THIRD DIVISION

[G.R. No. 146942. April 22, 2003.]

CORAZON G. RUIZ , petitioner, vs . COURT OF APPEALS and

CONSUELO TORRES , respondents.

Jose A. Suing for petitioner.

Leonardo Byron R. Perez, Jr. for private respondent.

SYNOPSIS

Petitioner obtained several loans from Torres for a total of P750,000, consolidated under
one promissory note. The same was secured by a real estate mortgage on a lot registered
to petitioner. Later, petitioner obtained three more loans from Torres under three separate
promissory notes. When petitioner failed to pay the said loans, Torres sought an extra-
judicial foreclosure of the real estate mortgage. The same, however, was enjoined by a writ
of preliminary injunction. Allegedly, the real estate mortgage was unenforceable for lack of
participation of petitioner's husband. Further, the promissory note was a unilateral
contract of adhesion drafted by Torres against petitioner.
The promissory note was not a contract of adhesion. There had been several loan
transactions with promissory notes and petitioner had all the time to study the stipulations
therein. Further, the real property covered by the mortgage was considered paraphernal
property absent sufficient evidence that the same was conjugal. As to the legal rate of
interest, 12% per annum, not 36% per annum, shall apply after the maturity dates of the
notes until full payment of the entire amount due. Surcharge was 1% of the principal loan
for every month of default. The proper attorney's fees was fixed to P50,000. The appealed
decision of the Court of Appeals was affirmed, with modification that the interest rate of
36% per annum shall be reduced to 12% per annum.

SYLLABUS

1. CIVIL LAW; CONTRACTS; CONTRACT OF ADHESION; ELUCIDATED. — In Sweet Lines,

Inc. vs. Teves, this Court discussed the nature of a contract of adhesion as follows: ". . .
there are certain contracts almost all the provisions of which have been drafted only by
one party, usually a corporation. Such contracts are called contracts of adhesion, because
the only participation of the other party is the signing of his signature or his 'adhesion'
thereto. Insurance contracts, bills of lading, contracts of sale of lots on the installment
plan fall into this category. ". . . it is drafted only by one party, usually the corporation, and is
sought to be accepted or adhered to by the other party . . . who cannot change the same
and who are thus made to adhere hereto on the 'take it or leave it' basis . . ." SAcaDE

