G.R. No.

L-30056 August 30, 1988

MARCELO AGCAOILI, plaintiff-appellee
vs.
GOVERNMENT SERVICE INSURANCE SYSTEM, defendant-appellant.
Artemio L. Agcaoili for plaintiff-appellee.
Office of the Government Corporate Counsel for defendant-appellant.
NARVASA, J.:
The appellant Government Service Insurance System, (GSIS, for short) having approved the application of the
appellee Agcaoili for the purchase of a house and lot in the GSIS Housing Project at Nangka Marikina, Rizal,
subject to the condition that the latter should forthwith occupy the house, a condition that Agacoili tried to fulfill
but could not for the reason that the house was absolutely uninhabitable; Agcaoili, after paying the first
installment and other fees, having thereafter refused to make further payment of other stipulated installments
until GSIS had made the house habitable; and appellant having refused to do so, opting instead to cancel the
award and demand the vacation by Agcaoili of the premises; and Agcaoili having sued the GSIS in the Court of
First Instance of Manila for specific performance with damages and having obtained a favorable judgment, the
case was appealled to this Court by the GSIS. Its appeal must fail.
The essential facts are not in dispute. Approval of Agcaoili's aforementioned application for purchase 1 was
contained in a letter 2 addressed to Agcaoili and signed by GSIS Manager Archimedes Villanueva in behalf of
the Chairman-General Manager, reading as follows:
Please be informed that your application to purchase a house and lot in our GSIS Housing
Project at Nangka, Marikina, Rizal, has been approved by this Office. Lot No. 26, Block No. (48)
2, together with the housing unit constructed thereon, has been allocated to you.
You are, therefore, advised to occupy the said house immediately.
If you fail to occupy the same within three (3) days from receipt of this notice, your application
shall be considered automatically disapproved and the said house and lot will be awarded to
another applicant.
Agcaoili lost no time in occupying the house. He could not stay in it, however, and had to leave the very next
day, because the house was nothing more than a shell, in such a state of incompleteness that civilized
occupation was not possible: ceiling, stairs, double walling, lighting facilities, water connection, bathroom,
toilet kitchen, drainage, were inexistent. Agcaoili did however ask a homeless friend, a certain Villanueva, to
stay in the premises as some sort of watchman, pending completion of the construction of the house. Agcaoili
thereafter complained to the GSIS, to no avail.
The GSIS asked Agcaoili to pay the monthly amortizations and other fees. Agcaoili paid the first monthly
installment and the incidental fees, 3 but refused to make further payments until and unless the GSIS completed
the housing unit. What the GSIS did was to cancel the award and require Agcaoili to vacate the
premises. 4 Agcaoili reacted by instituting suit in the Court of First Instance of Manila for specific performance
and damages. 5 Pending the action, a written protest was lodged by other awardees of housing units in the same
subdivision, regarding the failure of the System to complete construction of their own houses. 6 Judgment was

in due course rendered , 7 on the basis of the evidence adduced by Agcaoili only, the GSIS having opted to
dispense with presentation of its own proofs. The judgment was in Agcaoili's favor and contained the following
dispositions, 8 to wit:
1) Declaring the cancellation of the award (of a house and lot) in favor of plaintiff (Mariano
Agcaoili) illegal and void;
2) Ordering the defendant (GSIS) to respect and enforce the aforesaid award to the plaintiff
relative to Lot No. 26, Block No. (48) 2 of the Government Service Insurance System (GSIS)
low cost housing project at Nangka Marikina, Rizal;
3) Ordering the defendant to complete the house in question so as to make the same habitable
and authorizing it (defendant) to collect the monthly amortization thereon only after said house
shall have been completed under the terms and conditions mentioned in Exhibit A ;and
4) Ordering the defendant to pay P100.00 as damages and P300.00 as and for attorney's fees, and
costs.
Appellant GSIS would have this Court reverse this judgment on the argument that
1) Agcaoili had no right to suspend payment of amortizations on account of the incompleteness of his housing
unit, since said unit had been sold "in the condition and state of completion then existing ... (and) he is deemed
to have accepted the same in the condition he found it when he accepted the award;" and assuming
indefiniteness of the contract in this regard, such circumstance precludes a judgment for specific performance. 9
2) Perfection of the contract of sale between it and Agcaoili being conditioned upon the latter's immediate
occupancy of the house subject thereof, and the latter having failed to comply with the condition, no contract
ever came into existence between them ; 10
3) Agcaoili's act of placing his homeless friend, Villanueva, in possession, "without the prior or subsequent
knowledge or consent of the defendant (GSIS)" operated as a repudiation by Agcaoili of the award and a
deprivation of the GSIS at the same time of the reasonable rental value of the property. 11
Agcaoili's offer to buy from GSIS was contained in a printed form drawn up by the latter, entitled "Application
to Purchase a House and/or Lot." Agcaoili filled up the form, signed it, and submitted it. 12 The acceptance of the
application was also set out in a form (mimeographed) also prepared by the GSIS. As already mentioned, this
form sent to Agcaoili, duly filled up, advised him of the approval of his "application to purchase a house and lot
in our GSIS Housing Project at NANGKA, MARIKINA, RIZAL," and that "Lot No. 26, Block No. (48) 2,
together with the housing unit constructed thereon, has been allocated to you." Neither the application form nor
the acceptance or approval form of the GSIS nor the notice to commence payment of a monthly
amortizations, which again refers to "the house and lot awarded" contained any hint that the house was
incomplete, and was being sold "as is," i.e., in whatever state of completion it might be at the time. On the other
hand, the condition explicitly imposed on Agcaoili "to occupy the said house immediately," or in any case
within three (3) days from notice, otherwise his "application shall be considered automatically disapproved and
the said house and lot will be awarded to another applicant" would imply that construction of the house was
more or less complete, and it was by reasonable standards, habitable, and that indeed, the awardee should stay
and live in it; it could not be interpreted as meaning that the awardee would occupy it in the sense of a pioneer
or settler in a rude wilderness, making do with whatever he found available in the envirornment.

