DIVISIBLE AND INDIVISIBLE OBLIGATIONS
00 and by reason thereof Spouses Soledad and Antonio Suatengco
Government vs. CFI
FACTS:
In August 12, 1964, Vicente David Isip, (representing V.D. Isip Sons and
Associates) entered into a Contract and Agreement for the construction of a
new Pasay City Hall, which was then represented by its Mayor, Pablo Cuneta.
Their contract specifically stipulated that the work shall be done in
stages to be determined by the City Engineer, the Contractor shall advance the
necessary amount needed for each stage of work and the City of Pasay shall
reimburse the Contractor the cost of the work completed before the latter
shall proceed to the next stage.
The Contractor proceeded with the construction as per duly approved
plan and has accomplished worth P1,713,096 of the total contract which is P4,
914,500. However, the City of Pasay only paid a total of P1,100,000. Despite
demands from the contractor, the City failed to pay the remaining balance
from that phase of the construction.
In 1968, Contractor filed for specific performance with damages before
CFI against the City of Pasay. Months later, they drafted a Compromise
Agreement. It was only in Feb 1969, when Municipal Board of Pasay enacted
Ordinance 1012 which approved the Compromise Agreement and authorized
new Mayor Jovito Claudio to represent Pasay City.
The 2nd paragraph of the Compromise Agreement provides that the City
of Pasay shall pay and remit the remaining balance of P613,096 to the
Contractor within 90 days from approval of this Comp Agreement, and the
latter shall also commence the construction for the next stage, immediately
upon receipt of payment.
In July 1969, an application for and notice of garnishment were made and
effected upon funds of Pasay City. And Phil. National Bank. But Pasay City filed
a motion to set aside, contending that (1) it is still premature because the 90
day period hasnt elapsed yet and (2) since the Contractor hasnt put up a new
performance bond which is equivalent to 20% of the remaining cost of
construction per agreement, the City shall not be obliged to pay the remaining
balance. They also added that the funds of the City that the Sheriff has
garnished is by law, exempt from execution. But the respondent Court ruled
that there was no stipulation that the issuance of a new performance bond
was a condition before the City should pay the remaining balance.
ISSUE/S:WON the issuance of a new performance bond is a condition
precedent to the payment of the remaining balance of the City to the
Contractor.
RULING:
No.
By looking at the agreements entered into by the parties, it can be
concluded that they contemplated a divisible obligation (stage by stage
construction of the City Hall) which necessitated the issuance of a
performance bond in proportion to the uncompleted work.
But it can be noted that in the prior Agreement, the Contractor was allowed
to file a performance bond which was 5% of the total bid, thats why it is rather
curious why the City insists all of a sudden to a 20% performance bond.
To allow this would tantamount to the Citys evasion of their obligation
in the agreement.
The Supreme Court believed that respondent court was correct in ruling
the the filing of a new performance bond was not a condition precedent to the
payment of the remaining balance to the Contractor.
OBLIGATIONS WITH A PENAL CLAUSE
Guatengco vs. Reyes
FACTS:
An action for Sum of Money with Damages filed by defendant Carmencita
Reyes against petitioner Spouses Soledad and Antonio Suatengco.
Sometime in the first quarter of 1994, petitioner Soledad Suatengco
approached defendant Carmencita for the purpose of borrowing a sum of
money in order to pay her obligation to Philippines Phosphate Fertilizer
Corporation (Philphos). Defendant Carmencita paid Philphos the amount of P
1,336,313.
executed on June 24, 1994 a Promissory Note binding themselves jointly and
severally to pay defendant Carmencita the said amount in thirty-one (31)
monthly installments beginning June 30, 1994.
On July 27, 1994, only one (1) payment of P 15,000 have been paid by Spouses
Suatengco. That pursuant to a specific clause in the Promissory Note,
petitioner Spouses Suatengco have unequivocally waived the necessity of
demand to be made upon them to pay as well as a Notice of Dishonor and
presentation with acceleration clause.
On March 31, 1995, spouses Suatengco owe Carmencita Reyes P1,321,313
exclusive of interest, other charges which is due and demandable but remains
unpaid.