2. REMEDIAL LAW; EVIDENCE; PRESUMPTIONS; PERSON TAKES ORDINARY CARE OF

HIS CONCERNS. — As held by this Court in Lee, et al. vs. Court of Appeals, et al., it is
presumed that a person takes ordinary care of his concerns. Hence, the natural
presumption is that one does not sign a document without first informing himself of its
contents and consequences. This presumption acquires greater force in the case at bar
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 where not only one but several documents were executed at different times by petitioner in
favor of private respondent.
3. CIVIL LAW; FAMILY CODE; PROPERTY RELATIONS BETWEEN HUSBAND AND WIFE;
LAND IS PARAPHERNAL PROPERTY WHERE MARRIAGE IS MERELY DESCRIPTIVE. — We
also affirm the ruling of the appellate court that the real property covered by the subject
deed of mortgage is paraphernal property. The property subject of the mortgage is
registered in the name of "Corazon G. Ruiz, of legal age, married to Rogelio Ruiz, Filipinos."
Thus, title is registered in the name of Corazon alone because the phrase "married to
Rogelio Ruiz" is merely descriptive of the civil status of Corazon and should not be
construed to mean that her husband is also a registered owner. Furthermore, registration
of the property in the name of "Corazon G. Ruiz, of legal age, married to Rogelio Ruiz" is not
proof that such property was acquired during the marriage, and thus, is presumed to be
conjugal. The property could have been acquired by Corazon while she was still single, and
registered only after her marriage to Rogelio Ruiz. Acquisition of title and registration
thereof are two different acts. The presumption under Article 116 of the Family Code that
properties acquired during the marriage are presumed to be conjugal cannot apply in the
instant case. Before such presumption can apply, it must first be established that the
property was in fact acquired during the marriage. In other words, proof of acquisition
during the marriage is a condition sine qua non for the operation of the presumption in
favor of conjugal ownership. No such proof was offered nor presented in the case at bar.
Thus, on the basis alone of the certificate of title, it cannot be presumed that said property
was acquired during the marriage and that it is conjugal property. Since there is no
showing as to when the property in question was acquired, the fact that the title is in the
name of the wife alone is determinative of its nature as paraphernal, i.e., belonging
exclusively to said spouse. The only import of the title is that Corazon is the owner of said
property, the same having been registered in her name alone, and that she is married to
Rogelio Ruiz.
4. ID.; SPECIAL CONTRACTS; LOAN; PROPER LEGAL INTEREST, SURCHARGE AND
ATTORNEY'S FEES. — The legal rate of interest of 12% per annum shall apply after the
maturity dates of the notes until full payment of the entire amount due. Also, the only
permissible rate of surcharge is 1% per month, without compounding. We also uphold the
award of the appellate court of attorney's fees, the amount of which having been
reasonably reduced from the stipulated 25% (in the March 22, 1995 promissory note) and
10% (in the other three promissory notes) of the entire amount due, to a fixed amount of
P50,000.00. We held that while the Usury Law has been suspended by Central Bank
Circular No. 905, s. 1982, effective on January 1, 1983, and parties to a loan agreement
have been given wide latitude to agree on any interest rate, still stipulated interest rates are
illegal if they are unconscionable. Nothing in the said circular grants lenders carte blanche
authority to raise interest rates to levels which will either enslave their borrowers or lead to
a hemorrhaging of their assets. On the other hand, in Bautista vs. Pilar Development Corp .,
this Court upheld the validity of a 21% per annum interest on a P142,326.43 loan, and in
Garcia vs. Court of Appeals, sustained the agreement of the parties to a 24% per annum
interest on an P8,649,250.00 loan. It is on the basis of these cases that we reduce the 36%
per annum interest to 12%. An interest of 12% per annum is deemed fair and reasonable.
EIDaAH

5. ID.; DAMAGES; SURCHARGES. — The 1% surcharge on the principal loan for every
month of default is valid. This surcharge or penalty stipulated in a loan agreement in case
of default partakes of the nature of liquidated damages under Art. 2227 of the New Civil
Code, and is separate and distinct from interest payment. Also referred to as a penalty
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 clause, it is expressly recognized by law. It is an accessory undertaking to assume greater
liability on the part of an obligor in case of breach of an obligation. The obligor would then
be bound to pay the stipulated amount of indemnity without the necessity of proof on the
existence and on the measure of damages caused by the breach. Although the courts may
not at liberty ignore the freedom of the parties to agree on such terms and conditions as
they see fit that contravene neither law nor morals, good customs, public order or public
policy, a stipulated penalty, nevertheless, may be equitably reduced if it is iniquitous or
unconscionable.