There was then a perfected contract of sale between the parties; there had been a meeting of the minds upon the
purchase by Agcaoili of a determinate house and lot in the GSIS Housing Project at Nangka Marikina, Rizal at a
definite price payable in amortizations at P31.56 per month, and from that moment the parties acquired the right
to reciprocally demand performance. 13 It was, to be sure, the duty of the GSIS, as seller, to deliver the thing
sold in a condition suitable for its enjoyment by the buyer for the purpose contemplated , 14 in other words, to
deliver the house subject of the contract in a reasonably livable state. This it failed to do.
It sold a house to Agcaoili, and required him to immediately occupy it under pain of cancellation of the sale.
Under the circumstances there can hardly be any doubt that the house contemplated was one that could be
occupied for purposes of residence in reasonable comfort and convenience. There would be no sense to require
the awardee to immediately occupy and live in a shell of a house, a structure consisting only of four walls with
openings, and a roof, and to theorize, as the GSIS does, that this was what was intended by the parties, since the
contract did not clearly impose upon it the obligation to deliver a habitable house, is to advocate an absurdity,
the creation of an unfair situation. By any objective interpretation of its terms, the contract can only be
understood as imposing on the GSIS an obligation to deliver to Agcaoili a reasonably habitable dwelling in
return for his undertaking to pay the stipulated price. Since GSIS did not fulfill that obligation, and was not
willing to put the house in habitable state, it cannot invoke Agcaoili's suspension of payment of amortizations as
cause to cancel the contract between them. It is axiomatic that "(i)n reciprocal obligations, neither party incurs
in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon
him." 15
Nor may the GSIS succeed in justifying its cancellation of the award to Agcaoili by the claim that the latter had
not complied with the condition of occupying the house within three (3) days. The record shows that Agcaoili
did try to fulfill the condition; he did try to occupy the house but found it to be so uninhabitable that he had to
leave it the following day. He did however leave a friend in the structure, who being homeless and hence
willing to accept shelter even of the most rudimentary sort, agreed to stay therein and look after it. Thus the
argument that Agcaoili breached the agreement by failing to occupy the house, and by allowing another person
to stay in it without the consent of the GSIS, must be rejected as devoid of merit.
Finally, the GSIS should not be heard to say that the agreement between it and Agcaoili is silent, or imprecise as
to its exact prestation Blame for the imprecision cannot be imputed to Agcaoili; it was after all the GSIS which
caused the contract to come into being by its written acceptance of Agcaoili's offer to purchase, that offer being
contained in a printed form supplied by the GSIS. Said appellant having caused the ambiguity of which it would
now make capital, the question of interpretation arising therefrom, should be resolved against it.
It will not do, however, to dispose of the controversy by simply declaring that the contract between the parties
had not been validly cancelled and was therefore still in force, and that Agcaoili could not be compelled by the
GSIS to pay the stipulated price of the house and lot subject of the contract until and unless it had first
completed construction of the house. This would leave the contract hanging or in suspended animation, as it
were, Agcaoili unwilling to pay unless the house were first completed, and the GSIS averse to completing
construction, which is precisely what has been the state of affairs between the parties for more than twenty (20)
years now. On the other hand, assuming it to be feasible to still finish the construction of the house at this time,
to compel the GSIS to do so so that Agcaoili's prestation to pay the price might in turn be demanded, without
modifying the price therefor, would not be quite fair. The cost to the GSIS of completion of construction
at present prices would make the stipulated price disproportionate, unrealistic.
The situation calls for the exercise by this Court of its equity jurisdiction, to the end that it may render complete
justice to both parties.

As we . . reaffirmed in Air Manila, Inc. vs. Court of Industrial Relations (83 SCRA 579, 589
[1978]). "(E)quity as the complement of legal jurisdiction seeks to reach and do complete justice
where courts of law, through the inflexibility of their rules and want of power to adapt their
judgments to the special circumstances of cases, are incompetent so to do. Equity regards the
spirit of and not the letter, the intent and not the form, the substance rather than the circumstance,
as it is variously expressed by different courts... " 16
In this case, the Court can not require specific performance of the contract in question according to its literal
terms, as this would result in inequity. The prevailing rule is that in decreeing specific performance equity
requires17
... not only that the contract be just and equitable in its provisions, but that the consequences of
specific performance likewise be equitable and just. The general rule is that this equitable relief
will not be granted if, under the circumstances of the case, the result of the specific enforcement
of the contract would be harsh, inequitable, oppressive, or result in an unconscionable advantage
to the plaintiff . .
In the exercise of its equity jurisdiction, the Court may adjust the rights of parties in accordance with the
circumstances obtaining at the time of rendition of judgment, when these are significantly different from those
existing at the time of generation of those rights.
The Court is not restricted to an adjustment of the rights of the parties as they existed when suit
was brought, but will give relief appropriate to events occuring ending the suit. 18
While equitable jurisdiction is generally to be determined with reference to the situation existing
at the time the suit is filed, the relief to be accorded by the decree is governed by the conditions
which are shown to exist at the time of making thereof, and not by the circumstances attending
the inception of the litigation. In making up the final decree in an equity suit the judge may
rightly consider matters arising after suit was brought. Therefore, as a general rule, equity will
administer such relief as the nature, rights, facts and exigencies of the case demand at the close
of the trial or at the time of the making of the decree. 19
That adjustment is entirely consistent with the Civil Law principle that in the exercise of rights a person must
act with justice, give everyone his due, and observe honesty and good faith. 20 Adjustment of rights has been
held to be particularly applicable when there has been a depreciation of currency.
Depreciation of the currency or other medium of payment contracted for has frequently been
held to justify the court in withholding specific performance or at least conditioning it upon
payment of the actual value of the property contracted for. Thus, in an action for the specific
performance of a real estate contract, it has been held that where the currency in which the
plaintiff had contracted to pay had greatly depreciated before enforcement was sought, the relief
would be denied unless the complaint would undertake to pay the equitable value of the land.
(Willard & Tayloe [U.S.] 8 Wall 557,19 L. Ed 501; Doughdrill v. Edwards, 59 Ala 424) 21
In determining the precise relief to give, the Court will "balance the equities" or the respective interests of the
parties, and take account of the relative hardship that one relief or another may occasion to them .22