The court gave petitioner spouses Suatengco several extensions of time to file
their answer with responsive pleading but failed to do so. On October 27,
1995, petitioner Spouses Suatengco were declared as in default .
At the ex-parte hearing, Atty. Edmundo O. Reyes Jr. testified that he is the
attorney-in-fact of his mother Congresswoman Carmencita Reyes to enter into
and execute any agrrement with Soledad Suatengco. He explained that
petitioner spouses Suatengco own and manage Goldfields Development Corp.
Out of the P 1,336,313 debt of the Spouses Suatengco only P15,000 was paid
by them thereby leaving an outstanding balance of P1,321,313 plus 12%
interest per annum and attorneys fees equivalent to 20% of defendants total
outstanding balance inclusive of interest, which he believes to be reasonable
considering that the case will be prosecuted outside Metro Manila.
RTC rendered decision in favor of Defendant Carmencita Reyes and against
Petitioner Spouses Suatengco ordering petitioner spouses suatengco: (1)to
pay plaintiff in the amount of P 1,321,313 plus interest at 12% per annum, (2)
moral damages in the amount of P 1,000,000 (3)attorneys fees in the amount
of 20% of the sum collectible and (4) pay the cost of suit
Petitioner appealed to the CA but upheld the award of attorneys fees
equivalent to 20% of the balance of petitioners obligation and modified the
moral damages from P 1,000,000 to P200,000.
ISSUE/S:
WON the CA acted with grave abuse of discretion and committed a mistake of
law in awarding 20% attorneys fees contrary to the 5% as stipulated in the
promissory note.
RULING:
Yes. The Supreme Court find it improper for both the RTC and the CA to
increase the award of attorneys fees despite the express stipulation
contained in the said Promissory Note. Since it is not intended to be
compensation for respondents counsel but was rather in the nature of a
penalty or liquidated damages.
The fifth paragraph of the Promissory Note executed by petitioners in favor of
respondent specifically provided that:
Failure on the part of Sylvia and/or Antonio Suatengco to pay any installment
due will render the entire unpaid balance immediately, due and demandable
and Cong. Reyes becomes entitled not only for the unpaid balance but also for
12% interest per annum of the outstanding balance of P1,336,313.00 from
May 31, 1994 until fully paid plus attorneys fees equivalent to 5% of the total
outstanding indebtedness.
Attorneys fees herein litigated are in the nature of liquidated damages and
not the attorneys fees recoverable as between attorney and client. Liquidated
damages are those agreed upon by the parties to a contract to be paid in case
of breach.
The stipulation on attorneys fees contained in the said Promissory Note
constitutes what is known as a penal clause. A penalty clause, expressly
recognized by law, is an accessory undertaking to assume greater liability on
the part of the obligor in case of breach of an obligation. It functions to
strengthen the coercive force of obligation and to provide, in effect, for what
could be the liquidated damages resulting from such a breach.
It is well-settled that so long as such stipulation does not contravene law,
morals or public order, it is strictly binding upon the obligor. The attorneys
fees so provided are awarded in favor of the litigant, not his counsel. Oral
evidence certainly cannot prevail over the written agreement of the parties.
Titan Construction Corp. vs. Uni-Field Enterprises
FACTS:

FACTS: Corazon Ruiz is engaged in the business of buying and selling jewelry. She
obtained several loans from Consuelo Torres amounting to P750,000. Prior to
Petitioner Titan Construction purchased on credit, various construction the maturity of the loans, it was consolidated into one promissory note
supplies and materials from respondent Uni-Field. The purchases amounted wherein it was stipulated that:
to P7, 620, 433.12; only P6, 215, 795.70 was paid, leaving a balance of P 1, 404, the loan will earn an interest rate of 3% per month for 13 months,
637.42. Despite demand, the balance remained unpaid. to mature on April 1996.
A complaint was filed before the RTC for the collection of the money with
If the amount due is not yet paid before the date due, a surcharge
damages against petitioner. Petitioner admitted the purchases but disputed
of 1% of the principal loan for every month default shall be
the amount claimed by respondents.
collected.