DECISION

PUNO , J : p

On appeal is the decision 1 of the Court of Appeals in CA-G.R. CV No. 56621 dated 25
August 2000, setting aside the decision 2 of the trial court dated 19 May 1997 and lifting
the permanent injunction on the foreclosure sale of the subject lot covered by TCT No. RT-
96686, as well as its subsequent Resolution 3 dated 26 January 2001, denying petitioner's
Motion for Reconsideration.
The facts of the case are as follows:
Petitioner Corazon G. Ruiz is engaged in the business of buying and selling jewelry. 4 She
obtained loans from private respondent Consuelo Torres on different occasions, in the
following amounts: P100,000.00; P200,000.00; P300,000.00; and P150,000.00. 5 Prior to
their maturity, the loans were consolidated under one (1) promissory note dated March 22,
1995, which reads as follows: 6
"P750,000.00 Quezon City, March 22, 1995
PROMISSORY NOTE
For value received, I, CORAZON RUIZ , as principal and ROGELIO RUIZ as surety in
solidum, jointly and severally promise to pay to the order of CONSUELO P.
TORRES the sum of SEVEN HUNDRED FIFTY THOUSAND PESOS (P750,000.00)
Philippine Currency, to earn an interest at the rate of three per cent (3%) a month,
for thirteen months, payable every ________ of the month, and to start on April
1995 and to mature on April 1996, subject to renewal.
If the amount due is not paid on date due, a SURCHARGE of ONE PERCENT of the
principal loan, for every month default, shall be collected.
Remaining balance as of the maturity date shall earn an interest at the rate of ten
percent a month, compounded monthly.
It is finally agreed that the principal and surety in solidum, shall pay attorney's
fees at the rate of twenty-five percent (25%) of the entire amount to be collected;
in case this note is not paid according to the terms and conditions set forth, and
same is referred to a lawyer for collection.

In computing the interest and surcharge, a fraction of the month shall be

considered one full month.

In the event of an amicable settlement, the principal and surety in solidum shall
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 reimburse the expenses of the plaintiff.
(Sgd.) Corazon Ruiz ________________

Principal Surety"

The consolidated loan of P750,000.00 was secured by a real estate mortgage on a 240-
square meter lot in New Haven Village, Novaliches, Quezon City, covered by Transfer
Certificate of Title (TCT) No. RT-96686, and registered in the name of petitioner. 7 The
mortgage was signed by Corazon Ruiz for herself and as attorney-in-fact of her husband
Rogelio. It was executed on 20 March 1995, or two (2) days before the execution of the
subject promissory note. 8

Thereafter, petitioner obtained three (3) more loans from private respondent, under the
following promissory notes: (1) promissory note dated 21 April 1995, in the amount of
P100,000.00; 9 (2) promissory note dated May 23, 1995, in the amount of P100,000.00; 1 0
and (3) promissory note dated December 21, 1995, in the amount of P100,000.00. 1 1
These combined loans of P300,000.00 were secured by P571,000.00 worth of jewelry
pledged by petitioner to private respondent. 1 2
From April 1995 to March 1996, petitioner paid the stipulated 3% monthly interest on the
P750,000.00 loan, 1 3 amounting to P270,000.00. 1 4 After March 1996, petitioner was
unable to make interest payments as she had difficulties collecting from her clients in her
jewelry business. 1 5
Due to petitioner's failure to pay the principal loan of P750,000.00, as well as the interest
payment for April 1996, private respondent demanded payment not only of the
P750,000.00 loan, but also of the P300,000.00 loan. 1 6 When petitioner failed to pay,
private respondent sought the extra-judicial foreclosure of the aforementioned real estate
mortgage. 1 7
On September 5, 1996, Acting Clerk of Court and Ex-Oficio Sheriff Perlita V. Ele, Deputy
Sheriff In-Charge Rolando G. Acal and Supervising Sheriff Silverio P. Bernas issued a Notice
of Sheriff's Sale of subject lot. The public auction was scheduled on October 8, 1996. 1 8
On October 7, 1996, one (1) day before the scheduled auction sale, petitioner filed a
complaint with the RTC of Quezon City docketed as Civil Case No. Q-96-29024, with a
prayer for the issuance of a Temporary Restraining Order to enjoin the sheriff from
proceeding with the foreclosure sale and to fix her indebtedness to private respondent to
P706,000.00. The computed amount of P706,000.00 was based on the aggregate loan of
P750,000.00, covered by the March 22, 1995 promissory note, plus the other loans of
P300,000.00, covered by separate promissory notes, plus interest, minus P571,000.00
representing the amount of jewelry pledged in favor of private respondent. 1 9
The trial court granted the prayer for the issuance of a Temporary Restraining Order, 2 0 and
on 29 October 1996, issued a writ of preliminary injunction. 2 1 In its Decision dated May
19, 1997, it ordered the Clerk of Court and Ex-Oficio Sheriff to desist with the foreclosure
sale of the subject property, and it made permanent the writ of preliminary injunction. It
held that the real estate mortgage is unenforceable because of the lack of the
participation and signature of petitioner's husband. It noted that although the subject real
estate mortgage stated that petitioner was "attorney-in-fact for herself and her husband,"
the Special Power of Attorney was never presented in court during the trial. 2 2
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 The trial court further held that the promissory note in question is a unilateral contract of
adhesion drafted by private respondent. It struck down the contract as repugnant to public
policy because it was imposed by a dominant bargaining party (private respondent) on a
weaker party (petitioner). 2 3 Nevertheless, it held that petitioner still has an obligation to
pay the private respondent. Private respondent was further barred from imposing on
petitioner the obligation to pay the surcharge of one percent (1%) per month from March
1996 onwards, and interest of ten percent (10%) a month, compounded monthly from
September 1996 to January 1997. Petitioner was thus ordered to pay the amount of
P750,000.00 plus three percent (3%) interest per month, or a total of P885,000.00, plus
legal interest from date of [receipt of] the decision until the total amount of P885,000.00 is
paid. 2 4
Aside from the foregoing, the trial court took into account petitioner's proposal to pay her
other obligations to private respondent in the amount of P392,000.00. 2 5
The trial court also recognized the expenses borne by private respondent with regard the
foreclosure sale and attorney's fees. As the notice of the foreclosure sale has already been
published, it ordered the petitioner to reimburse private respondent the amount of
P15,000.00 plus attorney's fees of the same amount. 2 6
Thus, the trial court computed petitioner's obligation to private respondent, as follows:
Principal Loan P750,000.00
Interest 135,000.00