The completion of the unfinished house so that it may be put into habitable condition, as one form of relief to
the plaintiff Agcaoili, no longer appears to be a feasible option in view of the not inconsiderable time that has
already elapsed. That would require an adjustment of the price of the subject of the sale to conform to present
prices of construction materials and labor. It is more in keeping with the realities of the situation, and with
equitable norms, to simply require payment for the land on which the house stands, and for the house itself, in
its unfinished state, as of the time of the contract. In fact, this is an alternative relief proposed by Agcaoili
himself, i.e., "that judgment issue . . (o)rdering the defendant (GSIS) to execute a deed of sale that would
embody and provide for a reasonable amortization of payment on the basis of the present actual unfinished and
uncompleted condition, worth and value of the said house. 23
WHEREFORE, the judgment of the Court a quo insofar as it invalidates and sets aside the cancellation by
respondent GSIS of the award in favor of petitioner Agcaoili of Lot No. 26, Block No. (48) 2 of the GSIS low
cost housing project at Nangka, Marikina, Rizal, and orders the former to respect the aforesaid award and to pay
damages in the amounts specified, is AFFIRMED as being in accord with the facts and the law. Said judgments
is however modified by deleting the requirement for respondent GSIS "to complete the house in question so as
to make the same habitable," and instead it is hereby ORDERED that the contract between the parties relative to
the property above described be modified by adding to the cost of the land, as of the time of perfection of the
contract, the cost of the house in its unfinished state also as of the time of perfection of the contract, and
correspondingly adjusting the amortizations to be paid by petitioner Agcaoili, the modification to be effected
after determination by the Court a quo of the value of said house on the basis of the agreement of the parties, or
if this is not possible by such commissioner or commissioners as the Court may appoint. No pronouncement as
to costs.
SO ORDERED.
Cruz, Gancayco, Aquino and Medialdea, JJ., concur.

Footnotes
1 Dated June 24, 1964.
2 Dated October 5, 1965 (Exh. A ); Folder of Exhibits,p.1.
3 O.R. No. 186558, Oct. 10, 1966.
4 Exh. D, Folder of Exhibits, p. 4.
5 Docketed as Civil Case No. 69417.
6 The letter was sent thru the awardees' "Samahang Lakas ng Mahihirap," copy having been
marked at the trial as Exh. F; to the letter was attached a resolution of said Samahan adopted at
its meeting of July 23, 1967 and to which, in turn, was appended a 3 page list of uncompleted
houses with a specification of items not completed.
7 By Hon. Manuel P. Barcelona, presiding over Br. VIII of the CFI of Manila; Record on Appeal,
pp. 22-25, Rollo, p. 13.

8 Parenthetical insertions Identifying the parties, supplied.

9 Appellant's brief, pp. 11-14.
10 Id., pp. 7-8.
11 Appellant's brief, pp. 8-10.
12 Exh. E.
I3 Art. 1475, Civil Code; Pacific Oxygen & Acetylene Co. v. Central Bank, 37 SCRA 685.
14 Lim v. de los Santos, 8 SCRA 798.
I5 Art. 1169, last paragraph, Civil Code.
16 Cristobal vs. Melchor, 101 SCRA 857, 865.
17 771 Am. Jur. 2d, 101.
18 30C.J.S. 929.
19 27 Am Jur. 2d. 818.
20 Art. 19, Civil Code: "Every person must, in the exercise of his rights and in the performance
of his duties, act with justice, give everyone his due, and observe and good faith."
21 71 Am. Jur. 2d, 120.
22 Am. Jur. 2nd 628-629: "Their is a general principle that a court of equity will balance the
equities' between the parties in determining what, if any, relief to give. . . Thus, for example,
wherein the effect of the only relief which can be granted to protect the plaintiff will be
destructive of the defendants' business, which would be lawful but for the harm it does to the
plaintiff, relief may be refused if, on a balancing of the respective interests, that of the defendant
is found to be relatively important, and that of the plaintiff relatively insignificant. . ."
23 Record on Appeal, p. 5; Rollo, p. 13.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 73345. April 7, 1993.
SOCIAL SECURITY SYSTEM, petitioner,
vs.
MOONWALK DEVELOPMENT & HOUSING CORPORATION, ROSITA U. ALBERTO,
ROSITA U. ALBERTO, JMA HOUSE, INC., MILAGROS SANCHEZ SANTIAGO, in her
capacity as Register of Deeds for the Province of Cavite, ARTURO SOLITO, in his capacity as
Register of Deeds for Metro Manila District IV, Makati, Metro Manila and the INTERMEDIATE
APPELLATE COURT, respondents.
The Solicitor General for petitioner.
K.V. Faylona & Associates for private respondents.
DECISION
CAMPOS, JR., J p:
Before Us is a petition for review on certiorari of decision 1 of the then Intermediate Appellate
Court affirming in toto the decision of the former Court of First Instance of Rizal, Seventh
Judicial District, Branch XXIX, Pasay City.
The facts as found by the Appellate Court are as follows:
"On February 20, 1980, the Social Security System, SSS for brevity, filed a complaint in the
Court of First Instance of Rizal against Moonwalk Development & Housing Corporation,
Moonwalk for short, alleging that the former had committed an error in failing to compute the
12% interest due on delayed payments on the loan of Moonwalk resulting in a chain of errors
in the application of payments made by Moonwalk and, in an unpaid balance on the principal
loan agreement in the amount of P7,053.77 and, also in not reflecting in its statement or account
an unpaid balance on the said penalties for delayed payments in the amount of P7,517,178.21 as
of October 10, 1979.
Moonwalk answered denying SSS' claims and asserting that SSS had the opportunity to ascertain
the truth but failed to do so.
The trial court set the case for pre-trial at which pre-trial conference, the court issued an order
giving both parties thirty (30) days within which to submit a stipulation of facts.
The Order of October 6, 1980 dismissing the complaint followed the submission by the parties
on September 19, 1980 of the following stipulation of Facts:

"1. On October 6, 1971, plaintiff approved the application of defendant Moonwalk for an interim
loan in the amount of THIRTY MILLION PESOS (P30,000,000.00) for the purpose of
developing and constructing a housing project in the provinces of Rizal and Cavite;
"2. Out of the approved loan of THIRTY MILLION PESOS (P30,000,000.00), the sum of
P9,595,000.00 was released to defendant Moonwalk as of November 28, 1973;
"3. A third Amended Deed of First Mortgage was executed on December 18, 1973 Annex `D'
providing for restructuring of the payment of the released amount of P9,595,000.00.
"4. Defendants Rosita U. Alberto and Rosita U. Alberto, mother and daughter respectively, under
paragraph 5 of the aforesaid Third Amended Deed of First Mortgage substituted Associated
Construction and Surveys Corporation, Philippine Model Homes Development Corporation,
Mariano Z. Velarde and Eusebio T. Ramos, as solidary obligors;
"5. On July 23, 1974, after considering additional releases in the amount of P2,659,700.00, made
to defendant Moonwalk, defendant Moonwalk delivered to the plaintiff a promissory note for
TWELVE MILLION TWO HUNDRED FIFTY FOUR THOUSAND SEVEN HUNDRED
PESOS (P12,254,700.00) Annex `E', signed by Eusebio T. Ramos, and the said Rosita U. Alberto
and Rosita U. Alberto;
"6. Moonwalk made a total payment of P23,657,901.84 to SSS for the loan principal of
P12,254,700.00 released to it. The last payment made by Moonwalk in the amount of
P15,004,905.74 were based on the Statement of Account, Annex "F" prepared by plaintiff SSS
for defendant;
"7. After settlement of the account stated in Annex 'F' plaintiff issued to defendant Moonwalk the
Release of Mortgage for Moonwalk's mortgaged properties in Cavite and Rizal, Annexes 'G' and
'H' on October 9, 1979 and October 11, 1979 respectively.
"8. In letters to defendant Moonwalk, dated November 28, 1979 and followed up by another
letter dated December 17, 1979, plaintiff alleged that it committed an honest mistake in releasing
defendant.
"9. In a letter dated December 21, 1979, defendant's counsel told plaintiff that it had completely
paid its obligations to SSS;
"10. The genuineness and due execution of the documents marked as Annex (sic) 'A' to 'O'
inclusive, of the Complaint and the letter dated December 21, 1979 of the defendant's counsel to
the plaintiff are admitted.
"Manila for Pasay City, September 2, 1980." 2
On October 6, 1990, the trial court issued an order dismissing the complaint on the ground that
the obligation was already extinguished by the payment by Moonwalk of its indebtedness to SSS
and by the latter's act of cancelling the real estate mortgages executed in its favor by defendant
Moonwalk. The Motion for Reconsideration filed by SSS with the trial court was likewise
dismissed by the latter.

These orders were appealed to the Intermediate Appellate Court. Respondent Court reduced the
errors assigned by the SSS into this issue: ". . . are defendants-appellees, namely, Moonwalk
Development and Housing Corporation, Rosita U. Alberto, Rosita U. Alberto, JMA House, Inc.
still liable for the unpaid 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.
Hence, this Petition wherein SSS raises the following grounds for review:
"First, in concluding that the penalties due from Moonwalk are "deemed waived and/or barred,"
the appellate court disregarded the basic tenet that waiver of a right must be express, made in a
clear and unequivocal manner. There is no evidence in the case at bar to show that SSS made a
clear, positive waiver of the penalties, made with full knowledge of the circumstances.
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 of the owners and beneficiaries thereof. (United Christian Missionary Society v.
Social Security Commission, 30 SCRA 982, 988 [1969]).
Third, it ignored the fact that penalty at the rate of 12% p.a. is not inequitable.
Fourth, it ignored the principle that equity will cancel a release on the ground of mistake of fact."
4
The same problem which confronted the respondent court is presented before Us: Is the penalty
demandable even after the extinguishment of the principal obligation?
The former Intermediate Appellate Court, through Justice Eduard P. Caguioa, held in the
negative. It reasoned, thus:
"2. As we have explained under No. 1, contrary to what the plaintiff-appellant states in its Brief,
what is sought to be recovered in this case is not the 12% interest on the loan but the 12%
penalty for failure to pay on time the amortization. What is sought to be enforced therefore is the
penal clause of the contract entered into between the parties.
Now, what is a penal clause. A penal clause has been defined as
"an accessory obligation which the parties attach to a principal obligation for the purpose of
insuring the performance thereof by imposing on the debtor a special presentation (generally
consisting in the payment of a sum of money) in case the obligation is not fulfilled or is
irregularly or inadequately fulfilled" (3 Castan 8th Ed. p. 118).
Now an accessory obligation has been defined as that attached to a principal obligation in order
to complete the same or take its place in the case of breach (4 Puig Pea Part 1 p. 76). Note
therefore that an accessory obligation is dependent for its existence on the existence of a
principal obligation. A principal obligation may exist without an accessory obligation but an
accessory obligation cannot exist without a principal obligation. For example, the contract of
mortgage is an accessory obligation to enforce the performance of the main obligation of
indebtedness. An indebtedness can exist without the mortgage but a mortgage cannot exist

