O B L I G A T I O N S

  &   C O N T R A C T S   C a s e s   B a t
 
[No.  L-­9262.  July  10,  1959]   It   appears   that   in   accordance   with   the   contract   Exhibit   "A"   and   the   Job   O
MARINO  S.  UMALI,  petitioner,  vs.  EFRAIN  Y.  MICLAT,  respondent.   prepared  posters,  a  theater  show  board  display,  a  theater  display  standee,  a
  advertisement  for  the  showing  of  the  film  "LAGRIMAS";;  that  for  the  work  spe
agreed  to  pay  the  sum  of  P900,  of  which  appellee  was  paid  P225  in  advance
1.  CORPORATION;;  LlABILITY  OF  PRESIDENT  AND  MANAGER;;  CONTRACT  IN  His  PERSONAL  CAPACITY.—
Exhibit  "D",  Umali  agreed  to  pay  the  sum  of  P344.50;;  that  the  work  covered  by
If  the  President  and  General  Manager  of  a  corporation  contracted  for  work  to  be  done  in  his  personal   above  mentioned  were  completely  done  and  the  articles  called  for  therein  de
capacity  although  he  described  himself  as  such,  signing  the  contract  as  "party  of  the  second  part"  without   notwithstanding  several  demands  made  upon  Umali,  he  refused  to  pay  withou
stating  that  he  was  acting  in  behalf  of  the  corporation,  and  there  is  no  showing  that  he  entered  into  such    
contract   in   behalf   of   the   corporation   or   was   authorized   to   do   so   by   its   Board   of   Directors,   he   is   held   The  first  defense  set  up  by  appellant  is  that  the  contracts  which  appellee's  act
personally  liable  for  the  said  transaction.   by  and  between  the  appellee  and  the  Maharlika  Pictures,  Inc.,  of  which  app
  General  Manager,  and  so  the  action  should  have  been  directed  against  the  c
him  in  his  personal  capacity.  Appellant  does  not  dispute  the  correctness  of  t
2.  PENALTY;;  LIABILITY  FOR  DAMAGES  AND  INTEREST  IN  ADDITION  TO  PENALTY.—Under  the  law,  a  
complaint.  
penalty  takes  the  place  of  interests  only  if  there  is  no  stipulation  to  the  contrary,  and  even  then,  damages    
may  still  be  collected  if  the  obligor  refuses  to  pay  the  penalty.   The  Court  of  Appeals,  in  meeting  this  contention,  made  the  following  observa
   
PETITION  for  review  by  certiorari  of  a  decision  of  the  Court  of  Appeals.   We  have  gone  carefully  over  the  evidence  of  record,  and  we  have  ar
  the  decision  appealed  from  should  be  affirmed.  As  the  contract  (Exh
The  facts  are  stated  in  the  opinion  of  the  Court.   signed  the  same  in  his  personal  capacity.  While  it  is  mentioned  ther
and   General   Manager   of   Maharlika   Pictures,   Inc.,   it   is   not   stated   t
         Zavalla,  Bautista  &  Nuevas  for  petitioner.  
authorized  to  enter  into  the  contract  for  and  on  behalf  of  the  corpor
         Domingo  F.  de  Guzman  for  respondent.   was  the  intention  of  the  contracting  parties  to  hold  Maharlika  Pictures,
  liable,  it  was  not  explained  why  Umali  allowed  Maharlika  Pictures,  In
BAUTISTA  ANGELO,  J.:   Officer  at  the  time  of  trial  of  this  case,  to  be  declared  in  default  by  
  third-­party   complaint   filed   by   him.   Neither   did   Umali   present   in   e
This  is  an  action  to  recover  certain  sums  of  money,  plus  damages  and  attorney's  fees,  for  some  work   minutes   of   meeting   of   Maharlika   Pictures,   Inc.,   which   Umali   adm
done  by  plaintiff  for  defendant  Marino  S.  Umali.  Defendant  Antonio  M.  Tiongco  was  included  in  his  capacity   organized   and   existing   under   and   by   virtue   of   the   laws   of   the   Phi
as  guarantor  of  Umali  but  he  was  never  served  with  summons.  With  leave  of  Court,  defendant  Umali  filed   Directors,  ratifying  the  action  of  Umali  and  confirming  the  contract  (
a  third  party  complaint  against  Maharlika  Pictures,  Inc.,  a  corporation  duly  organized  under  the  laws  of   corporation.  As  President  and  General  Manager  of  the  corporation  a
the  Philippines,  but  because  the  latter  failed  to  file  its  answer,  it  was  declared  in  default.   be  solely  and  personally  liable  under  the  contract  (Exhibit  A),  Umali  
  enable  the  Board  of  Directors  of  the  corporation  to  adopt  a  resolutio
Defendant  Umali  set  up  the  defense  that  the  work  done  by  the  plaintiff  was  not  complete  or  satisfactorily;;   by  him  of  Exhibit  A  as  an  act  of  the  corporation  because  this  was  for
that  the  contract  upon  which  the  action  is  based  was  executed  by  the  Maharlika  Pictures,  Inc.,  of  which    
he   is   the   President   and   General   Manager,   and   so   plaintiff's   action   should   be   directed   against   said   We  find  the  above  observation  supported  by  evidence.  Indeed  it  appears  in  th
corporation.   the   one   who   contracted   for   the   work   to   be   done   is   appellant   in   his   perso
  described  himself  therein  as  President  and  General  Manager  of  the  Maharlika  
After   trial,   the   lower   court   rendered   judgment   ordering   defendant   Umali   to   pay   plaintiff   the   sum   of   the  contract  as  "party  of  the  second  part"  without  stating  that  he  was  acting  in
P675.00,  plus  10%  surcharge  thereon  as  stipulated,  and  the  sum  of  P200.00  as  attorney's  fees;;  and  with   And  from  what  may  be  gathered  from  the  decision  both  of  the  lower  court  
respect  to  the  second  claim,  to  pay  the  sum  of  P344.50.  The  Court  ordered  that  the  sums  of  P675.00  and   Umali  never  explained  that  when  he  entered  into  such  a  contract  he  acted  in  b
P344.50   shall   bear   6%   interest   per   annum   for   the   date   of   the   filing   of   the   complaint   until   paid.   The   was  authorized  to  do  so  by  its  Board  of  Directors.  It  is  strange  that,  after  br
complaint  with  respect  to  defendant  Tiongco  and  the  third  party  complaint  against  the  corporation  were   this  case  as  party-­defendant,  Umali  allowed  it  to  be  declared  in  default  being
dismissed.  Costs  were  taxed  against  defendant  Umali.   manager  as  he  claims  to  be,  which  gives  rise  to  the  suspicion  that  his  claim  is
  to  the  corporation  the  responsibility  for  the  transaction.  The  same  consideratio
Umali  took  the  case  on  appeal  to  the  Court  of  Appeals,  and  the  decision  of  the  lower  court  was  affirmed  in   to  the  job  order  Exhibit  "D".  It  is  true  that  on  its  face  it  appears  that  the  articl
toto,  with  costs  against  appellant.  Hence  the  present  petition  for  review.   delivered  to  the  corporation,  but  apparently  the  requisition  of  said  articles  was
  for  which  reason  he  was  made  personally  responsible  by  the  trial  court  and  th
a  question  of  fact  which  we  cannot  now  look  into.  
 O B L I G A T I O N S   &   C O N T R A C T S   C a s e s   B a t
 
The  next  question  refers  to  the  surcharge  of  10%  which  was  agreed  upon  in  the  contract  Exhibit  "A".  It    
appears  therein  that  if  appellant  should  fail  to  pay  the  balance  of  P675  after  the  lapse  of  30  days  from    
the  date  exhibition  of  the  film  "LAGRIMAS"  has  started,  he  should  pay  a  surcharge  of  10%  every  30  days    
thereafter  until  the  amount  has  been  fully  paid.  It  is  claimed  that  this  surcharged  is  unconscionable  and  
 
unreasonable,  because  it  is  tantamount  to  imposing  an  interest  of  10%  a  month,  or  120%  a  year  on  the  
balance  of  the  obligation  until  the  same  is  paid  in  full.    
   
There  is  merit  in  this  contention.  While  this  surcharge  partakes  of  the  nature  of  a  penal  clause  which  the    
parties  may  stipulate  under  the  law,1  however,  one  cannot  deny  that  the  same  is  unreasonable,  for  if  that    
is   to   be   maintained,   we   would   have   that   on   the   basis   of   P675   which   is   the   balance   that   remains    
outstanding,  appellant  would  pay  P67.50  a  month,  or  P810  a  year,  which  considering  the  time  that  has    
already  elapsed  since  appellant  defaulted,  would  amount  to  P3,420.  This  is  indeed  a  case  where  equity  
 
demands  that  the  penalty  be  reduced  in  fairness  to  the  debtor.  And  so,  making  use  of  the  discretion  that  
the  law  grants  us  on  the  matter,  we  are  of  the  opinion  that  a  surcharge  of  20%  per  annum  would  be    
reasonable.  We  therefore  hold  that  the  penalty  should  be  reduced  accordingly.2    
   
The  last  claim  of  appellant  refers  to  the  portion  of  the  decision  which  orders  the  payment  of  6%  interest    
per  annum  from  the  date  of  the  filing  of  the  complaint  until  full  payment  of  the  obligation  due,  which  is    
also  considered  unreasonable  considering  that  appellant  was  already  ordered  to  pay  the  penalty  agreed    
upon.  
 
 
This  claim  is  untenable  in  the  light  of  the  law  and  the  contract  of  the  parties.  Thus,  Article  1226  of  the    
new  Civil  Code  provides  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.  Nevertheless,  damages  shall  be  paid  if  the  obligor  refuses  to  pay  the  penalty.  .  .  .".  In  other    
words,  the  penalty  takes  the  place  of  the  interests  only  if  there  is  no  stipulation  to  the  contrary,  and  even    
then,  damages  may  still  be  collected  if  the  obligor  refuses  to  pay  the  penalty.  In  this  case  not  only  is  
 
there  an  express  stipulation  to  pay  damages  in  addition  to  the  penalty,  but  appellant  has  failed  to  pay  his  
obligation  as  well  as  the  penalty.  This  appears  in  paragraph  (f)  of  the  contract  Exhibit  "A".  The  imposition    
of  6%  interest  per  annum  is,  therefore,  justified.    
   
Modified  with  regard  to  the  amount  of  the  surcharge  to  be  imposed  on  appellant  as  above  indicated,  we    
hereby  affirm  the  decision  appealed  from  in  all  other  respects,  without  pronouncement  as  to  costs.    
   
Paras,  C.J.,  Bengzon,  Padilla,  Montemayor,  Concepcion,  Endencia  and  Barrera,  JJ.,  concur.  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 O B L I G A T I O N S   &   C O N T R A C T S   C a s e s   B a t
 
Nos.  L-­82282-­83.  November  24,  1988.*   Same;;  Same;;  Same;;  Same;;  Argument  that  Dynetics'  execution  of  the  indemni
ANTONIO   M.   GARCIA,   DYNETICS,   INC,   and   MATRIX   MANAGEMENT   CORPORATION,   its  purposes  and  therefore  ultra  vires  and  unenforceable  does  not  tender  a  gen
petitioners,   vs.   COURT   OF   APPEALS   and   SECURITY   BANK   AND   TRUST   COMPANY,   as   to   whether   or   not   Dynetics'   execution   of   the   indemnity   agreement   is   co
respondents.   therefore  ultra  vires  and  unenforceable  against  it  does  not  tender  a  genuine  is
  Dynetics  was  authorized  to  execute  the  indemnity  agreements  evidenced  by
Civil  Procedure;;  Summary  Judgment;;  Court  may  render  summary  judgment  when  there  is  no  genuine   certificate  (p.  38,  264  Original  Records).  This  was  not  rebutted.  
issue  as  to  any  material  fact  and  that  the  moving  party  is  entitled  to  a  judgment  as  a  matter  of  law.—A    
Summary  Judgment  may  be  rendered  by  a  court  upon  motion  of  a  party  before  trial  and  after  submission   Same;;  Interest;;  No  reversible  error  In  the  award  of  interest.—The  increased  
of  pleadings,  admissions,  documents  and/or  affidavits  and  counter  affidavits  when  it  is  clear  that  "except   provided  for  in  the  amended  credit  line  agreement  and  in  the  two  promissory  n
as  to  the  amount  of  damages,  there  is  no  genuine  issue  as  to  any  material  fact  and  that  the  moving  party   in  favor  of  Security  Bank  &  Trust  Co.  We  find  no  reversible  error  in  the  award
is  entitled  to  a  judgment  as  a  matter  of  law."  (Rule  34,  Rules  of  Court).  By  genuine  issue  is  meant  an    
issue   of   fact   which   calls   for   the   presentation   of   evidence   (Cadirao   v.   Estenzo,   132   SCRA   93)   as   Same;;  Same;;  Penalty  charges  are  excessive  and  unconscionable.—Penalty  in
distinguished   from   an   issue   which   is   sham,   fictitious,   contrived,   set   up   in   bad   faith,   or   patently   liquidated  damages  (Cumagun  v.  Philippine  American  Insurance  Co.,  Inc.,  et
unsubstantial  as  not  to  constitute  a  genuine  issue  for  trial.  (Vergara,  Sr.  v.  Suelto,  et  al.,  G.R.  No.  74766   15,  1988,  Lambert  v.  Fox,  26  Phil.  588)  and  may  be  equitably  reduced  by  the  
December  21,  1987;;  Cadiraso  v.  Estenzo  supra;;  Mercado,  et  al.  v.  Court  of  Appeals,  G.R.  No.  L-­44001   or   unconscionable.   (See   Articles   1229,   2227,   New   Civil   Code).   We   agree   w
June  10,1988)  This  can  be  determined  by  the  court  on  the  basis  of  the  pleadings,  admissions,  documents,   penalty  charges  are  excessive  and  unconscionable.  The  interest  charges  are  e
affidavits  and/or  counter-­affidavits  submitted  by  the  parties  to  the  court.   petitioners'  failure  to  comply  with  their  obligations.  
   
Same;;   Same;;   Same;;   Obligations   of   petitioners   to   respondents   are   clearly   defined   in   the   pleadings,   PETITION  to  review  the  decision  and  resolution  of  the  Court  of  Appeals.  
admissions  and  the  unrebutted  affidavit  of  Mrs.  Marquez.—Undoubtedly,  the  obligations  of  the  petitioners    
to  the  respondents  are  clearly  defined  in  the  pleadings,  admissions  and  the  unrebutted  affidavit  of  Ms.   The  facts  are  stated  in  the  opinion  of  the  Court.  
Marquez  who  handles  the  Chemark  account.            Sycip,  Salazar,  Hernandez  &  Gatmaitan  for  petitioners.  
           Bengzon,  Zarraga,  Narciso,  Cudala,  Pecson  &  Bengson  for  private  respond
Same;;   Same;;   Same;;   Same;;   No   material   questions   of   facts   tendered   by   the   defenses   as   to   the   main    
issue.—We  find  no  material  questions  of  facts  tendered  by  these  defenses  as  to  the  main  issue  on  whether   GUTIERREZ,  JR.,  J.:  
or  not  the  petitioners  can  be  held  liable  to  the  respondent  bank  under  their  indemnity  agreements.    
  In   a   summary   judgment   rendered   by   the   Regional   Trial   Court   of   Makati   in  
Same;;  Same;;  Same;;  Same;;  Same;;  Issue  tendered  in  the  first  and  second  defense  is  sham  and  fictitious.— complaint  was  dismissed  for  lack  of  merit  and  the  petitioners  were  ordered  to  
The  issue  tendered  in  the  first  defense  is  "sham  and  fictitious"  in  the  light  of  the  terms  of  the  indemnity   the  following:  (a)  the  unpaid  principal  sum  of  P15  million  remaining  unpaid  o
of  the  P20  million  credit  line,  plus  18%  interest  per  annum  and  36%  as  penalty
agreements.   Thus,   under   the   indemnity   agreements,   the   petitioners   bound   themselves   jointly   and  
Note  No.  DLS/74/540/83  from  March  23,  1984  until  fully  paid;;  and  plus  24%  in
severally   with   Chemark   in   favor   of   the   respondent   bank   for   the   payment,   upon   demand   and   without   as  penalty  per  annum  for  Promissory  Note  No.  DLS/74/1358/83  from  August  
benefit  of  excussion,  of  whatever  amount  or  amounts  Chemark  may  be  indebted  to  the  respondent  bank   attorney's  fees  equivalent  to  10%  of  the  total  amount  of  plaintiffs'  obligations
under   and   by   virtue   of   the   credit   accommodations.   (Italics   supplied)   The   economic   conditions   of   the    
country  are  immaterial  to  the  issue  on  the  liability  of  the  petitioners  under  their  indemnity  agreements.   The  summary  judgment  was  affirmed  by  the  Court  of  Appeals.  The  appella
The  issue  raised  in  the  second  defense,  on  whether  or  not  the  indemnity  agreements  were  intended  as   resolution   denying   a   motion   for   reconsideration   are   now   challenged   by   the
collaterals  for  future  Chemark  loans  is  likewise  sham  and  fictitious.  Under  the  indemnity  agreements,  the   petition.  
 
petitioners  bound  themselves  to  pay  whatever  amount  Chemark  may  be  indebted  to  the  bank  "under  and  
The  antecedent  facts  relevant  to  the  instant  petition  are  as  follows:  
by   virtue   of   aforesaid   credit   accommodation(s)   including   the   substitutions,   renewals,   extensions,    
increases,  amendments,  conversions  and  revivals  of  the  aforesaid  credit  accommodation(s)  x  x  x.   On  April  23,  1985  petitioners  Dynetics,  Inc.,  Matrix  Management  and  Trading  C
  Garcia  filed  a  complaint  for  declaratory  relief  and/or  injunction  with  damages  a
Bank  and  Trust  Company  (SBTC).  The  plaintiffs  sought  a  judicial  declaration  t
 O B L I G A T I O N S   &   C O N T R A C T S   C a s e s   B a t
 
the   defendant   bank   under   certain   Indemnity   Agreements   they   executed   in   favor   of   Chemark   Electric   Code;;  Hospicio  de  San  Jose  v.  Fidelity  and  Surety  Co.,  52  Phil.  926;;
Motors,  Inc.  which  had  been  extended  a  credit  accommodation  of  about  P20,000,000.00  by  the  defendant   G.R.  No.  8801-­R,  June  20,  1956).  The  debtor  in  obligations  to  do  s
bank.   They   also   prayed   for   payment   of   attorney's   fees   and   costs   of   suit.   Thus,   they   alleged   in   their   the  prestation  becomes  legally  impossible  without  the  fault  of  the  o
complaint:   New  Civil  Code);;  
   
xxx  xxx  xxx   h)  Assuming,  without  conceding,  that  the  plaintiffs  are  liable  under
  instruments,  they  are  not  liable  for  the  amounts  being  claimed  by  
a)  There  is  no  valid  consideration  for  the  execution  of  the  said  instruments;;   that   the   said   amounts   include   the   payment   of   exorbitant   interest
  amounts  imputed  to  be  due  which  are  not,  in  fact,  due.  (Rollo,  pp.  1
b)   The   said   instruments   had   become   invalid   and   ineffective   at   the   time   the   defendant   finally    
extended  the  loan  accommodation  to  Chemark  and  that  the  parties  to  the  said  instruments  did   On   June   11,   1985   the   respondent   bank   filed   its   Answer   and   Counterclaim   w
not   intend   the   said   instruments   to   cover   Chemark's   obligations   to   the   defendant   which   were   attachment.  The  defendant  alleged  in  its  counter  claim:  
subsequently  granted  under  separate  and  independent  transactions;;    
  ALLEGATIONS  COMMON  TO  ALL  DEFENDANTS  
c)   Assuming,   without   conceding,   that   there   is   a   valid   consideration   for   the   execution   of   the    
aforesaid  instruments  and  that  the  said  instruments  continued  to  be  valid  and  effective  when   21.  Sometime  in  August,  1981,  Chemark  was  granted  by  plaintiff  a
the  defendant  extended  a  credit  accommodation  to  Chemark,  said  instruments  are  null  and  void   consisting  of  an  import  LC-­TR  line  of  P2.0  million  and  an  export  loan
insofar  as  Dynetics  is  concerned  as  it  is  ultra  vires,  being  contrary  to  the  purposes  of  Dynetics,    
its  powers,  licenses  and  franchise;;   22.  Said  credit  line  was  increased  in  February,  1982  from  P4.0  millio
   
d)   Assuming,   without   conceding,   that   the   Indemnity   Agreement   instruments   are   valid   and   Export  loan  line—from  P2.0  million  to  P15.0  million  
enforceable,   the   obligations   of   the   plaintiffs   thereunder   have   been   extinguished,   either   by   Import  LC-­TR—from  P2.0  million  to  P5.0  million  
novation  or  by  the  acts  and  conduct  of  the  defendant,  who,  under  the  circumstances,  in  refusing    
the  valid  and  legitimate  plea  of  Chemark  for  a  reasonable  restructuring  plan  of  its  obligations   The  terms  and  conditions  of  this  P20.0  million  credit  are  reflected  in
has  practically  rendered  it  impossible  for  Chemark  to  pay  its  obligations  to  its  creditors  and  to   Agreement  dated  February  8,  1982  attached  as  Annex  "1"  hereof,  
the   plaintiffs   in   the   event   plaintiffs   are   legally   obligated   to   pay   Chemark's   obligations   to   the    
defendant;;   23.  Chemark  availed  of  said  credit  line  and  as  evidence  of  said  avai
  several  promissory  notes  covering  the  following  amounts  drawn  aga
e)   In   the   light   of   present   economic   conditions,   in   general,   and   the   condition   of   Chemark   in    
particular,  as  well  as  the  financial  condition  of  the  plaintiffs,  the  demand  of  the  defendant  for   a)  The  sum  of  P6,350,750.00  drawn  on  March  23,  1983  with  i
the  plaintiffs  to  pay  the  Chemark  obligations  would  constitute  an  abuse  of  right  as  defined  in   rate  indicated  in  promissory  Note  No.  DLS/74/540/83  to  mature
the  New  Civil  Code;;   is  attached  as  Annex  "3";;  
   
f)  Considering  the  present  adverse  economic  conditions  plaguing  the  entire  country,  the  terms   b)  The  sum  of  P8,649,250.00  drawn  on  August  9,  1983  with  inte
and   conditions   of   the   credit   accommodation   and   the   Indemnity   Agreement   instruments,   indicated  in  Promissory  Note  No.  DLS/74/1358/83  to  mature  on  
assuming  that  the  latter  are  valid  and  enforceable,  have  become  so  manifestly  difficult  as  to  be   of  which  is  hereto  attached  as  Annex  "4".  
beyond  the  contemplation  of  the  parties.  Under  the  provisions  of  Human  Relations  of  the  New    
Civil  Code,  as  well  as  the  general  principles  of  equity,  especially  the  doctrine  of  the  "rebus  sic   24.  Chemark  defaulted  in  paying  its  obligations  under  the  aforesaid  pr
stantibus"  and  "the  frustration  of  the  commercial  object  or  frustration  of  enterprise"  and  under   became  due.  Despite  repeated  demands,  Chemark  failed  and  refuse
Article  1267  of  the  New  Civil  Code,  when  the  service  has  become  so  difficult  as  to  be  manifestly   obligations   to   the   defendant   which,   as   of   December   11,   1984,   am
beyond  the  contemplation  of  the  parties,  the  obligor  may  be  released  therefrom;;   under  Promissory  Note  No.  DLS/74/540/83  and  P17,357,117.51  unde
   
g)  In  addition  to  the  reasons  stated  in  paragraphs  e  and  f  hereof,  Chemark,  the  principal  obligor,   CAUSE  OF  ACTION  AGAINST  ANTONIO  M.  GARCIA  
is  not  liable  for  its  obligations  under  the  credit  accommodations  extended  to  it  by  the  defendant    
because  it  has  been  prohibited  from  complying  therewith  by  a  lawful  authority.  Under  the  law   25.  Plaintiff  Garcia  personally  bound  himself  jointly  and  severally  with  
on  guaranty  and  surety,  the  guarantor  or  the  surety,  not  being  a  principal  debtor,  is  not  liable   upon  demand  and  without  benefit  of  excussion  of  whatever  amount
for  the  obligations  unless  the  principal  obligor  is  likewise  liable.  (Article  2054  of  the  New  Civil   be   indebted   to   defendant   under   and   by   virtue   of   the   aforesaid   c
 O B L I G A T I O N S   &   C O N T R A C T S   C a s e s   B a t
 
including   the   substitutions,   renewals,   extensions,   increases   and   other   amendments   of   the   amounts  Chemark  may  be  indebted  to  defendant  under  and  by  virtue
aforesaid   credit   accommodations,   as   well   as   all   other   obligations   that   Chemark   may   owe   the   accommodation   including   the   substitutions,   renewals,   extensio
defendant.   amendments   of   the   aforesaid   credit   accommodations,   as   well   a
  obligations  that  Chemark  may  owe  the  defendant.  
26.  Accordingly,  plaintiff  Garcia  executed  two  (2)  Indemnity  Agreements,  one  dated  January  20,    
1982,  a  copy  of  which  is  attached  hereto  and  made  integral  part  hereof  as  Annex  "E"  and  the   36.   Dynetics   executed   an   indemnity   agreement   dated   February   8
other,  an  Indemnity  Agreement  dated  February  8,  1982,  as  Annex  "B"  of  the  Complaint;;   attached  as  annex  "A"  of  the  Complaint.  
   
27.   Under   the   terms   of   the   foregoing   Indemnity   Agreements   executed   by   plaintiff   Garcia,   he   37.   Under   the   terms   of   the   foregoing   Indemnity   Agreement   execu
further  bound  himself  solidarily  with  Chemark  in  favor  of  defendant  for  the  faithful  compliance   bound  itself  solidarily  with  Chemark  in  favor  of  defendant  for  the  fa
of  all  the  terms  and  conditions  contained  in  the  Amended  Credit  Line  Agreement  (Annex  "l  ").   terms  and  conditions  contained  in  the  Amended  Credit  Line  Agreeme
   
28.   Defendant   demanded   from   plaintiff   Garcia   the   payment   of   the   outstanding   obligation   of   38.  Defendant  demanded  from  Dynetics  the  payment  of  the  outstan
Chemark  in  a  letter  dated  October  26,  1984,  a  copy  of  which  is  made  Annex  "5"  to  form  part   in  a  letter  dated  October  26,  1984,  a  copy  of  which  is  made  Anne
hereof.  Defendant  reiterated  said  demand  on  April  15,  1985.   Defendant  reiterated  said  demand  on  April  25,  1985.  
   
29.  Notwithstanding  said  demands,  plaintiff  Garcia  failed  and  refused,  as  he  still  fails  and  refuses   39.  Notwithstanding  said  demands,  Dynetics  failed  and  refused,  as  it  
to  pay  his  obligation  pursuant  to  the  indemnity  agreements  he  executed.   its  obligation  pursuant  to  the  indemnity  agreement  it  executed  in  de
  108-­111)  
CAUSES  OF  ACTION  AGAINST  MATRIX  MANAGEMENT  &  TRADING  CORPORATION    
  On  August  21,  1985,  the  petitioners  manifested  that  ...  they  are  adopting  all  al
30.  Plaintiff  Matrix  bound  itself  jointly  and  severally  with  Chemark  in  favor  of  the  defendant  for   as  their  answer  to  the  respective  counterclaim  against  each  of  them."  (Origin
the  payment,  upon  demand  and  without  benefit  of  excussion,  of  whatever  amount  or  amounts    
Chemark   may   be   indebted   to   defendant   under   and   by   virtue   of   the   aforesaid   credit   line   On  September  18,  1985,  the  respondent  bank  filed  a  motion  for  summary  jud
accommodation   including   the   substitutions,   renewals,   extensions,   increases   and   other   the   answer   to   the   counterclaim   "tenders   no   genuine   issue   as   to   any   mat
amendments  of  the  aforesaid  credit  accommodations,  as  well  as  of  the  amount  of  such  other   mere   conclusions   of   law   and   fact,   and   in   paragraph   4   thereof,   plaintiffs   exp
obligations  that  Chemark  may  owe  the  defendant.   obligation  to  defendant  and  indemnity  agreements   dated  February  8,  1982  w
  said  instruments,  it  was  basically  provided  that  for  and  in  consideration  of  th
31.  Accordingly,  Matrix  through  its  duly  authorized  officers,  executed  an  Indemnity  Agreement   the   total   amount   of   Twenty   Million   (20,000,000.00)   Pesos,   granted   by   defe
dated  February  8,  1982,  a  copy  of  which  is  attached  hereto  as  Annex  "A"  and  incorporated  herein   Electric  Motors,  Inc.,  a  corporation  duly  organized  and  existing  under  the  laws  
by  reference.   agreed  to  indemnify  defendant  in  the  event  Chemark  should  fail  to  comply  wit
  Records,  p.  248)  In  support  of  the  motion,  the  respondent  bank  attached  the
32.  Under  the  terms  of  the  foregoing  indemnity  agreement  executed  by  Matrix,  it  further  bound   17,  1985  of  Ms.  Charis  Marquez,  Senior  Assistant  Manager,  corporate  banking
itself  solidarily  with  Chemark  in  favor  of  defendant  for  the  faithful  compliance  of  all  the  terms   annexes.  
and  conditions  contained  in  the  Credit  Line  Agreement  (Annex  "B").<äre||anº•1àw>    
  The  petitioners  filed  an  opposition  to  the  motion  for  summary  judgment  but  t
33.  Defendant  demanded  from  Matrix  the  payment  of  the  outstanding  obligation  of  Chemark  in   rendered  a  decision  granting  the  motion  for  summary  judgment.  The  petitioner
a   letter   dated   October   26,   1984,   a   copy   of   which   is   made   Annex   "5"   to   form   part   hereof.   and  they  were  ordered  to  pay  the  respondent  bank  under  the  indemnity  agre
Defendant  reiterated  said  demand  on  April  25,  1985.    
  The  petitioners  then  filed  with  the  Court  of  Appeals:  1)  an  appeal  from  the  su
34.  Notwithstanding  said  demands,  Matrix  failed  and  refused,  as  it  still  fails  and  refuses,  to  pay   special  civil  action  for  certiorari  and  prohibition  with  a  prayer  for  preliminary  inj
its  obligation  pursuant  to  the  indemnity  agreement  it  executed  in  plaintiffs  favor.   of  the  lower,  court  granting  motion  for  summary  judgment  and  granting  mo
  appeal.  The  two  cases  were  consolidated.  
CAUSE  OF  ACTION  AGAINST  DYNETICS,  INC.    
  The  appellate  court  sustained  the  summary  judgment.  Both  petitions  were  di
35.  Plaintiff  Dynetics  bound  itself  jointly  and  severally  with  Chemark  in  favor  of  the  defendant   the  petitioners.  A  motion  for  reconsideration  thereto  was  denied.  
for   the   payment,   upon   demand   and   without   benefit   of   excussion,   of   whatever   amount   or    
 O B L I G A T I O N S   &   C O N T R A C T S   C a s e s   B a t
 
Hence,  this  petition.   KNOW  ALL  MEN  BY  THESE  PRESENTS:  That—  
   
On  March  30,  1988,  we  issued  a  temporary  restraining  order  to  enjoin  the  enforcement  of  the  questioned   DYNETICS,  INC.,  a  corportion  duly  organized  and  existing  under  and  
decision  of  the  appellate  court.  In  a  Resolution  dated  June  6,  1988,  we  gave  due  course  to  the  petition.   Philippines,  with  offices  at  the  FTI  Complex,  Taguig,  Metro  Manila  
  the  credit  accommodation  in  the  total  amount  of  TWENTY  MILLION
The  issue  raised  in  the  petition  is  whether  or  not  the  appellate  court  committed  reversible  error  when  it   granted  by  the  SECURITY  BANK  &  TRUST  COMPANY,  a  commercia
sustained  the  trial  court's  summary  judgment.   organized  and  existing  under  and  by  virtue  of  the  laws  of  the  Philip
  Ayala  Avenue,  Makati,  Metro  Manila,  hereinafter  referred  to  as  the  B
The  petitioners  submit  that  the  appellate  court  committed  such  an  error,  to  wit:   ELECTRIC  MOTORS,  INC.,  ...  a  corporation  duly  organized  and  exist
  the   laws   of   the   Philippines,   with   offices   at   the   2nd   Floor,   Princess
a.   The   rendition   of   Judge   Mendoza's   Summary   Judgment   was   improper   because   petitioners'   Legaspi  Village,  Makati,  Metro  Manila,  hereinafter  referred  to  as  the  C
Complaint  and  SBTC's  Answer  with  Counterclaim  raise  triable  issues  of  fact.  The  Court  of     interests   and   charges   thereon,   evidenced   by   that/those   certain
Appeals,  therefore,  erred  when  it  sustained  Judge  Mendoza's  Summary  Judgment.   AGREEMENT  made  and  executed  by  and  between  the  CLIENT  and  the
  bind(s)  himself/themselves  jointly  and  severally  with  the  CLIENT  in
b.  Assuming  (the  untrue)  that  there  were  no  "genuine  issues  as  to  any  material  fact,"  the  awards   payment,  upon  demand  and  without  benefit  of  excussion,  of  whatev
set  out  in  Judge  Mendoza's  Summary  Judgment  were  rendered  in  violation  of  rules  of  evidence   CLIENT  may  be  indebted  to  the  BANK  under  and  by  virtue  of  aforesa
and   laws   and   jurisprudence   on   interest,   penalties   and   attorney's   fees.   The   appellate   court,   including   the   substitutions,   renewals,   extensions,   increases,   amen
therefore,  committed  the  same  violation  when  it  upheld  Judge  Mendoza's  Summary  Judgment.   revivals  of  the  aforesaid  credit  accommodation(s),  as  well  as  of  the  a
(Rollo,  p.  325).   other  obligations  that  the  CLIENT  may  owe  the  BANK,  whether  dir
  secondary,   as   appears   in   the   accounts,   books   and   records   of   the
A  Summary  Judgment  may  be  rendered  by  a  court  upon  motion  of  a  party  before  trial  and  after  submission   expenses  arising  from  any  agreement  or  agreements  that  may  have
of  pleadings,  admissions,  documents  and/or  affidavits  and  counter  affidavits  when  it  is  clear  that  "except   may   hereafter   be   executed   by   and   between   the   parties   thereto,   i
as  to  the  amount  of  damages,  there  is  no  genuine  issue  as  to  any  material  fact  and  that  the  moving  party   renewals,  extensions,  increases,  amendments,  conversions  and  revi
is  entitled  to  a  judgment  as  a  matter  of  law."  (Rule  34,  Rules  of  Court).  By  genuine  issue  is  meant  an   accommodation(s),  and  further  bind(s)  himself/themselves  with  the  C
issue   of   fact   which   calls   for   the   presentation   of   evidence   Cadirao   v.   Estenzo,   132   SCRA   93)   as   for   the   faithful   compliance   of   all   the   aforesaid   credit   accommod
distinguished   from   an   issue   which   is   sham,   fictitious,   contrived,   set   up   in   bad   faith,   or   patently   incorporated  herein  and  made  part  hereof  by  reference.  
unsubstantial  as  not  to  constitute  a  genuine  issue  for  trial.  (Vergara,  Sr.  v.  Suelto,  et  al.,  G.R.  No.  74766    
December  21,  1987,  Cadirao  v.  Estenzo  supra;;  Mercado,  et  al.  v.  Court  of  Appeals,  G.R.  No.  L-­44001  June   IN  WITNESS  WHEREOF,  these  presents  are  signed  at  Makati,  Metro
10,  1988)  This  can  be  determined  by  the  court  on  the  basis  of  the  pleadings,  admissions,  documents,   February,  1982.  ...  and/or  its  trust  accounts  funding  this  loan—  
affidavits  and/or  counter-­affidavits  submitted  by  the  parties  to  the  court.  (Section  3,  Rule  34,  Revised    
Rules  of  Court;;  Vergara  v.  Suelto  supra;;  Cadirao  v.  Estenzo  supra).   DYNETICS,  INC.  
   