Other Loans 392,000.00

Publication Fees 15,000.00

Attorney's Fees 15,000.00

——————
TOTAL P1,307,000.00

with legal interest from date of receipt of decision until payment of total amount of
P1,307,000.00 has been made. 2 7
Private respondent's motion for reconsideration was denied in an Order dated July 21,
1997.
Private respondent appealed to the Court of Appeals. The appellate court set aside the
decision of the trial court. It ruled that the real estate mortgage is valid despite the non-
participation of petitioner's husband in its execution because the land on which it was
constituted is paraphernal property of petitioner-wife. Consequently, she may encumber
the lot without the consent of her husband. 2 8 It allowed its foreclosure since the loan it
secured was not paid.
Nonetheless, the appellate court declared as invalid the 10% compounded monthly interest
2 9 and the 10% surcharge per month stipulated in the promissory notes dated May 23,
1995 and December 1, 1995, 3 0 and so too the 1% compounded monthly interest
stipulated in the promissory note dated 21 April 1995, 3 1 for being excessive, iniquitous,
unconscionable, and contrary to morals. It held that the legal rate of interest of 12% per
annum shall apply after the maturity dates of the notes until full payment of the entire
amount due, and that the only permissible rate of surcharge is 1% per month, without
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 compounding. 3 2 The appellate court also granted attorney's fees in the amount of
P50,000.00, and not the stipulated 25% of the amount due, following the ruling in the case
of Medel v. Court of Appeals. 3 3
Now, before this Court, petitioner assigns the following errors:
(1) PUBLIC RESPONDENT COURT OF APPEALS GRAVELY ERRED IN RULING THAT
THE PROMISSORY NOTE OF P750,000.00 IS NOT A CONTRACT OF ADHESION DESPITE
THE CLEAR SHOWING THAT THE SAME IS A READY-MADE CONTRACT PREPARED BY
(THE) RESPONDENT CONSUELO TORRES AND DID NOT REFLECT THEIR TRUE
INTENTIONS AS IT WEIGHED HEAVILY IN FAVOR OF RESPONDENT AND AGAINST
PETITIONER.
(2) PUBLIC RESPONDENT COURT OF APPEALS GRAVELY ERRED IN DECLARING THAT
THE PROPERTY COVERED BY THE SUBJECT DEED OF MORTGAGE OF MARCH 20, 1995 IS
A PARAPHERNAL PROPERTY OF THE PETITIONER AND NOT CONJUGAL EVEN THOUGH
THE ISSUE OF WHETHER OR NOT THE MORTGAGED PROPERTY IS PARAPHERNAL WAS
NEVER RAISED, NOR DISCUSSED AND ARGUED BEFORE THE TRIAL COURT.
(3) PUBLIC RESPONDENT COURT OF APPEALS GRAVELY ERRED IN DISREGARDING
THE TRIAL COURT'S COMPUTATION OF THE ACTUAL OBLIGATIONS OF THE PETITIONER
WITH (THE) RESPONDENT TORRES EVEN THOUGH THE SAME IS BASED ON EVIDENCE
SUBMITTED BEFORE IT.
The pertinent issues to be resolved are:
(1) Whether the promissory note of P750,000.00 is a contract of adhesion;
(2) Whether the real property covered by the subject deed of mortgage dated March
20, 1995 is paraphernal property of petitioner; and
(3) Whether the rates of interests and surcharges on the obligation of petitioner to
private respondent are valid.
I
We hold that the promissory note in the case at bar is not a contract of adhesion. In Sweet
Lines, Inc. vs. Teves, 3 4 this Court discussed the nature of a contract of adhesion as
follows:
". . . there are certain contracts almost all the provisions of which have been
drafted only by one party, usually a corporation. Such contracts are called
contracts of adhesion, because the only participation of the other party is the
signing of his signature or his 'adhesion' thereto. Insurance contracts, bills of
lading, contracts of sale of lots on the installment plan fall into this category. 3 5
" . . . it is drafted only by one party, usually the corporation, and is sought to be
accepted or adhered to by the other party . . . who cannot change the same and
who are thus made to adhere hereto on the `take it or leave it' basis . . ." 3 6