RTC rendered judgement in favor of respondent. The same was affirmed by
the CA, ordering the petitioner to pay the principal amount, interest plus Remaining balance as of the maturity date shall earn an interest at
accrued interest charges, liquidated damages of P324, 147.94, and attorneys the rate of 10% a month, compounded monthly.
fees equivalent to 25% of whatever amount is due and payable and Corazon secured the loan by real estate mortgage.
accumulated appearance fees.
Petitioner insists that the TC and CA had no legal basis to award interest, Thereafter, she obtained 3 more loans amounting to P300,000.00 which
liquidated damages, and attorneys fees because the delivery receipts and Corazon secured by P571,000.00 worth of jewelry pledged to Torres.
sales invoices, which served as the basis for the award, were not formally
offered as evidence by respondent. Ruiz paid the stipulated 3% monthly interest for some time but later on, she
was unable to make the payments. Due to her failure to pay the principal loan
ISSUE/S:: and the interest, Torres demanded payment not only for the P750,000.00 loan
but also for the P300,000.00 loan. Unable to pay, Torres sought extra-judicial
WON there is legal basis to award interest, liquidated damages, and attorneys foreclosure of the real estate mortgage.
fees in favour of Uni-Field?
Ruiz filed an action with the RTC for the issuance of a Temporary Restraining
RULING: Order(TRO) on the execution of the real estate mortgage. The RTC granted the
YES. TRO but nevertheless, held Ruiz liable to pay her obligation to Torres.
The delivery receipts and sales invoices, which formed part of Titan's formal
offer of evidence, expressly stipulated the payment of interest, liquidated Torres filed an appeal with the CA. The CA ruled that the execution of the real
damages, and attorneys fees in case of overdue accounts and collection suits. estate mortgage was valid but reduced the interest for being excessive,
Titan did not only bind itself to pay the principal amount, it also promised to iniquitous, unconscionable and contrary to morals.
pay (1) interest of 24% per annum on overdue accounts, compounded with
the principal obligations as they accrue; (2) 25% liquidated damages based on ISSUE/S:
the outstanding total obligation; and (3) 25% attorneys fees based on the total
claim including liquidated damages. Since petitioner freely entered into the 1. WoN the rates of interests and surcharges on the obligation of Ruiz
contract, the stipulations in the contract are binding on petitioner. Thus, the to Torres are valid.
TC and CA did not err in using the delivery receipts and sales invoices as basis
for the award of interest, liquidated damages, and attorneys fees. RULING:
1. No. The SC agreed with the CA when it ruled that the interests and
Moreover, the law allows a party to recover attorneys fees under a written surcharges on the obligation are excessive, iniquitous,
agreement. In Barons Marketing Corporation v. Court of Appeals, the Court unconscionable and contrary to morals. The 10% compounded
ruled that: "The attorneys fees here are in the nature of liquidated damages monthly interest was ruled to be invalid. The legal rate of 12% per
and the stipulation therefor is aptly called a penal clause. It has been said that annum shall apply after the maturity dates of the promissory notes
so long as such stipulation does not contravene law, morals, or public order, it until the full payment of the amount due. The SC also reduced the
is strictly binding upon defendant. The attorneys fees so provided are 3% per month or 36% per annum interest to 1% per month or 12%
awarded in favor of the litigant, not his counsel." per annum interest.

On the other hand, the law also allows parties to a contract to stipulate on The 1% surcharge on the principal loan for every month of default
liquidated damages to be paid in case of breach. A stipulation on liquidated is valid. This surcharge is a penalty stipulated in the loan agreement
damages is a penalty clause where the obligor assumes a greater liability in in case of default. Under Art. 2227 of the NCC, the nature of
case of breach of an obligation. The obligor is bound to pay the stipulated liquidated damages is separate and distinct from interest payment.
amount without need for proof on the existence and on the measure of
damages caused by the breach.

The Court notes that Uni-Field had more than adequately protected itself from
a possible breach of contract because of the stipulations on the payment of
interest, liquidated damages, and attorneys fees. The Court finds the award
of attorneys fees "equivalent to 25% of whatever amount is due and payable"
to be exorbitant because it includes (1) the principal; (2) the interest charges;
and (3) liquidated damages. Moreover, the liquidated damages and the
attorneys fees serve the same purpose, that is, as penalty for breach of the
contract.