The  pleadings,  admissions  and  affidavits  submitted  in  court  in  this  case  reveal  the  following  facts:   (SGD.)  ANTONIO  M.  GARCIA  (SGD.)  DOMINADOR  GAMEZ  
  Signed  in  the  Presence  of.  
In   August   1981,   Chemark   was   granted   by   respondent   bank   a   credit   line   of   P4.0   million   which   was    
increased  in  February  1982  to  P20.0  million,  to  wit;;  Export  loan  line  from  P2.0  million  to  P15.00  million;;   (SGD.)  JONA  C.  CAJUYONG  (SGD.)  TERESITA  A.  DE  GUZMAN  
Import  LC/TR-­from  P2.0  million  to  P5.0  million.  The  terms  and  conditions  of  this  P20  million  credit  are   (Original  Records,  pp.  306-­307)  
stated  in  the  Credit  Line  Agreement  dated  February  8,  1982  (p.  254,  Records).  On  this  same  day,  February    
8,  1982  the  petitioners  executed  separate,  but  with  similar  terms,  indemnity  agreements  whereby  they   Both  Dynetics  and  Matrix  were  authorized  by  their  respective  board  
bound  themselves  jointly  and  severally  with  Chemark  to  pay  respondent  bank  upon  demand  and  without   indemnity  agreements.  In  the  case  of  Dynetics,  Corporate  Secretary
excussion   of   whatever   amount   Chemark   may   be   indebted   to   said   bank   by   virtue   of   said   credit   line   that  during  a  meeting  of  the  Board  of  Directors  held  on  December  29
accommodation   including   the   substitution,   renewals,   extensions,   increases   and   other   amendments   it  was  unanimously  adopted  that  the  corporation  "...  undertake  to  join
thereof;;   and   that   upon   default   of   Chemark,   proper   demands   to   pay   were   made   on   the   petitioners   to   the  credit  line  of  CHEMARK  ELECTRIC  MOTORS,  INC.  in  favor  of  the
comply  with  their  obligations.  The  three  indemnity  agreements  binding  each  of  the  petitioners  contain   COMPANY,   in   an   amount   not   to   exceed   TWENTY   MILLION   (20,000
the  following  provisions:   Original  Records).  In  the  case  of  MATRIX,  Corporate  Secretary  Rene  
  the  meeting  of  the  Board  of  Directors  held  on  December  28,  1981,  a  r
INDEMNITY  AGREEMENT   adopted  to  have  the  corporation  "...  jointly  and  severally  guarantee  
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ELECTRIC  MOTORS,  INC.  in  favor  of  the  SECURITY  BANK  &  TRUST  COMPANY,  in  an  amount   including  its  obligations  to  the  defendant,  except  that  its  liquidity  p
not  to  exceed  TWENTY  MILLION  (P20,000,000.00)  PESOS.  (Original  Records,  p.  262)   paying  its  creditors.  
   
Chemark  then  availed  of  the  P20.0  million  credit  line  and  executed  two  (2)  promissory  notes  covering  the   8.  Chemark  started  negotiating  with  the  defendant  for  the  restructur
following  amounts  drawn  against  the  Export  Loan  Line,  to  wit:   latter.   For   this   purpose,   it   submitted   several   proposed   courses   o
  whereby  in  time  all  of  its  obligations  to  the  defendant  would  be  paid
a)  The  sum  of  P6,350,750.00  drawn  on  March  23,  1983  with  interest  and  penalty  at  the  rate    
indicated  in  Promissory  Note  No.  DLS/74/540/83  to  mature  on  June  21,  1983  (p.  255,  Original   9.  In  the  meantime,  the  defendant  demanded  payment  from  the  pla
Records)   Chemark.   Although   plaintiffs   are   not   legally   liable   for   the   paymen
  nonetheless,   proposed   to   the   defendant   that   the   latter   allow   Chem
b)  The  sum  of  P8,649,250.00  drawn  on  August  9,  1983  with  interest  and  penalty  ac  the  rate   until   such   time   that   it   shall   have   recovered   its   ability   to   pay   its   ob
indicated   in   Promissory   Note   No.   DLS/74/1358/83   to   mature   on   September   8,   1983   (p.   256,   principle  was  reached  on  this  proposal  and  the  defendant  committed
Original  Records)   recover   from   its   liquidity   problems   and   to   refrain   from   demanding
  Chemark  from  the  plaintiffs.  (Emphasis  supplied).  (Rollo,  pp.  328-­32
These   obligations   were   not   paid   by   Chemark   when   they   became   due.   Hence,   the   respondent   bank    
demanded   from   the   petitioners   under   the   indemnity   agreements   the   payment   of   the   outstanding   xxx  xxx  xxx  
obligations  of  Chemark.    
  11.2  Second  Defense:  that  SBTC  and  the  petitioners  did  not  intend  to
Undoubtedly,  the  obligations  of  the  petitioners  to  the  respondents  are  clearly  defined  in  the  pleadings,   Agreements  as  collateral  security  for  Chemark's  loans  and  that  SBT
admissions  and  the  unrebutted  affidavit  of  Ms.  Marquez  who  handles  the  Chemark  account.   on  Chemark's  viability  as  a  business  enterprise.  
   
Nevertheless,  the  petitioners  insist  that  their  complaint  for  declaratory  relief  tenders  genuine  issues  which   11.2A  The  Complaint  pleads  this  defense  in  the  following  paragraphs
should  be  threshed  out  in  a  full-­blown  trial,  to  wit:    
  5.  ...  when  the  defendant  finally  extended  the  loan  to  Chemark,  it  
xxx  xxx  xxx   aforesaid   instruments   (referring   to   the   Indemnity   Agreements)   p
  (petitioners)  which,  in  the  meantime,  were  no  longer  valid  and  effe
11.1   First  Defense:  that  the  principal  obligation  has  not  yet  matured  because  SBTC,  agreed  to   parties  as  collateral  security  for  future  Chemark  loans,  but  because  
allow  Chemark  a  grace  period  within  which  to  recover  its  liquidity  and  pay  the  debt.   of  the  viability  of  Chemark's  business  operations  and  interest  income
  from  the  loans  to  Chemark.  (Emphasis  supplied)  (Rollo,  pp.  329-­330
11.1A  This  defense  is  pleaded  in  the  following  allegations  of  the  Complaint:    
  xxx  xxx  xxx  
6.  In  the  aftermath  of  the  assassination  of  Senator  Benigno  S.  Aquino,  Jr.,  on  August  21,  1983,    
the  Philippine  economy  was  plunged  into  a  deep  crisis.  There  was  a  massive  flight  of  capital;;   11.3   Third   Defense:   that   Dynetic's   execution   of   the   Indemnity   Ag
the  country's  balance  of  payments  deteriorated;;  business  and  industry  practically  stood  still;;  and   purposes  and  is  therefore  ultra  vires  and  unenforceable  against  it.  
the   foreign   debts   of   the   country   could   not   be   serviced;;   banks   collapsed,   the   exchange   rate    
between  the  Philippine  Peso  and  US  Dollar  tripled  and  there  was  practically  no  foreign  exchange   11.3A  This  defense  is  pleaded  in  the  Complaint  as  follows:  
available  in  the  country.  The  resultant  extremely  adverse  economic  conditions  were  not  foreseen    
or  contemplated  by  persons  or  entities  who  became  parties  to  a  contract.  None  of  the  parties  to   13.  Plaintiffs  are  not  liable  to  the  defendant  under  the  Indemnity  Agre
a  contract  expected  nor  did  they  intend  that  the  terms  and  conditions  they  agreed  upon  would   the  following  reasons:  
operate  under  extreme  adverse  economic  conditions.    
  xxx  xxx  xxx  
7.   Because   of   the   recent   economic   developments   here   and   abroad,   the   failure   of   one   of   the    
stockholders   of   Chemark   to   comply   with   its   commitments   and   Chemark's   inability   to   collect   (c)  Assuming,  without,  conceding,  that  there  is  a  valid  consideratio
substantial  receivables  from  its  marketing  representatives  in  the  United  States,  Chemark  started   aforesaid  instruments  and  that  said  instruments  continued  to  be  va
to  suffer  liquidity  problems.  As  a  consequence,  it  was  unable  to  pay  its  creditors,  among  whom   defendant   extended   a   credit   accommodation   to   Chemark,   said   inst
is  the  defendant.  However,  Chemark  had  more  than  sufficient  assets  to  pay  all  its  obligations   insofar  as  Dynetics  is  concerned  as  it  is  ultra  vires,  being  contrary  t
its  powers,  licenses  and  franchise:  (Emphasis  supplied)  (Rollo,  pp.  3
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We  find  no  material  questions  of  facts  tendered  by  these  defenses  as  to  the  main  issue  on  whether  or   Then  Dynetics  argues  that  it  has  raised  the  issue  of  novation  in  ligh
not  the  petitioners  can  be  held  liable  to  the  respondent  bank  under  their  indemnity  agreements.   between  Security  Bank  and  Chemark.  Again,  the  alleged  new  contrac
  need   not   be   the   subject   of   trial.   Upon   their   basis,   the   court   can  
The  issue  tendered  in  the  first  defense  is  "sham  and  fictitious"  in  the  light  of  the  terms  of  the  indemnity   novation  of  contract.  (Rollo,  P.  125)  
agreements.   Thus,   under   the   indemnity   agreements,   the   petitioners   bound   themselves   jointly   and    
severally   with   Chemark   in   favor   of   the   respondent   bank   for   the   payment,   upon   demand   and   without   The  petitioners  also  assail  the  awards  of  penalty  charges  at  36%  per  annum
benefit  of  excussion,  of  whatever  amount  or  amounts  Chemark  may  be  indebted  to  the  respondent  bank   24%  per  annum  respectively  on  the  loans.  They  contend  that  the  interests  
under  and  by  virtue  of  the  credit  accommodations.  (Emphasis  supplied)  The  economic  conditions  of  the   sustained  by  the  evidence  because  the  rate  of  interest  stipulated  in  the  prom
country  are  immaterial  to  the  issue  on  the  liability  of  the  petitioners  under  their  indemnity  agreements.   per  annum.  
   
The  issue  raised  in  the  second  defense,  on  whether  or  not  the  indemnity  agreements  were  intended  as   The   lower   courts   based   the   computation   of   interests   and   penalty   charges  
collaterals  for  future  Chemark  loans  is  likewise  sham  and  fictitious.  Under  the  indemnity  agreements,  the   Marquez,  Assistant  Manager  of  the  Corporate  Banking  Group  of  Security  Bank
petitioners  bound  themselves  to  pay  whatever  amount  Chemark  may  be  indebted  to  the  bank  "under  and   the  account  officer  who  handled  the  account  of  Chemark.  The  pertinent  porti
by   virtue   of   aforesaid   credit   accommodation(s)   including   the   substitutions,   renewals,   extensions,   follows:  
increases,  amendments,  conversions  and  revivals  of  the  aforesaid  credit  accommodation(s)  ...  (Emphasis    
supplied)   22.   As   per   statements   of   Accounts   dated   June   l5,   1985,   under  
  (Annexes  "2"  and  "3"  hereof)  covered  by  the  subject  Indemnity  Agr
The   argument   as   to   whether   or   not   Dynetics'   execution   of   the   indemnity   agreement   is   contrary   to   its   and  "8"  hereof),  the  total  outstanding  obligation  of  Dynetics,  Inc.,  Ma
purposes   and   therefore   ultra   vires   and   unenforceable   against   it   does   not   tender   a   genuine   issue.   The   Corporation  and  Antonio  M.  Garcia  to  Security  Bank  &  Trust  Co.  was
record   shows   that   Dynetics   was   authorized   to   execute   the   indemnity   agreements   evidenced   by   the   interest  and  charges.  Attached  hereto  as  Annexes  "9"  and  "l0"  are  co
Corporate  Secretary's  certificate  (p.  38,  264  Original  Records).   Accounts  dated  June  15,  1985;;  
   
This  was  not  rebutted.   23.  In  the  said  Statements  of  Accounts  dated  June  15,  1985,  we  c
  annum,  respectively,  because  the  subject  loans  (Annexes  "2"  and  "3
Indeed,  we  find  no  genuine  issues  raised  in  the  complaint  which  can  not  be  resolved  by  the  pleadings,   be   rediscounted   at   the   Central   Bank   at   11%   per   annum.   Howeve
admissions  and  the  affidavit  of  Charis  Marquez  submitted  to  the  court.  As  the  appellate  court  said:   Motors,  Inc.  failed  to  give  us  the  required  letter  of  credit  which  was  a
  Bank,  we  charged  them  18%  and  24%  instead  of  11%  interest  per  an
Dynetics,  Garcia  and  Matrix  attempted  to  avoid  liability  by  trying  hard  to  create  factual  issues  fit   charges  were  based  on  and  authorized  under  our  Credit  Proposal,  
for   trial.   The   attempt   is   but   a   hodgepodge   of   legal   arguments   and   conclusions   which   can   be   attached  as  Annexes  "11"  to  "11-­B".  (Original  Records,  p.  252)  
resolved  without  the  rituals  of  trial.  Thus,  Dynetics  urges  that  there  is  need  for  trial  to  determine    
whether  it  can  be  compelled  to  pay  considering  that  SEC  by  its  Order  of  September  27,  1984   The  increased  interest  rates  are  expressly  provided  for  in  the  amended  credit
has  prohibited  Chemark  from  paying  its  creditors.  The  issue  is  strictly  legal  and  can  be  decided   two  promissory  notes  executed  by  Chemark  in  favor  of  Security  Bank  &  Trus
by  determining  the  character  of  liability  of  Dynetics  as  joint  and  solidary  debtor.  Dynetics  also   error  in  the  award  of  interests.  
argues  that  it  raised  the  issue  of  lack  of  consideration  which  must  be  tried  on  the  merits.  The    
issue   deserves   scant   consideration   for   the   parties'   Indemnity   Agreement   specifies   the   The  penalty  of  36%  per  annum  is  provided  in  the  promissory  notes  (Annexes  "3
consideration  to  be  the  grant  of  credit  accommodation  to  Chemark  in  the  sum  of  P20  M.  Also    
what   is   posed   is   a   legal   issue   resolvable   in   light   of   the   character   of   Dynetics   as   a   joint   and   If  this  note  is  not  fully  paid  when  due,  the  undersigned  shall  pay,  in
solidary   debtor.   Dynetics   also   asseverates   that   it   did   not   intend   its   Indemnity   Agreement   as   interest,   a   penalty   of   3%   per   month   on   the   total   outstanding   prin
collaterals  for  future  Chemark  loans.  This  is  a  clear  pretense  considering  that  again  under  its   unpaid.  ...  (Original  Records,  p.  256)  
Indemnity  Agreement,  Dynetics  clearly  bound  itself  to  pay  whatever  amount  Chemark  may  be    
indebted   to   Security   Bank   "under   and   by   virtue   of   the   aforesaid   credit   accommodation(s)   The   affidavit   and   supporting   documents   were   attached   to   the   respondent   b
including   the   substitutions,   renewals,   extensions,   increases,   amendments,   conversions   and   judgment.   The   petitioners   failed   to   oppose   Marquez'   affidavit   in   their   "Oppo
revivals  of  aforesaid  credit  accommodation(s.)"  There  is  nothing  on  record  to  substantiate  the   summary   judgment.   Neither   did   they   submit   counter-­   affidavits,   as   was   th
pretense  of  mistake  of  Dynetics.  (Rollo,  p.  121)   amounts   due   from   them   including   the   increased   interests   and   penal
  circumstances,  the  respondent  bank  was  entitled  to  summary  judgment  (Philip
xxx  xxx  xxx   Leather   Co.,   Inc.,   et   al.   105   Phil.   400;;   See   also   Mercado,   et   al.   v.   Court   of
 
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stated,  the  lower  court  committed  no  reversible  error  in  awarding  the  questioned  interests.  We  cannot,   Notes.—Relief  of  summary  judgment  is  intended  to  expedite  or  promptly  dispo
however,  agree  with  the  appellate  court  as  regards  the  award  of  penalty  charges  at  36%  per  annum.   appear   undisputed   and   certain   from   the   pleadings,   dispositions,   admissions
  Estenzo,  89  SCRA  684).  
Penalty  interests  are  in  the  nature  of  liquidated  damages  (Cumagun  v.  Philippine  American  Insurance  Co.,  
 
Inc.,  et  al.  G.R.  No.  81453  August  15,  1988;;  Lambert  v.  Fox,  26  Phil.  588)  and  may  be  equitably  reduced  
by  the  courts  if  they  are  iniquitous  or  unconscionable.  (See  Articles  1229,  2227,  New  Civil  Code).   There  is  no  basis  for  issuance  of  Summary  Judgment  for  failure  to  observe  guid
  89  SCRA  684).  
The  records  show  that  on  the  first  loan,  the  principal  of  which  is  P6,350,750.00,  the  penalty  charges  as    
of   June   15,   1986   are   already   equivalent   to   P6,774,378.06   (p.   265,   Original   Records)   and   that   on   the   ——o0o——  
second   loan,   the   principal   of   which   is   P8,649,250.00   the   penalty   charges   as   of   June   15,   1985   are    
equivalent  to  P8,662,008.53.  (p.  266,  Original  Records)  The  P6,774,378.06  penalty  charges  in  the  first    
loan  would  have  been  earned  by  the  private  respondent  after  only  725  days  (1  year  and  360  days)  of  
 
delay  in  the  payment  of  the  loan  while  the  P8,662,008.53  penalty  charges  would  have  been  earned  by  
the  private  respondent  after  only  646  days  (1  year  and  281  days)  of  delay  in  the  payment  of  the  loan.    
The  figures  from  1985  to  1988  would  amount  to  several  times  the  principal  loans.    
   
We  agree  with  the  petitioner  that  the  penalty  charges  are  excessive  and  unconscionable.  The  interest    
charges  are  enough  punishment  for  the  petitioners'  failure  to  comply  with  their  obligations.    
   
Finally,  the  petitioners  question  the  amount  for  attorney's  fees  equivalent  to  10%  of  their  obligation.  
 
 
Again,  Chemark's  promissory  notes  provide  for  the  award  of  attorney's  fees  in  case  of  default  to  pay  the    
loans,  to  wit:    
   
xxx  xxx  xxx    
   
If  this  note  is  not  fully  paid  when  due,  the  undersigned  shall  pay,  in  addition  to  the  stipulated  
 
interest,   a   penalty   of   3%   per   month   on   the   total   outstanding   principal   and   interest   due   and  
unpaid.  The  undersigned  shall  also  pay,  as  and  for  attorney's  fee,  a  sum  equivalent  to  20%  of    
the  total  amount  due  under  this  note  plus  expenses  and  costs  of  collection,  in  case  this  note  is    
placed   in   the   hands   of   an   attorney   for   collection.   (See   Annexes   "2",   "3",   Affidavit   of   Charis    
Marquez)  (Original  Records,  p.  255)    
   
The  award  for  attorney's  fees  is  justified  and,  in  fact,  is  even  lower  than  that  agreed  upon  by  the  parties.    
 
 
WHEREFORE,  the  instant  petition  is  DISMISSED.  The  questioned  decision  and  resolution  of  the  Court  of  
Appeals  are  AFFIRMED  except  for  the  award  of  penalty  charges  which  is  stricken  from  the  judgment.  The    
Temporary  Restraining  Order  issued  on  March  30,  1988  is  LIFTED.  Costs  against  the  petitioners.    
   
SO  ORDERED.    
   
Fernan  C.J.,  Bidin  and  Cortes,  JJ.,  concur.    
Feliciano,  J.,  took  no  part.  
 
 
 
Petition  dismissed.  Decision  and  resolution  affirmed.  
 
 
 
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G.R.  Nos.  128833,  128834,  and  128866.  April  20,  1998.*   Same;;   Same;;   For   an   insurance   company   to   be   held   liable   for   unreasonably
RIZAL  COMMERCIAL  BANKING  CORPORATION,  UY  CHUN  BING  AND  ELI  D.  LAO,  petitioners,   payment  of  insurance  proceeds,  the  delay  must  be  wanton,  oppressive,  or  ma
vs.  COURT  OF  APPEALS  and  GOYU  &  SONS,  INC.,  respondents.   company  to  be  held  liable  for  unreasonably  delaying  and  withholding  payment
  delay  must  be  wanton,  oppressive,  or  malevolent  (Zenith  Insurance  Corpora
RIZAL  COMMERCIAL  BANKING  CORPORATION,  petitioner,  vs.  COURT  OF  APPEALS,  ALFREDO   [1990]).   It   is   generally   agreed,   however,   that   an   insurer   may   in   good   fait
C.  SEBASTIAN,  GOYU  &  SONS,  INC.,  GO  SONG  HIAP,  SPOUSES  GO  TENG  KOK  and  BETTY  CHIU   difference  of  opinion  as  to  its  liability.  Accordingly,  the  statutory  penalty  for  vex
SUK  YING  alias  BETTY  GO,  respondents.   to  pay  a  claim  should  not  be  inflicted  unless  the  evidence  and  circumstances  
  willful  and  without  reasonable  cause  as  the  facts  appear  to  a  reasonable  and
MALAYAN  INSURANCE,  INC.,  petitioner,  vs.  GOYU  &  SONS,  INC.,  respondent.   Co.  vs.  Bommarito  [CCA  8th]  42  F  [2d]  53,  70  ALR  1211;;  Phoenix  Ins.  Co.  vs
  853,  65  Am  St  Rep  307;;  Kusnetsky  vs.  Security  Ins.  Co.,  313  Mo.  143,  281  SW
Civil  Law;;  Insurance  Law;;  Mortgages;;  It  is  settled  that  a  mortgagor  and  a  mortgagee  have  separate  and   at  bar  does  not  show  that  MICO  wantonly  and  in  bad  faith  delayed  the  releas
distinct  insurable  interests  in  the  same  mortgaged  property,  such  that  each  one  of  them  may  insure  the    
same  property  for  his  own  sole  benefit;;  The  intentions  of  the  parties  as  shown  by  their  contemporaneous   Same;;  Same;;  Interests;;  The  essence  or  rationale  for  the  payment  of  interest  o
acts,  must  be  given  due  consideration  in  order  to  better  serve  the  interest  of  justice  and  equity.—It  is   and  distinct  from  that  of  surcharges  and  penalties;;  Court  fails  to  find  justificati
settled   that   a   mortgagor   and   a   mortgagee   have   separate   and   distinct   insurable   interests   in   the   same   outright   deletion   of   the   payment   of   interest   as   agreed   upon   in   the   respecti
mortgaged  property,  such  that  each  one  of  them  may  insure  the  same  property  for  his  own  sole  benefit.   essence  or  rationale  for  the  payment  of  interest  or  cost  of  money  is  separat
There  is  no  question  that  GOYU  could  insure  the  mortgaged  property  for  its  own  exclusive  benefit.  In  the   surcharges  and  penalties.  What  may  justify  a  court  in  not  allowing  the  credito
present  case,  although  it  appears  that  GOYU  obtained  the  subject  insurance  policies  naming  itself  as  the   penalties  despite  express  stipulation  therefor  in  a  valid  agreement,  may  not  e
sole  payee,  the  intentions  of  the  parties  as  shown  by  their  contemporaneous  acts,  must  be  given  due   of   interest.   The   charging   of   interest   for   loans   forms   a   very   essential   and   fu
consideration  in  order  to  better  serve  the  interest  of  justice  and  equity.   banking  business,  which  may  truly  be  considered  to  be  at  the  very  core  of  i
  inconceivable   for   a   bank   to   grant   loans   for   which   it   will   not   charge   any   inte
Same;;  Same;;  Same;;  It  is  basic  and  fundamental  that  the  first  mortgagee  has  superior  rights  over  junior   justification  for  the  Court  of  Appeals’  outright  deletion  of  the  payment  of  inte
mortgagees  or  attaching  creditors.—Anent  the  right  of  RCBC  to  intervene  in  Civil  Case  No.  1073,  before   respective  promissory  notes.  This  constitutes  gross  error.  
the   Zamboanga   Regional   Trial   Court,   since   it   has   been   determined   that   RCBC   has   the   right   to   the    
insurance   proceeds,   the   subject   matter   of   intervention   is   rendered   moot   and   academic.   Respondent   PETITIONS  for  review  on  certiorari  of  a  decision  of  the  Court  of  Appeals.  
Sebastian  must,  however,  yield  to  the  preferential  right  of  RCBC  over  the  MICO  insurance  policies.  It  is    
basic  and  fundamental  that  the  first  mortgagee  has  superior  rights  over  junior  mortgagees  or  attaching   The  facts  are  stated  in  the  opinion  of  the  Court.  
creditors.            Siguion  Reyna,  Montecillo  &  Ongsiako  for  petitioner  RCBC.  
           Rodolfo  P.  del  Prado  for  private  respondent  Goyu  &  Sons,  Inc.  
Same;;   Same;;   Section   53   of   the   Insurance   Code   ordains   that   the   insurance   proceeds   of   the   endorsed            Manuel  Melotindos  for  private  respondent  Go  Song  Hiap,  Spouses  Go  Ten
policies  shall  be  applied  exclusively  to  the  proper  interest  of  the  person  for  whose  benefit  it  was  made.— Betty  Go,  Jr.  
The   proceeds   of   the   8   insurance   policies   endorsed   to   RCBC   aggregate   to   P89,974,488.36.   Being            Linda  Eustaquio-­Lim  for  private  respondent  Alfredo  C.  Sebastian.  
exclusively  payable  to  RCBC  by  reason  of  the  endorsement  by  Alchester  to  RCBC,  which  we  already  ruled    
to  have  the  force  and  effect  of  an  endorsement  by  GOYU  itself,  these  8  policies  can  not  be  attached  by   MELO,  J.:  
GOYU’s  other  creditors  up  to  the  extent  of  the  GOYU’s  outstanding  obligation  in  RCBC’s  favor.  Section  53    
of   the   Insurance   Code   ordains   that   the   insurance   proceeds   of   the   endorsed   policies   shall   be   applied   The   issue   relevant   to   the   herein   three   consolidated   petitions   revolve   arou
exclusively  to  the  proper  interest  of  the  person  for  whose  benefit  it  was  made.  In  this  case,  to  the  extent   respondent   Goyu   &   Sons,   Inc.   (GOYU)   with   petitioner   Malayan   Insurance  
of   GOYU’s   obligation   with   RCBC,   the   interest   of   GOYU   in   the   subject   policies   had   been   transferred   to   connection   with   the   mortgage   contracts   entered   into   by   and   between  
Corporation  (RCBC)  and  GOYU.  
RCBC  effective  as  of  the  time  of  the  endorsement.  
 