In said case of Sweet Lines, 3 7 the conditions of the contract on the 4 x 6 inches
passenger ticket are in fine print. Thus we held:
" . . . it is hardly just and proper to expect the passengers to examine their tickets
received from crowded/congested counters, more often than not during rush
hours, for conditions that may be printed thereon, much less charge them with
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 having consented to the conditions, so printed, especially if there are a number of
such conditions in fine print, as in this case." 3 8

We further stressed in the said case that the questioned 'Condition No. 14' was prepared
solely by one party which was the corporation, and the other party who was then a
passenger had no say in its preparation. The passengers have no opportunity to examine
and consider the terms and conditions of the contract prior to the purchase of their
tickets. 3 9
In the case at bar, the promissory note in question did not contain any fine print provision
which could not have been examined by the petitioner. Petitioner had all the time to go
over and study the stipulations embodied in the promissory note. Aside from the March
22, 1995 promissory note for P750,000.00, three other promissory notes of different
dates and amounts were executed by petitioner in favor of private respondent. These
promissory notes contain similar terms and conditions, with a little variance in the terms of
interests and surcharges. The fact that petitioner and private respondent had entered into
not only one but several loan transactions shows that petitioner was not in any way
compelled to accept the terms allegedly imposed by private respondent. Moreover,
petitioner, in her complaint 4 0 dated October 7, 1990 filed with the trial court, never
claimed that she was forced to sign the subject note. Paragraph five of her complaint
states:

"That on or about March 22, 1995 plaintiff was required by the defendant Torres
to execute a promissory note consolidating her unpaid principal loan and
interests which said defendant computed to be in the sum of P750,000.00 . . ."

