Ligutan vs CA; GR 138677; February 12, 2002; Vitug

Facts:

On May 11, 1981, Tolomeo Ligutan and Leonidas dela Llana obtained a loan in the amount of Php
120,000 from Security bank. They executed a promissory note binding themselves, jointly and severally,
to pay the sum with an:

 interest of 15.189% per annum upon maturity

 penalty of 5% every month on the outstanding principal and interest in case of default
 pay the 10% of the total amount due by way of attorneys fees if the matter were indorsed to a
lawyer for collection or if a suit were instituted to enforce payment

The obligation matured on September 8, 1981.

Despite several demands from the bank, petitioners failed to settle the debt which, as of May 20, 1982
amounted to Php 114, 416. The bank issued a final demand letter on September 30, 198 which the
petitioners still failed to pay the loan. Security bank filed a case of recovery of the amount to RTC.

RTC ruled in favor of Security bank and ordered the petitioners to pay

 the sum of 114,416 with interest at the rate of 15.189% per annum, 2% service charge and 5%
per month penalty charge commencing on May 20, 1982
 to pay the further sum equivalent to 10% of the total amount of indebtedness for and as
attorneys fees and
 to pay the cost of the suit

Petitioners appealed to Court of Appeals assailing the imposition of 2% service charge, 5% per month
penalty charge, and the 10% attorneys fees.

Court of Appeals affirmed the decision of RTC except they removed the 2% service charge pursuant to
Central Bank Circular 783. Both parties were not satisfied with the decision and filed their respective
motion for reconsiderations. Petitioners prayed to reduce the 5% per month penalty for being
unconscionable. Security Bank asked that the payment of interest and penalty be commenced not from
the date of filing of complaint but from the time of default as so stipulated in the contract of the parties.

Court of Appeals resolved the issues wherein they amended their decision to have:

 the interest commence on the date when the obligation became due
 the penalty reduced from 5% to 3% in the interest of justice and public policy

Petitioners elevated the case to Supreme Court via petition for certiorari with the following issue:

Issue:

whether the 15.189% interest and the penalty of three (3%) percent per month or thirty-six (36%)
percent per annum imposed by private respondent bank on petitioners’ loan obligation is
unconscionable. (NO)
Held:

Regarding the 15.189% interest – the interest does not appear as excessive. The essence/rationale for
payment of interest is not the same as that of a surcharge or penalty. The interest prescribed in loan
financing arrangements is a fundamental part of the banking business.

Regarding the 3% per month penalty – Given the circumstances that the petitioners repeatedly
breached their contractual obligation, the court does not see any reason to modify the ruling

Regarding the 10% attorney’s fees – the rate of attorneys fees has been agreed by the parties and
intend to answer not only for the litigation expenses but for the collection efforts as well.

Doctrine:

1. Difference of interest from penalties and surcharges

A penalty clause, expressly recognized by law, is an accessory undertaking to assume greater liability on
the part of an obligor in case of breach of an obligation. It functions to strengthen the coercive force of
the obligation and to provide, in effect, for what could be the liquidated damages resulting from such a
breach.

The essence or rationale for the payment of interest, quite often referred to as cost of money, is not
exactly the same as that of a surcharge or a penalty. A penalty stipulation is not necessarily preclusive of
interest, if there is an agreement to that effect, the two being distinct concepts which may separately be
demanded. What may 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 the non-
payment or reduction of interest.

2. The question of whether a penalty is reasonable or iniquitous can be partly subjective and
partly objective.

Its resolution would depend on such factors as, but not necessarily confined to, the type, extent and
purpose of the penalty, the nature of the obligation, the mode of breach and its consequences, the
supervening realities, the standing and relationship of the parties, and the like, the application of which,
by and large, is addressed to the sound discretion of the court.