without the indebtedness, which is the principal obligation. In the present case, the principal
obligation is the loan between the parties. The accessory obligation of a penal clause is to enforce
the main obligation of payment of the loan. If therefore the principal obligation does not exist the
penalty being accessory cannot exist.
Now then when is the penalty demandable? A penalty is demandable in case of non performance
or late performance of the main obligation. In other words in order that the penalty may arise
there must be a breach of the obligation either by total or partial non fulfillment or there is non
fulfillment in point of time which is called mora or delay. The debtor therefore violates the
obligation in point of time if there is mora or delay. Now, there is no mora or delay unless there
is a demand. It is noteworthy that in the present case during all the period when the principal
obligation was still subsisting, although there were late amortizations there was no demand made
by the creditor, plaintiff-appellant for the payment of the penalty. Therefore up to the time of the
letter of plaintiff-appellant there was no demand for the payment of the penalty, hence the debtor
was no in mora in the payment of the penalty.
However, on October 1, 1979, plaintiff-appellant issued its statement of account (Exhibit F)
showing the total obligation of Moonwalk as P15,004,905.74, and forthwith demanded payment
from defendant-appellee. Because of the demand for payment, Moonwalk made several
payments on September 29, October 9 and 19, 1979 respectively, all in all totalling
P15,004,905.74 which was a complete payment of its obligation as stated in Exhibit F. Because
of this payment the obligation of Moonwalk was considered extinguished, and pursuant to said
extinguishment, the real estate mortgages given by Moonwalk were released on October 9, 1979
and October 10, 1979 (Exhibits G and H). For all purposes therefore the principal obligation of
defendant-appellee was deemed extinguished as well as the accessory obligation of real estate
mortgage; and that is the reason for the release of all the Real Estate Mortgages on October 9 and
10, 1979 respectively.
Now, besides the Real Estate Mortgages, the penal clause which is also an accessory obligation
must also be deemed extinguished considering that the principal obligation was considered
extinguished, and the penal clause being an accessory obligation. That being the case, the
demand for payment of the penal clause made by plaintiff-appellant in its demand letter dated
November 28, 1979 and its follow up letter dated December 17, 1979 (which parenthetically are
the only demands for payment of the penalties) are therefore ineffective as there was nothing to
demand. It would be otherwise, if the demand for the payment of the penalty was made prior to
the extinguishment of the obligation because then the 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 therefore liable for the
penalty.
Let it be emphasized that at the time of the demand made in the letters of November 28, 1979
and December 17, 1979 as far as the penalty is concerned, the defendant-appellee was not in
default since there was no mora prior to the demand. That being the case, therefore, the demand
made after the extinguishment of the principal obligation which carried with it the
extinguishment of the penal clause being merely an accessory obligation, was an exercise in
futility.

3. At the time of the payment made of the full obligation on October 10, 1979 together with the
12% interest by defendant-appellee Moonwalk, its obligation was extinguished. It being
extinguished, there was no more need for the penal clause. Now, it is to be noted that penalty at
anytime can be modified by the Court. Even substantial performance under Art. 1234 authorizes
the Court to consider it as complete performance minus damages. Now, Art, 1229 Civil Code of
the Philippines provides:
"ART. 1229. The judge shall equitably reduce the penalty when the principal obligation has been
partly 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."
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 demandable when full obligation has been complied with since in that
case there is no breach of the 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.
Let Us emphasize that the obligation of defendant-appellee was fully complied with by the
debtor, that is, the amount loaned together with the 12% interest has been fully paid by the
appellee. That being so, there is no basis for demanding the penal clause since the obligation has
been extinguished. Here there 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 under the contract since in got back in full the
amount loan (sic) as well as the interest thereof. The same 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 since it is merely
for the purpose of enforcing the performance of the main obligation has been fully complied with
and extinguished, the penal clause has lost its raison d' entre." 5
We find no reason to depart from the appellate court's decision. We, however, advance the
following reasons for the denial of this petition.
Article 1226 of the Civil Code provides:
"Art. 1226. In obligations with a penal clause, he penalty shall substitute the indemnity for
damages and the payment of interests in case of noncompliance, if there is no stipulation to the
contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty
of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the provisions of
this Code." (Emphasis Ours.)
A penal clause is an accessory undertaking to assume greater liability in case of breach. 6 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. 7 From 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. One
commentator of the Civil Code wrote:
"Now when is the penalty deemed demandable in accordance with the provisions of the Civil
Code? We must make a distinction between a positive and a negative obligation. With regard to
obligations which are positive (to give and to do), the penalty is demandable when the debtor is
in mora; hence, the necessity of demand by the debtor unless the same is excused . . ." 8
When does delay arise? Under the Civil Code, delay begins from the time the obligee judicially
or extrajudicially demands from the obligor the performance of the obligation.
"Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation."
There are only three instances when demand is not necessary to render the obligor in default.
These are the following:
"(1) When the obligation or the law expressly so declares;
(2) When from the nature and the circumstances of the obligation it appears that the designation
of the time when the thing is to be delivered or the service is to be rendered was a controlling
motive for the establishment of the contract; or
(3) When the demand would be useless, as when the obligor has rendered it beyond his power to
perform." 9
This case does not fall within any of the established exceptions. Hence, despite the provision in
the promissory note that "(a)ll amortization payments shall be made every first five (5) days of
the calendar month until the principal and interest on the loan or any portion thereof actually
released has been fully paid," 10 petitioner is not excused from making a demand. It has been
established that at the time of payment of the full obligation, private respondent Moonwalk has
long been delinquent in meeting its monthly arrears and in paying the full amount of the loan
itself as the obligation matured sometime in January, 1977. But mere delinquency in payment
does not necessarily mean delay in the legal concept. To be in default ". . . is different from mere
delay in the grammatical sense, because it involves the beginning of a special condition or status
which has its own peculiar effects or results." 11 In order that the debtor may be in default it is
necessary that the following requisites be present: (1) that the obligation be demandable and
already liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the
performance judicially and extrajudicially. 12 Default generally begins from the moment the
creditor demands the performance of the obligation. 13
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 payment of the
stipulated penalty upon the failure of Moonwalk to meet its monthly amortization. What the
complaint itself showed was that SSS tried to enforce the obligation sometime in September,
1977 by foreclosing the real estate mortgages executed by Moonwalk in favor of SSS. But this
foreclosure did 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 with said statement, Moonwalk paid its loan in full. What is clear,
therefore, is that Moonwalk was never in default because SSS never compelled performance.
Though it tried to foreclose the mortgages, SSS itself desisted from doing so 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, 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 penalty, not at the time it made the Statement of Account and certainly, not after the
extinguishment of the principal obligation because then, all the more that SSS had no reason to
ask for the penalties. Thus, there could never be any occasion for waiver or even mistake in the
application for payment because there was nothing for SSS to waive as its right to enforce the
penalty did not arise.
SSS, however, in buttressing its claim that it never waived the penalties, argued that the funds it
held were trust funds and as trustee, the petitioner could not perform acts affecting the funds that
would 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
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 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:
"No discretion or alternative is granted respondent Commission in the enforcement of the law's
mandate 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 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 gradually and perfect a social security
system which shall be suitable to the needs of the people throughout the Philippines and (to)
provide protection to employers against the hazards of disability, sickness, old age and death . . ."
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.
The case at bar does not refer to any penalty provided for by law nor does it refer to the non
remittance of premium. The case at bar refers to a contract of loan entered into between plaintiff
and defendant Moonwalk Development and Housing Corporation. Note, therefore, that no
provision of law is involved in this case, nor is there any penalty imposed by law nor a case
about non-remittance of premium required by law. The present case refers to a contract of loan
payable in installments not provided for by law but by agreement of the parties. Therefore, the
ratio decidendi of the case of United Christian Missionary Society vs. Social Security
Commission which plaintiff-appellant relies is not applicable in this case; clearly, the Social
Security Commission, which is a creature of the Social Security Act cannot condone a mandatory