To be required is certainly different from being compelled. She could have rejected the
conditions made by private respondent. As an experienced businesswoman, she ought
to understand all the conditions set forth in the subject promissory note. As held by this
Court in Lee, et al. vs. Court of Appeals, et al., 4 1 it is presumed that a person takes
ordinary care of his concerns. 4 2 Hence, the natural presumption is that one does not
sign a document without rst informing himself of its contents and consequences. This
presumption acquires greater force in the case at bar where not only one but several
documents were executed at different times by petitioner in favor of private
respondent.
II
We also affirm the ruling of the appellate court that the real property covered by the
subject deed of mortgage is paraphernal property. The property subject of the mortgage
is registered in the name of "Corazon G. Ruiz, of legal age, married to Rogelio Ruiz,
Filipinos." Thus, title is registered in the name of Corazon alone because the phrase
"married to Rogelio Ruiz" is merely descriptive of the civil status of Corazon and should not
be construed to mean that her husband is also a registered owner. Furthermore,
registration of the property in the name of "Corazon G. Ruiz, of legal age, married to
Rogelio Ruiz" is not proof that such property was acquired during the marriage, and thus, is
presumed to be conjugal. The property could have been acquired by Corazon while she
was still single, and registered only after her marriage to Rogelio Ruiz. Acquisition of title
and registration thereof are two different acts. 4 3 The presumption under Article 116 of
the Family Code that properties acquired during the marriage are presumed to be conjugal
cannot apply in the instant case. Before such presumption can apply, it must first be
established that the property was in fact acquired during the marriage. In other words,
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 proof of acquisition during the marriage is a condition sine qua non for the operation of the
presumption in favor of conjugal ownership. 4 4 No such proof was offered nor presented
in the case at bar. Thus, on the basis alone of the certificate of title, it cannot be presumed
that said property was acquired during the marriage and that it is conjugal property. Since
there is no showing as to when the property in question was acquired, the fact that the title
is in the name of the wife alone is determinative of its nature as paraphernal, i.e., belonging
exclusively to said spouse. 4 5 The only import of the title is that Corazon is the owner of
said property, the same having been registered in her name alone, and that she is married
to Rogelio Ruiz. 4 6
III
We now resolve the issue of whether the rates of interests and surcharges on the
obligation of petitioner to private respondent are legal.
The four (4) unpaid promissory notes executed by petitioner in favor of private respondent
are in the following amounts and maturity dates:
(1) P750,000.00, dated March 22, 1995 matured on April 21, 1996;
(2) P100,000.00, dated April 21, 1995 matured on August 21, 1995;
(3) P100,000.00, dated May 23, 1995 matured on November 23, 1995;
and ,
(4) P100,000.00, dated December 21, 1995 matured on March 1, 1996.
The P750,000.00 promissory note dated March 22, 1995 has the following provisions:
(1) 3% monthly interest, from the signing of the note until its maturity
date;
(2) 10% compounded monthly interest on the remaining balance at
maturity date;
(3) 1% surcharge on the principal loan for every month of default; and
(4) 25% attorney's fees.
The P100,000.00 promissory note dated April 21, 1995 has the following provisions:
(1) 3% monthly interest, from the signing of the note until its maturity
date;
(2) 10% monthly interest on the remaining balance at maturity date;
(3) 1% compounded monthly surcharge on the principal loan for every
month of default; and
(4) 10% attorney's fees.
The two (2) other P100,000.00 promissory notes dated May 23, 1995 and December 1,
1995 have the following provisions:
(1) 3% monthly interest, from the signing of the note until its maturity
date;
(2) 10% compounded monthly interest on the remaining balance at
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 maturity date;
(3) 10% surcharge on the principal loan for every month of default; and
(4) 10% attorney's fees.