 
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The  Court  of  Appeals  ordered  MICO  to  pay  GOYU  its  claims  in  the  total  amount  of  P74,040,518.58,  plus   In  the  meantime,  another  notice  of  garnishment  was  handed  down  by  anoth
37%  interest  per  annum  commending  July  27,  1992.  RCBC  was  ordered  to  pay  actual  and  compensatory   28)  for  the  amount  of  P8,696,838.75  (Exhibit  "22-­Malayan").  
damages   in   the   amount   of   P5,000,000.00.   MICO   and   RCBC   were   held   solidarily   liable   to   pay   GOYU    
P1,500,000.00  as  exemplary  damages  and  P1,500,000.00  for  attorney's  fees.  GOYU's  obligation  to  RCBC   After  trial,  Branch  3  of  the  Manila  RTC  rendered  judgment  in  favor  of  GOYU,  d
was  fixed  at  P68,785,069.04  as  of  April  1992,  without  any  interest,  surcharges,  and  penalties.  RCBC  and    
MICO  appealed  separately  but,  in  view  of  the  common  facts  and  issues  involved,  their  individual  petitions   WHEREFORE,  judgment  is  hereby  rendered  in  favor  of  the  plaintiff  a
were  consolidated.   Malayan  Insurance  Company,  Inc.  and  Rizal  Commercial  Banking  Corp
  as  follows:  
The  undisputed  facts  may  be  summarized  as  follows:    
  1.  For  defendant  Malayan  Insurance  Co.,  Inc.:  
GOYU   applied   for   credit   facilities   and   accommodations   with   RCBC   at   its   Binondo   Branch.   After   due    
evaluation,   RCBC   Binondo   Branch,   through   its   key   officers,   petitioners   Uy   Chun   Bing   and   Eli   D.   Lao,   a.  To  pay  the  plaintiff  its  fire  loss  claims  in  the  total  amount
recommended   GOYU's   application   for   approval   by   RCBC's   executive   committee.   A   credit   facility   in   the   amount  of  P50,000,000.00  which  is  deposited  with  this  Cou
amount  of  P30  million  was  initially  granted.  Upon  GOYU's  application  and  Uy's  and  Lao's  recommendation,    
RCBC's  executive  committee  increased  GOYU's  credit  facility  to  P50  million,  then  to  P90  million,  and  finally   b.  To  pay  the  plaintiff  damages  by  was  of  interest  for  the  
to  P117  million.   July   27,   1992   (ninety   days   after   defendant   insurer's   receip
  loss   and   notice   of   loss)   at   the   rate   of   twice   the   ceiling   p
As  security  for  its  credit  facilities  with  RCBC,  GOYU  executed  two  real  estate  mortgages  and  two  chattel   Board,  on  the  following  amounts:  
mortgages   in   favor   of   RCBC,   which   were   registered   with   the   Registry   of   Deeds   at   Valenzuela,   Metro    
Manila.  Under  each  of  these  four  mortgage  contracts,  GOYU  committed  itself  to  insure  the  mortgaged   1)  P50,000,000.00  —  from  July  27,  1992  up  to  the  time  
property  with  an  insurance  company  approved  by  RCBC,  and  subsequently,  to  endorse  and  deliver  the   with  this  Court  on  January  7,  1994;;  
insurance  polices  to  RCBC.    
  2)   P24,040,518.58   —   from   July   27,   1992   up   to   the
GOYU   obtained   in   its   name   a   total   of   ten   insurance   policies   from   MICO.   In   February   1992,   Alchester   attachments  were  received  by  defendant  Malayan;;  
Insurance  Agency,  Inc.,  the  insurance  agent  where  GOYU  obtained  the  Malayan  insurance  policies,  issued    
nine  endorsements  in  favor  of  RCBC  seemingly  upon  instructions  of  GOYU  (Exhibits  "1-­Malayan"  to  "9-­ 2.  For  defendant  Rizal  Commercial  Banking  Corporation:  
Malayan").    
  a.   To   pay   the   plaintiff   actual   and   compensatory   dam
On  April  27,  1992,  one  of  GOYU's  factory  buildings  in  Valenzuela  was  gutted  by  fire.  Consequently,  GOYU   P2,000,000.00;;  
submitted  its  claim  for  indemnity  on  account  of  the  loss  insured  against.  MICO  denied  the  claim  on  the    
ground  that  the  insurance  policies  were  either  attached  pursuant  to  writs  of  attachments/garnishments   3.  For  both  defendants  Malayan  and  RCBC:  
issued  by  various  courts  or  that  the  insurance  proceeds  were  also  claimed  by  other  creditors  of  GOYU    
alleging  better  rights  to  the  proceeds  than  the  insured.  GOYU  filed  a  complaint  for  specific  performance   a.  To  pay  the  plaintiff,  jointly  and  severally,  the  following  am
and   damages   which   was   docketed   at   the   Regional   Trial   Court   of   the   National   Capital   Judicial   Region    
(Manila,  Branch  3)  as  Civil  Case  No.  93-­65442,  now  subject  of  the  present  G.R.  No.  128833  and  128866.   1)  P1,000,000.00  as  exemplary  damages;;  
  2)  P1,000,000.00  as,  and  for,  attorney's  fees;;  
RCBC,  one  of  GOYU's  creditors,  also  filed  with  MICO  its  formal  claim  over  the  proceeds  of  the  insurance   3)  Costs  of  suit.  
policies,  but  said  claims  were  also  denied  for  the  same  reasons  that  MICO  denied  GOYU's  claims.    
  and  on  the  Counterclaim  of  defendant  RCBC,  ordering  the  plainti
In   an   interlocutory   order   dated   October   12,   1993   (Record,   pp.   311-­312),   the   Regional   Trial   Court   of   with  defendant  RCBC  in  the  amount  of  P68,785,069.04,  as  of  A
Manila  (Branch  3),  confirmed  that  GOYU's  other  creditors,  namely,  Urban  Bank,  Alfredo  Sebastian,  and   thereon  at  the  rate  stipulated  in  the  respective  promissory  note
Philippine  Trust  Company  obtained  their  respective  writs  of  attachments  from  various  courts,  covering  an   penalties)  per  computation,  pp.  14-­A,  14-­B  &  14-­C.  
aggregate   amount   of   P14,938,080.23,   and   ordered   that   the   proceeds   of   the   ten   insurance   policies   be    
deposited   with   the   said   court   minus   the   aforementioned   P14,938,080.23.   Accordingly,   on   January   7,   FURTHER,  the  Clerk  of  Court  of  the  Regional  Trial  Court  of  Manila  is
1994,  MICO  deposited  the  amount  of  P50,505,594.60  with  Branch  3  of  the  Manila  RTC.   immediately  to  the  plaintiff  the  amount  of  P50,000,000.00  deposited  w
  Malayan,  together  with  all  the  interest  earned  thereon.  
 
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(Record,  pp.  478-­479.)   action  between  Alfredo  C.  Sebastian  (the  creditor)  and  GOYU  (the  debtor),  w
  policies  were  attached  in  favor  of  Sebastian.  
From  this  judgment,  all  parties  interposed  their  respective  appeals.  GOYU  was  unsatisfied  with  the  amount    
awarded  in  its  favor.  MICO  and  RCBC  disputed  the  trial  court's  findings  of  liability  on  their  part.  The  Court   After  a  careful  reviews  of  the  material  facts  as  found  by  the  two  courts  below
of  Appeals  party  granted  GOYU's  appeal,  but  sustained  the  findings  of  the  trial  court  with  respect  to  MICO   and  applicable  laws,  we  find  merit  in  the  submission  of  RCBC  and  MICO.  
and  RCBC's  liabilities,  thusly:    
  The  several  causes  of  action  pursued  below  by  GOYU  gave  rise  to  several  re
WHEREFORE,  the  decision  of  the  lower  court  dated  June  29,  1994  is  hereby  modified  as  follows:   submitted  in  the  petitions  before  us.  This  Court,  however,  discerns  one  prim
  this  is,  whether  or  not  RCBC,  as  mortgagee,  has  any  right  over  the  insurance  p
1.  FOR  DEFENDANT  MALAYAN  INSURANCE  CO.,  INC:   mortgagor,  in  case  of  the  occurrence  of  loss.  
   
a)  To  pay  the  plaintiff  its  fire  loss  claim  in  the  total  amount  of  P74,040,518.58  less  the   As  earlier  mentioned,  accordant  with  the  credit  facilities  extended  by  RCBC  to
amount   of   P50,505,594.60   (per   O.R.   No.   3649285)   plus   deposited   in   court   and   several  mortgage  contracts  in  favor  of  RCBC.  It  was  expressly  stipulated  in  the
damages  by  way  of  interest  commencing  July  27,  1992  until  the  time  Goyu  receives   GOYU   shall   insure   the   mortgaged   property   with   any   of   the   insurance   comp
the  said  amount  at  the  rate  of  thirty-­seven  (37%)  percent   per  annum  which  is  twice   GOYU  indeed  insured  the  mortgaged  property  with  MICO,  an  insurance  com
the  ceiling  prescribed  by  the  Monetary  Board.   Bases  on  their  stipulations  in  the  mortgage  contracts,  GOYU  was  supposed  t
  policies   in   favor   of,   and   deliver   them,   to   RCBC.   Alchester   Insurance   Agency
2.  FOR  DEFENDANT  RIZAL  COMMERCIAL  BANKING  CORPORATION;;   from  whom  GOYU  obtained  the  subject  insurance  policies,  prepared  the  nine  e
  Malayan"  to  "9-­Malayan";;  also  Exh.  "51-­RCBC"  to  "59-­RCBC"),  copies  of  whic
a)   To   pay   the   plaintiff   actual   and   compensatory   damages   in   the   amount   of   RCBC,   and   MICO.   However,   because   these   endorsements   do   not   bear   the  
P5,000,000.00.   GOYU,  the  trial  court,  as  well  as  the  Court  of  Appeals,  concluded  that  the  end
   
3.   FOR   DEFENDANTS   MALAYAN   INSURANCE   CO.,   INC.,   RIZAL   COMMERCIAL   BANKING   We  do  not  quite  agree.  
CORPORATION,  UY  CHUN  BING  AND  ELI  D.  LAO:    
  It   is   settled   that   a   mortgagor   and   a   mortgagee   have   separated   and   distinc
a)  To  pay  the  plaintiff  jointly  and  severally  the  following  amounts:   same  mortgaged  property,  such  that  each  one  of  them  may  insure  the  same
  benefit.  There  is  no  question  that  GOYU  could  insure  the  mortgaged  property  fo
1.  P1,500,000.00  as  exemplary  damages;;   In  the  present  case,  although  it  appears  that  GOYU  obtained  the  subject  insu
2.  P1,500,000.00  as  and  for  attorney's  fees.   as  the  sole  payee,  the  intentions  of  the  parties  as  shown  by  their  contempora
  due  consideration  in  order  to  better  serve  the  interest  of  justice  and  equity.  
4.   And   on   RCBC's   Counterclaim,   ordering   the   plaintiff   Goyu   &   Sons,   Inc.   to   pay   its   loan    
obligation   with   RCBC   in   the   amount   of   P68,785,069.04   as   of   April   27,   1992   without   any   It  is  to  be  noted  that  nine  endorsement  documents  were  prepared  by  Alche
interest,  surcharges  and  penalties.   Court  is  in  a  quandary  how  Alchester  could  arrive  at  the  idea  of  endorsing  an
  in   favor   of   any   particular   beneficiary   or   payee   other   than   the   insured   had  
The  Clerk  of  the  Court  of  the  Regional  Trial  Court  of  Manila  is  hereby  ordered  to  immediately   beneficiary  been  specifically  disclosed  by  the  insured  itself.  It  is  also  significant
release  to  Goyu  &  Sons,  Inc.  the  amount  of  P50,505,594.60  (per  O.R.  No.  3649285)  deposited   purposely  took  the  insurance  policies  from  MICO,  a  sister  company  of  RCBC,  a
with  it  by  Malayan  Insurance  Co.,  Inc.,  together  with  all  the  interests  thereon.   insurance   company.   Alchester   would   not   have   found   out   that   the   subjec
  mortgaged  to  RCBC  had  not  such  information  been  voluntarily  disclosed  by  G
(Rollo,  p.  200.)   for   GOYU,   Alchester   would   not   have   known   of   GOYU's   intention   of   obtain
  compliance  with  its  undertaking  in  the  mortgage  contracts  with  RCBC,  and  
RCBC  and  MICO  are  now  before  us  in  G.R.  No.  128833  and  128866,  respectively,  seeking  review  and   have  endorsed  the  policies  to  RCBC  had  it  not  been  so  directed  by  GOYU.  
consequent  reversal  of  the  above  dispositions  of  the  Court  of  Appeals.    
  On  equitable  principles,  particularly  on  the  ground  of  estoppel,  the  Court  is  c
In  G.R.  No.  128834,  RCBC  likewise  appeals  from  the  decision  in  C.A.  G.R.  No.  CV-­48376,  which  case,  by   of   mortgagor   RCBC.   The   basis   and   purpose   of   the   doctrine   was   explained   i
virtue  of  the  Court  of  Appeals'  resolution  dated  August  7,  1996,  was  consolidated  with  C.A.  G.R.  No.  CV-­ vs.  Court  of  Appeals  (94  SCRA  357  [1979]),  to  wit:  
46162  (subject  of  herein  G.R.  No.  128833).  At  issue  in  said  petition  is  RCBC's  right  to  intervene  in  the    
 O B L I G A T I O N S   &   C O N T R A C T S   C a s e s   B a t c
 
The  doctrine  of  estoppel  is  based  upon  the  grounds  of  public,  policy,  fair  dealing,  good  faith  and   3.  Endorsement  documents  were  prepared  by  MICO's  underwriter,  Alchester  I
justice,   and   its   purpose   is   to   forbid   one   to   speak   against   his   own   act,   representations,   or   copies  thereof  were  sent  to  GOYU,  MICO,  and  RCBC.  GOYU  did  not  assail,  unti
commitments   to   the   injury   of   one   to   whom   they   were   directed   and   who   reasonably   relied   endorsements.  
thereon.  The  doctrine  of  estoppel  springs  from  equitable  principles  and  the  equities  in  the  case.    
It  is  designed  to  aid  the  law  in  the  administration  of  justice  where  without  its  aid  injustice  might   4.  GOYU  continued  until  the  occurrence  of  the  fire,  to  enjoy  the  benefits  of  th
result.  It  has  been  applied  by  this  Court  wherever  and  whenever  special  circumstances  of  a  case   by  RCBC  which  was  conditioned  upon  the  endorsement  of  the  insurance  polic
so  demand.   cover  the  mortgaged  properties.  
   
(p.  368.)   This   Court   cannot   over   stress   the   fact   that   upon   receiving   its   copies   of   the
  prepared  by  Alchester,  GOYU,  despite  the  absence  of  its  written  conformity  th
Evelyn   Lozada   of   Alchester   testified   that   upon   instructions   of   Mr.   Go,   through   a   certain   Mr.   Yam,   she   said  endorsement  to  be  sufficient  compliance  with  its  obligation  under  the  mor
prepared   in   quadruplicate   on   February   11,   1992   the   nine   endorsement   documents   for   GOYU's   nine   accordingly   continued   to   extend   the   benefits   of   its   credits   facilities   and   G
insurance  policies  in  favor  of  RCBC.  The  original  copies  of  each  of  these  nine  endorsement  documents   therefrom.  Just  as  plain  too  is  the  intention  of  the  parties  to  constitute  RCB
were  sent  to  GOYU,  and  the  others  were  sent  to  RCBC  and  MICO,  while  the  fourth  copies  were  detained   various  insurance  policies  obtained  by  GOYU.  The  intention  of  the  parties  will
for  Alchester's  file  (tsn,  February  23,  pp.  7-­8).  GOYU  has  not  denied  having  received  from  Alchester  the   and  effect  particular  case.  The  insurance  proceeds  may,  therefore,  be  exclusiv
originals  of  these  documents.   under  the  factual  circumstances  of  the  case,  is  truly  the  person  or  entity  for
  were  clearly  intended.  
RCBC,  in  good  faith,  relied  upon  the  endorsement  documents  sent  to  it  as  this  was  only  pursuant  to  the    
stipulation  in  the  mortgage  contracts.  We  find  such  reliance  to  be  justified  under  the  circumstances  of   Moreover,   the   law's   evident   intention   to   protect   the   interests   of   the   mortg
the  case.  GOYU  failed  to  seasonably  repudiate  the  authority  of  the  person  or  persons  who  prepared  such   property  is  expressed  in  Article  2127  of  the  Civil  Code  which  states:  
endorsements.  Over  and  above  this,  GOYU  continued,  in  the  meantime,  to  enjoy  the  benefits  of  the  credit    
facilities  extended  to  it  by  RCBC.  After  the  occurrence  of  the  loss  insure  against,  it  was  too  late  for  GOYU   Art.  2127.  The  mortgage  extends  to  the  natural  accessions,  to  the  imp
to  disown  the  endorsements  for  any  imagined  or  contrived  lack  of  authority  of  Alchester  to  prepare  and   and  the  rents  or  income  not  yet  received  when  the  obligation  becom
issue  said  endorsements.  If  there  had  not  been  actually  an  implied  ratification  of  said  endorsements  by   of  the  indemnity  granted  or  owing  to  the  proprietor  from  the  insurers  
virtue  of  GOYU's  inaction  in  this  case,  GOYU  is  at  the  very  least  estopped  from  assailing  their  operative   or  in  virtue  of  expropriation  for  public  use,  with  the  declarations,  am
effects.  To  permit  GOYU  to  capitalize  on  its  non-­confirmation  of  these  endorsements  while  it  continued   established  by  law,  whether  the  estate  remains  in  the  possession  of  
to   enjoy   the   benefits   of   the   credit   facilities   of   RCBC   which   believed   in   good   faith   that   there   was   due   into  the  hands  of  a  third  person.  
endorsement   pursuant   to   their   mortgage   contracts,   is   to   countenance   grave   contravention   of   public    
policy,  fair  dealing,  good  faith,  and  justice.  Such  an  unjust  situation,  the  Court  cannot  sanction.  Under   Significantly,  the  Court  notes  that  out  of  the  10  insurance  policies  subject  o
the   peculiar   circumstances   obtaining   in   this   case,   the   Court   is   bound   to   recognize   RCBC's   right   to   the   appear   to   have   been   subject   of   the   endorsements   prepared   and   delivered  
proceeds  of  the  insurance  polices  if  not  for  the  actual  endorsement  of  the  policies,  at  least  on  the  basis   instructions  of  GOYU  as  shown  below:  
of  the  equitable  principle  of  estoppel.    
  INSURANCE  POLICY  PARTICULARS  ENDORSEMENT  
GOYU  cannot  seek  relief  under  Section  53  of  the  Insurance  Code  which  provides  that  the  proceeds  of    
insurance  shall  exclusively  apply  to  the  interest  of  the  person  in  whose  name  or  for  whose  benefit  it  is   a.  Policy  Number  F-­114-­07795  None  
made.  The  peculiarity  of  the  circumstances  obtaining  in  the  instant  case  presents  a  justification  to  take   Issue  Date  March  18,  1992  
exception  to  the  strict  application  of  said  provision,  it  having  been  sufficiently  established  that  it  was  the   Expiry  Date  April  5,  1993  
intention   of   the   parties   to   designate   RCBC   as   the   party   for   whose   benefit   the   insurance   policies   were   Amount  P9,646,224.92  
taken  out.  Consider  thus  the  following:    
  b.  Policy  Number  ACIA/F-­174-­07660  Exhibit  "1-­Malayan"  
1.  It  is  undisputed  that  the  insured  pieces  of  property  were  the  subject  of  mortgage  contracts  entered   Issue  Date  January  18,  1992  
into  between  RCBC  and  GOYU  in  consideration  of  and  for  securing  GOYU's  credit  facilities  from  RCBC.   Expiry  Date  February  9,  1993  
The  mortgage  contracts  contained  common  provisions  whereby  GOYU,  as  mortgagor,  undertook  to  have   Amount  P4,307,217.54  
the  mortgaged  property  properly  covered  against  any  loss  by  an  insurance  company  acceptable  to  RCBC.    
  c.  Policy  Number  ACIA/F-­114-­07661  Exhibit  "2-­Malayan"  
2.  GOYU  voluntarily  procured  insurance  policies  to  cover  the  mortgaged  property  from  MICO,  no  less  than   Issue  Date  January  18,  1992  
a  sister  company  of  RCBC  and  definitely  an  acceptable  insurance  company  to  RCBC.   Expiry  Date  February  15,  1993  
 O B L I G A T I O N S   &   C O N T R A C T S   C a s e s   B a t c
 
Amount  P6,603,586.43   to  have  the  force  and  effect  of  an  endorsement  by  GOYU  itself,  these  8  polic
  GOYU's  other  creditors  up  to  the  extent  of  the  GOYU's  outstanding  obligation  
d.  Policy  Number  ACIA/F-­114-­07662  Exhibit  "3-­Malayan"   of   the   Insurance   Code   ordains   that   the   insurance   proceeds   of   the   endorse
Issue  Date  January  18,  1992   exclusively  to  the  proper  interest  of  the  person  for  whose  benefit  it  was  made
Expiry  Date  (not  legible)   of   GOYU's   obligation   with   RCBC,   the   interest   of   GOYU   in   the   subject   policie
Amount  P6,603,586.43   RCBC  effective  as  of  the  time  of  the  endorsement.  These  policies  may  no  long
  creditors   of   GOYU,   like   Alfredo   Sebastian   in   the   present   G.R.   No.   128834
e.  Policy  Number  ACIA/F-­114-­07663  Exhibit  "4-­Malayan"   forthwith  be  dismissed  for  being  moot  and  academic  in  view  of  the  results  re
Issue  Date  January  18,  1992   other   policies   amounting   to   P19,646,224.92   may   be   validly   attached,   garn
Expiry  Date  February  9,  1993   GOYU's  other  creditors.  To  the  extent  of  GOYU's  outstanding  obligation  with
Amount  P9,457,972.76   other  insurance  policies  above-­listed  which  were  endorsed  to  RCBC,  are,  ther
  attachment,  garnishment,  and  levy  by  the  other  creditors  of  GOYU.  
f.  Policy  Number  ACIA/F-­114-­07623  Exhibit  "7-­Malayan"    
Issue  Date  January  13,  1992   This  brings  us  to  the  next  issue  to  be  resolved,  which  is,  the  extent  of  GOYU's  
Expiry  Date  January  13,  1993   RCBC  which  the  proceeds  of  the  8  insurance  policies  will  discharge  and  liquid
Amount  P24,750,000.00   actual  amount  of  GOYU's  liability  to  RCBC.  
   
g.  Policy  Number  ACIA/F-­174-­07223  Exhibit  "6-­Malayan"   The  Court  of  Appeals  simply  echoed  the  declaration  of  the  trial  court  finding  t
Issue  Date  May  29,  1991   to   RCBC   was   only   P68,785,060.04   as   of   April   27,   1992,   thus   sanctioning   th
Expiry  Date  June  27,  1992   Promissory  Note  No.  421-­92  (renewal  of  Promissory  Note  No.  908-­91)  and  P
Amount  P6,000,000.00   (renewal  of  Promissory  Note  No.  952-­91)  on  the  ground  that  their  execution
  not   only   are   these   dated   after   the   fire,   but   also   because   the   signatures  
h.  Policy  Number  CI/F-­128-­03341  None   representative  are  conspicuously  absent.  Accordingly,  the  Court  of  Appeals  sp
Issue  Date  May  3,  1991    
Expiry  Date  May  3,  1992   .   .   .   Hence,   this   Court   is   inclined   to   conclude   that   said   promissory
Amount  P10,000,000.00   plaintiff  in  bank  terms,  as  averred  by  plaintiff,  in  contemplation  of  
  loans,  for  the  same  practice  of  procedure  has  always  been  adopted  i
i.  Policy  Number  F-­114-­07402  Exhibit  "8-­Malayan"   the  bank.  
Issue  Date  September  16,  1991    
Expiry  Date  October  19,  1992   (Rollo,  pp.  181-­182.)  
Amount  P32,252,125.20    
  The  fact  that  the  promissory  notes  bear  dates  posterior  to  the  fire  does  not
j.  Policy  Number  F-­114-­07525  Exhibit  "9-­Malayan"   documents   are   spurious,   for   it   is   presumed   that   the   ordinary   course   of   bu
Issue  Date  November  20,  1991   (Metropolitan  Bank  and  Trust  Company  vs.  Quilts  and  All,  Inc.,  22  SCRA  486  [1
Expiry  Date  December  5,  1992   the  holder  of  the  negotiable  instrument  has  the  burden  of  proof  of  showing  t
Amount  P6,603,586.43   obligee  any  amount  (Travel-­On,  Inc.  vs.  Court  of  Appeals,  210  SCRA  351  [199
   
(pp.  456-­457,  Record;;  Folder  of  Exhibits  for  MICO.)   Even  casting  aside  the  presumption  of  regularity  of  private  transactions,  receip
  P121,966,058.67  (Exhibits  1-­29,  RCBC)  was  admitted  by  GOYU  as  indicated  in
Policy   Number   F-­114-­07795   [(a)   above]   has   not   been   endorsed.   This   fact   was   admitted   by   MICO's   Hiap  when  he  answered  the  queries  of  the  trial  court.  
witness,  Atty.  Farolan  (tsn,  February  16,  1994,  p.  25).  Likewise,  the  record  shows  no  endorsement  for    
Policy   Number   CI/F-­128-­03341   [(h)   above].   Also,   one   of   the   endorsement   documents,   Exhibit   "5-­ ATTY.  NATIVIDAD  
Malayan",  refers  to  a  certain  insurance  policy  number  ACIA-­F-­07066,  which  is  not  among  the  insurance    
policies  involved  in  the  complaint.   Q:   But   insofar   as   the   amount   stated   in   Exhibits   1   to   29-­RCBC,   you
  stated  therein?  
The   proceeds   of   the   8   insurance   policies   endorsed   to   RCBC   aggregate   to   P89,974,488.36.   Being    
excessively  payable  to  RCBC  by  reason  of  the  endorsement  by  Alchester  to  RCBC,  which  we  already  ruled   A:  Yes,  sir,  I  received  the  amount.  
 O B L I G A T I O N S   &   C O N T R A C T S   C a s e s   B a t c
 
COURT   It  should,  however,  be  quickly  added  that  whatever  amount  RCBC  may  have
He  is  asking  if  he  received  all  the  amounts  stated  in  Exhibits  1  to  29-­RCBC?   insurers   of   the   mortgage   property   will,   nonetheless,   have   to   be   applied   as
  obligation.  But,  contrary  to  the  lower  courts'  findings,  payments  effected  by  
WITNESS:   1993  should  no  longer  be  deducted.  Such  payments  had  obviously  been  duly  
Yes,  Your  Honor,  I  received  all  the  amounts.   aforequoted   letter   date   March   9,   1993,   wherein   it   admitted   that   its   p
  P116,301,992.60  as  of  January  21,  1993.  
COURT    
Indicated  in  the  Promissory  Notes?   The  net  obligation  of  GOYU,  after  deductions,  is  thus  reduced  to  P107,246,887
  to  wit:  
WITNESS   Total  Obligation  as  admitted  by  GOYU  
A.  The  promissory  Notes  they  did  not  give  to  me  but  the  amount  I  asked  which  is  correct,  Your   as  of  January  21,  1993:            
Honor.    
  Broken  down  as  follows:  
COURT   Principal  1  Interest  
  Regular           80,535,946.32  
Q  Your  mean  to  say  the  amounts  indicated  in  Exhibits  1  to  29-­RCBC  is  correct?   FDU           27,548,025.17  
  ____________  
A  Yes,  Your  Honor.   Total           108,083,971.49    
   
(tsn,  Jan.  14,  1994,  p.  26.)   LESS:  
  1)  Proceeds  from  
Furthermore,  aside  from  its  judicial  admission  of  having  received  all  the  proceeds  of  the  29  promissory   Seaboard  Eastern  
notes   as   hereinabove   quotes,   GOYU   also   offered   and   admitted   to   RCBC   that   is   obligation   be   fixed   at   Insurance  Company            6,095,145.81  
P116,301,992.60  as  shown  in  its  letter  date  March  9,  1993,  which  pertinently  reads:    
  2)  Proceeds  from  
We   wish   to   inform   you,   therefore   that   we   are   ready   and   willing   to   pay   the   current   past   due   Equitable  Insurance  
account  of  this  company  in  the  amount  of  P116,301,992.60  as  of  21  January  1993,  specified  in   Company              2,756,373.00  
pars.  15,  p.  10,  and  18,  p.  13  of  your  affidavits  of  Third  Party  Claims  in  the  Urban  case  at  Makati,   3)  Payment  from  
Metro   Manila   and   in   the   Zamboanga   case   at   Zamboanga   city,   respectively,   less   the   total   of   foreign  department  
P8,851,519.71  paid  from  the  Seaboard  and  Equitable  insurance  companies  and  other  legitimate   negotiation:                  203,584.89  
deductions.   We   accept   and   confirm   this   amount   of   P116,301,992.60   as   stated   as   true   and  
correct.                
  NET  AMOUNT  as  of  January  21,  1993        
(Exhibit  BB.)    
  The  need  for  the  payment  of  interest  due  the  principal  amount  of  the  oblig
The  Court  of  Appeals  erred  in  placing  much  significance  on  the  fact  that  the  excluded  promissory  notes   money   to   RCBC,   the   primary   end   and   the   ultimate   reason   for   RCBC's   exist
are   dated   after   the   fire.   It   failed   to   consider   that   said   notes   had   for   their   origin   transactions   recognized  by  the  trial  court  when  it  ruled  favorably  on  RCBC's  counterclaim,
consummated  prior  to  the  fire.  Thus,  careful  attention  must  be  paid  to  the  fact  that  Promissory  Notes  No.   loan  obligation  with  RCBC  in  the  amount  of  P68,785,069.04,  as  of  April  27,  1
420-­92  and  421-­92  are  mere  renewals  of  Promissory  Notes  No.  908-­91  and  952-­91,  loans  already  availed   at   the   rate   stipulated   in   the   respective   promissory   notes   (without   surch
of  by  GOYU.   computation,   pp.   14-­A,   14-­B   14-­C"   (Record,   p.   479).   Inexplicably,   the   Cour
  laying  down  the  factual  or  legal  justification  for  its  ruling,  modified  the  trial  
The  two  courts  below  erred  in  failing  to  see  that  the  promissory  notes  which  they  ruled  should  be  excluded   GOYU  "to  pay  the  principal  amount  of  P68,785,069.04   without  any  interest,
for  bearing  dates  which  are  after  that  of  the  fire,  are  mere   renewals  of  previous  ones.  The  proceeds  of   (Rollo,  p.  200).  
the  loan  represented  by  these  promissory  notes  were  admittedly  received  by  GOYU.  There  is  ample  factual    
and  legal  basis  for  giving  GOYU's  judicial  admission  of  liability  in  the  amount  of  P116,301,992.60  full  force   It  is  to  be  noted  in  this  regard  that  even  the  trial  court  hedgingly  and  with  mu
and  effect.   payment  of  additional  interest,  penalties,  and  charges,  in  this  manner:  
 
 O B L I G A T I O N S   &   C O N T R A C T S   C a s e s   B a t c
 
Regarding   defendant   RCBC's   commitment   not   to   charge   additional   interest,   penalties   and   3.  When  the  judgment  of  the  court  awarding  a  sum  of  money  becom
surcharges,   the   same   does   not   require   that   it   be   embodied   in   a   document   or   some   form   of   rate  of  legal  interest,  whether  the  case  falls  under  paragraph  1  or  pa
writing   to   be   binding   and   enforceable.   The   principle   is   well   known   that   generally   a   verbal   12%  per  annum  from  such  finality  until  its  satisfaction,  this  interim  
agreement  or  contract  is  no  less  binding  and  effective  than  a  written  one.  And  the  existence  of   by  then  an  equivalent  to  a  forbearance  of  credit.  
such  a  verbal  agreement  has  been  amply  established  by  the  evidence  in  this  case.  In  any  event,    
regardless  of  the  existence  of  such  verbal  agreement,  it  would  still  be  unjust  and  inequitable  for   (pp.  95-­97).  
defendant   RCBC   to   charge   the   plaintiff   with   surcharges   and   penalties   considering   the   latter's    
pitiful  situation.  (Emphasis  supplied).   There   being   written   stipulations   as   to   the   rate   of   interest   owing   on   each   s
  summarized  and  tabulated  by  the  trial  court  in  its  decision  (pp.  470  and  471,  R
(Record,  p.  476)   rates  must  be  followed.  This  is  very  clear  from  paragraph  II,  sub-­paragraph  1
   
The  essence  or  rationale  for  the  payment  of  interest  or  cost  of  money  is  separate  and  distinct  from  that   On  the  issue  of  payment  of  surcharges  and  penalties,  we  partly  agree  that  G
of  surcharges  and  penalties.  What  may  justify  a  court  in  not  allowing  the  creditor  to  charge  surcharges   be   taken   into   account.   We   do   not   agree,   however,   that   payment   of   any   a
and   penalties   despite   express   stipulation   therefor   in   a   valid   agreement,   may   not   equally   justify   non-­ penalties  should  altogether  be  deleted.  Even  assuming  that  RCBC,  through  its  
payment  of  interest.  The  charging  of  interest  for  loans  forms  a  very  essential  and  fundamental  element   petitioners  Eli  Lao  and  Uy  Chun  Bing,  may  have  relayed  its  assurance  for  assist
of  the  banking  business,  which  may  truly  be  considered  to  be  at  the  very  core  of  its  existence  or  being.   after  the  occurrence  of  the  fire,  we  cannot  accept  the  lower  courts'  finding  t
It  is  inconceivable  for  a  bank  to  grant  loans  for  which  it  will  not  charge  any  interest  at  all.  We  fail  to  find   facto   effectively   waived   collection   of   any   additional   interests,   surcharges,  
justification  for  the  Court  of  Appeal's  outright  deletion  of  the  payment  of  interest  as  agreed  upon  in  the   Assurances  of  assistance  are  one  thing,  but  waiver  of  additional  interests,  su
respective  promissory  notes.  This  constitutes  gross  error.   another.  
   