Wherefore, the decision of the CA is confirmed but the amount of attorneys

fees is modified to 25% of the principal obligation.

Ruiz vs. CA
SSS vs. Moonwalk
FACTS: Plaintiff approved the application of defendant Moonwalk for an
interim loan in the amount of P30M for the purpose of developing and
constructing a housing project in the provinces of Rizal and Cavite; Out of the
approved loan, P9M was released to defendant.
A Third Amended Deed of First Mortgage was executed providing for
restructuring of the payment of the released amount of P9M.
After considering additional releases in the amount of P2M made to
defendant Moonwalk, defendant delivered to the plaintiff a promissory note
for P12M.
Moonwalk made a total payment of P23M to SSS for the loan
principal of P12M released to it. The last payment made by Moonwalk in the
amount of P15M were based on the Statement of Account, prepared by
plaintiff SSS for defendant.
After settlement of the account, plaintiff issued to defendant the
Release of Mortgage for Moonwalk's mortgaged properties.
In a letter, plaintiff alleged that it committed an honest mistake in
releasing defendant. Defendants told plaintiff that it had completely paid its
obligations to SSS.
SSS filed a complaint in the CFI against Moonwalk 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.
Moonwalk answered denying SSS' claims and asserting that SSS had
the opportunity to ascertain the truth but failed to do so.
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.
IAC held that Moonwalk's obligation was extinguished and affirmed
the trial court.
ISSUE/S:
WN the penalty is demandable even after the extinguishment of the principal
obligation
WN the respondents were in default
RULING: Court finds no reason to depart from the appellate court's decision.
Intermediate Appellate Court, through Justice Caguioa, held in the
negative. It reasoned, thus:
2. What is sought to be recovered in this case is not the 12% interest
but the 12% penalty for failure to pay on time the amortization. What is sought
to be enforced is the penal clause of the contract entered into between the
parties.
Plaintiff issued its Statement of Account showing the total obligation
of Moonwalk as P15M, and demanded payment from them. Because of the
demand, Moonwalk made payments totaling P15M, which was a complete
payment of its obligation. Because of this payment, the obligation of
Moonwalk was considered extinguished, and pursuant to this, the real estate
mortgages given by Moonwalk were released. The principal obligation of
defendant 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.
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. That being the case, the
demand for payment of the penal clause made by plaintiff are therefore
ineffective as there was nothing to demand.
3. At the time of the payment made of the full obligation by
defendant, its obligation was extinguished. It being extinguished, there was no
more need for the penal clause.
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."
In the present case, there has been 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. There is no basis for demanding the
penal clause since the obligation has been extinguished. There has been a
waiver of the penal clause as it was not demanded before the full obligation
was fully paid and extinguished.
Court advances the following reasons for the denial of the petition.
"Art. 1226. In obligations with a penal clause, the 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."
It has been established that at the time of payment of the full
obligation, private respondent has long been delinquent in meeting its
monthly arrears and in paying the full amount of the loan itself as the
obligation matured. But mere delinquency in payment does not necessarily
mean delay in the legal concept.
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 therefore, there was 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.
Petition was dismissed.
State Investment House vs. CA
STATE INVESTMENT HOUSE, INC., petitioner, vs. COURT OF APPEALS,
LOMUYON TIMBER INDUSTRIES, INC., AMANDA MALONJAO and RUFINO
MALONJAO, respondents.
Principle: 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.
Facts: On March 9, 1978, Lomuyon Timber Industries, Inc. (hereafter, Lomuyon
agreed to sell to plaintiff its receivables at a discount with recourse basis (Exh.