We affirm the ruling of the appellate court, striking down as invalid the 10% compounded
monthly interest, the 10% surcharge per month stipulated in the promissory notes dated
May 23, 1995 and December 1, 1995, and the 1% compounded monthly interest stipulated
in the promissory note dated April 21, 1995. The legal rate of interest of 12% per annum
shall apply after the maturity dates of the notes until full payment of the entire amount due.
Also, the only permissible rate of surcharge is 1% per month, without compounding. We
also uphold the award of the appellate court of attorney's fees, the amount of which having
been reasonably reduced from the stipulated 25% (in the March 22, 1995 promissory note)
and 10% (in the other three promissory notes) of the entire amount due, to a fixed amount
of P50,000.00. However, we equitably reduce the 3% per month or 36% per annum interest
present in all four (4) promissory notes to 1% per month or 12% per annum interest.
The foregoing rates of interests and surcharges are in accord with Medel vs. Court of
Appeals, 4 7 Garcia vs. Court of Appeals, 4 8 Bautista vs. Pilar Development Corporation, 4 9
and the recent case of Spouses Solangon vs. Salazar. 5 0 This Court invalidated a stipulated
5.5% per month or 66% per annum interest on a P500,000.00 loan in Medel 5 1 and a 6% per
month or 72% per annum interest on a P60,000.00 loan in Solangon 5 2 for being excessive,
iniquitous, unconscionable and exorbitant. In both cases, we reduced the interest rate to
12% per annum. We held that while the Usury Law has been suspended by Central Bank
Circular No. 905, s. 1982, effective on January 1, 1983, and parties to a loan agreement
have been given wide latitude to agree on any interest rate, still stipulated interest rates are
illegal if they are unconscionable. Nothing in the said circular grants lenders carte blanche
authority to raise interest rates to levels which will either enslave their borrowers or lead to
a hemorrhaging of their assets. 5 3 On the other hand, in Bautista vs. Pilar Development
Corp., 5 4 this Court upheld the validity of a 21% per annum interest on a P142,326.43 loan,
and in Garcia vs. Court of Appeals, sustained the agreement of the parties to a 24% per
annum interest on an P8,649,250.00 loan. It is on the basis of these cases that we reduce
the 36% per annum interest to 12%. An interest of 12% per annum is deemed fair and
reasonable. While it is true that this Court invalidated a much higher interest rate of 66%
per annum in Medel 5 5 and 72% in Solangon 5 6 it has sustained the validity of a much lower
interest rate of 21% in Bautista 5 7 and 24% in Garcia. 5 8 We still find the 36% per annum
interest rate in the case at bar to be substantially greater than those upheld by this Court in
the two (2) aforecited cases.
The 1% surcharge on the principal loan for every month of default is valid. This surcharge
or penalty stipulated in a loan agreement in case of default partakes of the nature of
liquidated damages under Art. 2227 of the New Civil Code, and is separate and distinct
from interest payment. 5 9 Also referred to as a penalty clause, it is expressly recognized by
law. It is an accessory undertaking to assume greater liability on the part of an obligor in
case of breach of an obligation. 6 0 The obligor would then be bound to pay the stipulated
amount of indemnity without the necessity of proof on the existence and on the measure
of damages caused by the breach. 6 1 Although the courts may not at liberty ignore the
freedom of the parties to agree on such terms and conditions as they see fit that
contravene neither law nor morals, good customs, public order or public policy, a
stipulated penalty, nevertheless, may be equitably reduced if it is iniquitous or
unconscionable. 6 2 In the instant case, the 10% surcharge per month stipulated in the
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 promissory notes dated May 23, 1995 and December 1, 1995 was properly reduced by the
appellate court.
In sum, petitioner shall pay private respondent the following:
1. Principal of loan under promissory note dated
March 22, 1995 P750,000.00
a. 1% interest per month on principal from
March 22, 1995 until fully paid, less P270,000.00
paid by petitioner as interest
from April 1995 to March 1996
b. 1% surcharge per month on principal from May
1996 until fully paid
2. Principal of loan under promissory note dated
April 21, 1995 P100,000.00

