint. Penalty interest of 1% amonth or 12% per annum is reasonable so that from December 12,1980 up to September 12, 1984, penalty charges should beP19,202.83. Considering that the defendants-appellees have paidthe amount of P68,676.75, they, therefore, owed the bank theamount of P38,915.18 when the complaint was filed. There is noindication in the records as to the fluctuation of actual interest ratesfrom 1984 and, therefore, we order interest at the legal rate of 12%per annum on the unpaid amount.

WHEREFORE, the decision of the lower court is MODIFIED. Thedefendants-appellants Ricardo Salazar and Epifania Salazar areordered to pay Insular Bank of Asia and America (IBAA) the sum ofTHIRTY-EIGHT THOUSAND NINE HUNDRED PESOS andEIGHTEEN CENTAVOS (P38,915.18 ) with interest thereon at therate of Twelve Percent (12%) per annum from the filing of thecomplaint until fully paid.

SO ORDERED.

#44 GARCIA v. CAG.R. Nos. L-82282-83. November 24, 1988.167 SCRA 815GUTIERREZ, JR., J.

FACTS:Chemark Electric Motors, Inc. availed and was granted a credit line by

Security Bank andTrust Company. Subsequently, Chemark defaulted on its payments when they became due andrefused to pay despite repeated demands by SBTC. Antonio Garcia, on theother hand boundhimself jointly and severally with Chemark to pay SBTC and like Chemark has failed and refusedto pay his obligations despite demands made upon him by SBTC. The same is true with Dyneticsand Matrix; they bound themselves jointly and severally with Chemark to pay SBTC and has failedand refused to do so. In an action to enforce the indemnity agreements executed by the above parties with SBTC, the latter prayed for a summary judgment which was consequently granted. Inanswer Dynetics, Inc., Matrix Management and Trading Corporation and Antonio Garcia sought a judicial declaration that they were not liable to Security Bank and Trust Company under saidindemnity agreements they executed in favor of Chemark Electric Motors, Inc. which had beenextended a credit accommodation of about 20, 000, 000.00 Php by SBTC. This was dismissed bythe Court of Appeals ordering Dynetics, Matrix and Garcia to pay SBTC. Hence, the case waselevated to the SC where one of the assigned errors by the plaintiffs (Dynetics, Matrix and Garcia)to the appellate court's assailed decision is the awards of penalty charges claiming that such chargesare excessive.

ISSUES:Whether or not the penalty charges awarded were excessive and thus must be reduced.

HELD:Yes, In the case at bar, the penalty charges are excessive and unconscionable and so theinterest charges are enough punishment for the petitioners' failure to comply with their obligations.Penalty interests are in the nature of liquidated damages and may be equitably reduced by

the courts if they are iniquitous and unconscionable. Article 1229 of the New Civil Code states that"The judge shall equitably reduce the penalty when the principal obligation has been partly orirregularly complied with by the debtor.Even if there has been no performance, the penalty mayalso be reduced by the courts if it is iniquitous or unconscionable