A). It was agreed in that sale that should a receivable remain unpaid, plaintiff,
at its discretion, may impose a penalty fee of 3% per month. To secure the
payment of the receivables, the Malonjaos also executed in favor of plaintiff,
a real estate mortgage over their real property covered by Transfer Certificates
of Title Nos. (445856) S-65586 and No. (162775) S-65585 . Pursuant to their
agreement, on March 9, 10 and 15, 1978 and July 19, 1978, Lomuyon sold to
plaintiff for a total consideration of P2,558,073.75, various receivables
consisting of checks. When plaintiff presented the checks for payment to the
drawee banks, the same were dishonored for having been drawn against
insufficient funds except for TCBTC 618821.Plaintiff made repeated written
demands on defendants to make good the checks they indorsed and to pay
the penalty charges it has imposed thereon. Defendants failed to pay the value
of the checks. Plaintiff thus decided to undertake foreclosure of the real estate
mortgage. On February 14, 1983, the Provincial Sheriff sold at public auction,
defendants mortgaged properties to plaintiff who was the highest bidder for
P4,233,874.00. On June 27, 1983, plaintiff filed the complaint alleging that
after deducting the price of the mortgaged properties from defendants
outstanding obligation, there remains a deficiency of P2,601,147.62 as of
February 14, 1983, which as of May 31, 1983 amounted to P2,876,929.27
inclusive of interest and charges. As an alternative cause of action, plaintiff
alleged that it is entitled to recover from the defendant the total value of the
checks amounting to P2,239,237.10. Plaintiff further prayed that it be awarded
exemplary damages, attorneys fees and litigation expenses. Petitioner asserts
that as of September 26, 1981, private respondents obligation amounted to
P4,809,187.12. At that time of the foreclosure sale on February 14, 1983, the
obligation to SIHI was computed to be P6,833,021.62 inclusive of interest and
penalty charges. Considering that the bid price of the foreclosed properties
was only P4,233,874.00, petitioner was still entitled to a deficiency of about
P2,601,147.62. Petitioner further added that until the original obligation is
fully paid, private respondents outstanding obligation continue to earn
interest and penalty charges from day to day. Thus, from the time of the
foreclosure sale on February 14, 1983 (P2,601,147.62) up to the filing of the
complaint for the deficiency claim on May 31, 1983 (P2,876,929.27), and up to
the trial on June 3, 1988 in the RTC, private respondents outstanding
obligation to SIHI rose to P7,651,969.41.
Issue: WON the petitioner was entitled to recover any deficiency amount after
the foreclosure sale.
Ruling: The court disallowed the payment of the deficiency altogether because
it found that the principal obligation of the private respondent would not have
ballooned to such a horrendous amount of P4.8M as of September 21, 1991 if
not for the penalty charge of 3% per month or 36% per annum. The trial court
justified, to wit: x x x [F]rom the various checks the defendants had sold
originally to the plaintiff at the beginning of their transactions, it is shown that
the amount including interests and other charges, is P2,970,556.64. For a two
year period from June 9, 1978 to March 9, 1980 and up to September 26, 1981
the amount grew to P4,809.187.12. In other words, the money of the plaintiff
has already earned interests and other charges to more or less P1,638,630.48.
As alleged in plaintiffs complaint, the total amount purchased by plaintiff was
only for P2,500,000.00. There is reason to believe that the P2,970,566.64
represented by the various checks include therein, the interest and other
charges upon their maturity dates. Deducting the amount of P2,500,000.00
from P2,970,556.64 is P420,556.64. In brief, the interests and charges that
plaintiff has already earned from the time it has foreclosed defendants'
properties has passed the P2,000,000.00. Contrary to petitioners contention,
the respondent court acted in accordance to Article 1229 when it declared that
petitioner was no longer entitled to the payment of the deficiency amount.
The disallowance of the payment of deficiency was in effect merely a reduction
of the penalty charges and not as a deletion of the penalties as contended by
the petitioner. In the case at bar, the two courts below found the penalty
charge of 3% a month or 36% per annum iniquitous and
unconscionable. Petitioner computed the amount of P4,809,187.12 as the
outstanding obligation of the petitioner as of September 21, 1981 after
imposing the 3% penalty charge when petitioner defaulted in their
payments. This amount was no longer questioned and was particularly taken
into consideration when the mortgaged properties were foreclosed and sold
at the auction sale in 1983, obtaining a sum of about P4,223,874.00. These
foreclosed properties located in Makati are undoubtedly valuable properties
whose market value has greatly appreciated to substantially satisfy the
payment of the outstanding obligation. Notwithstanding the balance
of P575,313.12, petitioner has clearly recouped its investment and earned
more than enough profit in two years (1978-1981) by way of penalty charges.