For  the  computation  of  the  interest  due  to  be  paid  to  RCBC,  the  following  rules  of  thumb  laid  down  by   Surcharges   and   penalties   agreed   to   be   paid   by   the   debtor   in   case   of   defau
this  Court  in  Eastern  Shipping  Lines,  Inc.  vs.  Court  of  Appeals  (234  SCRA  78  [1994]),  shall  apply,  to  wit:   liquidated  damages,  covered  by  Section  4,  Chapter  3,  Title  XVIII  of  the  Civil  
  provides:  
I.   When   an   obligation,   regardless   of   its   source,   i.e.,   law,   contracts,   quasi-­contracts,   delicts   or   quasi-­  
delicts  is  breached,  the  contravenor  can  be  held  liable  for  damages.  The  provisions  under  Title  XVIII  on   Art.  2227.  Liquidated  damages,  whether  intended  as  a  indemnity  or
"Damages"  of  the  Civil  Code  govern  in  determining  the  measure  of  recoverable  damages.   reduced  if  they  are  iniquitous  and  unconscionable.  
   
II.  With  regard  particularly  to  an  award  of  interest  in  the  concept  of  actual  and  compensatory  damages,   In   exercising   this   vested   power   to   determine   what   is   iniquitous   and   uncon
the  rate  of  interest,  as  well  as  the  actual  thereof,  is  imposed,  as  follows:   consider  the  circumstances  of  each  case.  It  should  be  stressed  that  the  Court  w
  ruling  that  surcharges  and  penalties  imposed  by  banks  for  non-­payment  of  th
1.  When  the  obligation  is  breached,  and  it  consists  in  the  payment  of  a  sum  of  money,   i.e.,  a   are  generally  iniquitous  and  unconscionable.  What  may  be  iniquitous  and  un
loan  or  forbearance  of  money,  the  interest  due  should  be  that  which  may  have  been  stipulated   may  be  totally  just  and  equitable  in  another.  This  provision  of  law  will  have  to  b
in  writing.  Furthermore,  the  interest  due  shall  itself  earn  legal  interest  from  the  time  it  is  judicially   facts  of  any  given  case.  Given  the  circumstance  under  which  GOYU  found  its
demanded.   In   the   absence   of   stipulation,   the   rate   of   interest   shall   be   12%  per  annum   to   be   the  fire,  the  Court  rules  the  surcharges  rates  ranging  anywhere  from  9%  to  27%
computed   from   default,   i.e.,   from   judicial   or   extrajudicial   demand   under   and   subject   to   the   of  36%,  to  be  definitely  iniquitous  and  unconscionable.  The  Court  tempers  t
provisions  of  Article  1169  of  the  Civil  Code.   respectively.  Furthermore,  in  the  light  of  GOYU's  offer  to  pay  the  amount  of  P1
  March  1993  (See:  Exhibit  "BB"),  which  RCBC  refused,  we  find  it  more  in  keep
2.  When  an  obligation,  not  constituting  a  loan  or  forbearance  of  money,  is  breached,  an  interest   for  RCBC  not  to  charge  additional  interest,  surcharges,  and  penalties  from  tha
on  the  amount  of  damages  awarded  may  be  imposed  at  the  discretion  of  the  court  at  the  rate    
of  6%  per  annum.  No  interest,  however,  shall  be  adjudged  on  unliquidated  claims  or  damages   Given  the  factual  milieu  hereover,  we  rule  that  it  was  error  to  hold  MICO  liab
except   when   or   until   the   demand   can   be   established   with   reasonable   certainty.   Accordingly,   or  withholding  the  proceeds  of  the  insurance  claim  to  GOYU.  
where  the  demand  is  established  with  reasonable  certainty,  the  interest  shall  begin  to  run  from    
the   time   the   claim   is   made   judicially   or   extrajudicially   (Art.   1169,   Civil   Code)   but   when   such   Firstly,  by  virtue  of  the  mortgage  contracts  as  well  as  the  endorsements  of  th
certainty  cannot  be  so  reasonably  established  at  the  time  the  demand  is  made,  the  interest  shall   has   the   right   to   claim   the   insurance   proceeds,   in   substitution   of   the   prope
begin   to   run   only   from   the   date   of   the   judgment   of   the   court   is   made   (at   which   time   the   assigned  its  rights,  GOYU  lost  its  standing  as  the  beneficiary  of  the  said  insura
quantification  of  damages  may  be  deemed  to  have  been  reasonably  ascertained).  The  actual    
base  for  the  computation  of  legal  interest  shall,  in  any  case,  be  on  the  amount  finally  adjudged.  
 O B L I G A T I O N S   &   C O N T R A C T S   C a s e s   B a t c
 
Secondly,  for  an  insurance  company  to  be  held  liable  for  unreasonably  delaying  and  withholding  payment   WHEREFORE,  the  petitions  are  hereby  GRANTED  and  the  decision  and  resolu
of   insurance   proceeds,   the   delay   must   be   wanton,   oppressive,   or   malevolent   (Zenith   Insurance   and  April  3,  1997  in  CA-­G.R.  CV  No.  46162  are  hereby  REVERSED  and  SET  ASID
Corporation  vs.  CA.  185  SCRA  403  [1990]).  It  is  generally  agreed,  however,  that  an  insurer  may  in  good    
faith  and  honesty  entertain  a  difference  of  opinion  as  to  its  liability.  Accordingly,  the  statutory  penalty  for   1.   Dismissing   the   Complaint   of   private   respondent   GOYU   in   Civil   C
vexatious   refusal   of   an   insurer   to   pay   a   claim   should   not   be   inflicted   unless   the   evidence   and   Branch  3  of  the  Manila  Trial  Court  for  lack  of  merit;;  
circumstances  show  that  such  refusal  was  willful  and  without  reasonable  cause  as  the  facts  appear  to  a    
reasonable   and   prudent   man   (Bufallo   Ins.   Co.   vs.   Bommarito   [CCA   8th]   42   F   [2d]   53,   70   ALR   1211;;   2.   Ordering   Malayan   Insurance   Company,   Inc.   to   deliver   to   R
Phoenix  Ins.  Co.  vs.  Clay,  101  Ga.  331,  28  SE  853,  65  Am  St.  Rep  307;;  Kusnetsky  vs.  Security  Ins.  Co.,   Corporation  the  proceeds  of  the  insurance  policies  in  the  amount  of  P
313  Mo.  143,  281  SW  47,  45  ALR  189).  The  case  at  bar  does  not  show  that  MICO  wantonly  and  in  bad   of   adjuster   Toplis   &   Harding   (Far   East),   Inc.,   Exhibits   "2"   and   "
faith   delayed   the   release   of   the   proceeds.   The   problem   in   the   determination   of   who   is   the   actual   P50,505,594.60  (per  O.R.  No.  3649285);;  
beneficiary  of  the  insurance  policies,  aggravated  by  the  claim  of  various  creditors  who  wanted  to  partake    
of  the  insurance  proceeds,  not  to  mention  the  importance  of  the  endorsement  to  RCBC,  to  our  mind,  and   3.  Ordering  the  Clerk  of  Court  to  release  the  amount  of  P50,505,594
as  now  borne  out  by  the  outcome  herein,  justified  MICO  in  withholding  payment  to  GOYU.   earned  to  Rizal  Commercial  Banking  Corporation;;  
   
In  adjudging  RCBC  liable  in  damages  to  GOYU,  the  Court  of  Appeals  said  that  RCBC  cannot  avail  itself  of   4.   Ordering   Goyu   &   Sons,   Inc.   to   pay   its   loan   obligation   with  
two  simultaneous  remedies  in  enforcing  the  claim  of  an  unpaid  creditor,  one  for  specific  performance  and   Corporation   in   the   principal   amount   of   P107,246,887.90,   with   inter
the  other  for  foreclosure.  In  doing  so,  said  the  appellate  court,  the  second  action  is  deemed  barred,  RCBC   stipulated  in  each  promissory  note  from  January  21,  1993  until  fin
having  split  a  single  cause  of  action  (Rollo,  pp.  195-­199).  The  Court  of  Appeals  was  too  accommodating   surcharges  at  2%  and  penalties  at  3%  from  January  21,  1993  to  Marc
in   giving   due   consideration   to   this   argument   of   GOYU,   for   the   foreclosure   suit   is   still   pending   appeal   made  by  Malayan  Insurance  Company,  Inc.  and  the  proceeds  of  the  
before  the  same  Court  of  Appeals  in  CA  G.R.  CV  No.  46247,  the  case  having  been  elevated  by  RCBC.   trial  court  and  its  earned  interest.  The  total  amount  due  RCBC  at  the
  judgment  shall  earn  interest  at  the  legal  rate  of  12%  in  lieu  of  all  oth
In  finding  that  the  foreclosure  suit  cannot  prosper,  the  Fifteenth  Division  of  the  Court  of  Appeals  pre-­ charges  until  fully  paid.  
empted  the  resolution  of  said  foreclosure  case  which  is  not  before  it.  This  is  plain  reversible  error  if  not    
grave  abuse  of  discretion.   The  petition  of  Rizal  Commercial  Banking  Corporation  against  the  respondent
  is   DISMISSED   for   being   moot   and   academic   in   view   of   the   results   here
As  held  in  Peña  vs.  Court  of  Appeals  (245  SCRA  691  [1995]):   Sebastian's  right  as  attaching  creditor  must  yield  to  the  preferential  rights  of
  Corporation  over  the  Malayan  insurance  policies  as  first  mortgagee.  
It   should   have   been   enough,   nonetheless,   for   the   appellate   court   to   merely   set   aside   the    
questioned  ordered  of  the  trial  court  for  having  been  issued  by  the  latter  with  grave  abuse  of   SO  ORDERED.  
discretion.  In  likewise  enjoining  permanently  herein  petitioner  "from  entering  in  and  interfering    
with  the  use  or  occupation  and  enjoyment  of  petitioner's  (now  private  respondent)  residential   Regalado,  Puno,  Mendoza  and  Martinez,  JJ.,  concur.  
house  and  compound,"  the  appellate  court  in  effect,  precipitately  resolved  with  finality  the  case    
for  injunction  that  was  yet  to  be  heard  on  the  merits  by  the  lower  court.  Elevated  to  the  appellate   Petitions  granted,  decision  and  resolution  reversed  and  set  aside.  
court,  it  might  be  stressed,  were  mere  incidents  of  the  principal  case  still  pending  with  the  trial    
court.  In   Municipality  of  Biñan,  Laguna  vs.   Court  of  Appeals,  219  SCRA  69,  we  ruled  that  the  
Note.—Where  both  parties  offer  a  conflicting  interpretation  of  a  contract  the
Court  of  Appeals  would  have  "no  jurisdiction  in  a  certiorari  proceeding  involving  an  incident  in  a  
case  to  rule  on  the  merits  of  the  main  case  itself  which  was  not  on  appeal  before  it.   the  parties’  intention  is  inevitable.  (China  Banking  Corporation  vs.  Court  of  App
   
(pp.  701-­702.)   ——o0o——  
   
Anent  the  right  of  RCBC  to  intervene  in  Civil  Case  No.  1073,  before  the  Zamboanga  Regional  Trial  Court,    
since  it  has  been  determined  that  RCBC  has  the  right  to  the  insurance  proceeds,  the  subject  matter  of    
intervention   is   rendered   moot   and   academic.   Respondent   Sebastian   must,   however,   yield   to   the  
 
preferential   right   of   RCBC   over   the   MICO   insurance   policies.   It   is   basic   and   fundamental   that   the   first  
mortgagee  has  superior  rights  over  junior  mortgagees  or  attaching  creditors  (Alpha  Insurance  &  Surety    
Co.  vs.  Reyes,  106  SCRA  274  [1981];;  Sun  Life  Assurance  Co.  of  Canada  vs.  Gonzales  Diaz,  52  Phil.  271    
[1928]).    
 O B L I G A T I O N S   &   C O N T R A C T S   C a s e s   B a t c
 
G.R.  No.  138677.  February  12,  2002.*   below.  In  any  event,  the  interest  stipulation,  on  its  face,  does  not  appear  as
TOLOMEO  LIGUTAN  and  LEONIDAS  DE  LA  LLANA,  petitioners,  vs.  HON.  COURT  OF  APPEALS   essence  or  rationale  for  the  payment  of  interest,  quite  often  referred  to  as  co
&  SECURITY  BANK  &  TRUST  COMPANY,  respondents.   the  same  as  that  of  a  surcharge  or  a  penalty.  A  penalty  stipulation  is  not  neces
  if   there   is   an   agreement   to   that   effect,   the   two   being   distinct   concepts  
Obligations  and  Contracts;;  Penalty  Clauses;;  Words  and  Phrases;;  A  penalty  clause,  expressly  recognized   demanded.  What  may  justify  a  court  in  not  allowing  the  creditor  to  impose  ful
by  law,  is  an  accessory  undertaking  to  assume  greater  liability  on  the  part  of  an  obligor  in  case  of  breach   despite  an  express  stipulation  therefor  in  a  valid  agreement,  may  not  equally  
of  an  obligation;;  Although  a  court  may  not  at  liberty  ignore  the  freedom  of  the  parties  to  agree  on  such   reduction  of  interest.  Indeed,  the  interest  prescribed  in  loan  financing  arran
terms  and  conditions  as  they  see  fit  that  contravene  neither  law  nor  morals,  good  customs,  public  order   part  of  the  banking  business  and  the  core  of  a  bank’s  existence.  
or   public   policy,   a   stipulated   penalty,   nevertheless,   may   be   equitably   reduced   by   the   courts   if   it   is    
iniquitous  or  unconscionable  or  if  the  principal  obligation  has  been  partly  or  irregularly  complied  with.— Same;;  Attorney’s  Fees;;  Where  the  rate  of  attorney’s  fees  has  been  agreed  to  b
A  penalty  clause,  expressly  recognized  by  law,  is  an  accessory  undertaking  to  assume  greater  liability  on   to  answer  not  only  for  litigation  expenses  but  also  for  collection  efforts  as  well,  
the  part  of  an  obligor  in  case  of  breach  of  an  obligation.  It  functions  to  strengthen  the  coercive  force  of   fees  is  reasonable.—Petitioners  next  assail  the  award  of  10%  of  the  total  amou
the  obligation  and  to  provide,  in  effect,  for  what  could  be  the  liquidated  damages  resulting  from  such  a   of  attorney’s  fees  for  being  grossly  excessive,  exorbitant  and  unconscionable  v
breach.  The  obligor  would  then  be  bound  to  pay  the  stipulated  indemnity  without  the  necessity  of  proof   the  extent  of  services  rendered  by  counsel  for  the  bank  and  the  nature  of  the
on  the  existence  and  on  the  measure  of  damages  caused  by  the  breach.  Although  a  court  may  not  at   the  rate  of  attorney’s  fees  has  been  agreed  to  by  the  parties  and  intended  to  a
liberty   ignore   the   freedom   of   the   parties   to   agree   on   such   terms   and   conditions   as   they   see   fit   that   expenses  but  also  for  collection  efforts  as  well,  the  Court,  like  the  appellate  
contravene   neither   law   nor   morals,   good   customs,   public   order   or   public   policy,   a   stipulated   penalty,   10%  attorney’s  fees  to  be  reasonable.  
nevertheless,  may  be  equitably  reduced  by  the  courts  if  it  is  iniquitous  or  unconscionable  or  if  the  principal    
obligation  has  been  partly  or  irregularly  complied  with.   Same;;  Novation;;  Requisites;;  In  order  that  an  obligation  may  be  extinguished  b
  the   same,   it   is   imperative   that   it   be   so   declared   in   unequivocal   terms,   or  
Same;;  Same;;  The  question  of  whether  a  penalty  is  reasonable  or  iniquitous  can  be  partly  subjective  and   obligation  be  on  every  point  incompatible  with  each  other;;  When  not  expressed
partly  objective.—The  question  of  whether  a  penalty  is  reasonable  or  iniquitous  can  be  partly  subjective   so  as  to  ensure  that  the  parties  have  indeed  intended  such  novation  despite  
and  partly  objective.  Its  resolution  would  depend  on  such  factors  as,  but  not  necessarily  confined  to,  the   categorical  terms.—Extinctive  novation  requires,  first,  a  previous  valid  obligati
type,   extent   and   purpose   of   the   penalty,   the   nature   of   the   obligation,   the   mode   of   breach   and   its   of  all  the  parties  to  the  new  contract;;  third,  the  extinguishment  of  the  obligati
consequences,  the  supervening  realities,  the  standing  and  relationship  of  the  parties,  and  the  like,  the   of  the  new  one.  In  order  that  an  obligation  may  be  extinguished  by  another  w
application  of  which,  by  and  large,  is  addressed  to  the  sound  discretion  of  the  court.  In  Rizal  Commercial   it  is  imperative  that  it  be  so  declared  in  unequivocal  terms,  or  that  the  old  an
Banking  Corp.  vs.  Court  of  Appeals,  just  an  example,  the  Court  has  tempered  the  penalty  charges  after   every  point  incompatible  with  each  other.  An  obligation  to  pay  a  sum  of  money
taking  into  account  the  debtor’s  pitiful  situation  and  its  offer  to  settle  the  entire  obligation  with  the  creditor   by  a  new  instrument  which  merely  changes  the  terms  of  payment  or  addin
bank.  The  stipulated  penalty  might  likewise  be  reduced  when  a  partial  or  irregular  performance  is  made   where  the  old  contract  is  merely  supplemented  by  the  new  one.  When  not  e
by  the  debtor.  The  stipulated  penalty  might  even  be  deleted  such  as  when  there  has  been  substantial   required   so   as   to   ensure   that   the   parties   have   indeed   intended   such   novat
performance  in  good  faith  by  the  obligor,  when  the  penalty  clause  itself  suffers  from  fatal  infirmity,  or   express  it  in  categorical  terms.  The  incompatibility,  to  be  sure,  should  take  p
when  exceptional  circumstances  so  exist  as  to  warrant  it.   elements  of  the  obligation,  i.e.,  (1)  the  juridical  relation  or  tie,  such  as  from  a  m
  of  things,  or  from  negotiorum  gestio  to  agency,  or  from  a  mortgage  to  antich
Same;;  Same;;  Interests;;  The  essence  or  rationale  for  the  payment  of  interest,  quite  often  referred  to  as   of  loan;;  (2)  the  object  or  principal  conditions,  such  as  a  change  of  the  nature  o
cost  of  money,  is  not  exactly  the  same  as  that  of  a  surcharge  or  a  penalty,  and  a  penalty  stipulation  is   subjects,  such  as  the  substitution  of  a  debtor  or  the  subrogation  of  the  credito
not   necessarily   preclusive   of   interest,   if   there   is   an   agreement   to   that   effect,   the   two   being   distinct   not  necessarily  imply  that  the  new  agreement  should  be  complete  by  itself;;  ce
concepts  which  may  separately  be  demanded;;  What  may  justify  a  court  in  not  allowing  the  creditor  to   may  be  carried,  expressly  or  by  implication,  over  to  the  new  obligation.  
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.—Anent  the  stipulated  interest  of  15.189%   PETITION  for  review  on  certiorari  of  a  decision  of  the  Court  of  Appeals.  
per  annum,  petitioners,  for  the  first  time,  question  its  reasonableness  and  prays  that  the  Court  reduce    
the  amount.  This  contention  is  a  fresh  issue  that  has  not  been  raised  and  ventilated  before  the  courts    
 O B L I G A T I O N S   &   C O N T R A C T S   C a s e s   B a t c
 
The  facts  are  stated  in  the  opinion  of  the  Court.   Petitioners  interposed  an  appeal  with  the  Court  of  Appeals,  questioning  the  re
         Florimond  C.  Rous  for  petitioners.   their  motion  to  present  evidence  and  assailing  the  imposition  of  the  2%  service
         Castro,  Biñas,  Samillano  &  Mangrobang  for  Security  Bank  &  Trust  Co.   penalty  charge  and  10%  attorney's  fees.  In  its  decision3   of  7  March  1996,  th
the  judgment  of  the  trial  court  except  on  the  matter  of  the  2%  service  charge  w
 
to  Central  Bank  Circular  No.  783.  Not  fully  satisfied  with  the  decision  of  the  a
VITUG,  J.:   filed   their   respective   motions   for   reconsideration.4   Petitioners   prayed   for  
  stipulated  penalty  for  being  unconscionable.  The  bank,  on  the  other  hand,  
Before  the  Court  is  a  petition  for  review  on   certiorari  under  Rule  45  of  the  Rules  of  Court,  assailing  the   interest  and  penalty  be  commenced  not  from  the  date  of  filing  of  complaint  b
decision  and  resolutions  of  the  Court  of  Appeals  in  CA-­G.R.  CV  No.  34594,  entitled  "Security  Bank  and   as  so  stipulated  in  the  contract  of  the  parties.  
Trust  Co.  vs.  Tolomeo  Ligutan,  et  al."    
  On  28  October  1998,  the  Court  of  Appeals  resolved  the  two  motions  thusly:  
Petitioners  Tolomeo  Ligutan  and  Leonidas  dela  Llana  obtained  on  11  May  1981  a  loan  in  the  amount  of    
P120,000.00  from  respondent  Security  Bank  and  Trust  Company.  Petitioners  executed  a  promissory  note   "We  find  merit  in  plaintiff-­appellee’s  claim  that  the  principal  sum  of  P114,41
binding   themselves,   jointly   and   severally,   to   pay   the   sum   borrowed   with   an   interest   of   15.189%   per   must  commence  not  on  the  date  of  filing  of  the  complaint  as  we  have  previou
annum  upon  maturity  and  to  pay  a  penalty  of  5%  every  month  on  the  outstanding  principal  and  interest   on  the  date  when  the  obligation  became  due.  
in  case  of  default.  In  addition,  petitioners  agreed  to  pay  10%  of  the  total  amount  due  by  way  of  attorney’s    
fees  if  the  matter  were  indorsed  to  a  lawyer  for  collection  or  if  a  suit  were  instituted  to  enforce  payment.   "Default   generally   begins   from   the   moment   the   creditor   demands   the   perfo
The  obligation  matured  on  8  September  1981;;  the  bank,  however,  granted  an  extension  but  only  up  until   However,   demand   is   not   necessary   to   render   the   obligor   in   default   when   th
29  December  1981.   provides.  
   
Despite  several  demands  from  the  bank,  petitioners  failed  to  settle  the  debt  which,  as  of  20  May  1982,   "In  the  case  at  bar,  defendants-­appellants  executed  a  promissory  note  where
amounted  to  P114,416.10.  On  30  September  1982,  the  bank  sent  a  final  demand  letter  to  petitioners   obligation  on  its  maturity  date  'without  necessity  of  demand.'  They  also  agreed
informing  them  that  they  had  five  days  within  which  to  make  full  payment.  Since  petitioners  still  defaulted   of  non-­payment  from  the  date  of  default.  
on  their  obligation,  the  bank  filed  on  3  November  1982,  with  the  Regional  Trial  Court  of  Makati,  Branch    
143,  a  complaint  for  recovery  of  the  due  amount.   "x  x  x                      x  x  x                    x  x  x  
   
After  petitioners  had  filed  a  joint  answer  to  the  complaint,  the  bank  presented  its  evidence  and,  on  27   "While  we  maintain  that  defendants-­appellants  must  be  bound  by  the  contrac
March  1985,  rested  its  case.  Petitioners,  instead  of  introducing  their  own  evidence,  had  the  hearing  of   and  signed,  we  take  cognizance  of  their  plea  for  the  application  of  the  provisi
the  case  reset  on  two  consecutive  occasions.  In  view  of  the  absence  of  petitioners  and  their  counsel  on    
28  August  1985,  the  third  hearing  date,  the  bank  moved,  and  the  trial  court  resolved,  to  consider  the   "Considering  that  defendants-­appellants  partially  complied  with  their  obligation
case  submitted  for  decision.   by  the  reduction  of  the  original  amount  of  P120,000.00  to  P114,416.00  and  in
  settle  their  obligation,  it  is  our  view  and  we  so  hold  that  in  the  interest  of  
Two  years  later,  or  on  23  October  1987,  petitioners  filed  a  motion  for  reconsideration  of  the  order  of  the   penalty  of  3%  per  month  or  36%  per  annum  would  suffice.  
trial  court  declaring  them  as  having  waived  their  right  to  present  evidence  and  prayed  that  they  be  allowed    
to  prove  their  case.  The  court  a  quo  denied  the  motion  in  an  order,  dated  5  September  1988,  and  on  20   "x  x  x                      x  x  x                    x  x  x  
October  1989,  it  rendered  its  decision,1  the  dispositive  portion  of  which  read:    
  "WHEREFORE,  the  decision  sought  to  be  reconsidered  is  hereby  MODIFIED.  
"WHEREFORE,  judgment  is  hereby  rendered  in  favor  of  the  plaintiff  and  against  the  defendants,  ordering   Tolomeo  Ligutan  and  Leonidas  dela  Llana  are  hereby  ordered  to  pay  the  plain
the  latter  to  pay,  jointly  and  severally,  to  the  plaintiff,  as  follows:   and  Trust  Company  the  following:  
   
"1.  The  sum  of  P114,416.00  with  interest  thereon  at  the  rate  of  15.189%  per  annum,  2%  service   "1.  The  sum  of  P114,416.00  with  interest  thereon  at  the  rate  of  15
charge  and  5%  per  month  penalty  charge,  commencing  on  20  May  1982  until  fully  paid;;   per  month  penalty  charge  commencing  May  20,  1982  until  fully  paid
   
"2.  To  pay  the  further  sum  equivalent  to  10%  of  the  total  amount  of  indebtedness  for  and  as   "2.  The  sum  equivalent  to  10%  of  the  total  amount  of  the  indebted
attorney’s  fees;;  and   fees."5  
   
"3.  To  pay  the  costs  of  the  suit."2  
 O B L I G A T I O N S   &   C O N T R A C T S   C a s e s   B a t c
 
On   16   November   1998,   petitioners   filed   an   omnibus   motion   for   reconsideration   and   to   admit   newly   nevertheless,  may  be  equitably  reduced  by  the  courts  if  it  is  iniquitous  or  uncon
discovered  evidence,6  alleging  that  while  the  case  was  pending  before  the  trial  court,  petitioner  Tolomeo   obligation  has  been  partly  or  irregularly  complied  with.13  
Ligutan  and  his  wife  Bienvenida  Ligutan  executed  a  real  estate  mortgage  on  18  January  1984  to  secure    
the  existing  indebtedness  of  petitioners  Ligutan  and  dela  Llana  with  the  bank.  Petitioners  contended  that   The  question  of  whether  a  penalty  is  reasonable  or  iniquitous  can  be  partly  sub
the  execution  of  the  real  estate  mortgage  had  the  effect  of  novating  the  contract  between  them  and  the   Its   resolution   would   depend   on   such   factors   as,   but   not   necessarily   confine
bank.  Petitioners  further  averred  that  the  mortgage  was  extrajudicially  foreclosed  on  26  August  1986,   purpose   of   the   penalty,   the   nature   of   the   obligation,   the   mode   of   breach  
that  they  were  not  informed  about  it,  and  the  bank  did  not  credit  them  with  the  proceeds  of  the  sale.  The   supervening  realities,  the  standing  and  relationship  of  the  parties,  and  the  lik
appellate  court  denied  the  omnibus  motion  for  reconsideration  and  to  admit  newly  discovered  evidence,   by  and  large,  is  addressed  to  the  sound  discretion  of  the  court.  In   Rizal  Com
ratiocinating  that  such  a  second  motion  for  reconsideration  cannot  be  entertained  under  Section  2,  Rule   Court  of  Appeals,14  just  an  example,  the  Court  has  tempered  the  penalty  charg
52,   of   the   1997   Rules   of   Civil   Procedure.   Furthermore,   the   appellate   court   said,   the   newly-­discovered   the   debtor’s   pitiful   situation   and   its   offer   to   settle   the   entire   obligation   w
evidence  being  invoked  by  petitioners  had  actually  been  known  to  them  when  the  case  was  brought  on   stipulated   penalty   might   likewise   be   reduced   when   a   partial   or   irregular   pe
appeal  and  when  the  first  motion  for  reconsideration  was  filed.7   debtor.15   The   stipulated   penalty   might   even   be   deleted   such   as   when   th
  performance  in  good  faith  by  the  obligor,16  when  the  penalty  clause  itself  suf
Aggrieved  by  the  decision  and  resolutions  of  the  Court  of  Appeals,  petitioners  elevated  their  case  to  this   when  exceptional  circumstances  so  exist  as  to  warrant  it.17  
Court  on  9  July  1999  via  a  petition  for  review  on  certiorari  under  Rule  45  of  the  Rules  of  Court,  submitting    
thusly  -­   The  Court  of  Appeals,  exercising  its  good  judgment  in  the  instant  case,  has  re
  from  5%  a  month  to  3%  a  month  which  petitioner  still  disputes.  Given  the  circ
"I.  The  respondent  Court  of  Appeals  seriously  erred  in  not  holding  that  the  15.189%  interest   the  repeated  acts  of  breach  by  petitioners  of  their  contractual  obligation,  the  C
and  the  penalty  of  three  (3%)  percent  per  month  or  thirty-­six  (36%)  percent  per  annum  imposed   to  modify  the  ruling  of  the  appellate  court..  
by   private   respondent   bank   on   petitioners’   loan   obligation   are   still   manifestly   exorbitant,    
iniquitous  and  unconscionable.   Anent   the   stipulated   interest   of   15.189%   per   annum,   petitioners,   for   th
  reasonableness  and  prays  that  the  Court  reduce  the  amount.  This  contention  i
"II.  The  respondent  Court  of  Appeals  gravely  erred  in  not  reducing  to  a  reasonable  level  the  ten   been  raised  and  ventilated  before  the  courts  below.  In  any  event,  the  inter
(10%)  percent  award  of  attorney’s  fees  which  is  highly  and  grossly  excessive,  unreasonable  and   does  not  appear  as  being  that  excessive.  The  essence  or  rationale  for  the  paym
unconscionable.   referred   to   as   cost   of   money,   is   not   exactly   the   same   as   that   of   a   surchar
  stipulation  is  not  necessarily  preclusive  of  interest,  if  there  is  an  agreement  to
"III.   The   respondent   Court   of   Appeals   gravely   erred   in   not   admitting   petitioners’   newly   distinct   concepts   which   may   separately   be   demanded.18   What   may   justify   a
discovered  evidence  which  could  not  have  been  timely  produced  during  the  trial  of  this  case.   creditor   to   impose   full   surcharges   and   penalties,   despite   an   express   stipu
  agreement,   may   not   equally   justify   the   non-­payment   or   reduction   of   inte
"IV.  The  respondent  Court  of  Appeals  seriously  erred  in  not  holding  that  there  was  a  novation   prescribed  in  loan  financing  arrangements  is  a  fundamental  part  of  the  bankin
of  the  cause  of  action  of  private  respondent’s  complaint  in  the  instant  case  due  to  the  subsequent   a  bank's  existence.19  
execution   of   the   real   estate   mortgage   during   the   pendency   of   this   case   and   the   subsequent    
foreclosure  of  the  mortgage."8   Petitioners  next  assail  the  award  of  10%  of  the  total  amount  of  indebtedness
  for   being   grossly   excessive,   exorbitant   and   unconscionable   vis-­a-­vis   the   tim
Respondent  bank,  which  did  not  take  an  appeal,  would,  however,  have  it  that  the  penalty  sought  to  be   services  rendered  by  counsel  for  the  bank  and  the  nature  of  the  case.  Bearin
deleted  by  petitioners  was  even  insufficient  to  fully  cover  and  compensate  for  the  cost  of  money  brought   attorney’s  fees  has  been  agreed  to  by  the  parties  and  intended  to  answer  not  
about  by  the  radical  devaluation  and  decrease  in  the  purchasing  power  of  the  peso,  particularly   vis-­a-­ but   also   for   collection   efforts   as   well,   the   Court,   like   the   appellate   court,  
vis  the  U.S.  dollar,  taking  into  account  the  time  frame  of  its  occurrence.  The  Bank  would  stress  that  only   attorney’s  fees  to  be  reasonable.  
the  amount  of  P5,584.00  had  been  remitted  out  of  the  entire  loan  of  P120,000.00.9    
  Neither  can  the  appellate  court  be  held  to  have  erred  in  rejecting  petitioner
A  penalty  clause,  expressly  recognized  by  law,10   is  an  accessory  undertaking  to  assume  greater  liability   admit  newly  discovered  evidence.  As  the  appellate  court  so  held  in  its  resolut
on  the  part  of  an  obligor  in  case  of  breach  of  an  obligation.  It  functions  to  strengthen  the  coercive  force    
of  the  obligation11  and  to  provide,  in  effect,  for  what  could  be  the  liquidated  damages  resulting  from  such   "Under   Section   2,   Rule   52   of   the   1997   Rules   of   Civil   Procedur
a  breach.  The  obligor  would  then  be  bound  to  pay  the  stipulated  indemnity  without  the  necessity  of  proof   reconsideration   of   a   judgment   or   final   resolution   by   the   same   p
on  the  existence  and  on  the  measure  of  damages  caused  by  the  breach.12  Although  a  court  may  not  at   Considering  that  the  instant  motion  is  already  a  second  motion  for
liberty   ignore   the   freedom   of   the   parties   to   agree   on   such   terms   and   conditions   as   they   see   fit   that   must  therefore  be  denied.  
contravene   neither   law   nor   morals,   good   customs,   public   order   or   public   policy,   a   stipulated   penalty,  
 O B L I G A T I O N S   &   C O N T R A C T S   C a s e s   B a t c
 
"Furthermore,  it  would  appear  from  the  records  available  to  this  court  that  the  newly-­discovered   Notes.—There  can  be  no  novation  unless  two  distinct  and  successive  binding
evidence   being   invoked   by   defendants-­appellants   have   actually   been   existent   when   the   case   the  later  one  designed  to  replace  the  preceding  convention.  Modifications  in
was  brought  on  appeal  to  this  court  as  well  as  when  the  first  motion  for  reconsideration  was   becomes  obligatory  can  in  no  sense  constitute  novation  in  law.  (Montelibano  v
filed.  Hence,  it  is  quite  surprising  why  defendants-­appellants  raised  the  alleged  newly-­discovered  
5  SCRA  36  [1962])  
evidence  only  at  this  stage  when  they  could  have  done  so  in  the  earlier  pleadings  filed  before  
this  court.    
  Novation  is  never  presumed—it  must  be  proven  as  a  fact  either  by  express  s
"The   propriety   or   acceptability   of   such   a   second   motion   for   reconsideration   is   not   contingent   by  implication  derived  from  an  irreconcilable  incompatibility  between  old  and  n
upon   the   averment   of   'new'   grounds   to   assail   the   judgment,   i.e.,   grounds   other   than   those   (Uraca  vs.  Court  of  Appeals,  278  SCRA  702  [1997])  
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   There  is  no  novation  where  the  obligation  to  pay  a  sum  of  money  remained  a
formulating  'additional  flaws'  or  'newly  discovered  errors'  therein,  or  thinking  up  some  injury  or  
served  as  security  for  the  loans  covered  by  the  promissory  notes.  (Developm
prejudice  to  the  rights  of  the  movant  for  reconsideration."20  
  vs.  Court  of  Appeals,  284  SCRA  14  [1998])  
At  any  rate,  the  subsequent  execution  of  the  real  estate  mortgage  as  security  for  the  existing  loan  would    
not  have  resulted  in  the  extinguishment  of  the  original  contract  of  loan  because  of  novation.  Petitioners   ——o0o——  
acknowledge   that   the   real   estate   mortgage   contract   does   not   contain   any   express   stipulation   by   the    
parties   intending   it   to   supersede   the   existing   loan   agreement   between   the   petitioners   and   the    
bank.21   Respondent   bank   has   correctly   postulated   that   the   mortgage   is   but   an   accessory   contract   to    
secure  the  loan  in  the  promissory  note.  
 