a. 1% interest per month on principal from

April 21, 1995 until fully paid

b. 1% surcharge per month on principal from

September 1995 until fully paid

3. Principal of loan under promissory note dated

May 23, 1995 P100,000.00

a. 1% interest per month on principal from

May 23, 1995 until fully paid
b. 1% surcharge per month, on principal from
December 1995 until fully paid
4. Principal of loan under promissory note dated
December 1, 1995 P100,000.00
a. 1% interest per month on principal from
December 1, 1995 until fully paid
b. 1% surcharge per month, on principal from
April 1996 until fully paid
5. Attorney's fees P50,000.00

Hence, since the mortgage is valid and the loan it secures remains unpaid, the foreclosure
proceedings may now proceed.
IN VIEW WHEREOF, the appealed Decision of the Court of Appeals is AFFIRMED, subject to
the MODIFICATION that the interest rate of 36% per annum is ordered reduced to 12% per
annum. CaDATc

SO ORDERED.
Panganiban, Sandoval-Gutierrez, Corona and Carpio-Morales, JJ., concur.
Footnotes
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 1. Rollo, pp. 126-136.
2. Id. at 162-165.
3. Id. at 38.
4. TSN, 17 January 1997, p. 5.
5. TSN, 03 February 1997, p. 9.

6. Id. at 12; RTC Records, p. 9.

7. Rollo, pp. 41-42.
8. Records, pp. 10-11.
9. Id. at 12.
10. Id. at 13.
11. Id. at 14.
12. TSN, 21 October 1996, pp. 21-22.
13. TSN, 17 January 1997, p. 8; TSN, 27 January 1997, pp. 7-8; Records, p. 103.
14. TSN, 21 October 1996, p. 21.
15. TSN, 17 January 1997, p. 13.

16. TSN, 29 January 1997, pp. 10-11.

17. Id. at 12.
18. Records, p. 15.

19. Id. at 3-4.

20. Id. at 23.
21. Id. at 58-59.
22. Rollo, p. 44.
23. Ibid.
24. Id. at 44-45.
25. Id. at 45.
26. Ibid.
27. Ibid.
28. Id. at 32.
29. Id. at 34, citing Medel vs. Court of Appeals, 299 SCRA 481 and Bautista vs. Pilar
Development Corp., 312 SCRA 611.
30. Id. at 35.
31. Ibid.

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 32. Id. at 34.
33. Medel vs. Court of Appeals, 299 SCRA 481.
34. Sweet Lines, Inc. vs. Teves, 83 SCRA 361.
35. Supra note 34 at 368-369, citing Paras, Civil Code of the Philippines, Seventh Ed., Vol. I,
p. 80.
36. Supra note 34 at 369.
37. Supra note 34.
38. Supra note 34 at 371.
39. Ibid.
40. Records, pp. 1-15.

41. G.R. No. 117913, 01 February 2002.

42. Section 3(d), Rule 131 of the Rules of Court.

43. Jocson vs. Court of Appeals, 170 SCRA 333, 345.

44. Id. at 344, citing Cobb-Perez vs. Lantin, 23 SCRA 637, 644.
45. Ibid.
46. Supra note 43.
47. Supra note 33.
48. Garcia vs. Court of Appeals, 167 SCRA 815.
49. Bautista vs. Pilar Development Corporation, 312 SCRA 611.
50. Spouses Solangon vs. Salazar, G.R. No. 125944, 29 June 2001.
51. Supra note 33.
52. Supra note 50.
53. Spouses Solangon vs. Salazar, G.R. No. 125944, 29 June 2001, also citing Almeda v.
Court of Appeals, 256 SCRA 292.
54. Supra note 49.
55. Supra note 33.
56. Supra note 50.
57. Supra note 49.
58. Supra note 48.
59. RCBC v. Court of Appeals, 289 SCRA 292, 312.
60. Ligutan, et al. vs. Court of Appeals, et al., G.R. No. 138677, 12 February 2002, also citing
Art. 1226, Civil Code.
61. Ibid., citing Art. 1228, Civil Code and Manila Racing Club vs. Manila Jockey Club, 69
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 Phil. 55.
62. Ibid., citing Arts. 2227 and 1229, Civil Code.

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