Although petitioner claims that the penalty charge was well within the banking
and business practice, no proof was adduced thereof. To allow the petitioner
to recover the amount of P6,835,021.21 at the time of the foreclosure sale in
1983, or P7,651,969.41 at the time of the trial of the case in 1988 which
amounts are almost three times more than the original investment of about
P2,558,073.75 is rather unwarranted.
Spouses Solangon vs. Salazar
FACTS:
1. Petitioner-spouses mortgaged a parcel of land in favor of respondent
(Salazar) to secure payment of a loan of P60,000.00 payable within
a period of 4 months with an interest of 6% per month.
2. Thereafter, the spouses executed another 2 real estate mortgages of
the same parcel of land in the amounts of P136,512.00 and
P230,000.00 with an interest at a legal rate.
3. The spouses filed an action before the RTC in which the trial court
rendered in favour of the respondent (Salazar) dismissing the
complaint.
4. They appealed before the CA alleging that that they obtained only
one loan from the defendant-appellee, and that was for the amount
of P60,000.00, the subsequent mortgages were merely
continuations of the first one, which is null and void because it
provided for unconscionable rate of interest.
5. They also alleged they have already paid the respondent (Salazar)
P78,000.00 and tendered P47,000.00 more, but the latter has
initiated foreclosure proceedings for their alleged failure to pay the
loan P230,000.00 plus interest.
6. On the other hand, the respondent (Salazar) claimed that 3 subject
mortgages were executed to secure three separate loans of
P60,000.00 P136,512.00 and P230,000.00, and that the first two
loans were paid, but the last one was not.
7. The CA rendered a decision holding that there were 3 mortgage
contracts were executed by the parties instead of one (1), and that
the loan obligation secured by a real estate mortgage with an
interest of 72% per cent per annum or 6% per month is not
unconscionable.
ISSUE/S:
Whether or not the CA erred in decreeing that the stipulated interest rate of
72% per annum or 6% per month is not unconscionable
RULING:
Yes.
The Court of Appeals, in sustaining the stipulated interest rate, ratiocinated
that since the Usury Law had been repealed by Central Bank Circular No. 905
there is no more maximum rate of interest and the rate will just depend on
the mutual agreement of the parties.
However, the factual circumstances of the present case require the application
of a different jurisprudential instruction. While the Usury Law ceiling on
interest rates was lifted, nothing in the said circular grants lenders carte
blanche authority to raise interest rates to levels which will either enslave their
borrowers or lead to a hemorrhaging of their assets.
ITCAB, petitioners stand on a worse situation. They are required to pay the
stipulated interest rate of 6% per month or 72% per annum which is definitely
outrageous and inordinate. Surely, it is more consonant with justice that the
said interest rate be reduced equitably. An interest of 12% per annum is
deemed fair and reasonable.
Barons Marketing Corp. vs. CA
FACTS:
1. From December 1986 to August 1987, Barons purchased from
Phelps Dodge on credit various electrical wires and cables
amounting to Php4,102,438.30.
2. Under the sales invoices issued by Phelps Dodge to Barons, it was
stipulated that the interest is set at 12% per annum charged on all
overdue accounts plus 25% on the said amount for attorneys fees
and collection. (Actually, wala ang 25% sa factual antecedents. 12%
interest ra for attorneys fees and collection. But lahi na stipulation
ang nigawas sa ruling so mao na lang akong gibutang diri sa facts
kay mao may basis sa ruling.)
3. However, Barons only paid Phelps Dodge the total amount of
Php300,000.00 despite repeated written demands.
4. Barons then requested that it be allowed to pay the balance in
installments of Php500,000 plus 1% interest every month. Phelps
Dodge rejected such request and repeated its demand for full
payment.
5. Phelps Dodge then filed a complaint for recovery of the unpaid
balance with other fees and damages. Barons alleged it suffered
injury to its reputation due to Phelps Dodges acts.