 
Extinctive  novation  requires,  first,  a  previous  valid  obligation;;  second,  the  agreement  of  all  the  parties  to    
the  new  contract;;  third,  the  extinguishment  of  the  obligation;;  and  fourth,  the  validity  of  the  new  one.22  In    
order  that  an  obligation  may  be  extinguished  by  another  which  substitutes  the  same,  it  is  imperative  that    
it   be   so   declared   in   unequivocal   terms,   or   that   the   old   and   the   new   obligation   be   on   every   point    
incompatible  with  each  other.23  An  obligation  to  pay  a  sum  of  money  is  not  extinctively  novated  by  a  new    
instrument  which  merely  changes  the  terms  of  payment  or  adding  compatible  covenants  or  where  the  
 
old  contract  is  merely  supplemented  by  the  new  one.24   When  not  expressed,  incompatibility  is  required  
so  as  to  ensure  that  the  parties  have  indeed  intended  such  novation  despite  their  failure  to  express  it  in    
categorical  terms.  The  incompatibility,  to  be  sure,  should  take  place  in  any  of  the  essential  elements  of    
the  obligation,  i.e.,  (1)  the  juridical  relation  or  tie,  such  as  from  a  mere  commodatum  to  lease  of  things,    
or   from   negotiorum   gestio   to   agency,   or   from   a   mortgage   to   antichresis,25   or   from   a   sale   to   one   of    
loan;;26  (2)  the  object  or  principal  conditions,  such  as  a  change  of  the  nature  of  the  prestation;;  or  (3)  the    
subjects,   such   as   the   substitution   of   a   debtor27   or   the   subrogation   of   the   creditor.   Extinctive   novation    
does   not   necessarily   imply   that   the   new   agreement   should   be   complete   by   itself;;   certain   terms   and  
 
conditions  may  be  carried,  expressly  or  by  implication,  over  to  the  new  obligation.  
   
WHEREFORE,  the  petition  is  DENIED.    
   
SO  ORDERED.    
   
Melo,  (Chairman),  Panganiban,  Sandoval-­Gutierrez,  and  Carpio,  JJ.,  concur.  
 
 
 
Petition  denied.  
 
 
 
 
 O B L I G A T I O N S   &   C O N T R A C T S   C a s e s   B a t c
 
G.R.  No.  73345.  April  7,  1993.*   The  facts  as  found  by  the  Appellate  Court  are  as  follows:  
SOCIAL   SECURITY   SYSTEM,   petitioner,   vs.   MOONWALK   DEVELOPMENT   &   HOUSING    
CORPORATION,   ROSITA   U.   ALBERTO,   ROSITA   U.   ALBERTO,   JMA   HOUSE,   INC.,   MILAGROS   "On  February  20,  1980,  the  Social  Security  System,  SSS  for  brevity,  filed  a  com
Instance  of  Rizal  against  Moonwalk  Development  &  Housing  Corporation,  M
SANCHEZ  SANTIAGO,  in  her  capacity  as  Register  of  Deeds  for  the  Province  of  Cavite,  ARTURO  
that  the  former  had  committed  an  error  in  failing  to  compute  the  12%  interes
SOLITO,   in   his   capacity   as   Register   of   Deeds   for   Metro   Manila   District   IV,   Makati,   Metro   on  the  loan  of  Moonwalk  —  resulting  in  a  chain  of  errors  in  the  application  of  pa
Manila  and  the  INTERMEDIATE  APPELLATE  COURT,  respondents.   and,  in  an  unpaid  balance  on  the  principal  loan  agreement  in  the  amount  of  
  reflecting  in  its  statement  or  account  an  unpaid  balance  on  the  said  penaltie
Contracts;;  Penal  Clause;;  Function.—A  penal  clause  is  an  accessory  undertaking  to  assume  greater  liability   the  amount  of  P7,517,178.21  as  of  October  10,  1979.  
in  case  of  breach.  It  has  a  double  function:  (1)  to  provide  for  liquidated  damages,  and  (2)  to  strengthen    
the  coercive  force  of  the  obligation  by  the  threat  of  greater  responsibility  in  the  event  of  breach.  From   Moonwalk   answered   denying   SSS'   claims   and   asserting   that   SSS   had   the   op
truth  but  failed  to  do  so.  
the   foregoing,   it   is   clear   that   a   penal   clause   is   intended   to   prevent   the   obligor   from   defaulting   in   the  
 
performance  of  his  obligation.  Thus,  if  there  should  be  default,  the  penalty  may  be  enforced.   The  trial  court  set  the  case  for  pre-­trial  at  which  pre-­trial  conference,  the  co
  both  parties  thirty  (30)  days  within  which  to  submit  a  stipulation  of  facts.  
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  in  the  grammatical  sense,  because  it  involves  the  beginning  of  a  special   The   Order   of   October   6,   1980   dismissing   the   complaint   followed   the   sub
condition   or   status   which   has   its   own   peculiar   effects   or   results.”   In   order   that   the   debtor   may   be   in   September  19,  1980  of  the  following  stipulation  of  Facts:  
default  it  is  necessary  that  the  following  requisites  be  present:  (1)  that  the  obligation  be  demandable  and    
"1.  On  October  6,  1971,  plaintiff  approved  the  application  of  defendant  Moon
already   liquidated;;   (2)   that   the   debtor   delays   performance;;   and   (3)   that   the   creditor   requires   the  
the  amount  of  THIRTY  MILLION  PESOS  (P30,000,000.00)  for  the  purpose  of  d
performance   judicially   and   extrajudicially.   Default   generally   begins   from   the   moment   the   creditor   a  housing  project  in  the  provinces  of  Rizal  and  Cavite;;  
demands  the  performance  of  the  obligation.  Nowhere  in  this  case  did  it  appear  that  SSS  demanded  from    
Moonwalk  the  payment  of  its  monthly  amortizations.  Neither  did  it  show  that  petitioner  demanded  the   "2.  Out  of  the  approved  loan  of  THIRTY  MILLION  PESOS  (P30,000,000.00),  
payment  of  the  stipulated  penalty  upon  the  failure  of  Moonwalk  to  meet  its  monthly  amortization.  What   was  released  to  defendant  Moonwalk  as  of  November  28,  1973;;  
the  complaint  itself  showed  was  that  SSS  tried  to  enforce  the  obligation  sometime  in  September,  1977    
"3.  A  third  Amended  Deed  of  First  Mortgage  was  executed  on  December  18,
by  foreclosing  the  real  estate  mortgages  executed  by  Moonwalk  in  favor  of  SSS.  But  this  foreclosure  did  
for  restructuring  of  the  payment  of  the  released  amount  of  P9,595,000.00.  
not  push  through  upon  Moonwalk’s  requests  and  promises  to  pay  in  full.  The  next  demand  for  payment    
happened  on  October  1,  1979  when  SSS  issued  a  Statement  of  Account  to  Moonwalk  And  in  accordance   "4.   Defendants   Rosita   U.   Alberto   and   Rosita   U.   Alberto,   mother   and   dau
with  said  statement,  Moonwalk  paid  its  loan  in  full.  What  is  clear,  therefore,  is  that  Moonwalk  was  never   paragraph  5  of  the  aforesaid  Third  Amended  Deed  of  First  Mortgage  substitut
in  default  because  SSS  never  compelled  performance.   and   Surveys   Corporation,   Philippine   Model   Homes   Development   Corporation
  Eusebio  T.  Ramos,  as  solidary  obligors;;  
PETITION  for  review  on  certiorari  of  the  decision  of  the  then  Intermediate  Appellate  Court.    
"5.   On   July   23,   1974,   after   considering   additional   releases   in   the   amount   o
 
defendant   Moonwalk,   defendant   Moonwalk   delivered   to   the   plaintiff   a   pro
The  facts  are  stated  in  the  opinion  of  the  Court.   MILLION  TWO  HUNDRED  FIFTY  FOUR  THOUSAND  SEVEN  HUNDRED  PESOS  (P
         The  Solicitor  General  for  petitioner.   signed  by  Eusebio  T.  Ramos,  and  the  said  Rosita  U.  Alberto  and  Rosita  U.  Alb
         K.V.  Faylona  &  Associates  for  private  respondents.    
  "6.  Moonwalk  made  a  total  payment  of  P23,657,901.84  to  SSS  for  the  loan  p
CAMPOS,  JR.,  J.:   released  to  it.  The  last  payment  made  by  Moonwalk  in  the  amount  of  P15,004
Statement  of  Account,  Annex  "F"  prepared  by  plaintiff  SSS  for  defendant;;  
 
 
Before   Us   is   a   petition   for   review   on   certiorari   of   decision   1   of   the   then   Intermediate   Appellate   Court  
"7.  After  settlement  of  the  account  stated  in  Annex  'F'  plaintiff  issued  to  defend
affirming   in   toto   the   decision   of   the   former   Court   of   First   Instance   of   Rizal,   Seventh   Judicial   District,  
of  Mortgage  for  Moonwalk's  mortgaged  properties  in  Cavite  and  Rizal,  Annexe
Branch  XXIX,  Pasay  City.  
1979  and  October  11,  1979  respectively.  
 
 
 O B L I G A T I O N S   &   C O N T R A C T S   C a s e s   B a t c
 
"8.  In  letters  to  defendant  Moonwalk,  dated  November  28,  1979  and  followed  up  by  another  letter  dated   to   pay   on   time   the   amortization.   What   is   sought   to   be   enforced   therefore  
December  17,  1979,  plaintiff  alleged  that  it  committed  an  honest  mistake  in  releasing  defendant.   contract  entered  into  between  the  parties.  
   
"9.  In  a  letter  dated  December  21,  1979,  defendant's  counsel  told  plaintiff  that  it  had  completely  paid  its   Now,  what  is  a  penal  clause.  A  penal  clause  has  been  defined  as  
obligations  to  SSS;;    
  "an  accessory  obligation  which  the  parties  attach  to  a  principal  obligation  for  
"10.  The  genuineness  and  due  execution  of  the  documents  marked  as  Annex  (sic)  'A'  to  'O'  inclusive,  of   performance   thereof   by   imposing   on   the   debtor   a   special   presentation   (g
the   Complaint   and   the   letter   dated   December   21,   1979   of   the   defendant's   counsel   to   the   plaintiff   are   payment  of  a  sum  of  money)  in  case  the  obligation  is  not  fulfilled  or  is  irregular
admitted.   (3  Castan  8th  Ed.  p.  118).  
   
"Manila  for  Pasay  City,  September  2,  1980."  2   Now   an   accessory   obligation   has   been   defined   as   that   attached   to   a   princ
  complete  the  same  or  take  its  place  in  the  case  of  breach  (4  Puig  Peña  Part  1  
On   October   6,   1990,   the   trial   court   issued   an   order   dismissing   the   complaint   on   the   ground   that   the   an  accessory  obligation  is  dependent  for  its  existence  on  the  existence  of  a  prin
obligation  was  already  extinguished  by  the  payment  by  Moonwalk  of  its  indebtedness  to  SSS  and  by  the   obligation  may  exist  without  an  accessory  obligation  but  an  accessory  obliga
latter's   act   of   cancelling   the   real   estate   mortgages   executed   in   its   favor   by   defendant   Moonwalk.   The   principal   obligation.   For   example,   the   contract   of   mortgage   is   an   accessory
Motion  for  Reconsideration  filed  by  SSS  with  the  trial  court  was  likewise  dismissed  by  the  latter.   performance  of  the  main  obligation  of  indebtedness.  An  indebtedness  can  exis
  a  mortgage  cannot  exist  without  the  indebtedness,  which  is  the  principal  oblig
These  orders  were  appealed  to  the  Intermediate  Appellate  Court.  Respondent  Court  reduced  the  errors   the  principal  obligation  is  the  loan  between  the  parties.  The  accessory  obliga
assigned  by  the  SSS  into  this  issue:  ".  .  .  are  defendants-­appellees,  namely,  Moonwalk  Development  and   enforce  the  main  obligation  of  payment  of  the  loan.  If  therefore  the  principa
Housing   Corporation,   Rosita   U.   Alberto,   Rosita   U.   Alberto,   JMA   House,   Inc.   still   liable   for   the   unpaid   the  penalty  being  accessory  cannot  exist.  
penalties  as  claimed  by  plaintiff-­appellant  or  is  their  obligation  extinguished?"  3  As  We  have  stated  earlier,    
the  respondent  Court  held  that  Moonwalk's  obligation  was  extinguished  and  affirmed  the  trial  court.   Now  then  when  is  the  penalty  demandable?  A  penalty  is  demandable  in  case  
  performance  of  the  main  obligation.  In  other  words  in  order  that  the  penalty  
Hence,  this  Petition  wherein  SSS  raises  the  following  grounds  for  review:   breach  of  the  obligation  either  by  total  or  partial  non  fulfillment  or  there  is  non
  which  is  called  mora  or  delay.  The  debtor  therefore  violates  the  obligation  in  p
"First,   in   concluding   that   the   penalties   due   from   Moonwalk   are   "deemed   waived   and/or   barred,"   the   or  delay.  Now,  there  is  no  mora  or  delay  unless  there  is  a  demand.  It  is  note
appellate  court  disregarded  the  basic  tenet  that  waiver  of  a  right  must  be  express,  made  in  a  clear  and   case   during   all   the   period   when   the   principal   obligation   was   still   subsisting
unequivocal  manner.  There  is  no  evidence  in  the  case  at  bar  to  show  that  SSS  made  a  clear,  positive   amortizations   there   was   no   demand   made   by   the   creditor,   plaintiff-­appella
waiver  of  the  penalties,  made  with  full  knowledge  of  the  circumstances.   penalty.  Therefore  up  to  the  time  of  the  letter  of  plaintiff-­appellant  there  was  n
  of  the  penalty,  hence  the  debtor  was  no  in  mora  in  the  payment  of  the  penalt
Second,  it  misconstrued  the  ruling  that  SSS  funds  are  trust  funds,  and  SSS,  being  a  mere  trustee,  cannot    
perform  acts  affecting  the  same,  including  condonation  of  penalties,  that  would  diminish  property  rights   However,  on  October  1,  1979,  plaintiff-­appellant  issued  its  statement  of  accou
of   the   owners   and   beneficiaries   thereof.   (United   Christian   Missionary   Society   v.   Social   Security   total   obligation   of   Moonwalk   as   P15,004,905.74,   and   forthwith   demanded  
Commission,  30  SCRA  982,  988  [1969]).   appellee.   Because   of   the   demand   for   payment,   Moonwalk   made   several   pa
  October  9  and  19,  1979  respectively,  all  in  all  totalling  P15,004,905.74  which  w
Third,  it  ignored  the  fact  that  penalty  at  the  rate  of  12%  p.a.  is  not  inequitable.   its  obligation  as  stated  in  Exhibit  F.  Because  of  this  payment  the  obligation  of
  extinguished,  and  pursuant  to  said  extinguishment,  the  real  estate  mortgage
Fourth,  it  ignored  the  principle  that  equity  will  cancel  a  release  on  the  ground  of  mistake  of  fact."  4   released  on  October  9,  1979  and  October  10,  1979  (Exhibits  G  and  H).  For  
  principal  obligation  of  defendant-­appellee  was  deemed  extinguished  as  well  
The   same   problem   which   confronted   the   respondent   court   is   presented   before   Us:   Is   the   penalty   of  real  estate  mortgage;;  and  that  is  the  reason  for  the  release  of  all  the  Real  Es
demandable  even  after  the  extinguishment  of  the  principal  obligation?   9  and  10,  1979  respectively.  
   
The   former   Intermediate   Appellate   Court,   through   Justice   Eduard   P.   Caguioa,   held   in   the   negative.   It   Now,  besides  the  Real  Estate  Mortgages,  the  penal  clause  which  is  also  an  acc
reasoned,  thus:   be  deemed  extinguished  considering  that  the  principal  obligation  was  consid
  penal  clause  being  an  accessory  obligation.  That  being  the  case,  the  demand
"2.  As  we  have  explained  under  No.  1,  contrary  to  what  the  plaintiff-­appellant  states  in  its  Brief,  what  is   clause  made  by  plaintiff-­appellant  in  its  demand  letter  dated  November  28,  1
sought  to  be  recovered  in  this  case  is  not  the  12%  interest  on  the  loan  but  the  12%  penalty  for  failure   dated  December  17,  1979  (which  parenthetically  are  the  only  demands  for  pa
 O B L I G A T I O N S   &   C O N T R A C T S   C a s e s   B a t c
 
therefore   ineffective   as   there   was   nothing   to   demand.   It   would   be   otherwise,   if   the   demand   for   the   damages  shall  be  paid  if  the  obligor  refuses  to  pay  the  penalty  or  is  guilty  o
payment   of   the   penalty   was   made   prior   to   the   extinguishment   of   the   obligation   because   then   the   the  obligation.  
obligation  of  Moonwalk  would  consist  of:  1)  the  principal  obligation  2)  the  interest  of  12%  on  the  principal    
obligation  and  3)  the  penalty  of  12%  for  late  payment  for  after  demand,  Moonwalk  would  be  in  mora  and   The  penalty  may  be  enforced  only  when  it  is  demandable  in  accordance  with  t
therefore  liable  for  the  penalty.   (Emphasis  Ours.)  
   
Let   it   be   emphasized   that   at   the   time   of   the   demand   made   in   the   letters   of   November   28,   1979   and   A  penal  clause  is  an  accessory  undertaking  to  assume  greater  liability  in  case  o
December  17,  1979  as  far  as  the  penalty  is  concerned,  the  defendant-­appellee  was  not  in  default  since   function:  (1)  to  provide  for  liquidated  damages,  and  (2)  to  strengthen  the  coe
there   was   no   mora   prior   to   the   demand.   That   being   the   case,   therefore,   the   demand   made   after   the   by  the  threat  of  greater  responsibility  in  the  event  of  breach.  7  From  the  foreg
extinguishment  of  the  principal  obligation  which  carried  with  it  the  extinguishment  of  the  penal  clause   clause  is  intended  to  prevent  the  obligor  from  defaulting  in  the  performance
being  merely  an  accessory  obligation,  was  an  exercise  in  futility.   there  should  be  default,  the  penalty  may  be  enforced.  One  commentator  of  th
   
3.  At  the  time  of  the  payment  made  of  the  full  obligation  on  October  10,  1979  together  with  the  12%   "Now  when  is  the  penalty  deemed  demandable  in  accordance  with  the  provis
interest  by  defendant-­appellee  Moonwalk,  its  obligation  was  extinguished.  It  being  extinguished,  there   must  make  a  distinction  between  a  positive  and  a  negative  obligation.  With  r
was  no  more  need  for  the  penal  clause.  Now,  it  is  to  be  noted  that  penalty  at  anytime  can  be  modified   are   positive   (to   give   and   to   do),   the   penalty   is   demandable   when   the   deb
by   the   Court.   Even   substantial   performance   under   Art.   1234   authorizes   the   Court   to   consider   it   as   necessity  of  demand  by  the  debtor  unless  the  same  is  excused  .  .  ."  8  
complete  performance  minus  damages.  Now,  Art,  1229  Civil  Code  of  the  Philippines  provides:    
  When   does   delay   arise?   Under   the   Civil   Code,   delay   begins   from   the   tim
"ART.  1229.  The  judge  shall  equitably  reduce  the  penalty  when  the  principal  obligation  has  been  partly   extrajudicially  demands  from  the  obligor  the  performance  of  the  obligation.  
or  irregularly  complied  with  by  the  debtor.  Even  if  there  has  been  no  performance,  the  penalty  may  also    
be  reduced  by  the  courts  if  it  is  iniquitous  or  unconscionable."   "Art.  1169.  Those  obliged  to  deliver  or  to  do  something  incur  in  delay  from  the
  or  extrajudicially  demands  from  them  the  fulfillment  of  their  obligation."  
If  the  penalty  can  be  reduced  after  the  principal  obligation  has  been  partly  or  irregularly  complied  with    
by  the  debtor,  which  is  nonetheless  a  breach  of  the  obligation,  with  more  reason  the  penal  clause  is  not   There  are  only  three  instances  when  demand  is  not  necessary  to  render  the  o
demandable   when   full   obligation   has   been   complied   with   since   in   that   case   there   is   no   breach   of   the   the  following:  
obligation.  In  the  present  case,  there  has  been  as  yet  no  demand  for  payment  of  the  penalty  at  the  time    
of  the  extinguishment  of  the  obligation,  hence  there  was  likewise  an  extinguishment  of  the  penalty.   "(1)  When  the  obligation  or  the  law  expressly  so  declares;;  
   
Let  Us  emphasize  that  the  obligation  of  defendant-­appellee  was  fully  complied  with  by  the  debtor,  that   (2)  When  from  the  nature  and  the  circumstances  of  the  obligation  it  appears  
is,  the  amount  loaned  together  with  the  12%  interest  has  been  fully  paid  by  the  appellee.  That  being  so,   time  when  the  thing  is  to  be  delivered  or  the  service  is  to  be  rendered  was  a
there  is  no  basis  for  demanding  the  penal  clause  since  the  obligation  has  been  extinguished.  Here  there   establishment  of  the  contract;;  or  
has  been  a  waiver  of  the  penal  clause  as  it  was  not  demanded  before  the  full  obligation  was  fully  paid    
and  extinguished.  Again,  emphasis  must  be  made  on  the  fact  that  plaintiff-­appellant  has  not  lost  anything   (3)   When   the   demand   would   be   useless,   as   when   the   obligor   has   rendere
under  the  contract  since  in  got  back  in  full  the  amount  loan  (sic)  as  well  as  the  interest  thereof.  The  same   perform."  9  
thing  would  have  happened  if  the  obligation  was  paid  on  time,  for  then  the  penal  clause,  under  the  terms    
of  the  contract  would  not  apply.  Payment  of  the  penalty  does  not  mean  gain  or  loss  of  plaintiff-­appellant   This   case   does   not   fall   within   any   of   the   established   exceptions.   Hence,   d
since   it   is   merely   for   the   purpose   of   enforcing   the   performance   of   the   main   obligation   has   been   fully   promissory  note  that  "(a)ll  amortization  payments  shall  be  made  every  first  fi
complied  with  and  extinguished,  the  penal  clause  has  lost  its  raison  d'  entre."  5   month  until  the  principal  and  interest  on  the  loan  or  any  portion  thereof  actu
  paid,"  10  petitioner  is  not  excused  from  making  a  demand.  It  has  been  esta
We   find   no   reason   to   depart   from   the   appellate   court's   decision.   We,   however,   advance   the   following   payment   of   the   full   obligation,   private   respondent   Moonwalk   has   long   been
reasons  for  the  denial  of  this  petition.   monthly  arrears  and  in  paying  the  full  amount  of  the  loan  itself  as  the  obliga
  January,  1977.  But  mere  delinquency  in  payment  does  not  necessarily  mean  
Article  1226  of  the  Civil  Code  provides:   To   be   in   default   ".   .   .   is   different   from   mere   delay   in   the   grammatical   sens
  beginning  of  a  special  condition  or  status  which  has  its  own  peculiar  effects  o
"Art.  1226.  In  obligations  with  a  penal  clause,  he  penalty  shall  substitute  the  indemnity  for  damages  and   the  debtor  may  be  in  default  it  is  necessary  that  the  following  requisites  be  pre
the  payment  of  interests  in  case  of  noncompliance,  if  there  is  no  stipulation  to  the  contrary.  Nevertheless,   be  demandable  and  already  liquidated;;  (2)  that  the  debtor  delays  performanc
 O B L I G A T I O N S   &   C O N T R A C T S   C a s e s   B a t c
 
requires  the  performance  judicially  and  extrajudicially.  12  Default  generally  begins  from  the  moment  the   The  case  at  bar  does  not  refer  to  any  penalty  provided  for  by  law  nor  does  it  
creditor  demands  the  performance  of  the  obligation.  13   of  premium.  The  case  at  bar  refers  to  a  contract  of  loan  entered  into  betwe
  Moonwalk  Development  and  Housing  Corporation.  Note,  therefore,  that  no  pr
Nowhere   in   this   case   did   it   appear   that   SSS   demanded   from   Moonwalk   the   payment   of   its   monthly   this  case,  nor  is  there  any  penalty  imposed  by  law  nor  a  case  about  non-­remit
amortizations.  Neither  did  it  show  that  petitioner  demanded  the  payment  of  the  stipulated  penalty  upon   by  law.  The  present  case  refers  to  a  contract  of  loan  payable  in  installments  n
the  failure  of  Moonwalk  to  meet  its  monthly  amortization.  What  the  complaint  itself  showed  was  that  SSS   by  agreement  of  the  parties.  Therefore,  the  ratio  decidendi  of  the  case  of  U
tried  to  enforce  the  obligation  sometime  in  September,  1977  by  foreclosing  the  real  estate  mortgages   Society  vs.  Social  Security  Commission  which  plaintiff-­appellant  relies  is  not  app
executed   by   Moonwalk   in   favor   of   SSS.   But   this   foreclosure   did   not   push   through   upon   Moonwalk's   the  Social  Security  Commission,  which  is  a  creature  of  the  Social  Security  Act  ca
requests  and  promises  to  pay  in  full.  The  next  demand  for  payment  happened  on  October  1,  1979  when   provision  of  law  providing  for  the  payment  of  premiums  and  for  penalties  for  
SSS  issued  a  Statement  of  Account  to  Moonwalk.  And  in  accordance  with  said  statement,  Moonwalk  paid   the  Social  Security  Act  is  in  the  premiums  because  these  are  the  funds  from  w
its   loan   in   full.   What   is   clear,   therefore,   is   that   Moonwalk   was   never   in   default   because   SSS   never   gets  the  money  for  its  purposes  and  the  non-­remittance  of  the  premiums  is  
compelled  performance.  Though  it  tried  to  foreclose  the  mortgages,  SSS  itself  desisted  from  doing  so   Security  Commission  but  by  law.  
upon  the  entreaties  of  Moonwalk.  If  the  Statement  of  Account  could  properly  be  considered  as  demand    
for  payment,  the  demand  was  complied  with  on  time.  Hence,  no  delay  occurred  and  there  was,  therefore,   xxx  xxx  xxx  
no  occasion  when  the  penalty  became  demandable  and  enforceable.  Since  there  was  no  default  in  the    
performance   of   the   main   obligation   —   payment   of   the   loan   —   SSS   was   never   entitled   to   recover   any   It   is   admitted   that   when   a   government   created   corporation   enters   into   a   c
penalty,  not  at  the  time  it  made  the  Statement  of  Account  and  certainly,  not  after  the  extinguishment  of   concerning  a  loan,  it  descends  to  the  level  of  a  private  person.  Hence,  the  rule
the  principal  obligation  because  then,  all  the  more  that  SSS  had  no  reason  to  ask  for  the  penalties.  Thus,   private  parties  are  applicable  to  it.  The  argument  therefore  that  the  Social  S
there  could  never  be  any  occasion  for  waiver  or  even  mistake  in  the  application  for  payment  because   waive  or  condone  the  penalties  which  was  applied  in  the  United  Christian  Missi
there  was  nothing  for  SSS  to  waive  as  its  right  to  enforce  the  penalty  did  not  arise.   in  this  case.  First,  because  what  was  not  paid  were  installments  on  a  loan  but
  to  be  paid  by  the  parties  covered  by  the  Social  Security  Act.  Secondly,  what  is
SSS,  however,  in  buttressing  its  claim  that  it  never  waived  the  penalties,  argued  that  the  funds  it  held   waived  are  penalties  not  imposed  by  law  for  failure  to  remit  premiums  require
were   trust   funds   and   as   trustee,   the   petitioner   could   not   perform   acts   affecting   the   funds   that   would   non  payment  provided  for  by  the  agreement  of  the  parties  in  the  contract  bet
diminish  property  rights  of  the  owners  and  beneficiaries  thereof.  To  support  its  claim,  SSS  cited  the  case    
of  United  Christian  Missionary  Society  v.  Social  Security  Commission.  14   WHEREFORE,   in   view   of   the   foregoing,   the   petition   is   DISMISSED   and   the  
  court  is  AFFIRMED.  LLpr  
We  looked  into  the  case  and  found  out  that  it  is  not  applicable  to  the  present  case  as  it  dealt  not  with  the    
right  of  the  SSS  to  collect  penalties  which  were  provided  for  in  contracts  which  it  entered  into  but  with   SO  ORDERED.  
its  right  to  collect  premiums  and  its  duty  to  collect  the  penalty  for  delayed  payment  or  non-­payment  of    
premiums.  The  Supreme  Court,  in  that  case,  stated:   Narvasa,  C  .J  .,  Padilla,  Regalado  and  Nocon,  JJ  .,  concur.  
   