provision of law providing for the payment of premiums and for penalties for non remittance.
The life of the Social Security Act is in the premiums because these are the funds from which the
Social Security Act gets the money for its purposes and the non-remittance of the premiums is
penalized not by the Social Security Commission but by law.
xxx xxx xxx
It is admitted that when a government created corporation enters into a contract with private
party concerning a loan, it descends to the level of a private person. Hence, the rules on contract
applicable to private parties are applicable to it. The argument therefore that the Social Security
Commission cannot waive or condone the penalties which was applied in the United Christian
Missionary Society cannot apply in this case. First, because what was not paid were installments
on a loan but premiums required by law to be paid by the parties covered by the Social Security
Act. Secondly, what is sought to be condoned or waived are penalties not imposed by law for
failure to remit premiums required by law, but a penalty for non payment provided for by the
agreement of the parties in the contract between them . . ." 15
WHEREFORE, in view of the foregoing, the petition is DISMISSED and the decision of the
respondent court is AFFIRMED. LLpr
SO ORDERED.
Narvasa, C .J ., Padilla, Regalado and Nocon, JJ ., concur.
Footnotes
1. AC-G.R. CV No. 68692, "Social Security System vs. Moonwalk Development & Housing
Corporation, et al.", penned by Associate Justice Eduardo P. Caguioa, Associate Justices
Abdulwahid A. Bidin and Floreliana C. Bartolome, concurring with dissenting opinion of
Presiding Justice Ramon G. Gaviola, Jr., and Associate Justice Ma. Rosario Quetulio-Losa,
concurring.
2. Annex "A" of Petition, pp. 1-3; Rollo, pp. 44-46.
3. Decision, p. 13; Rollo, p. 56.
4. Petition, p. 12; Rollo, p. 27.
5. Rollo, pp. 62-66.
6. 4 TOLENTINO, CIVIL CODE OF THE PHILIPPINES 259 (1991 ed.).
7. Ibid.
8. 4 E.P. CAGUIOA, COMMENTS AND CASES ON CIVIL LAW 280 (1983 ed.).
9. CIVIL CODE, Art. 1169.
10. Annex "C" of the Petition, Record on Appeal, p. 10.

11. Supra, note 6.

12. Ibid.
13. Ibid.
14. 30 SCRA 982, 987 (1969).
15. Supra, note 3, pp. 17-18.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 133107 March 25, 1999

RIZAL COMMERCIAL BANKING CORPORATION, petitioner,
vs.
COURT OF APPEALS and FELIPE LUSTRE, respondents.

KAPUNAN, J.:
A simple telephone call and an ounce of good faith on the part of petitioner could have prevented the present
controversy.
On March 10, 1993, private respondent Atty. Felipe Lustre purchased a Toyota Corolla from Toyota Shaw, Inc.
for which he made a down payment of P164,620.00, the balance of the purchase price to be paid in 24 equal
monthly installments. Private respondent thus issued 24 postdated checks for the amount of P14,976.00 each.
The first was dated April 10, 1991; subsequent checks were dated every 10th day of each succeeding month.
To secure the balance, private respondent executed a promissory note 1 and a contract of chattel
mortgage 2 over the vehicle in favor of Toyota Shaw, Inc. The contract of chattel mortgage, in paragraph 11
thereof, provided for an acceleration clause stating that should the mortgagor default in the payment of any
installment, the whole amount remaining unpaid shall become due. In addition, the mortgagor shall be liable for
25% of the principal due as liquidated damages.
On March 14, 1991, Toyota Shaw, Inc. assigned all its rights and interests in the chattel mortgage to petitioner
Rizal Commercial Banking Corporation (RCBC).
All the checks dated April 10, 1991 to January 10, 1993 were thereafter encashed and debited by RCBC from
private respondent's account, except for RCBC Check No. 279805 representing the payment for August 10,
1991, which was unsigned. Previously, the amount represented by RCBC Check No. 279805 was debited from
private respondent's account but was later recalled and re-credited, to him. Because of the recall, the last two
checks, dated February 10, 1993 and March 10, 1993, were no longer presented for payment. This was
purportedly in conformity with petitioner bank's procedure that once a client's account was forwarded to its
account representative, all remaining checks outstanding as of the date the account was forwarded were no
longer presented for patent.
On the theory that respondent defaulted in his payments, the check representing the payment for August 10,
1991 being unsigned, petitioner, in a letter dated January 21, 1993, demanded from private respondent the
payment of the balance of the debt, including liquidated damages. The latter refused, prompting petitioner to file
an action for replevin and damages before the Pasay City Regional Trial Court (RTC). Private respondent, in his
Answer, interposed a counterclaim for damages.