6. The trial court rendered its decision in favor of Phelps Dodge,
ordering Barons to pay Phelps Dodge:
a. Php3,108,000 (unpaid balance) with interest of 12% per
annum computed from the respective expiration of the 60
day credit term as stipulated in the sales invoices and/or
delivery receipts
b. 25% of the preceding obligation for and as attorneys fees
c. Php10,000 as exemplary damages
 d. Costs of suit.
7. Both parties appealed the decision, Phelps Dodge claiming the value
of the unpaid balance was a typographical error, and Barons
reiterating its claims for damages due to creditors abuse.
8. The CA rendered a decision modifying the decision of the trial court,
ordering Barons to pay Phelps Dodge:
. Php3,802,478.20 (unpaid balance) with interest of 12% per annum
computed from the respective expiration of the 60 day credit term as
stipulated in the sales invoices and/or delivery receipts
a. 5% of the preceding obligation for and as attorneys fees.
No costs.
ISSUE/S:
Whether or not the CA erred in ruling that Barons is liable to Phelps Dodge for
interest and attorneys fees.
RULING:
Yes. Stipulations in the sales invoices expressly provide for interest at 12% per
annum and attorneys fees at 25%. The 25% amount constitutes what is known
as a penal clause. Petitioner is thus obliged to pay the said penalty on top of
the 12% annual interest as provided for by an express stipulation. However,
the Court agrees with Barons in finding that the rate of the penalty is grossly
excessive. As provided for by law, specifically Art. 1229, courts are empowered
to reduce such penalty if the same is iniquitous or unconscionable. To allow
the current rate of 25% to stay would result to the interest amounting to
Php4.5M, exceeding the principal debt of Php4.0M. The Court found it just to
reduce the interest to 10% of the principal.
Manila Racing Club vs. Manila Jockey Club
FACTS:
On Sept. 18, 1936, Campos entered into a contract with respondent The
Manila Jockey Club to purchase a parcel of land with its improvements, the
good-will, and certain personal property for P1.2M, payable as follows:
P 50,000 upon signing of contract
P 50,000 on or before Sept. 28,1936
P 300,000 on or before Dec. 24, 1936
P 200,000 on or before Mar. 24, 1937
P 600,000 on or before Sept. 24, 1937
It was agreed that failure to pay installment on time will result to a
rescission of contract by the vendor (respondent) while keeping the amounts
paid. It also stated that purchaser (Campos) may form a corporation called The
Manila Racing Club, Inc. to whom he may transfer all his rights and obligations
under the contract.
Campos paid the 2 installments and later on, organized The Manila Racing
Club. Campos was unable to pay the 3rd installment wherein respondent
declared the contract cancelled while keeping the amounts paid. The latter
granted an extension to Campos to revive the contract by paying P300,000.
Having failed to pay the same, the partners of respondent ratified the
cancellation of the contract and the forfeiture of P100,000 paid by Campos.
This action is filed by petitioner against respondent and its partners for
the recovery of the forfeited amount P100,000 plus damages of P50,000. Court
rendered judgment in favor of respondent. Hence this petition.
ISSUE/S:
WON the forfeiture of the P100,000 already paid is valid.
RULING:
Yes. This clause regarding the forfeiture of what has been partially
paid is valid. It is in the nature of a penal clause which may be legally
established by the parties (articles 1152 and 1255 of the Civil Code). In its
double purpose of insuring compliance with the contract and of otherwise
measuring beforehand the damages which may result from non-compliance,
it is not contrary to law, morals or public order because it was voluntarily and
knowingly agreed upon by the parties.
In the case at bar, the amount forfeited constitutes only eight per
cent of the stipulated price, which is not excessive if considered as the profit
which would have been obtained had the contract been complied with. There
is evidence that the respondents, because of this contract with Campos, had
to reject other propositions to buy the same property. At any rate, the penal
clause does away with the duty to prove the existence and measure of the
damages caused by the breach.