"No  discretion  or  alternative  is  granted  respondent  Commission  in  the  enforcement  of  the  law's  mandate   Petition  dismissed.  Decision  affirmed.  
that  the  employer  who  fails  to  comply  with  his  legal  obligation  to  remit  the  premiums  to  the  System  within    
the  prescribed  period  shall  pay  a  penalty  of  three  (3%)  per  month.  The  prescribed  penalty  is  evidently  of  
Note.—Default  generally  begins  from  the  moment  the  creditor  demands  the  pe
a  punitive  character,  provided  by  the  legislature  to  assure  that  employers  do  not  take  lightly  the  State's  
exercise  of  the  police  power  in  the  implementation  of  the  Republic's  declared  policy  "to  develop,  establish   without  such  demand,  the  effect  of  default  will  not  arise  (Rose  Packing  Co.,
gradually   and   perfect   a   social   security   system   which   shall   be   suitable   to   the   needs   of   the   people   167  SCRA  309).  
throughout   the   Philippines   and   (to)   provide   protection   to   employers   against   the   hazards   of   disability,    
sickness,  old  age  and  death  .  .  ."   ——o0o——  
   
Thus,  We  agree  with  the  decision  of  the  respondent  court  on  the  matter  which  We  quote,  to  wit:    
 
 
"Note  that  the  above  case  refers  to  the  condonation  of  the  penalty  for  the  non  remittance  of  the  premium  
which  is  provided  for  by  Section  22(a)  of  the  Social  Security  Act  .  .  .  In  other  words,  what  was  sought  to    
be  condoned  was  the  penalty  provided  for  by  law  for  non  remittance  of  premium  for  coverage  under  the    
Social  Security  Act.    
   
 O B L I G A T I O N S   &   C O N T R A C T S   C a s e s   B a t c
 
G.R.   No.   190512.   June  20,  2018.*   the  duration  of  its  possession  from  the  termination  of  the  lease  until  he  vaca
D.M.  RAGASA  ENTERPRISES,  INC.,  petitioner,  vs.  BANCO  DE  ORO,  INC.  (formerly  Equitable   in  effect  the  ruling  of  the  Court  in  Manila  Bay  Club  Corp.  when  it  affirmed  the  a
PCI  Bank,  Inc.),  respondent.   equivalent  to  P250,000.00,  which  was  the  valuation  of  the  trial  court  as  affirm
   
Civil  Law;;  Obligations;;  Obligations  arising  from  contracts  have  the  force  of  law  between  the  contracting   Same;;  Obligations;;  Penal  Clauses;;  A  penal  clause  is  an  accessory  obligation  w
parties  and  should  be  complied  with  in  good  faith.—At  the  outset,  it  is  well  to  remember  that  a  contract   principal   obligation   for   the   purpose   of   insuring   the   performance   thereof   by  
is   the   law   between   the   parties.   Obligations   arising   from   contracts   have   the   force   of   law   between   the   special  prestation  (generally  consisting  in  the  payment  of  a  sum  of  money)  in
contracting  parties  and  should  be  complied  with  in  good  faith.  The  parties  are  allowed  by  law  to  enter   fulfilled   or   is   irregularly   or   inadequately   fulfilled.—A   penal   clause   is   an   acce
into  stipulations,  clauses,  terms  and  conditions  they  may  deem  convenient  which  bind  the  parties  as  long   parties  attach  to  a  principal  obligation  for  the  purpose  of  insuring  the  perform
as  they  are  not  contrary  to  law,  morals,  good  customs,  public  order  or  public  policy.   on  the  debtor  a  special  prestation  (generally  consisting  in  the  payment  of  a  
  obligation  is  not  fulfilled  or  is  irregularly  or  inadequately  fulfilled.  Quite  comm
Same;;  Lease;;  Rescission;;  Termination  of  Lease;;  Damages;;  Generally,  if  the  lessor  or  lessee  should  not   clause   functions   to   strengthen   the   coercive   force   of   the   obligation   and   to   p
comply  with  their  obligations,  the  aggrieved  party  may  ask  for  either  the  rescission  of  the  contract  and   would  be  the  liquidated  damages  resulting  from  a  breach.  A  penal  clause  has  
indemnification  for  damages,  or  only  the  latter,  allowing  the  contract  to  remain  in  force.—Article  1170  of   coercive  purpose  or  one  of  guarantee  —  this  is  to  urge  the  debtor  to  the  fulfillm
the   Civil   Code   mandates   that   those   who,   in   the   performance   of   their   obligations,   are   guilty   of   fraud,   under  pain  of  paying  the  penalty;;  (2)  to  serve  as  liquidated  damages  —  this  is
negligence,  or  delay,  and  those  who,  in  any  manner,  contravene  the  tenor  thereof,  are  liable  for  damages.   damages  that  may  be  occasioned  by  the  noncompliance  of  the  obligation;;  and
Thus,  having  contravened  the  tenor  of  the  Lease  Contract  regarding  its  term  or  period,  the  bank  should   —  this  is  to  punish  the  debtor  for  nonfulfillment  of  the  main  obligation.  While
be  liable  for  damages.  However,  how  much  in  damages  should  the  bank  be  liable?  Generally,  if  the  lessor   present,  the  second  purpose  is  presumed  and  the  third  purpose  must  be  expr
or   the   lessee   should   not   comply   with   their   obligations,   the   aggrieved   party   may   ask   for   either   the    
rescission  of  the  contract  and  indemnification  for  damages,  or  only  the  latter,  allowing  the  contract  to   Same;;  Same;;  Same;;  The  penal  clause  may  be  considered  either  a  reparation,  
remain  in  force.   for   damages,   on   one   hand,   or   as   a   punishment   in   case   of   breach   of   the  
  Evidently,  the  penal  clause  may  be  considered  either  reparation,  compensation
Same;;  Same;;  Same;;  Same;;  Same;;  To  force  either  party  to  continue  with  a  contract  that  is  automatically   on  one  hand,  or  as  a  punishment  in  case  of  breach  of  the  obligation,  on  the  
terminated  in  case  of  its  breach  by  either  party  (pursuant  to  its  express  provision)  is  not  in  furtherance   reparation  or  compensation,  the  question  as  to  the  appropriate  amount  of  dam
of  or  sanctioned  by  the  contract.—Pursuant  to  the  automatic  termination  clause  of  the  Lease  Contract,   for  all  because  the  stipulated  indemnity  represents  a  legitimate  estimate  made
which  is  in  furtherance  of  the  autonomy  characteristic  of  contracts,  the  Lease  Contract  was  terminated   of   the   damages   caused   by   the   nonfulfillment   or   breach   of   the   obligation.   P
upon  its  unauthorized  pre-­termination  by  the  bank  on  June  30,  2001.  Ragasa  is,  thus,  precluded  from   consequently,  not  necessary  in  order  that  the  stipulated  penalty  may  be  dema
availing  of  the  second  option  which  is  to  claim  damages  by  reason  of  the  breach  and  allow  the  lease  to   a  punishment,  the  question  of  damages  is  not  yet  resolved  inasmuch  as  the
remain  in  force.  With  the  lease  having  been  automatically  resolved  or  terminated  by  agreement  of  the   the  penalty,  still  subsists.  Thus,  if  the  injured  party  desires  to  recover  the  da
parties,  Ragasa  is  entitled  only  to  indemnification  for  damages.  To  force  either  party  to  continue  with  a   him  in  addition  to  the  penalty,  he  must  prove  such  damages.  
contract  that  is  automatically  terminated  in  case  of  its  breach  by  either  party  (pursuant  to  its  express    
provision)  is  not  in  furtherance  of  or  sanctioned  by  the  contract.  Rather,  it  is  a  contravention  thereof  and   Same;;  Damages;;  Liquidated  Damages;;  Liquidated  damages  are  those  agree
it  negates  the  autonomy  characteristic  of  contracts.   contract,   to   be   paid   in   case   of   breach   thereof.—Penal   clause   may   be   classi
  source:  (a)  legal  (when  it  is  provided  by  law)  and  (b)  conventional  (when  it  is
Same;;  Same;;  Same;;  Same;;  Rentals;;  Damages;;  Entitlement  to  rentals  after  the  termination  of  the  lease   of  the  parties);;  (2)  according  to  demandability:  (a)  subsidiary  (when  only  the
pursuant  to  an  automatic  rescission  or  termination  clause  is  possible  in  the  case  where  the  lessor  invokes   and  (b)  complementary  (when  both  the  principal  obligation  and  the  penalty  
the  clause  and  the  lessee  refuses  to  vacate  the  leased  premises.  The  lessee  will  be  liable  for  damages   according  to  purpose:  (a)  cumulative  (when  damages  may  be  collected  in  a
equivalent   to   the   rentals   for   the   duration   of   its   possession   from   the   termination   of   the   lease   until   he   reparatory  (when  the  penalty  substitutes  indemnity  for  damages).  Item  8(m)  
vacates  the  premises.—Entitlement  to  rentals  after  the  termination  of  the  lease  pursuant  to  an  automatic   accessory  obligation  or  prestation  to  the  principal  obligation  of  lease.  It  spec
rescission  or  termination  clause  is  possible  in  the  case  where  the  lessor  invokes  the  clause  and  the  lessee   of  liquidated  damages  —  the  full  deposit  —  to  be  awarded  to  the  injured  par
refuses  to  vacate  the  leased  premises.  The  lessee  will  be  liable  for  damages  equivalent  to  the  rentals  for   Term  or  period  of  the  principal  obligation.  Hence,  as  to  source,  it  is  conventio
 O B L I G A T I O N S   &   C O N T R A C T S   C a s e s   B a t c
 
damages  are  those  agreed  upon  by  the  parties  to  a  contract,  to  be  paid  in  case  of  breach  thereof.  The   the  requisites  for  the  demandability  of  the  penal  clause  are  present  in  this  ca
amount  of  the  liquidated  damages  is  purely  contractual  between  the  parties;;  and  the  courts  will  intervene   total  nonfulfillment  of  the  obligation  or  the  defective  fulfillment  is  chargeable
only  to  equitably  reduce  the  liquidated  damages,  whether  intended  as  an  indemnity  or  a  penalty,  if  they   and   (2)   that   the   penalty   may   be   enforced   in   accordance   with   the   provision
are  iniquitous  or  unconscionable,  pursuant  to  Articles  2227  and  1229  of  the  Civil  Code.   requisite,  the  penalty  is  demandable  when  the  debtor  is  in  mora  in  regard  to  o
  (to  give  and  to  do)  where  demand  may  be  necessary  unless  it  is  excused;;  a
Same;;  Same;;  Actual  Damages;;  Penal  Clauses;;  Proof  of  actual  damages  suffered  by  the  creditor  is  not   obligations,  when  an  act  is  done  contrary  to  that  which  is  prohibited.  
necessary  in  order  that  the  penalty  may  be  demanded.—Proof  of  actual  damages  suffered  by  the  creditor    
is  not  necessary  in  order  that  the  penalty  may  be  demanded.  Item  8(m)  seeks  to  insure  or  guarantee  the   Same;;  Diligence  of  Good  Father  of  the  Family;;  Article  2203  of  the  Civil  Code
completion  of  the  lease  period  since  its  noncompliance  shall  be  met  with  a  penalty.  The  degree  of  the   suffering  loss  or  injury  must  exercise  the  diligence  of  a  good  father  of  a  famil
coercive  effect  or  impact  of  the  penalty  to  insure  or  guarantee  the  performance  of  the  principal  obligation   resulting  from  the  act  or  omission.”—Article  2203  of  the  Civil  Code  provides
depends  largely  on  the  stipulated  amount  of  the  liquidated  damages.  If  the  amount  is  substantial,  then   loss  or  injury  must  exercise  the  diligence  of  a  good  father  of  a  family  to  minim
the  compulsion  to  perform  may  be  greater.  The  obligor  may  not,  however,  be  willing  to  accept  a  very   from  the  act  or  omission.’’  Ragasa  likewise  failed  in  this  respect.  
stiff  penalty.  As  expressed  earlier,  the  amount  is  purely  discretionary  on  the  parties  provided  that  it  will    
pass  the  test  of  unconscionability  or  excessiveness.  Since  the  herein  parties  have  agreed  on  a  specific   PETITION  for  review  on  certiorari  of  the  decision  and  resolution  of  the  Court  of
amount  of  penalty,  P367,821.00  or  the  full  deposit,  the  Court  will  not  even  second  guess  whether  it  is   Division  and  Former  Special  Thirteenth  Division.  
substantial   enough   to   insure   the   compliance   of   the   lease   period.   The   Court   will   simply   rule   that   it   is    
reasonable.   The  facts  are  stated  in  the  opinion  of  the  Court.  
           Tomas  Carmelo  T.  Araneta  for  petitioner.  
Same;;  Penal  Clauses;;  From  the  first  paragraph  of  Article  1226,  it  is  evident  that,  as  a  rule,  the  penalty  is            BDO  Unibank,  Inc.  Legal  Services  Group  for  respondent.  
fixed  by  the  contracting  parties  as  a  compensation  or  substitute  for  damages  in  case  of  breach  of  the    
obligation;;  and  it  is,  therefore,  clear  that  the  penalty  in  its  compensatory  aspect  is  the  general  rule,  while   CAGUIOA,   J.:  
the  penalty  in  its  strictly  penal  aspect  is  the  exception.—From  the  first  paragraph  of  Article  1226,  it  is    
evident  that,  as  a  rule,  the  penalty  is  fixed  by  the  contracting  parties  as  a  compensation  or  substitute  for   Before  the  Court  is  a  Petition  for  Review[1]  on   Certiorari  (Petition)  under  Rul
damages  in  case  of  breach  of  the  obligation;;  and  it  is,  therefore,  clear  that  the  penalty  in  its  compensatory   (Rules)   filed   by   petitioner   D.M.   Ragasa   Enterprises,   Inc.,   (Ragasa)   against  
aspect  is  the  general  rule,  while  the  penalty  in  its  strictly  penal  aspect  is  the  exception.   Inc.,[2]   formerly   Equitable   PCI   Bank,   Inc.   (bank),   assailing   the   Decision[
(questioned   Decision)   and   Resolution[4]   dated   November   25,   2009,   both   of  
 
Special  Thirteenth  (13th)  Division  and  Former  Special  Thirteenth  Division,  re
Same;;  Same;;  Obligations;;  Contracts;;  It  is  clear  from  paragraph  1  of  Article  1226  that  when  an  obligation   No.  88322.  
or  a  contract  contains  a  penal  clause,  the  penalty  shall  substitute  the  indemnity  for  damages  and  the    
payment  of  interests  in  case  of  noncompliance  with  or  breach  of  the  principal  obligation.—It  is  also  clear   The  CA  reversed  and  set  aside  the  rulings  in  favor  of  Ragasa  of  the  Regional  T
from   paragraph   1   of   Article   1226   that   when   an   obligation   or   a   contract   contains   a   penal   clause,   the   City,  Branch  216,  in  its  Decision  dated  April  4,  2006[5]  and  Order  dated  Octob
penalty  shall  substitute  the  indemnity  for  damages  and  the  payment  of  interests  in  case  of  noncompliance   corresponding  Motion  for  Reconsideration)  in  Civil  Case  No.  Q-­02-­46341.  
with  or  breach  of  the  principal  obligation.  This  general  rule,  however,  admits  three  exceptions,  namely:    
The  Facts  
(1)  when  there  is  a  stipulation  to  the  contrary;;  (2)  when  the  obligor  or  debtor  is  sued  for  refusal  to  pay  
 
the  agreed  penalty;;  and  (3)  when  the  obligor  or  debtor  is  guilty  of  fraud.  In  these  exceptions,  it  is  evident   On   January   30,   1998,   Ragasa   and   then   Equitable   Banking   Corporation   (Eq
that  the  purpose  of  the  penalty  is  to  punish  since  the  obligee  or  creditor  can  recover  from  the  obligor  or   Contract   of   Lease[7]   (Lease   Contract),   as   lessor   and   lessee,   respectively,   ov
debtor  not  only  the  penalty,  but  also  the  damages  or  interests  resulting  from  the  breach  of  the  principal   floors  of  a  commercial  building  located  at  175  Tomas  Morato  Avenue  corner
obligation.   (subject   premises),   for   a   period   of   five   years,   commencing   on   February   1,  
  2003[9],   with   a   monthly   rental   of   P122,607.00.[10]   The   pertinent   provisio
Same;;  Same;;  The  requisites  for  the  demandability  of  the  penal  clause  are  present  in  this  case.  These  are:   state,  viz.:  
 
(1)  that  the  total  nonfulfillment  of  the  obligation  or  the  defective  fulfillment  is  chargeable  to  the  fault  of  
2.  The  TERM  of  this  Lease  shall  be  for  a  period  of  five  (5)  years,  commencing
the  debtor;;  and  (2)  that  the  penalty  may  be  enforced  in  accordance  with  the  provisions  of  law.—Clearly,  
 O B L I G A T I O N S   &   C O N T R A C T S   C a s e s   B a t c
 
3.  The  TENANT  shall  pay  a  monthly  rental  of  ONE  HUNDRED  TWENTY  TWO  THOUSAND  SIX  HUNDRED   x  x  x  x  
SEVEN  (122,607)  pesos  based  on  P463.16  per  square  meter  per  month  inclusive  of  Value  Added  Tax  and    
withholding  tax  and  payable  in  advance  in  the  first  five  days  of  the  month,  that  is  1st  to  5th  of  every   10.   In   the   event   that   a   Court   Litigation   has   been   resorted   to   by   the   LESSO
month.  An  annual  increase  of  10%  shall  be  applied  during  the  term  of  the  lease.   compliance  of  any  of  the  foregoing  provisions,  the  aggrieved  party  shall  be  p
  less  than  fifteen  thousand  (P15,000)  pesos,  Philippine  Currency,  for  Attorney
4.  The  failure  to  pay  two  consecutive  monthly  rentals  within  the  first  five  (5)  days  of  any  month,  as  stated   that  the  honorable  court  may  allow;;  the  cost  of  litigations  shall  be  born[e]  or
in  No.  3,  shall  automatically  terminate  this  Contract,  without  need  of  any  further  notice  to  the  TENANT.   or  in  default.  All  unpaid  accounts  and  obligations  of  the  TENANT  shall  earn  inte
The  LESSOR  is  hereby  authorized,  and  has  the  right  to  show  the  premises  to  prospective  tenants,  and   rate  of  14%  per  annum  or  at  the  allowable  rate  of  interest  from  the  date  of  d
within  five  (5)  days  following  the  last  day  of  the  grace  period  stated  in  No.  3,  the  TENANT  shall  vacate   be  brought  in  the  town  of  Quezon  City.[11]  
the  premises  without  the  need  of  the  usual  judicial  proceedings,  and/or  the  LESSOR  shall  padlock  the    
premises  until  the  TENANT  settles  his  obligations.  The  TENANT  agrees  to  this  padlocking  as  a  sign  of  his   Pursuant   to   the   Lease   Contract,   Equitable   Bank   paid   the   amounts   of   P367,
good  faith  in  his  compliance  with  No.  3  of  this  Contract  and  the  LESSOR  is  not  liable  or  answerable  for   months  advance  rentals,  and  P367,821.00  representing  three  months  rentals  
any  damage  that  the  TENANT  may  incur  or  suffer  due  to  his  non-­entrance  to  the  premises,  or  the  LESSOR    
may  confiscate  any  property  found  in  the  premises  equivalent  to  the  unpaid  rental,  penalty,  and  interests   Meanwhile,   Equitable   Bank   entered   into   a   merger   with   Philippine   Commerc
thereto,  as  guaranty  and/or  pledge,  and  can  be  retrieved  anytime  upon  full  payment  of  his  accounts  but   Bank)  thereby  forming  Equitable  PCI  Bank,  Inc.[13]  The  latter  would  eventually
must   not   be   for   more   than   three   (3)   months   from   the   date   of   default   [;;]   otherwise,   the   confiscated   merge  with  Banco  de  Oro,  Inc.  to  form  the  respondent  bank.[14]  
property  or  properties  shall  become  permanently  owned  by  the  LESSOR  as  partial  payment  of  his  unpaid    
rentals,  penalties  and  interests,  and  in  case  of  any  unpaid  balance,  the  TENANT  is  still  liable.   As  a  result  of  the  merger,  the  bank  closed  and  joined  the  branches  of  its  con
  in   close   proximity   with   each   other   as   maintaining   said   branches   would   be  
x  x  x  x   branches  which  had  to  be  closed  is  the  branch  located  in  the  subject  premise
   
7.  The  parties  hereby  covenant  and  agree  upon  the  signing  of  this  Contract  of  Lease  that  [the]  TENANT   For  this  reason,  the  bank  sent  a  notice  dated  May  28,  2001,  informing  Ragas
shall  pay  to  the  LESSOR  or  his  representative,  the  amount  of  SEVEN  HUNDRED  THIRTY  FIVE  THOUSAND   terminating   their   Lease   Contract   effective   June   30,   2001   (Notice   of   Pr
SIX  HUNDRED  FORTY  TWO  (P735,642)  pesos,  Philippine  Currency,  P367,821  as  three  months  advanced   responded  with  a  demand  letter  dated  June  20,  2001[18]  for  payment  of  month
rental,  and  P367,821  as  three  months  deposit,  which  deposit  shall  be  refunded  to  the  TENANT  only  upon   term  of  the  Lease  Contract  from  July  1,  2001  to  January  31,  2003  totaling  P
termination  of  this  Lease,  that  is,  after  expiration  of  the  lease,  paid  occupancy  of  the  said  premises,  and   there   is   no   express   provision   in   the   Lease   Contract   allowing   pre-­terminatio
after   vacating   the   same   and   also   after   deducting   the   unpaid   water   bills[,]   if   any,   electric   bills,   through   a   letter   dated   June   26,   2001,[20]   that   its   only   liability   for   pre-­term
extraordinary  wear  and  tear  of  the  premises,  losses  and  breakages  of  the  premises,  and  other  damages   forfeiture  of  its  security  deposit  pursuant  to  item  8(m)  of  the  Lease  Contract
sustained  by  the  LESSOR.   bank  vacated  the  subject  premises  without  heeding  Ragasa's  demand  for  pay
   
8.  The  TENANT  voluntarily  binds  himself  and  agrees  to  the  following  without  any  coercion  or  force  by  the   After   sending   two   more   reiterative   demand   letters,[22]   which   were   both   ign
LESSOR;;   finally  filed  on  March  11,  2002  with  the  RTC  the  Complaint  for  Collection  of  Su
  P3,146,596.42  representing  the  monthly  rentals  under  the  Lease  Contract  for
x  x  x  x   January   31,   2003)   and   Damages.   Ragasa   argued   that   under   the   Lease   Con
  bank's  security  deposit  does  not  exempt  it  from  payment  of  the  rentals  for  
m)  The  full  deposit  shall  be  forfeited  in  favor  of  the  LESSOR  upon  non-­compliance  of  the  Term  of  the   lease  because  the  bank's  act  of  pre-­terminating  the  contract  was  a  major  bre
Contract  of  Lease  by  the  TENANT,  and  cannot  be  applied  to  Rental;;   item  8(m)  expressly  provides  that  the  security  deposit  shall  not  be  applied  to  
   
n)  To  pay  a  penalty  of  3%  of  the  monthly  rental,  for  every  month  of  delay  of  payment  of  the  monthly   In  its  Answer  filed  on  April  26,  2002,  the  bank  argued,  in  gist,  that  item  8(m
rental,  [with]  a  fraction  of  the  month  x  x  x  considered  [as]  one  month;;   actually  a  penalty  clause  which,  in  line  with  Article  1226[23]  of  the  Civil  Code,  t
  and  interests  in  case  of  breach.  Hence,  for  breaching  the  Lease  Contract  by
p)  Breach  or  non-­compliance  of  any  of  the  provisions  of  this  Contract,  especially  non-­payment  of  two   the   bank   is   liable   to   forfeit   its   security   deposit   in   favor   of   Ragasa   but   wou
consecutive  monthly  rentals  on  time,  shall  mean  the  termination  of  this  Contract,  and  within  five  (5)  days   corresponding  to  the  remaining  life  of  the  Contract.  Moreover,  the  bank  is  n
from  the  date  of  breach,  non-­compliance,  or  default,  the  TENANT  shall  vacate  the  premises  quietly  and   the  rate  of  3%  under  item  8(n)  of  the  Lease  Contract  because  the  bank  paid
peacefully   without   need   of   the   required   judicial   proceedings.   If   he   does   not   vacate   the   premises,   the   time  it  pre-­terminated  the  same.[24]  
TENANT  has  agreed  that  the  LESSOR  has  no  liability  whatsoever  due  to  the  padlocking  of  the  same;;    
   
 O B L I G A T I O N S   &   C O N T R A C T S   C a s e s   B a t c
 
Ruling  of  the  RTC   the  bank  is  liable   to  forfeit  its  security  deposit   pursuant   to  the   penalty   clau
  contract.  The  CA  ruled  that  to  allow  Ragasa  to  collect  the  value  of  the  unexp
The  RTC  ruled  in  Ragasa's  favor  in  a  Decision  dated  April  4,  2006,  the  dispositive  portion  of  which  reads:   penalty  would  constitute  unjust  enrichment.  
   
WHEREFORE,  the  Court  finds  that  plaintiff  has  established  its  case  against  defendant  by  preponderance   Ragasa  filed  a  Motion  for  Reconsideration  of  the  questioned  Decision,  which
of  evidence  and  judgment  is  hereby  rendered  ordering  defendant  Equitable  PCI  Bank,  Inc.  to  pay  plaintiff   merit,  in  its  Resolution  dated  November  25,  2009.[29]  
the  following:    
  Refusing   to   concede,   Ragasa   filed   the   present   Petition   on   January   21,   2010
1.   The  amount  of  Php  3,146,596.42  Philippine  Currency,  representing  the  monthly  rentals  from   namely:  
July  1,  2001  to  January  31,  2003;;    
2.   A  penalty  of  3%  of  the  monthly  rental  for  every  month  of  delay;;   Issues  
3.   An  interest  of  14%  per  annum  on  the  full  amount  due  until  fully  paid;;    
4.   Attorney's  fees  in  the  amount  of  Php  30,000.00;;  and   1.)  WHETHER  OR  NOT  THE  COURT  OF  APPEALS  SERIOUSLY  ERRED  IN  LAW  
5.   Costs  of  litigation.   OF  RESPONDENT  BANK  AND  IN  DENYING  THE  MOTION  FOR  RECONSIDERA
  WHICH  IS  CONTRARY  TO  ARTICLES  1170  AND  1308  OF  THE  NEW  CIVIL  COD
Defendant's  Counterclaim  is  dismissed.    
  2.)   WHETHER   OR   NOT   THE   COURT   OF   APPEALS   SERIOUSLY   ERRED   IN   LA
SO  ORDERED.[25]   PENALTY  CLAUSE  APPLICABLE  IN  THE  CASE  IS  ITEM  NO.  8(m)  OF  THE  CONT
  OF  THE  SAME  CONTRACT[.]  
The  RTC  held  that  the  bank  may  not  unilaterally  pre-­terminate  the  Lease  Contract;;  hence,  it  is  still  liable    
to  pay  the  rentals  for  the  remaining  duration  of  the  said  contract.  Likewise,  in  addition  to  item  8(m)  of   3.)   WHETHER   OR   NOT   THE   COURT   OF   APPEALS   SERIOUSLY   ERRED   IN   LA
the  Lease  Contract  providing  for  the  forfeiture  of  the  bank's  security  deposit,  item  8(n),  another  penalty   SUBJECT  CONTRACT  HAD  BEEN  TERMINATED[.]  
clause  providing  for  additional  3%  of  the  monthly  rental  for  each  month  of  delay  in  payment,  also  applies.    
Finally,  pursuant  to  Section  10,  an  interest  of  14%  per  annum  on  the  amount  due  was  awarded.   4.)   WHETHER   OR   NOT   THE   COURT   OF   APPEALS   SERIOUSLY   ERRED   IN   LA
  PETITIONER  IS  GUILTY  OF  UNJUST  ENRICHMENT[.][30]  
The  bank  filed  a  Motion  for  Reconsideration  which  was  denied  by  the  RTC  in  its  Order  dated  October  3,    
2006.[26]   The  fundamental  issue  that  the  Court  is  called  upon  to  resolve  is:  What  is  the
  for  its  act  of  pre-­terminating  the  Lease  Contract?  
On  October  23,  2006,  the  bank  filed  a  Notice  of  Appeal  to  the  CA,  arguing  that  the  Lease  Contract  was    
automatically  terminated  by  the  act  of  the  bank  in  pre-­terminating  the  lease  or  based  on  the  provisions   At  the  outset,  it  is  well  to  remember  that  a  contract  is  the  law  between  the  pa
of  the  Lease  Contract,  and  that  upon  termination  of  the  lease,  the  bank  has  been  released  from  its  future   from   contracts   have   the   force   of   law   between   the   contracting   parties   and   s
contractual  obligations  including  the  payment  of  "future  rentals."[27]   good  faith.[32]  The  parties  are  allowed  by  law[33]  to  enter  into  stipulations,  cla
  they  may  deem  convenient  which  bind  the  parties  as  long  as  they  are  not  con
Ruling  of  the  CA   customs,  public  order  or  public  policy.[34]  
   
In  the  questioned  Decision  dated  March  27,  2009,  the  CA  granted  the  bank's  appeal  and  reversed  and   The  pertinent  provisions  of  the  Lease  Contract  are  as  follows:  
set  aside  the  RTC's  ruling,  disposing  of  the  case  as  follows:    
  2.  The  TERM  of  this  Lease  shall  be  for  a  period  of  five  (5)  years,  commencing
WHEREFORE,  the  appeal  is  hereby  GRANTED.  The  ruling  of  the  trial  court  is  hereby  REVERSED  and  SET    
ASIDE.  The  complaint  is  dismissed  for  lack  of  legal  basis.   x  x  x  x  
   
SO  ORDERED.[28]   7.  The  parties  hereby  covenant  and  agree  upon  the  signing  of  this  Contract  o
  shall  pay  to  the  LESSOR  or  his  representative,  the  amount  of  SEVEN  HUNDRED
The  CA  ruled  that  the  bank's  failure  to  continue  the  Lease  Contract  until  its  expiration  constituted  a  breach   SIX  HUNDRED  FORTY  TWO  (P735,642)  pesos,  Philippine  Currency,  P367,821
of  its  provision.  As  such,  the  Lease  Contract  was  automatically  terminated  by  virtue  of  item  8(p)  thereof   rental,  and  P367,821  as  three  months  deposit,  which  deposit  shall  be  refunde
providing  for  its  outright  termination  in  case  of  breach  of  any  of  its  provisions.  Hence,  there  is  no  legal   termination  of  this  Lease,  that  is,  after  expiration  of  the  lease,  paid  occupanc
basis  to  hold  the  bank  liable  for  payment  of  rentals  for  the  unexpired  period  of  the  contract.  However,   after   vacating   the   same   and   also   after   deducting   the   unpaid   water   bil
 O B L I G A T I O N S   &   C O N T R A C T S   C a s e s   B a t c
 
extraordinary  wear  and  tear  of  the  premises,  losses  and  breakages  of  the  premises,  and  other  damages   m)  The  full  deposit  shall  be  forfeited  in  favor  of  the  LESSOR  upon  non-­com
sustained  by  the  LESSOR.   Contract  of  Lease  by  the  TENANT,  and  cannot  be  applied  to  Rental;;[37]  
   