After trial, the. RTC 3 rendered a decision disposing of the case as follows:
WHEREFORE, in view of the foregoing, judgment is hereby, rendered as follows:
I. The complaint; for lack of cause of action, is hereby DISMISSED and plaintiff RCBC is
hereby ordered,
A. To accept the payment equivalent to the three checks amounting
to a total of P44,938.00, without interest.
B. To release/cancel the mortgage on the car . . . upon payment of
the amount of P44,938.00, without interest.
C. To pay the cost of suit.
II. On The Counterclaim.
A. Plaintiff RCBC to pay Atty. Lustre the amount of P200,000.00
as moral damages.
B. RCBC to pay P100,000.00 as exemplary damages.
C. RCBC to pay Atty. Obispo P50,000.00 as Attorney's fees. Atty.
Lustre is not entitled to any fee for lawyering for himself.
All awards for damages are subject to payment of fees to be assessed by the Clerk
of Court, RTC, Pasay City.
SO ORDERED.
On appeal by petitioner, the Court of Appeals affirmed the decision of the RTC, thus:
We . . . concur with the trial court's ruling that the Chattel Mortgage contract being a contract of
adhesion that is, one wherein a party, usually a corporation, prepares the stipulations in the
contract, while the other party merely affixes his signature or his "adhesion" thereto . . . is to
be strictly construed against appellant bank which prepared the form Contract . . . Hence . . .
paragraph 11 of the Chattel Mortgage contract [containing the acceleration clause] should be
construed to cover only deliberate and advertent failure on the part of the mortgagor to pay an
amortization as it became due in line with the consistent holding of the Supreme Court
construing obscurities and ambiguities in the restrictive sense against the drafter thereof . . . in
the light of Article 1377 of the Civil Code.
In the case at bench, plaintiff-appellant's imputation of default to defendant-appellee rested
solely on the fact that the 5th check issued by appellee . . . was recalled for lack of signature.
However, the check was recalled only after the amount covered thereby had been deducted from
defendant-appellee's account, as shown by the testimony of plaintiff's own witness Francisco
Bulatao who was in charge of the preparation of the list and trial balances of bank
customers . . . . The "default" was therefore not a case of failure to pay, the check being
sufficiently funded, and which amount was in fact already debited [sic] from appellee's account

by the appellant bank which subsequently re-credited the amount to defendant-appelle's account
for lack of signature. All these actions RCBC did on its own without notifying defendant until
sixteen (16) months later when it wrote its demand letter dated January 21, 1993.
Clearly, appellant bank was remiss in the performance, of its functions for it could have easily
called the defendant's attention to the lack of signature on the check and sent the check to or
summoned, the latter to affix his signature. It is also to be noted that the demand letter contains
no explanation as to how defendant-appellee incurred arrearages in the amount of P66,255.70,
which is why defendant-appellee made a protest notation thereon.
Notably, all the other checks issued by the appellee dated subsequent to August 10, 1991 and
dated earlier than the demand letter, were duly encashed. This fact should have already prompted
the appellant bank to review its action relative to the unsigned check. . . . 4
We take exception to the application by both the trial and appellate courts of Article 1377 of the Civil Code,
which states:
The interpretation of obscure words or stipulations in a contract shall not favor the
party who caused the obscurity.
It bears stressing that a contract of adhesion is just as binding as ordinary contracts. 5 It is true that we have, on
occasion, struck down such contracts as void when the weaker party is imposed upon in dealing with the
dominant bargaining party and is reduced to the alternative of taking it or leaving it, completely deprived of the
opportunity to bargain on equal footing. 6 Nevertheless, contracts of adhesion are not invalid per se; 7 they are
not entirely prohibited. 8 The one who adheres to the contract is in reality free to reject it entirely; if he adheres,
he gives his consent. 9
While ambiguities in a contract of adhesion are to be construed against the party that prepared the same, 10 this
rule applies only if the stipulations in such contract are obscure or ambiguous. If the terms thereof are clear and
leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall
control. 11 In the latter case, there would be no need for construction. 12
Here, the terms of paragraph 11 of the Chattel Mortgage Contract 13 are clear. Said paragraph states:
11. In case the MORTGAGOR fails to pay any of the installments, or to pay the interest that may
be due as provided in the said promissory note, the whole amount remaining unpaid therein shall
immediately become due and payable and the mortgage on the property (ies) herein-above
described may be foreclosed by the MORTGAGEE, or the MORTGAGEE may take any other
legal action to enforce collection of the obligation hereby secured, and in either case the
MORTGAGOR further agrees to pay the MORTGAGEE an additional sum of 25% of the
principal due and unpaid, as liquidated damages, which said sum shall become part thereof. The
MORTGAGOR hereby waives reimbursement of the amount heretofore paid by him/it to the
MORTGAGEE.
The above terms leave no room for construction. All that is required is the application thereof.
Petitioner claims that private respondent's check representing the fifth installment was "not encashed," 14 such
that the installment for August 1991 was not paid. By virtue of paragraph 11 above, petitioner submits that it
"was justified in treating the entire balance of the obligation as due and

demandable." 15 Despite demand by petitioner, however, private respondent refused to pay the balance of the
debt. Petitioner, in sum imputes delay on the part of private respondent.
We do not subscribe to petitioner's theory.
Art. 170 of the Civil Code states that those who in the performance of their obligations are guilty of delay are
liable for damages. The delay in the performance of the obligation, however, must be either malicious or
negligent. 16Thus, assuming that private respondent was guilty of delay in the payment of the value of unsigned
check, private respondent cannot be held liable for damages. There is no imputation, much less evidence, that
private respondent acted with malice or negligence in failing to sign the check. Indeed, we agree with the Court
of Appeals finding that such omission was mere "in advertence" on the part of private respondent. Toyota
salesperson Jorge Geronimo testified that he even verified whether private respondent had signed all the checks
and in fact returned three or four unsigned checks to him for signing:
Atty. Obispo:
After these receipts were issued, what else did you do about the transaction?
A: During our transaction with Atty. Lustre, I found out when he issued to me the
24 checks, I found out 3 to 4 checks are unsigned and I asked him to signed these
checks.
Atty. Obispo:
What did you do?
A: I asked him to sign the checks. After signing the checks, I reviewed again all
the documents, after I reviewed all the documents and found out that all are
completed and the down payments was completed, we realed to him the car. 17
Even when the checks were delivered to petitioner, it did not object to the unsigned check. In view of the
lack of malice or negligence on the part of private respondent, petitioner's blind and mechanical
invocation of paragraph 11 of the contract of chattel mortgage was unwarranted.
Petitioner's conduct, in the light of the circumstances of this case, can only be described as mercenary. Petitioner
had already debited the value of the unsigned check from private respondent's account only to re-credit it much
later to him. Thereafter, petitioner encashed checks subsequently dated, then abruptly refused to encash the last
two. More than a year after the date of the unsigned check, petitioner, claiming delay and invoking paragraph
11, demanded from private respondent payment of the value of said check and that of the last two checks,
including liquidated damages. As pointed out by the trial court, this whole controversy could have been avoided
if only petitioner bothered to call up private respondent and ask him to sign the check. Good faith not only in
compliance with its contractual obligations, 18 but also in observance of the standard in human relations, for
every person "to act with justice, give everyone his due, and observe honesty and good faith." 19 behooved the
bank to do so.
Failing thus, petitioner is liable for damages caused to private respondent. 20 These include moral damages for
the mental anguish, serious anxiety, besmirched reputation, wounded feelings and social humiliation suffered by
the latter. 21The trial court found that private respondent was:

[a] client who has shared transactions for over twenty years with a bank . . ..The shabby
treatment given the defendant is unpardonable since he was put to shame and embarrassment
after the case was filed in Court. He is a lawyer in his own right, married to another member of
the bar. He sired children who are all professionals in their chosen field. He is known to the
community of golfers with whom he gravitates. Surely the filing of the case made defendant feel
so bad and bothered.
To deter others from emulating petitioner's callous example, we affirm the award of exemplary damages. 22 As
exemplary damages are warranted, so are attorney's fees. 23
We, however, find excessive the amount of damages awarded by the trial court in favor of private respondent
with respect to his counterclaims and, accordingly, reduce the same as follows:
(a) Moral damages from P200,000.00 to P100,000.00
(b) Exemplary damages from P100,000.00 to P75,000.00
(c) Attorney's fees from P50,000.00 to P 30,000.00
WHEREFORE, subject to these modifications, the decision of the Court of Appeals is AFFIRMED.
SO ORDERED.
Davide, Jr., C.J., Melo and Pardo, JJ., concur.
Footnotes
1 Exhibit "A."
2 Exhibit "B."
3 Branch 108, presided by Judge Priscilla Mijares.
4 Rollo, pp. 6-8.
5 Art's. 1305, 1308, Civil Code. Serra vs. Court of Appeals, 229 SCRA 60 (1994).
6 Phil., Commercial International Bank vs. Court Bank vs. Court of Appeals, 255 SCRA 299 (1996).
7 Philippine Airlines, Inc. vs. Court of Appeals, 255 SCRA 48 (1996); Telengtan Brothers & Sons, Inc.
vs. Court of Appeals, 236 SCRA 617 (1994).
8 Telengtan Brothers & Sons, Inc. vs. Court of Appeals, supra, Philippine American General Insurance
Co., Inc. vs. Sweet Lines, Inc, 212 SCRA 194 (1992); Pan American World Airways vs. Rapadas, 209
SCRA 67 (1992); Saludo, Jr. vs. Court of Appeals, 207 SCRA 498 (1992).
9 Serra vs. Court of Appeals, supra; Philippine American General Insurance Co., Inc. vs. Sweet Lines,
Inc.,supra; Saludo, Jr. vs. Court of Appeals, supra.

10 Angeles vs. Calasanz, 135 SCRA 323 (1985).

11 Art. 1370, Civil Code. Salvatierra vs. Court of Appeals, 261 SCRA 45 (1996); Abella vs. Court of
Appeals 257 SCRA 482 (1996); Syquia vs. Court of Appeals, 217 SCRA 624 (1993); Luffhansa German
Airlines vs. Court of Appeals, 208 SCRA 708 (1992); Papa vs. Alonzo, 198 SCRA 564 (1991).
12 Leveriza vs. Intermediate Appellate Court, 157 SCRA 283 (1988).
13 Exhibit "B."
14 Rollo, p. 12.
15 Id., at 13.
16 IV Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, 1991 ed., p.113.
17 TSN March 10, 1994, pp. 15-16.
18 Art. 1159, Civil Code.
19 Art. 19, Civil Code.
20 Art. 19 in relation to Article 21, id.
21 Art. 2217, id.
22 Art. 2229, id.
23 Art. 2208 (1), id.