Ligutan vs. CA
FACTS:
Petitioners Ligutan and dela Llana obtained a loan of P120,000.00
from respondent Security Bank and Trust Co. Petitioners executed a
promissory note to pay the amount with an interest of 15.189% per annum
upon maturity and to pay a penalty of 5% every month on the outstanding
principal and interest in case of default. In addition, petitioners agreed to pay
10% of the total amount due by way of attorneys fees should the matter be
referred to a lawyer if a suit were instituted. When the obligation matured and
the petitioners were still unable to pay, they were granted an extension by the
bank however they still failed to settle their debt despite several demands.
Respondent then filed a complaint for recovery of the due amount.
RTC ruling: The RTC ordered petitioners to pay P114,416.00 with 15.189%
interest per annum, 2% service charge and 5% monthly penalty charge, 10%
of the total amount of indebtedness as attorneys fees and the costs of the
suit.
CA ruling: The CA modified the RTC ruling and deleted the 2% service charge
and reduced the penalty charge from 5% to 3%.
Since petitioners still dispute this ruling by the CA, the respondent
bank contended that the penalty sought to be deleted by petitioners was even
insufficient to fully cover and compensate for the cost of money due to the
decrease in the purchasing power of the peso. Only P5,584.00 had been
remitted out of the entire loan of P120,000.00.
ISSUE/S:
Whether or not the Court of Appeals erred in not holding that the interest rate
and penalty imposed were exorbitant, iniquitous and unconscionable
RULING:
No. The Supreme Court dismissed the petition and held that the CA exercised
good judgment in reducing the penalty interest from 5% a month to 3% a
month which petitioner still disputes. Given the circumstances, not to mention
the repeated acts of breach by petitioners of their contractual obligation, the
Court sees no cogent ground to modify the ruling of the appellate court.
A penalty clause, which is expressly recognized by law, is an
accessory obligation to assume greater liability on the part of an obligor in case
of breach of an obligation. Article 1228 provides that even without evidence
of damages caused by the breach, the obligor is still bound to pay the
stipulated penalty. The Court, however, pursuant to Article 1229, may
equitably reduce the stipulated penalty if it is iniquitous or unconscionable or
if the principal obligation has been partly or irregularly complied with.
The stipulated penalty might even be deleted such as when there
has been substantial performance in good faith by the obligor, when the
penalty clause itself suffers from fatal infirmity, or when exceptional
circumstances so exist as to warrant it.
In the case at bar, the Supreme Court found no such exceptional
circumstance as to further grant a reduction to the penalty imposed by the
lower court.
ALLEN VS. PROVINCE OF ALBAY & AMBOS CAMARINES
FACTS:
-Provinces advertised for construction of bridge over Argos River
-Plaintiff submitted his bid, and contract was executed.
-Bridge was completed and was accepted by the Provinces
-Provinces paid Plaintiff only less amount because of delay and the expenses
that they had to incur for the delay of the completion
-Plaintiff wants to recover the amount so the filed motion
-Provinces contend that it was the Plaintiff's fault because of negligence
which is why they had to deduct the contract price as penalty or liquidated
damages
ISSUE: WON Provinces caused the delay of the Plaintiff thus waiving the
penalty.
HELD: YES, SO NO PENALTY
IN CONTRACT: Completion of bridge on or before 1st day of September and
agreed that in the event that the necessary steel should be furnished by the
provinces at ship side in Legaspi, deduction from contract price should be
made per kilo of steel thus delivered.
-Plaintiff asked for extension of work because (as in his letter) he faced a lot
of fortuitous events along the way in which one of them was caused by the
Provinces (quarantine of animals) in delivering the steel
-Because the Provinces caused the delay, they waived the action of the other
party so penalties for delay should not be sustained.
-In liquidated damage clauses, if the plaintiff was responsible for a large
number of days of delay than the Provinces, we cannot then "APPORTION"
such delay between the two and therefore hold the plaintiff liable.
-If there was an unreasonable delay from the Plaintiff, Provinces can
withhold the penalty but since there is not (If for example plaintiff asked for
an extension right after the date of completion, making it unreasonable),
then Provinces have no right to withhold the penalty of 1,301.45 pesos.
-IN FAVOR OF PLAINTIFF, AMOUNT CAN BE RECOVERED.