8.  The  TENANT  voluntarily  binds  himself  and  agrees  to  the  following  without  any  coercion  or  force  by  the   The  word  "term"  appears  only  in  three  instances,  but  in  three  forms,  in  the
LESSOR;;   Firstly,  "TERM"  (a  defined  word  as  the  letters  are  all  capitalized)  is  used  in  it
  indicate  the  five-­year  period  of  the  lease.  Secondly,  "Term"  is  used  in  item  8
x  x  x  x   being  with  a  capitalized  initial  letter  it  also  indicates  that  it  is  a  defined  word.  L
  8(g)  that  the  lessee  voluntarily  binds  itself  and  agrees:  "To  pay  from  time  to  ti
m)  The  full  deposit  shall  be  forfeited  in  favor  of  the  LESSOR  upon  non-­compliance  of  the  Term  of  the   Lease,  all  expenses  such  as  salaries,  wages,  etc.,  if  for  business,  all  charges  f
Contract  of  Lease  by  the  TENANT,  and  cannot  be  applied  to  Rental;;   any  such  other  services  in  the  Leased  Premises."[38]  
   
x  x  x  x   Given  the  fact  that  in  item  2  and  item  8(g),  the  words  "TERM"  and  "term"  defi
  the  lease,  the  word  "Term"  in  item  8(m)  should  likewise  be  understood  to  hav
p)  Breach  or  non-­compliance  of  any  of  the  provisions  of  this  Contract,  especially  non-­payment  of  two    
consecutive  monthly  rentals  on  time,  shall  mean  the  termination  of  this  Contract,  and  within  five  (5)  days   The  word  "Term"  could  not  mean  stipulation,  provision,  condition,  covenant  o
from  the  date  of  breach,  non-­compliance,  or  default,  the  TENANT  shall  vacate  the  premises  quietly  and   can  also  be  understood.  In  the  default  clauses  of  the  Lease  Contract,   i.e.,  ite
peacefully   without   need   of   the   required   judicial   proceedings.   If   he   does   not   vacate   the   premises,   the   employed  is  "provisions."  It  is  the  word  "provisions"  which  the  parties  intended
TENANT  has  agreed  that  the  LESSOR  has  no  liability  whatsoever  due  to  the  padlocking  of  the  same;;   condition,  covenant  or  clause  and  not  the  word  "term."  
   
x  x  x  x   Consequently,  the  correct  interpretation  of  the  word  "Term"  in  item  8(m)  is  th
  the  lease,  and  not  to  any  other  provision  of  the  Lease  Contract.  
10.   In   the   event   that   a   Court   Litigation   has   been   resorted   to   by   the   LESSOR   or   LESSEE,   due   to   non-­  
compliance  of  any  of  the  foregoing  provisions,  the  aggrieved  party  shall  be  paid  by  the  other  party,  no   Article  1170  of  the  Civil  Code  mandates  that  those  who,  in  the  performance  of
less  than  fifteen  thousand  (P15,000)  pesos,  Philippine  Currency,  for  Attorney's  fees,  and  other  damages   of  fraud,  negligence,  or  delay,  and  those  who,  in  any  manner,  contravene  th
that  the  honorable  court  may  allow;;  the  cost  of  litigations  shall  be  born[e]  or  paid  by  the  party  in  fault,   for  damages.  
or  in  default.  All  unpaid  accounts  and  obligations  of  the  TENANT  shall  earn  interest  or  bear  interest  at  the    
rate  of  14%  per  annum  or  at  the  allowable  rate  of  interest  from  the  date  of  default.  The  legal  suits  shall   Thus,  having  contravened  the  tenor  of  the  Lease  Contract  regarding  its  term  
be  brought  in  the  town  of  Quezon  City.[35]  (Underscoring  supplied)   be  liable  for  damages.  However,  how  much  in  damages  should  the  bank  be  li
   
The   foregoing   stipulations   are   clear   and   show   no   contravention   of   law,   morals,   good   customs,   public   Generally,  if  the  lessor  or  the  lessee  should  not  comply  with  their  obligations
order  or  public  policy.  As  such,  they  are  valid,  and  the  parties'  rights  shall  be  adjudicated  according  to   ask  for  either  the  rescission  of  the  contract  and  indemnification  for  damages,
them,  being  the  primary  law  between  them.  When  the  terms  of  the  contract  are  clear  and  leave  no  doubt   the  contract  to  remain  in  force.[39]  
as  to  the  intention  of  the  contracting  parties,  the  rule  is  settled  that  the  literal  meaning  of  its  stipulations    
should  control.[36]   In  the  present  case,  there  is  an  express  stipulation  in  item  8(p)  of  the  Lease
  non-­compliance   of   any   of   the   provisions   of   this   Contract,   especially   non-­pa
In  the  case  at  bar,  there  is  no  question  that  the  bank  breached  the  Lease  Contract.  When  it  served  upon   monthly  rentals  on  time,  shall  mean  the  termination  of  this  Contract."[40]  
Ragasa  the  Notice  of  Pre-­termination  effective  June  30,  2001  and  when  it,  indeed,  vacated  the  subject    
premises  on  said  date,  the  bank,  in  effect,  breached  item  2  of  the  Lease  Contract,  providing  for  a  five-­ The  validity  of  an  automatic  termination  clause  such  as  the  one  quoted  above
year  term.  It  must  be  noted  that  the  Lease  Contract  does  not  contain  a  pre-­termination  clause.    
  In   Manila  Bay  Club  Corp.  v.  Court  of  Appeals[41]  (Manila  Bay  Club  Corp.),  the
The  Lease  Contract  has  a  specific  provision  in  case  of  non-­compliance  of  its  "Term"  —  "a  period  of  five   was  from  March  4,  1988  to  March  4,  1998  but  was  short-­lived  because  the  p
(5)  years,  commencing  on  February  1,  1998,"  to  wit:   unilaterally  terminated  the  lease  with  the  request  that  petitioner  therein  vaca
  peacefully  surrender  its  possession  for  the  failure,  among  others,  to  insure  the
8.  The  TENANT  voluntarily  binds  himself  and  agrees  to  the  following  without  any  coercion  or  force  by  the   of  paragraph  22  of  the  lease  contract  between  the  parties  therein.[42]  The  p
LESSOR;;   invoked  the  "Special  Clause"  as  found  in  paragraph  19  of  the  said  lease  cont
  to  wit:  
x  x  x  x    
 O B L I G A T I O N S   &   C O N T R A C T S   C a s e s   B a t c
 
19.  If  the  rental  herein  stipulated  or  any  part  thereof  at  any  time,  shall  be  in  arrears  or  unpaid,  or  if  the   Pursuant   to   the   automatic   termination   clause   of   the   Lease   Contract,   whic
tenant   shall   at   any   time   fail   or   neglect   to   perform   or   comply   with   any   of   the   covenants,   conditions,   autonomy   characteristic   of   contracts,   the   Lease   Contract   was   terminated   u
agreements   or   restrictions   stipulated   or   if   the   tenant   shall   become   bankrupt   or   insolvent   or   shall   termination  by  the  bank  on  June  30,  2001.  Ragasa  is,  thus,  precluded  from  av
compound   with   his   creditors,   then   and   in   any   of   such   above   cases,   this   lease   contract   shall   become   which  is  to  claim  damages  by  reason  of  the  breach  and  allow  the  lease  to  rem
automatically  terminated  and  cancelled  and  the  said  premises  shall  be  peacefully  vacated  by  the  LESSEE   having  been  automatically  resolved  or  terminated  by  agreement  of  the  parties
for  the  LESSOR  to  hold  and  enjoy  henceforth  as  if  these  presents  have  not  been  made  and  it  shall  be   indemnification  for  damages.  
lawful  for  the  LESSOR  or  any  person  duly  authorized  in  his  behalf,  without  any  formal  notice  or  demand    
to   enter   into   and   upon   said   leased   premises   or   any   part   thereof   without   prejudice   on   the   part   of   the   To  force  either  party  to  continue  with  a  contract  that  is  automatically  termina
LESSOR  to  exercise  all  rights  on  the  contract  of  lease  and  those  given  by  law.  And  upon  such  cancellation   either   party   (pursuant   to   its   express   provision)   is   not   in   furtherance   of   or   s
of  the  contract,  the  LESSEE  hereby  grants  the  LESSOR  the  legal  right  to  enter  into  and  take  possession   Rather,  it  is  a  contravention  thereof  and  it  negates  the  autonomy  characterist
of  the  leased  premises  as  though  the  term  of  the  leased  contract  has  expired.[43]    
  Is  the  claim  of  Ragasa  that  it  is  entitled  to  damages  in  the  amount  of  P3,14
The  Court  justified  the  validity  of  the  above  automatic  termination  clause,  thus:   monthly  rentals  from  July  1,  2001  to  January  31,  2003,  or  the  unexpired  perio
   
Certainly,   there   is   nothing   wrong   if   the   parties   to   the   lease   contract   agreed   on   certain   mandatory   Entitlement  to  rentals  after  the  termination  of  the  lease  pursuant  to  an  automa
provisions  concerning  their  respective  rights  and  obligations,  such  as  the  procurement  of  the  insurance   clause  is  possible  in  the  case  where  the  lessor  invokes  the  clause  and  the  le
and   rescission   clause.   For   it   is   well   to   recall   that   contracts   are   respected   as   the   law   between   the   leased  premises.  The  lessee  will  be  liable  for  damages  equivalent  to  the  ren
contracting  parties,  and  may  establish  such  stipulations,  clauses,  terms  and  conditions  as  they  may  want   possession  from  the  termination  of  the  lease  until  he  vacates  the  premises.  T
to  include.  As  long  as  such  agreements  are  not  contrary  to  law,  morals,  good  customs,  public  policy  or   of  the  Court  in   Manila  Bay  Club  Corp.  when  it  affirmed  the  award  of  the  mon
public  order  they  shall  have  the  force  of  law  between  them.[44]   250,000.00,  which  was  the  valuation  of  the  trial  court  as  affirmed  by  the  CA,  
   
In  Riesenbeck  v.  Spouses  Silvino  Maceren,  Jr.  and  Patricia  Maceren[45]  (Riesenbeck),  the  Court  observed:   Petitioner  in  its  third  assignment  of  error  assails  the  P250,000.00  monthly  re
  the  trial  court  and  as  affirmed  by  respondent  Court  of  Appeals,  claiming  that  t
The  Contract  of  Lease  was  called  off  by  respondents  in  virtue  of  Clauses  No.  10[46]  and  No.  13[47]  thereof   finding.  
to  which  the  parties  voluntarily  bound  themselves.  In  Manila  Bay  Club  Corp.  v.  Court  of  Appeals,[48]  this    
Court  interpreted  as  requiring  mandatory  compliance  by  the  parties  a  provision  in  a  lease  contract  that   Again,  we  disagree.  In  reaching  that  amount,  the  trial  court  took  into  consider
failure  or  neglect  to  perform  or  comply  with  any  of  the  covenants,  conditions,  agreements  or  restrictions   1)  prevailing  rates  in  the  vicinity;;  2)  location  of  the  property;;  3)  use  of  the  pro
stipulated  shall  result  in  the  automatic  termination  and  cancellation  of  the  lease.   5)  the  testimony  of  private  respondent  Modesta  Sabeniano  that  she  was  offe
  investor  a  monthly  rental  of  P400,000.00  for  the  leased  premises  then  occupied
In  accord  with  this  ruling  is   Peoples  Industrial  and  Commercial  Corp.  v.  Court  of  Appeals[49]  where  the   for  its  part  should  have  presented  its  controverting  evidence  below  to  suppor
Court  held  that  there  is  nothing  wrong  if  the  parties  to  a  lease  contract  agreed  on  certain  mandatory   fair  rental  value  of  the  leased  building  since  the  burden  of  proof  to  show  th
provisions  concerning  their  respective  rights  and  obligations,  such  as  the  procurement  of  insurance  and   unconscionable  or  exorbitant  rests  upon  the  lessee.[53]  But  petitioner  failed  to  
the  rescission  clause.  Thus  –   by  the  trial  court,  as  affirmed  by  respondent  Court  of  Appeals,  stands.  
   
[I]t  is  well  to  recall  that  contracts  are  respected  as  the  law  between  the  contracting  parties,  and  they   It  is  worth  stressing  at  this  juncture  that  the  trial  court  had  the  authority  to  f
may  establish  such  stipulations,  clauses,  terms  and  conditions  as  they  may  want  to  include.  As  long  as   the  continued  use  and  occupancy  of  the  leased  premises  after  the  termination
such  agreements  are  not  contrary  to  law,  morals,  good  customs,  public  policy  or  public  order  they  shall   that  it  was  not  bound  by  the  stipulated  rental  in  the  contract  of  lease  since  it  
have  the  force  of  law  between  them.   termination   or   expiration   of   the   contract   of   lease,   the   rental   stipulated   ther
  reasonable  value  for  the  use  and  occupation  of  the  premises  as  a  result  or  b
The   foregoing   legal   truism   finds   equal   potency   in   the   case   at   bar.   No   doubt,   the   pre-­termination   was   rise  in  values.[54]  Moreover,  the  trial  court  can  take  judicial  notice  of  the  genera
properly  resorted  to  by  respondents  pursuant  to  Clause  10  of  the  Contract  of  Lease.  Indeed,  the  law  on   estate  especially  of  business  establishments[55]  like  the  leased  building  owned
obligations  and  contracts  does  not  prohibit  parties  from  entering  into  agreement  providing  that  a  violation    
of  the  terms  of  the  contract  would  cause  its  cancellation  even  without  judicial  intervention.[50]  This  is  what   That  is,  however,  not  the  situation  here.  The  bank  did  not  continue  to  possess
petitioner  and  respondents  entered  into,  a  lease  contract  with  a  stipulation  that  the  contract  is  rescinded   its  automatic  termination,  as  it  vacated  the  same  on  June  30,  2001.  
upon  violation  of  its  substantial  provisions,  which  petitioner,  does  not  deny  having  violated.[51]    
  As  explained  above,  the  provision  or  clause  that  is  applicable  in  case  of  non-­
period  of  the  Lease  Contract  is  item  8(m)  which  mandates  that  the  full  dep
 O B L I G A T I O N S   &   C O N T R A C T S   C a s e s   B a t c
 
equivalent  of  three  months  rentals  shall  be  forfeited  with  the  proviso  that  the  deposit  cannot  be  applied   damages   may   be   collected   in   addition   to   penalty)   and   (b)   reparatory   (wh
to  rental.  This  proviso  as  to  non-­application  to  rental  of  the  deposit  means  that  the  forfeiture  is  without   indemnity  for  damages).[64]  
prejudice  to  the  payment  of  any  unpaid  rental  at  the  time  of  the  non-­compliance  or  breach  of  the  Term    
or  period  of  the  Lease  Contract.  Since  the  bank  had  no  unpaid  rental  as  of  June  30,  2001,  the  proviso  finds   Item   8(m)   of   the   Lease   Contract   is   an   accessory   obligation   or   prestation   to
no  application  in  the  present  case.   lease.  It  specifies  the  stipulated  amount  of  liquidated  damages  —  the  full  depo
  injured  party  in  case  of  breach  of  the  Term  or  period  of  the  principal  obligatio
What  is  the  nature  of  item  8(m)  of  the  Lease  Contract:  "The  full  deposit  shall  be  forfeited  in  favor  of  the   conventional.  
LESSOR  upon  non-­compliance  of  the  Term  of  the  Contract  of  Lease  by  the  TENANT,  and  cannot  be  applied    
to  Rental"?   As  defined,  liquidated  damages  are  those  agreed  upon  by  the  parties  to  a  con
  breach  thereof.[65]  The  amount  of  the  liquidated  damages  is  purely  contractua
The  Court  believes  and  so  holds  that  item  No.  8(m)  is  a  penalty  or  penal  clause.   the   courts   will   intervene   only   to   equitably   reduce   the   liquidated   damages
  indemnity  or  a  penalty,  if  they  are  iniquitous  or  unconscionable,  pursuant  to  A
A  penal  clause  is  an  accessory  obligation  which  the  parties  attach  to  a  principal  obligation  for  the  purpose   the  Civil  Code.  
of  insuring  the  performance  thereof  by  imposing  on  the  debtor  a  special  prestation  (generally  consisting    
in  the  payment  of  a  sum  of  money)  in  case  the  obligation  is  not  fulfilled  or  is  irregularly  or  inadequately   Also,  proof  of  actual  damages  suffered  by  the  creditor  is  not  necessary  in  ord
fulfilled.[57]  Quite  common  in  lease  contracts,  this  clause  functions  to  strengthen  the  coercive  force  of  the   demanded.[67]  
obligation  and  to  provide,  in  effect,  for  what  would  be  the  liquidated  damages  resulting  from  a  breach.[58]    
  Item  8(m)  seeks  to  insure  or  guarantee  the  completion  of  the  lease  period  sin
A  penal  clause  has  a  three-­fold  purpose:  (1)  a  coercive  purpose  or  one  of  guarantee  —  this  is  to  urge  the   be  met  with  a  penalty.  The  degree  of  the  coercive  effect  or  impact  of  the  pen
debtor  to  the  fulfillment  of  the  main  obligation  under  pain  of  paying  the  penalty;;  (2)  to  serve  as  liquidated   the  performance  of  the  principal  obligation  depends  largely  on  the  stipulated
damages  —  this  is  to  evaluate  in  advance  the  damages  that  may  be  occasioned  by  the  non-­compliance   damages.  If  the  amount  is  substantial,  then  the  compulsion  to  perform  may  b
of  the  obligation;;  and  (3)  a  strictly  penal  purpose  —  this  is  to  punish  the  debtor  for  non-­fulfillment  of  the   not,   however,   be   willing   to   accept   a   very   stiff   penalty.   As   expressed   ear
main  obligation.[59]  While  the  first  purpose  is  always  present,  the  second  purpose  is  presumed  and  the   discretionary  on  the  parties  provided  that  it  will  pass  the  test  of  unconscionabi
third  purpose  must  be  expressly  agreed  upon.[60]   the  herein  parties  have  agreed  on  a  specific  amount  of  penalty,  P367,821.00  o
  will  not  even  second  guess  whether  it  is  substantial  enough  to  insure  the  com
Stated  otherwise,  the  purposes  of  penalty  or  penal  clause  are:  (1)  funcion  coercitiva  o  de  guarantia  or  to   The  Court  will  simply  rule  that  it  is  reasonable.  
insure  the  performance  of  the  obligation;;  (2)  funcion  liquidatoria  or  to  liquidate  the  amount  of  damages    
to   be   awarded   to   the   injured   party   in   case   of   breach   of   the   principal   obligation;;   and   (3)   funcion   As  to  the  effect  of  the  penal  clause,  Article  1226  of  the  Civil  Code  provides:  
estrictamente   penal   or   to   punish   the   obligor   in   case   of   breach   of   the   principal   obligation,   in   certain    
exceptional  cases.[61]  The  second  is  evidently  compensatory  and  the  third  is  punitive  in  character,  while   Art.  1226.  In  obligations  with  a  penal  clause,  the  penalty  shall  substitute  the  i
the  first  is  the  general  purpose  regardless  of  whether  the  penalty  is  compensatory  or  punitive.[62]   the  payment  of  interests  in  case  of  noncompliance,  if  there  is  no  stipulation  to  
  damages  shall  be  paid  if  the  obligor  refuses  to  pay  the  penalty  or  is  guilty  o
Evidently,  the  penal  clause  may  be  considered  either  reparation,  compensation  or  substitute  for  damages,   the  obligation.  
on  one  hand,  or  as  a  punishment  in  case  of  breach  of  the  obligation,  on  the  other.  When  considered  as    
reparation  or  compensation,  the  question  as  to  the  appropriate  amount  of  damages  is  resolved  once  and   The  penalty  may  be  enforced  only  when  it  is  demandable  in  accordance  with  
for  all  because  the  stipulated  indemnity  represents  a  legitimate  estimate  made  by  the  contracting  parties    
of   the   damages   caused   by   the   nonfulfillment   or   breach   of   the   obligation.   Proof   of   actual   damages   is,   From  the  first  paragraph  of  Article  1226,  it  is  evident  that,  as  a  rule,  the  penalt
consequently,  not  necessary  in  order  that  the  stipulated  penalty  may  be  demanded.  When  considered  as   parties   as   a   compensation   or   substitute   for   damages   in   case   of   breach   of
a  punishment,  the  question  of  damages  is  not  yet  resolved  inasmuch  as  the  right  to  damages,  besides   therefore,  clear  that  the  penalty  in  its  compensatory  aspect  is  the  general  ru
the  penalty,  still  subsists.  Thus,  if  the  injured  party  desires  to  recover  the  damages  actually  suffered  by   strictly  penal  aspect  is  the  exception.[68]  
him  in  addition  to  the  penalty,  he  must  prove  such  damages.[63]    
  It  is  also  clear  from  paragraph  1  of  Article  1226  that  when  an  obligation  or  a
Penal  clause  may  be  classified  into:  (1)  according  to  source:  (a)  legal  (when  it  is  provided  by  law)  and   clause,  the  penalty  shall  substitute  the  indemnity  for  damages  and  the  paym
(b)  conventional  (when  it  is  provided  for  by  stipulation  of  the  parties);;  (2)  according  to  demandability:   noncompliance   with   or   breach   of   the   principal   obligation.   This   general   ru
(a)  subsidiary  (when  only  the  penalty  may  be  enforced)  and  (b)  complementary  (when  both  the  principal   exceptions,  namely:  (1)  when  there  is  a  stipulation  to  the  contrary;;  (2)  when  t
obligation   and   the   penalty   may   be   enforced);;   and   (3)   according   to   purpose:   (a)   cumulative   (when   for   refusal   to   pay   the   agreed   penalty;;   and   (3)   when   the   obligor   or   debtor  
exceptions,  it  is  evident  that  the  purpose  of  the  penalty  is  to  punish  since  t
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recover  from  the  obligor  or  debtor  not  only  the  penalty,  but  also  the  damages  or  interests  resulting  from   positive  (to  give  and  to  do)  where  demand  may  be  necessary  unless  it  is  ex
the  breach  of  the  principal  obligation.[69]   negative  obligations,  when  an  act  is  done  contrary  to  that  which  is  prohibited
   
Is  item  8(m)  intended  by  the  parties  for  a  strictly  penal  purpose  or  a  punishment  on  the  guilty  party?  If   In  the  present  case,  the  bank  pre-­terminated  the  Lease  Contract  which  is  not
it  is,  then  item  8(m)  is  both  complementary  and  cumulative.  If  it  is  not,  then  it  is  subsidiary  and  reparatory.   For  not  complying  with  its  Term  or  period,  the  bank  did  an  act  contrary  to  
  Lease  Contract.  
As  earlier  observed,  the  third  purpose  of  a  penal  clause,  which  is  strictly  penal,  must  be  expressly  agreed    
upon.  This  is  in  consonance  with  the  first  sentence  of  Article  1226  —  "the  penalty  shall  substitute  the   Additionally,  the  bank  cannot  insist  on  paying  only  the  penalty.  This  is  proscr
indemnity  for  damages  and  interests  in  case  of  noncompliance,  if  there  is  no  stipulation  to  the  contrary."   wit:  
Thus,  the  contract  must  expressly  provide  that  in  addition  to  the  penalty,  the  guilty  party  shall  be  liable    
for  damages  or  interests  resulting  from  the  breach  of  the  principal  obligation.   Art.   1227.   The   debtor   cannot   exempt   himself   from   the   performance   of   the
  penalty,  save  in  the  case  where  this  right  has  been  expressly  reserved  for  him
Item   8(m)   does   not   expressly   make   a   reservation   for   an   additional   claim   for   damages   and   interests   demand  the  fulfillment  of  the  obligation  and  the  satisfaction  of  the  penalty  at
occasioned  by  the  breach  of  the  lease  period.  There  is,  however,  another  provision  of  the  Lease  Contract   right  has  been  clearly  granted  him.  However,  if  after  the  creditor  has  decided  
that  is  triggered  by  a  default  in  item  8(m),  to  wit:   the  obligation,  the  performance  thereof  should  become  impossible  without  hi
  enforced.  
10.   In   the   event   that   a   Court   Litigation   has   been   resorted   to   by   the   LESSOR   or   LESSEE,   due   to   non-­  
compliance  of  any  of  the  foregoing  provisions,  the  aggrieved  party  shall  be  paid  by  the  other  party,  no   There   is   nothing   in   the   Lease   Contract   which   provides   that   the   bank   ca
less  than  fifteen  thousand  (P15,000)  pesos,  Philippine  Currency,  for  Attorney's  fees,  and  other  damages   performance  of  any  provision  therein,  including  the  Term  or  period,  by  simply
that  the  honorable  court  may  allow;;  the  cost  of  litigations  shall  be  born[e]  or  paid  by  the  party  in  fault,   8(m)  and  10  do  not  contain  any  such  exemption.  
or  in  default.  All  unpaid  accounts  and  obligations  of  the  TENANT  shall  earn  interest  or  bear  interest  at  the    
rate  of  14%  per  annum  or  at  the  allowable  rate  of  interest  from  the  date  of  default.  The  legal  suits  shall   As  discussed  above,  Ragasa  cannot  insist  on  the  performance  of  the  lease,  i.e
be  brought  in  the  town  of  Quezon  City.[70]  (Underscoring  supplied)   until  expiration  of  its  term,  because  the  lease  has  been  automatically  terminate
  it  by  pre-­terminating  its  terms.  Thus,  Ragasa  is  only  entitled  to  damages.  
Being  provisions  on  default,  item  8(m)  and  item  10  must  be  applied  jointly  and  simultaneously.  Thus,    
aside  from  the  forfeiture  of  the  full  deposit,  the  party  at  fault  or  in  default  is  liable,  pursuant  to  item  10   That  said,  that  is,  even  as  items  8(m)  and  10  are  considered  strictly  penal  or  p
of  the  Lease  Contract,  for  the  payment  of  attorney's  fees  in  an  amount  which  is  not  less  than  P15,000.00,   injured  party,  is  nonetheless  required  to  prove  the  "other  damages"  that  it  act
other   damages   that   the   court   may   allow,   cost   of   litigation,   and   14%   interest   per   annum   on   unpaid   be   entitled   thereto.   However,   a   review   of   the   records   shows   that   Ragasa   p
accounts  and  obligations.   simply  insisted  that  the  bank  should  be  liable  for  the  amount  representing  the
  1,  2001  up  to  January  31,  2003  or  the  unexpired  term  of  the  Lease  Contract,  eq
Can  item  10  pass  as  the  "stipulation  to  the  contrary"  or  the  express  agreement  required  in  Article  1226?   Ragasa  did  not  adduce  any  evidence  to  support  its  claim  that  it  actually  suffere
A  careful  reading  of  all  the  pertinent  provisions  leads  the  Court  to  believe  that  when  item  10  provides   in  terms  of  lost  income.  In  this  regard,  it  must  be  emphasized  that  Ragasa  co
that  "other  damages  that  the  court  may  allow"  are  recoverable  in  case  of  noncompliance  of  any  provision   Premises  as  early  as  July  1,  2001  because  the  bank  had  completely  vacated
of  the  Lease  Contract,  this  only  means  what  it  says,  that  the  aggrieved  party  can  be  awarded  damages   2001.   That   Ragasa   chose   not   to   lease   the   Leased   Premises   and   not   earn   a
in  addition  to  the  forfeiture  of  the  deposit  that  is  provided  in  item  8(m).  In  fine,  item  8(m)  and  item  10,   meantime  that  its  complaint  for  damages  against  the  bank  was  being  litigate
construed  together,  form  a  complementary  and  cumulative  penal  clause;;  and  it  is  a  punishment  or  strictly   doing.  
penal.    
  Article  2203  of  the  Civil  Code  provides  that  "[t]he  party  suffering  loss  or  injury  
From  the  foregoing,  the  Court  accordingly  rules  that  the  bank  is  liable  for  the  forfeiture  of  the  deposit   of  a  good  father  of  a  family  to  minimize  the  damages  resulting  from  the  act  or
and   attorney's   fees   in   the   amount   of   P15,000.00   and   such   other   damages   which   Ragasa   suffered   by   failed  in  this  respect.  
reason  of  the  breach  of  the  lease  period  by  the  bank.    
  In  conclusion,  the  Court  rules  that  Ragasa  is  not  entitled  to  the  rental  for  th
Clearly,  the  requisites  for  the  demandability  of  the  penal  clause  are  present  in  this  case.  These  are:  (1)   Lease   Contract,   and   it   is   only   entitled   to   the   forfeiture   of   the   full   deposit   p
that  the  total  non-­fulfillment  of  the  obligation  or  the  defective  fulfillment  is  chargeable  to  the  fault  of  the   P15,000.00  as  attorney's  fees  pursuant  to  item  10.  
debtor;;  and  (2)  that  the  penalty  may  be  enforced  in  accordance  with  the  provisions  of  law.  As  to  the    
second  requisite,  the  penalty  is  demandable  when  the  debtor  is  in  mora  in  regard  to  obligations  that  are   WHEREFORE,   premises   considered,   the   instant   petition   for   review   is   here
Decision  dated  March  27,  2009  and  the  Resolution  dated  November  25,  2009
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WITH  MODIFICATION,  awarding  attorney's  fees  in  the  amount  of  P15,000.00  in  favor  of  petitioner    
D.M.  Ragasa  Enterprises,  Inc.    
   
SO  ORDERED.  
 
 
Carpio  (Chairperson),[*]  Peralta,  Perlas-­Bernabe,  and  A.  Reyes,  Jr.,  JJ.,  concur.    
   
Petition  granted,  judgment  and  resolution  affirmed  with  modification.    
   
Notes.—A  penal  clause  is  an  accessory  undertaking  attached  to  a  principal  obligation.  (Buenaventura  vs.    
Metropolitan  Bank  and  Trust  Company,  799  SCRA  239  [2016])    
   
Section  17  of  the  Omnibus  Rules  implementing  the  Civil  Service  Law  states  that  if  the  respondent  judge    
is  found  guilty  of  two  (2)  or  more  charges  or  counts,  the  penalty  imposed  should  be  that  corresponding    
to  the  most  serious  charge  or  counts  and  the  rest  may  be  considered  aggravating  circumstances.  (Re:    
Findings   on   the   Judicial   Audit   Conducted   in   Regional   Trial   Court,   Branch   8,   La   Trinidad,   Benguet,   819    
SCRA  274  [2017])    
   
     
   
——o0o——    
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
 
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G.R.  No.  185765.   September  28,  2016.*   As  petitioner  notes,  by  the  time  respondent  made  its  offer,  the  Complaint  for  r
PHILIPPINE  ECONOMIC  ZONE  AUTHORITY,  petitioner,  vs.  PILHINO  SALES  CORPORATION,   already  been  filed  before  the  Regional  Trial  Court  of  Pasay  City.  If  at  all,  the  o
respondent.   a   belated   reaction   to   undercut   litigation.   By   the   time   respondent   made   it
  petitioner   was   no   longer   capable   of   accommodating   contractual   modific
Civil   Law;;   Sales;;   Contract   of   Sale;;   Reciprocal   Obligations;;   A   contract   of   sale   entails   reciprocal   established   the   impropriety   of   modifying   awarded   contracts   that   were   prev
obligations.—A  contract  of  sale,  such  as  that  entered  into  by  petitioner  and  respondent,  entails  reciprocal   bidding,   such   as   that   between   petitioner   and   respondent:   An   essential   ele
obligations.  As  explained  in  Spouses  Velarde  v.  Court  of  Appeals,  361  SCRA  56  (2001),  “[i]n  a  contract  of   contract  is  that  all  bidders  must  be  on  equal  footing.  Not  simply  in  terms  of  ap
sale,  the  seller  obligates  itself  to  transfer  the  ownership  of  and  deliver  a  determinate  thing,  and  the  buyer   rules  and  regulations  imposed  by  the  relevant  government  agency,  but  more  i
to  pay  therefor  a  price  certain  in  money  or  its  equivalent.”   bidded  upon.  Each  bidder  must  be  able  to  bid  on  the  same  thing.  The  rational
  bidder   is   allowed   to   later   include   or   modify   certain   provisions   in   the   contra
Same;;  Contracts;;  Rescission;;  Jurisprudence  has  long  settled  that  the  restoration  of  the  contracting  parties   contract  is  altered  in  any  material  respect,  then  the  essence  of  fair  competit
to  their  original  state  is  the  very  essence  of  rescission.—Respondent  correctly  notes  that  rescission  under   destroyed.  A  public  bidding  would  indeed  be  a  arce  if  after  the  contract  is  aw
Article   1911   results   in   mutual   restitution.   Jurisprudence   has   long   settled   that   the   restoration   of   the   may  modify  the  contract  and  include  provisions  which  are  favorable  to  it  that
contracting  parties  to  their  original  state  is  the  very  essence  of  rescission.  In  Spouses  Velarde  v.  Court  of   available  to  the  other  bidders.  
Appeals,  361  SCRA  56  (2001):  Considering  that  the  rescission  of  the  contract  is  based  on  Article  1191  of    
the  Civil  Code,  mutual  restitution  is  required  to  bring  back  the  parties  to  their  original  situation  prior  to   Damages;;   Liquidated   Damages;;   Words   and   Phrases;;   By   definition,   liquidate
the   inception   of   the   contract.   Accordingly,   the   initial   payment   of   P800,000   and   the   corresponding   meant   to   impress   upon   defaulting   obligors   the   graver   consequences   of  
mortgage   payments   .   .   .   should   be   returned   by   private   respondents,   lest   the   latter   unjustly   enrich   definition,   liquidated   damages   are   a   penalty,   meant   to   impress   upon   defa
themselves  at  the  expense  of  the  former.  Rescission  creates  the  obligation  to  return  the  object  of  the   consequences  of  their  own  culpability.  Liquidated  damages  must  necessarily  
contract.  It  can  be  carried  out  only  when  the  one  who  demands  rescission  can  return  whatever  he  may   cumbersome   than   compliance.   Otherwise,   contracts   might   as   well   make   no
be  obliged  to  restore.  To  rescind  is  to  declare  a  contract  void  at  its  inception  and  to  put  an  end  to  it  as   Liquidated   damages   are   those   that   the   parties   agree   to   be   paid   in   case   of  
though  it  never  was.  It  is  not  merely  to  terminate  it  and  release  the  parties  from  further  obligations  to   amount  agreed  upon  answers  for  damages  suffered  by  the  owner  due  to  dela
each  other,  but  to  abrogate  it  from  the  beginning  and  restore  the  parties  to  their  relative  positions  as  if   project.  Under  Philippine  laws,  these  damages  take  the  nature  of  penalties.  A  p
no  contract  has  been  made.   undertaking   to   assume   greater   liability   in   case   of   a   breach.   It   is   attached   t
  ensure  performance.  
Same;;   Same;;   Same;;   Liquidated   Damages;;   Mutual   restitution   under   Article   1191   is   no   license   for   the    
negation   of   contractually   stipulated   liquidated   damages.—Contrary   to   respondent’s   assertion,   mutual   PETITION  for  review  on  certiorari  of  the  decision  and  resolution  of  the  Court  
restitution  under  Article  1191  is,  however,  no  license  for  the  negation  of  contractually  stipulated  liquidated    
damages.  Article  1191  itself  clearly  states  that  the  options  of  rescission  and  specific  performance  come   The  facts  are  stated  in  the  opinion  of  the  Court.  
with  “with  the  payment  of  damages  in  either  case.”  The  very  same  breach  or  delay  in  performance  that        Office  of  the  Solicitor  General  for  petitioner.  
triggers  rescission  is  what  makes  damages  due.  When  the  contracting  parties,  by  their  own  free  acts  of        Virgilio  C.  Gener  for  respondent.  
will,  agreed  on  what  these  damages  ought  to  be,  they  established  the  law  between  themselves.  Their    
contemplation  of  the  consequences  proper  in  the  event  of  a  breach  has  been  articulated.  When  courts   LEONEN,   J.:  
are,  thereafter,  confronted  with  the  need  to  award  damages  in  tandem  with  rescission,  courts  must  not    
lose  sight  of  how  the  parties  have  explicitly  stated,  in  their  own  language,  these  consequences.  To  uphold   Although   the   provisions   of   a   contract   are   legally   null   and   void,   the   stipula
both  Article  1191  of  the  Civil  Code  and  the  parties’  will,  contractually  stipulated  liquidated  damages  must,   liquidated  damages  may  be  accepted  as  evidence  of  the  intent  of  the  parties.
as  a  rule,  be  maintained.   can  be  basis  for  finding  a  factual  anchor  for  liquidated  damages.  The  liable  part
better  evidence  to  establish  a  more  accurate  basis  for  awarding  damages.  In
 
failed  to  do  so.  
Bids   and   Bidding;;   Jurisprudence   has   established   the   impropriety   of   modifying   awarded   contracts   that    
were   previously   subjected   to   public   bidding.—Respondent’s   attempt   at   rectification   came   too   late   and   This  resolves  a  Petition  for  Review  on  Certiorari[1]  praying  that  the  assailed  M
under  such  circumstances  that  petitioner  was  no  longer  even  in  a  position  to  accept  respondent’s  offer.   November  25,  2008  Resolution[3]  of  the  Court  of  Appeals  in  CA  G.R.  CV  No.  
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aside  and  that  the  Decision[4]  dated  November  2,  2005  of  Branch  108  of  the  Regional  Trial  Court  of  Pasay   1.   Pay  the  plaintiff  in  liquidated  damages  a[t]  the  rate  of  1/10  of  1%  o
City  in  Civil  Case  No.  00-­0343  be  reinstated.   Php  5,800,000.00  for  each  day  of  delay  commencing  from  June  19,  
   
The  Regional  Trial  Court's  November  2,  2005  Decision  ruled  in  favor  of  petitioner  Philippine  Economic   2.   Pay  the  plaintiff  exemplary  damages  in  the  amount  of  Php  100,00[0]
Zone  Authority,  which,  as  plaintiff,  brought  an  action  for  rescission  of  contract  and  damages  against  the    
defendant,  now  respondent  Pilhino  Sales  Corporation  (Pilhino).[5]   3.   That  the  contract  be  declared  rescinded  and  the  performance  bond  p
  forfeited  in  favor  of  the  plaintiff.  
The   assailed   Court   of   Appeals   Decision   partly   granted   Pilhino's   appeal   by   reducing   the   amount   of    
liquidated  damages  due  from  it  to  the  Philippine  Economic  Zone  Authority,  and  by  deleting  the  forfeiture   4.   For  defendant  to  pay  the  cost  of  the  suit.  
of  its  performance  bond.[6]  The  assailed  Court  of  Appeals  Resolution  denied  the  Philippine  Economic  Zone    
Authority's  Motion  for  Reconsideration.[7]   SO  ORDERED.[23]  
   
The  facts  are  not  disputed,  and  all  that  is  in  issue  is  the  consequence  of  Pilhino's  contractual  breach.   Pilhino  then  appealed  before  the  Court  of  Appeals.  
   
On  October  4,  1997,  the  Philippine  Economic  Zone  Authority  published  an  invitation  to  bid  in  the  Business   In  its  assailed  May  2,  2008  Decision,[24]  the  Court  of  Appeals  partly  granted  P
Daily  for  its  acquisition  of  two  (2)  brand  new  fire  truck  units  "with  a  capacity  of  4,000-­5,000  liters  [of]   the   forfeiture   of   Pilhino's   performance   bond   and   pegging   the   liquidated   da
water  and  500-­1,000  liters  [of  chemical  foam,]  with  complete  accessories."[8]   Philippine  Economic  Zone  Authority  in  the  amount  of  P1,400,000.00.  
   
Three  (3)  companies  participated  in  the  bidding:  Starbilt  Enterprise,  Inc.,  Shurway  Industries,  Inc.,  and   The  Court  of  Appeals  debunked  Pilhino's  claim  that  there  was  no  meeting  of
Pilhino.[9]   Pilhino   secured   the   contract   for   the   acquisition   of   the   fire   trucks.[10]   The   contract   price   was   Pilhino  "manifested  its  acquiescence  .  .  .  [to]  the  Purchase  Order  .  .  .  when  it  s
initially  at  P3,000,000.00  per  truck,  but  this  was  reduced  after  negotiation  to  P2,900,000.00  per  truck.[11]   Economic  Zone  Authority]  a  Performance  Bond  dated  02  June  1999  and  Inde
  June  1998  duly  signed  by  its  Vice  President."[25]  It  added  that  in  a  subsequ
The  contract  awarded  to  Pilhino  stipulated  that  Pilhino  was  to  deliver  to  the  Philippine  Economic  Zone   1999[26]   "signed   by   [Pilhino's]   Hino   Division   Manager   Edgar   R.   Santiago   an
Authority  two  (2)  FF3HP  brand  fire  trucks  within  45  days  of  receipt  of  a  purchase  order  from  the  Philippine   Roberto   R.   Garcia,   [Pilhino]   admitted   that   it   can   no   longer   meet   the   re
Economic  Zone  Authority.[12]  A  further  stipulation  stated  that  "[i]n  case  of  fail[u]re  to  deliver  the  .  .  .  good   specification  on  the  two  (2)  units  of  fire  truck[s]."[27]  
on  the  date  specified  .  .  .  ,  the  Supplier  agree[s]  to  pay  penalty  at  the  rate  of  1/10  of  1%  of  the  total    
contract  price  for  each  days  [sic]  commencing  on  the  first  day  after  the  date  stipulated  above."[13]   In  this  March  29,  1999  letter,  Pilhino  not  only  acknowledged  its  inability  to  m
  proposed  a  modified  arrangement  with  the  Philippine  Economic  Zone  Authorit
The   Philippine   Economic   Zone   Authority   furnished   Pilhino   with   a   purchase   order   dated   November   6,    
1997.[14]  Pilhino  failed  to  deliver  the  trucks  as  it  had  committed.[15]  This  prompted  the  Philippine  Economic   [P]lease  allow  us  to  submit  our  new  proposal  for  your  consideration  (please  s
Zone  Authority  to  make  formal  demands  on  Pilhino  on  July  27,  1998[16]  and  on  February  23,  1999.[17]  As   Our   price   for   this   new   specification   if   P3,600,000.00/unit.   However,   we   a
Pilhino  still  failed  to  comply,  the  Philippine  Economic  Zone  Authority  filed  before  the  Regional  Trial  Court   difference  between  the  original  price  of  P2,900,000.00/unit  and  P3,600,000.00
of  Pasay  City  a  Complaint[18]  for  rescission  of  contract  and  damages.  This  was  docketed  as  Civil  Case  No.   we  also  request  your  good  office  to  stop  the  accumulation  of  the  penalty  [.][2
00-­0343  and  raffled  to  Branch  108.[19]    
  In   calibrating   the   amount   of   liquidated   damages,   the   Court   of   Appeals   c
In  its  defense,  Pilhino  claimed  that  there  was  no  starting  date  from  which  its  obligation  to  deliver  could   2227[30]  of  the  Civil  Code.  It  reasoned  that  through  its  March  29,  1999  letter,  
be   reckoned,   considering   that   the   Complaint   supposedly   failed   to   allege   acceptance   by   Pilhino   of   the   rectification  or  mitigation:  
purchase  order.[20]  Pilhino  suggested  that  there  was  not  even  a  meeting  of  minds  between  it  and  the    
Philippine  Economic  Zone  Authority.[21]   In  the  instant  case,  we  consider  the  supervening  reality  that  after  appellant's  f
  the  two  (2)  brand  new  units  of  fire  trucks  in  accordance  with  the  specificatio
In   its   November   2,   2005   Decision,[22]   the   Regional   Trial   Court   ruled   for   the   Philippine   Economic   Zone   appellant   nevertheless   tried   to   remedy   the   situation   by   offering   to   appe
Authority.  The  dispositive  portion  of  the  Decision  reads:   P3,600,000.00  per  unit;;  and  expressed  willingness  to  shoulder  the  difference
  (based  on  the  contract)  of  P2,900,000.00  per  unit  and  the  price  corresponding
WHEREFORE,  judgment  is  hereby  rendered  in  favor  of  the  plaintiff  and  against  the  defendant  ordering   Further,   it   is   undisputed   that   appellee   has   not   paid   any   amount   to   appella
the  latter  to:   undelivered  two  (2)  brand  new  units  of  fire  trucks.  We  thus  equitably  reduce  
 
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P1,400,000.00,  which  is  the  difference  between  the  contract  price  of  P5,800,000.00  and  P7,200,000.00   Article  1191.  The  power  to  rescind  obligations  is  implied  in  reciprocal  ones,  
based  on  the  new  specifications  for  two  (2)  new  units  of  fire  trucks.[31]   should  not  comply  with  what  is  incumbent  upon  him.  
   
The  Philippine  Economic  Zone  Authority  moved  for  reconsideration  of  the  modifications  to  the  Regional   The   injured   party   may   choose   between   the   fulfillment   and   the   rescission   o
Trial   Court's   award.   As   this   Motion   was   denied   in   the   Court   of   Appeals'   assailed   November   25,   2008   payment  of  damages  in  either  case.  He  may  also  seek  rescission,  even  after  h
Resolution,[32]  the  Philippine  Economic  Zone  Authority  filed  the  present  Petition.   the  latter  should  become  impossible.  
   
Petitioner  asks  for  the  reinstatement  of  the  Regional  Trial  Court's  award  asserting  that  it  already  suffered   The  court  shall  decree  the  rescission  claimed,  unless  there  be  just  cause  autho
damage   when   respondent   Pilhino   Sales   Corporation   failed   to   deliver   the   trucks   on   time;;[33]   that   the    
contractually  stipulated  penalty  of  1/10  of  1%  of  the  contract  price  for  every  day  of  delay  was  neither   This  is  understood  to  be  without  prejudice  to  the  rights  of  third  persons  who  
unreasonable[34]  nor  contrary  to  law,  morals,  or  public  order;;[35]  that  the  stipulation  on  liquidated  damages   accordance  with  articles  1385  and  1388  and  the  Mortgage  Law.  (Emphasis  su
was  freely  entered  into  by  it  and  respondent;;[36]  and  that  the  Court  of  Appeals'  computation  had  no  basis   Respondent  correctly  notes  that  rescission  under  Article  1911  results  in  mutua
in  fact  and  law.[37]  Regarding  respondent's  supposed  attempt  at  mitigation,  petitioner  notes  that  by  the   has  long  settled  that  the  restoration  of  the  contracting  parties  to  their  origina
time  the  offer  was  made,  the  Complaint  for  rescission  and  damages  had  already  been  filed[38]  and  was,   of  rescission.  In  Spouses  Velarde:  
therefore,  inconsequential  and  hardly  a  remedy.    
  Considering  that  the  rescission  of  the  contract  is  based  on  Article  1191  of  the  C
Commenting  on  petitioner's  Petition,[39]  respondent  raises  the  question  of:   is   required   to   bring   back   the   parties   to   their   original   situation   prior   to   the
  Accordingly,  the  initial  payment  of  P800,000  and  the  corresponding  mortgag
Whether  or  not  a  contract  can  be  rescinded  and  declared  void  ab  initio,  and  then  thus  rescinded,  can  a   returned  by  private  respondents,  lest  the  latter  unjustly  enrich  themselves  at  
stipulation  for  liquidated  damages  or  penalty  contained  in  that  very  same  contract  be  given  separate  life,    
force  and  effect,  that  is,  separate  and  distinct  from  the  rescinded  and  voided  contract  itself?[40]   Rescission  creates  the  obligation  to  return  the  object  of  the  contract.  It  can  be
  one  who  demands  rescission  can  return  whatever  he  may  be  obliged  to  resto
Therefore,  respondent  suggests  that  with  the  rescission  of  its  contract  with  petitioner  must  have  come   a  contract  void  at  its  inception  and  to  put  an  end  to  it  as  though  it  never  was.  I
the  negation  of  the  contractual  stipulation  on  liquidated  damages  and  the  obliteration  of  its  liability  for   it  and  release  the  parties  from  further  obligations  to  each  other,  but  to  abro
such  liquidated  damages.[41]   and  restore  the  parties  to  their  relative  positions  as  if  no  contract  has  been  m
  Laperal  v.  Solid  Homes,  Inc.[46]  has  explained  how  the  restitution  spoken  of
We  resolve  the  twin  issues  of:   1385  of  the  Civil  Code  equally  holds  true  for  rescission  under  Article  1191  of  t
   
First,  the  propriety  of  an  award  based  on  contractually  stipulated  liquidated  damages  notwithstanding  the   Despite  the  fact  that  Article  1124  of  the  old  Civil  Code  from  whence  Article  
rescission  of  the  same  contract  stipulating  it;;  and   term  "resolution",  the  amendment  thereto  (presently,  Article  1191)  explicitly
  "rescission".  Unless  Article  1191  is  subsequently  amended  to  revert  back  to  
Second,  on  the  assumption  that  such  award  is  proper,  the  propriety  of  the  Court  of  Appeals'  reduction  of   Court  has  no  alternative  but  to  apply  the  law,  as  it  is  written.  
the  liquidated  damages  due  to  petitioner.    
  Again,   since   Article   1385   of   the   Civil   Code   expressly   and   clearly   states   th
I   obligation  to  return  the  things  which  were  the  object  of  the  contract,  togethe
  price  with  its  interest,"  the  Court  finds  no  justification  to  sustain  petitioners'  po
Respondent's   intimation   that   with   the   rescission   of   a   contract   necessarily   and   inexorably   follows   the   does  not  apply  to  rescission  under  Article  1191.  
obliteration   of   liability   for   what   the   same   contracts   stipulates   as   liquidated   damages[42]   is   entirely    
misplaced.   In  Palay,  Inc.  vs.  Clave,  this  Court  applied  Article  1385  in  a  case  involving  "res
  thus:  
A  contract  of.  sale,  such  as  that  entered  into  by  petitioner  and  respondent,  entails  reciprocal  obligations.    
As  explained  in  Spouses  Velarde  v.  Court  of  Appeals,[43]  "[i]n  a  contract  of  sale,  the  seller  obligates  itself   Regarding  the  second  issue  on  refund  of  the  installment  payments  made  by  
to  transfer  the  ownership  of  and  deliver  a  determinate  thing,  and  the  buyer  to  pay  therefor  a  price  certain   1385  of  the  Civil  Code  provides:  
in  money  or  its  equivalent."[44]    
  "ART.  1385.  Rescission  creates  the  obligation  to  return  the  things  which  were
Rescission  on  account  of  breach  of  reciprocal  obligations  is  provided  for  in  Article  1191  of  the  Civil  Code:   together  with  their  fruits,  and  the  price  with  its  interest;;  consequently,  it  can
  he  who  demands  rescission  can  return  whatever  he  may  be  obliged  to  restore
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"Neither  shall  rescission  take  place  when  the  things  which  are  the  object  of  the  contract  are  legally  in  the   1.   Further   to   the   stipulations   on   paragraph   10,   upon   default   of   performanc
possession  of  third  persons  who  did  not  act  in  bad  faith.   compliance  with  the  terms  and  conditions  herein  agreed  upon  by  the  DEVELOP
  the  DEVELOPER  deliberately  abandoned  or  discontinued  the  work  on  the  proje
"In  this  case,  indemnity  for  damages  may  be  demanded  from  the  person  causing  the  loss."   entitlement,  if  any,  to  any  refund  and/or  advances  it  may  have  incurred  in  co
  previous  development  works  in  the  subdivision;;  likewise,  all  improvements  of
As   a   consequence   of   the   resolution   by   petitioners,   rights   to   the   lot   should   be   restored   to   private   introduced   by   the   DEVELOPER   on   the   property,   existing   as   of   the   date   of
respondent   or   the   same   should   be   replaced   by   another   acceptable   lot.   However,   considering   that   the   automatically  belong  to  the  OWNER  without  obligation  on  his  part  to  pay  for  t
property  had  already  been  sold  to  a  third  person  and  there  is  no  evidence  on  record  that  other  lots  are    
still  available,  private  respondent  is  entitled  to  the  refund  of  installments  paid  plus  interest  at  the  legal   2.  Similarly  with  the  same  condition  of  default  or  violation  obtaining,  as  stat
rate   of   12%   computed   from   the   date   of   the   institution   of   the   action.   It   would   be   most   inequitable   if   agreement,   all   advances   made   and   remittances   of   proceeds   from   reservatio
petitioners  were  to  be  allowed  to  retain  private  respondent's  payments  and  at  the  same  time  appropriate   DEVELOPER   to   the   OWNER   as   provided   for   in   this   agreement   shall   be   deem
the  proceeds  of  the  second  sale  to  another.   favor  of  the  OWNER,  resulting  to  waiver  of  DEVELOPER'S  rights,  if  any,  with  r
   
Applying  the  clear  language  of  the  law  and  the  consistent  jurisprudence  on  the  matter,  therefore,   the   If  this  Court  recognized  the  right  of  the  parties  to  stipulate  on  an  extrajudic
Court   rules   that   rescission   under   Article   1191   in   the   present   case,   carries   with   it   the   corresponding   1191,  there  is  no  reason  why  this  Court  will  not  allow  the  parties  to  stipulate
obligation  of  restitution.[47]  (Citations  omitted)   in   case   of   such   rescission   under   Book   IV,   Title   VIII,   Chapter   3,   Section   2   o
  liquidated  damages.[49]  (Citations  omitted)  
Contrary  to  respondent's  assertion,  mutual  restitution  under  Article  1191  is,  however,  no  license  for  the    
negation  of  contractually  stipulated  liquidated  damages.   We  see  no  reason  for  departing  from  this.  It  is  true  that   Laperal  involved  ex
  this   case   involves   rescission   through   judicial   action.   The   distinction   betwee
Article  1191  itself  clearly  states  that  the  options  of  rescission  and  specific  performance  come  with  "with   rescission  is  in  how  extrajudicial  rescission  is  possible  only  when  the  contract
the  payment  of  damages  in  either  case."  The  very  same  breach  or  delay  in  performance  that  triggers   to  that  effect.[50]  This  distinction  does  not  diminish  the  rights  of  a  contracting  
rescission  is  what  makes  damages  due.   the  Civil  Code  and  is  immaterial  for  purposes  of  the  availability  of  liquidated  d
   
When  the  contracting  parties,  by  their  own  free  acts  of  will,  agreed  on  what  these  damages  ought  to  be,   To  sustain  respondent's  claim  would  be  to  sustain  an  absurdity  and  an  injus
they  established  the  law  between  themselves.  Their  contemplation  of  the  consequences  proper  in  the   suggests  that  with  rescission  must  necessarily  come  the  obliteration  of  the  pu
event  of  a  breach  has  been  articulated.  When  courts  are,  thereafter,  confronted  with  the  need  to  award   to  begin  with,  was  the  product  of  its  own  (along  with  the  other  contracting  p
damages  in  tandem  with  rescission,  courts  must  not  lose  sight  of  how  the  parties  have  explicitly  stated,   turns   delinquency   into   a   profitable   enterprise,   enabling   contractual   breach  
in  their  own  language,  these  consequences.  To  uphold  both  Article  1191  of  the  Civil  Code  and  the  parties'   evading  its  own  fallout.  It  is  a  position  we  cannot  tolerate.  
will,  contractually  stipulated  liquidated  damages  must,  as  a  rule,[48]  be  maintained.    
  II  
What  respondent  purports  to  be  the  ensuing  nullification  of  liquidated  damages  is  not  a  novel  question  in    
jurisprudence.  This  matter  has  been  settled,  and  respondent's  position  has  been  rebuked.  In  Laperal:   In   calibrating   the   amount   of   liquidated   damages,   the   Court   of   Appeals   r
  supposedly  attempted  to  rectify  things  "by  offering  to  [petitioner]  new  spec
This  notwithstanding,  the  Court  does  not  agree  with  the  Court  of  Appeals  that,  as  a  consequence  of  the   per  unit;;  and  expressed  willingness  to  shoulder  the  difference  between  the  o
obligation  of  mutual  restitution  in  this  case,  petitioners  should  return  the  amount  of  P5,200,833.27  to   contract)  of  P2,900,000.00  per  unit  and  the  price  corresponding  to  the  new  s
respondent.    
  As   underscored   by   petitioner,   however,   this   offer   was   inconsequential   an
Article  1191  states  that  "the  injured  party  may  choose  between  fulfillment  and  rescission  of  the  obligation,   predicament  it  found  itself  in.  
with   the   payment   of   damages   in   either   case."   In   other   words,   while   petitioners   are   indeed   obliged   to    
return  the  said  amount  to  respondent  under  Article  1385,  assuming  said  figure  is  correct,  respondent  is   Petitioner   already   suffered   damage   by   respondent's   mere   delay.   Philippine
at   the   same   time   liable   to   petitioners   in   the   same   amount   as   liquidated   damages   by   virtue   of   the   Director  General  Lilia  B.  De  Lima's  internal  memorandum  to  its  Board  of  Direc
forfeiture/penalty  clause  as  freely  stipulated  upon  by  the  parties  in  the  Addendum,  paragraphs  1  and  2   at  the  time,  the  specific  urgency  of  obtaining  fire  trucks:  
of  which  respectively  read:    
  1.   With   the   increase   in   the   number   of   locator-­enterprises   at   the   regular   z
WHEREAS,  included  as  part  of  said  agreement  are  the  following:   additional  units  of  fire  trucks  to  address  any  eventuality.   The  onset  of  the  E
makes  it  imperative  that  PEZA  be  more  prepared.  
 O B L I G A T I O N S   &   C O N T R A C T S   C a s e s   B a t c
 
2.  At  present,  there  are  only  six  (6)  units  of  serviceable  fire  trucks  distributed  as  follows:   Liquidated   damages   are   those   that   the   parties   agree   to   be   paid   in   case   of  
  amount  agreed  upon  answers  for  damages  suffered  by  the  owner  due  to  dela
Bataan  EZ                            2   project.  Under  Philippine  laws,  these  damages  take  the  nature  of  penalties.  A  p
Baguio  City  EZ                1   undertaking   to   assume   greater   liability   in   case   of   a   breach.   It   is   attached   t
Cavite  EZ                              1   ensure  performance.[56]  (Citations  omitted)  
Mactan  EZ                            2[52]  (Emphasis  supplied)    
  Respondent  cannot  now  balk  at  the  natural  result  of  its  own  breach.  As  for  th
The  Court  of  Appeals  itself  recognized  that  "time  was  of  the  essence  when  the  contract  .  .  .  was  awarded   it  to  be  in  error  in  frustrating  the  express  terms  of  the  contract  that  respond
to   [respondent]   and   the   non-­compliance   therewith   exposed   [petitioner's]   operations   [at]   risk."[53]   be   awarded   to   it.   The   exigencies   that   impelled   petitioner   to   obtain   fire   truc
  respondent  to  act  with  dispatch.  Instead,  it  dragged  its  feet,  left  petitioner  w
Respondent's  attempt  at  rectification  came  too  late  and  under  such  circumstances  that  petitioner  was  no   addressing  the  very  emergencies  that  engendered  the  need  for  fire  trucks,  an
longer  even  in  a  position  to  accept  respondent's  offer.  As  petitioner  notes,  by  the  time  respondent  made   enforce  its  rights.  
its  offer,  the  Complaint  for  rescission  and  damages  had  already  been  filed  before  the  Regional-­Trial  Court    
of  Pasay  City.[54]  If  at  all,  the  offer  was  nothing  more  than  a  belated  reaction  to  undercut  litigation.   WHEREFORE,  the  Petition  is  GRANTED.  The  assailed  May  2,  2008  Decisio
  Resolution   of   the   Court   of   Appeals   in   CA   G.R.   CV   No.   86406   are   REVERS
By   the   time   respondent   made   its   attempt   at   rectification,   petitioner   was   no   longer   capable   of   Decision  dated  November  2,  2005  of  Branch  108  of  the  Regional  Trial  Court
accommodating   contractual   modifications.   Jurisprudence   has   established   the   impropriety   of   modifying   No.  00-­0343  is  REINSTATED.  
awarded  contracts  that  were  previously  subjected  to  public  bidding,  such  as  that  between  petitioner  and    
respondent:   SO  ORDERED.  
   
An  essential  element  of  a  publicly  bidded  contract  is  that  all  bidders  must  be  on  equal  footing.  Not  simply   Brion,**   (Acting   Chairperson),   Del   Castillo,   and   Men
in   terms   of   application   of   the   procedural   rules   and   regulations   imposed   by   the   relevant   government   Carpio,  J.,  on  official  leave.  
agency,  but  more  importantly,  on  the  contract  bidded  upon.  Each  bidder  must  be  able  to  bid  on  the  same    
thing.  The  rationale  is  obvious.  If  the  winning  bidder  is  allowed  to  later  include  or  modify  certain  provisions   Petition  granted,  judgment  and  resolution  reversed  and  set  aside.  
in  the  contract  awarded  such  that  the  contract  is  altered  in  any  material  respect,  then  the  essence  of  fair    
competition   in   the   public   bidding   is   destroyed.   A   public   bidding   would   indeed   be   a   farce   if   after   the   Notes.—A   substantial   breach   of   a   reciprocal   obligation   like   failure   to   pay
contract   is   awarded,   the   winning   bidder   may   modify   the   contract   and   include   provisions   which   are   prescribed  by  the  contract  entitles  the  injured  party  to  rescind  the  obligation.  (
favorable  to  it  that  were  not  previously  made  available  to  the  other  bidders.  Thus:   vs.  World  Class  Properties,  Inc.,  614  SCRA  75  [2010])  
   
It  is  inherent  in  public  biddings  that  there  shall  be  a  fair  competition  among  the  bidders.  The  specifications   A  case  for  rescission  or  annulment  of  contract  is  not  susceptible  of  pecuniary  
in   such   biddings   provide   the   common   ground   or   basis   for   the   bidders.   The   specifications   should,   eventually  result  in  the  recovery  of  real  property;;  In  determining  whether  a
accordingly,  operate  equally  or  indiscriminately  upon  all  bidders.   matter   of   which   is   not   capable   of   pecuniary   estimation,   this   Court   has   ad
  ascertaining  the  nature  of  the  principal  action  or  remedy  sought;;  Determinatio
The  same  rule  was  restated  by  Chief  Justice  Stuart  of  the  Supreme  Court  of  Minnesota:   to-­case  basis,  depending  on  the  facts  and  circumstances  of  each.  (Home  Gu
  Builders,  Inc.,  652  SCRA  649  [2011])  
The  law  is  well  settled  that  where,  as  in  this  case,  municipal  authorities  can  only  let  a  contract  for  public    
work  to  the  lowest  responsible  bidder,  the  proposals  and  specifications  therefore  must  be  so  framed  as      
to  permit  free  and  full  competition.   Nor  can  they  enter  into  a  contract  with  the  best  bidder  containing    
substantial  provisions  beneficial  to  him,  not  included  or  contemplated  in  the  terms  and  specifications  upon   ——o0o——  
which  the  bids  were  invited.[55]  (Emphasis  supplied)    
 
By   definition,   liquidated   damages   are   a   penalty,   meant   to   impress   upon   defaulting   obligors  
the   graver   consequences   of   their   own   culpability.   Liquidated   damages   must   necessarily   make   non-­
compliance  more  cumbersome  than  compliance.  Otherwise,  contracts  might  as  well  make  no  threat  of  a  
penalty  at  all: