Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. Nos. 82282-83 November 24, 1988

ANTONIO M. GARCIA, DYNETICS, INC., and MATRIX MANAGEMENT CORPORATION, petitioners,

vs.
COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.

Sycip, Salazar, Hernandez & Gatmaitan for petitioners.

Bengson, Zarraga, Narciso, Cudala, Pecson & Bengson for private respondent.

GUTIERREZ, JR., J.:

In a summary judgment rendered by the Regional Trial Court of Makati in Civil Case No. 10398, the complaint was
dismissed for lack of merit and the petitioners were ordered to pay the private respondent the following: (a) the unpaid
principal sum of P15 million remaining unpaid out of Chemark's availment of the P20 million credit line, plus 18% interest
per annum and 36% as penalty per annum for Promissory Note No. DLS/74/540/83 from March 23, 1984 until fully paid;
and plus 24% interest per annum and 36% as penalty per annum for Promissory Note No. DLS/74/1358/83 from August 9,
1983 until fully paid; (b) attorney's fees equivalent to 10% of the total amount of plaintiffs' obligations and (c) costs of suit.

The summary judgment was affirmed by the Court of Appeals. The appellate court's decision and the resolution denying a
motion for reconsideration are now challenged by the petitioners in the instant petition.

The antecedent facts relevant to the instant petition are as follows:

On April 23, 1985 petitioners Dynetics, Inc., Matrix Management and Trading Corporation and Antonio M. Garcia filed a
complaint for declaratory relief and/or injunction with damages against respondent Security Bank and Trust Company
(SBTC). The plaintiffs sought a judicial declaration that they were not liable to the defendant bank under certain Indemnity
Agreements they executed in favor of Chemark Electric Motors, Inc. which had been extended a credit accommodation of
about P20,000,000.00 by the defendant bank. They also prayed for payment of attorney's fees and costs of suit. Thus, they
alleged in their complaint:

xxx xxx xxx

a) There is no valid consideration for the execution of the said instruments;

b) The said instruments had become invalid and ineffective at the time the defendant finally extended the
loan accommodation to Chemark and that the parties to the said instruments did not intend the said
instruments to cover Chemark's obligations to the defendant which were subsequently granted under
separate and independent transactions;

c) Assuming, without conceding, that there is a valid consideration for the execution of the aforesaid
instruments and that the said instruments continued to be valid and effective when the defendant
extended a credit accommodation to Chemark, said instruments are null and void insofar as Dynetics is
concerned as it is ultra vires, being contrary to the purposes of Dynetics, its powers, licenses and
franchise;

d) Assuming, without conceding, that the Indemnity Agreement instruments are valid and enforceable,
the obligations of the plaintiffs thereunder have been extinguished, either by novation or by the acts and
conduct of the defendant, who, under the circumstances, in refusing the valid and legitimate plea of
Chemark for a reasonable restructuring plan of its obligations has practically rendered it impossible for
Chemark to pay its obligations to its creditors and to the plaintiffs in the event plaintiffs are legally
obligated to pay Chemark's obligations to the defendant;

e) In the light of present economic conditions, in general, and the condition of Chemark in particular, as
well as the financial condition of the plaintiffs, the demand of the defendant for the plaintiffs to pay the
Chemark obligations would constitute an abuse of right as defined in the New Civil Code;
 f) Considering the present adverse economic conditions plaguing the entire country, the terms and
conditions of the credit accommodation and the Indemnity Agreement instruments, assuming that the
latter are valid and enforceable, have become so manifestly difficult as to be beyond the contemplation of
the parties. Under the provisions of Human Relations of the New Civil Code, as well as the general
principles of equity, especially the doctrine of the "rebus sic stantibus" and "the frustration of the
commercial object or frustration of enterprise" and under Article 1267 of the New Civil Code, when the
service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor
may be released therefrom;

g) In addition to the reasons stated in paragraphs e and f hereof, Chemark, the principal obligor, is not
liable for its obligations under the credit accommodations extended to it by the defendant because it has
been prohibited from complying therewith by a lawful authority. Under the law on guaranty and surety,
the guarantor or the surety, not being a principal debtor, is not liable for the obligations unless the
principal obligor is likewise liable. (Article 2054 of the New Civil Code; Hospicio de San Jose v. Fidelity and
Surety Co., 52 Phil. 926; Uy Isabelo v. Yandoc, CA-G.R. No. 8801-R, June 20, 1956). The debtor in
obligations to do shall also be released when the prestation becomes legally impossible without the fault
of the obligor. (Article 1266 of the New Civil Code);

h) Assuming, without conceding, that the plaintiffs are liable under the Indemnity Agreement instruments,
they are not liable for the amounts being claimed by the defendant, considering that the said amounts
include the payment of exorbitant interests, excessive penalties and amounts imputed to be due which
are not, in fact, due. (Rollo, pp. 106-107)

On June 11, 1985 the respondent bank filed its Answer and Counterclaim with prayer for preliminary attachment. The
defendant alleged in its counter claim:

ALLEGATIONS COMMON TO ALL DEFENDANTS

21. Sometime in August, 1981, Chemark was granted by plaintiff a credit line of P4.0 million consisting of
an import LC-TR line of P2.0 million and an export loan line of P2.0 million.

22. Said credit line was increased in February, 1982 from P4.0 million to P20.0 million, to wit:

Export loan line—from P2.0 million to P15.0 million

Import LC-TR—from P2.0 million to P5.0 million

The terms and conditions of this P20.0 million credit are reflected in the Amended Credit Line Agreement
dated February 8, 1982 attached as Annex "1" hereof,

23. Chemark availed of said credit line and as evidence of said availments, Chemark executed several
promissory notes covering the following amounts drawn against this credit line, viz;

a) The sum of P6,350,750.00 drawn on March 23, 1983 with interest and penalty at the
rate indicated in promissory Note No. DLS/74/540/83 to mature on June 21, 1983, a copy
is attached as Annex "3";

b) The sum of P8,649,250.00 drawn on August 9, 1983 with interest and penalty at the
rate indicated in Promissory Note No. DLS/74/1358/83 to mature on September 8, 1983,
a copy of which is hereto attached as Annex "4".

24. Chemark defaulted in paying its obligations under the aforesaid promissory notes when these became
due. Despite repeated demands, Chemark failed and refused to pay its valid and just obligations to the
defendant which, as of December 11, 1984, amounted to P13,130,596.93 under Promissory Note No.
DLS/74/540/83 and P17,357,117.51 under PN No. DLS/74/1358/83.

CAUSE OF ACTION AGAINST ANTONIO M. GARCIA

25. Plaintiff Garcia personally bound himself jointly and severally with Chemark, to pay defendant upon
demand and without benefit of excussion of whatever amount or amounts Chemark may be indebted to
defendant under and by virtue of the aforesaid credit line accommodation, including the substitutions,
renewals, extensions, increases and other amendments of the aforesaid credit accommodations, as well
as all other obligations that Chemark may owe the defendant.
 26. Accordingly, plaintiff Garcia executed two (2) Indemnity Agreements, one dated January 20, 1982, a
copy of which is attached hereto and made integral part hereof as Annex "E" and the other, an Indemnity
Agreement dated February 8, 1982, as Annex "B" of the Complaint;

27. Under the terms of the foregoing Indemnity Agreements executed by plaintiff Garcia, he further
bound himself solidarily with Chemark in favor of defendant for the faithful compliance of all the terms
and conditions contained in the Amended Credit Line Agreement (Annex "l ").

28. Defendant demanded from plaintiff Garcia the payment of the outstanding obligation of Chemark in a
letter dated October 26, 1984, a copy of which is made Annex "5" to form part hereof. Defendant
reiterated said demand on April 15, 1985.

29. Notwithstanding said demands, plaintiff Garcia failed and refused, as he still fails and refuses to pay his
obligation pursuant to the indemnity agreements he executed.

CAUSES OF ACTION AGAINST MATRIX MANAGEMENT & TRADING CORPORATION

30. Plaintiff Matrix bound itself jointly and severally with Chemark in favor of the defendant for the
payment, upon demand and without benefit of excussion, of whatever amount or amounts Chemark may
be indebted to defendant under and by virtue of the aforesaid credit line accommodation including the
substitutions, renewals, extensions, increases and other amendments of the aforesaid credit
accommodations, as well as of the amount of such other obligations that Chemark may owe the
defendant.

31. Accordingly, Matrix through its duly authorized officers, executed an Indemnity Agreement dated
February 8, 1982, a copy of which is attached hereto as Annex "A" and incorporated herein by reference.

32. Under the terms of the foregoing indemnity agreement executed by Matrix, it further bound itself
solidarily with Chemark in favor of defendant for the faithful compliance of all the terms and conditions
contained in the Credit Line Agreement (Annex "B").<äre||anº•1àw>

33. Defendant demanded from Matrix the payment of the outstanding obligation of Chemark in a letter
dated October 26, 1984, a copy of which is made Annex "5" to form part hereof. Defendant reiterated said
demand on April 25, 1985.

34. Notwithstanding said demands, Matrix failed and refused, as it still fails and refuses, to pay its
obligation pursuant to the indemnity agreement it executed in plaintiffs favor.

CAUSE OF ACTION AGAINST DYNETICS, INC.

35. Plaintiff Dynetics bound itself jointly and severally with Chemark in favor of the defendant for the
payment, upon demand and without benefit of excussion, of whatever amount or amounts Chemark may
be indebted to defendant under and by virtue of the aforesaid credit line accommodation including the
substitutions, renewals, extensions, increases and other amendments of the aforesaid credit
accommodations, as well as of the amount of such obligations that Chemark may owe the defendant.

36. Dynetics executed an indemnity agreement dated February 8, 1982, copy of which is attached as
annex "A" of the Complaint.

37. Under the terms of the foregoing Indemnity Agreement executed by Dynetics, it further bound itself
solidarily with Chemark in favor of defendant for the faithful compliance of all the terms and conditions
contained in the Amended Credit Line Agreement (Annex "I")

38. Defendant demanded from Dynetics the payment of the outstanding obligation of Chemark in a letter
dated October 26, 1984, a copy of which is made Annex "5", to form part hereof. Defendant reiterated
said demand on April 25, 1985.

39. Notwithstanding said demands, Dynetics failed and refused, as it still fails and refuses to pay its
obligation pursuant to the indemnity agreement it executed in defendant's favor. (Rollo, pp. 108-111)

On August 21, 1985, the petitioners manifested that ... they are adopting all allegations in their Complaint as their answer
to the respective counterclaim against each of them." (Original Records, p. 229)

On September 18, 1985, the respondent bank filed a motion for summary judgment on the ground that the answer to the
counterclaim "tenders no genuine issue as to any material fact, and consists of mere conclusions of law and fact, and in
paragraph 4 thereof, plaintiffs expressly acknowledged their obligation to defendant and indemnity agreements  dated
February 8, 1982 when they admitted "under said instruments, it was basically provided that for and in consideration of
the credit accommodation in the total amount of Twenty Million (20,000,000.00) Pesos, granted by defendant in favor of
Chemark Electric Motors, Inc., a corporation duly organized and existing under the laws of the Philippines, plaintiffs
agreed to indemnify defendant in the event Chemark should fail to comply with its obligations."' (Original Records, p. 248)
In support of the motion, the respondent bank attached the affidavit dated September 17, 1985 of Ms. Charis Marquez,
Senior Assistant Manager, corporate banking group, SBTC including its annexes.

The petitioners filed an opposition to the motion for summary judgment but to no avail. The lower court rendered a
decision granting the motion for summary judgment. The petitioners' complaint was dismissed and they were ordered to
pay the respondent bank under the indemnity agreements.

The petitioners then filed with the Court of Appeals: 1) an appeal from the summary judgment and 2) a special civil action
for certiorari and prohibition with a prayer for preliminary injunction to annul the orders of the lower, court granting
motion for summary judgment and granting motion for execution pending appeal. The two cases were consolidated.

The appellate court sustained the summary judgment. Both petitions were dismissed with costs against the petitioners. A
motion for reconsideration thereto was denied.

Hence, this petition.

On March 30, 1988, we issued a temporary restraining order to enjoin the enforcement of the questioned decision of the
appellate court. In a Resolution dated June 6, 1988, we gave due course to the petition.

The issue raised in the petition is whether or not the appellate court committed reversible error when it sustained the trial
court's summary judgment.

The petitioners submit that the appellate court committed such an error, to wit:

a. The rendition of Judge Mendoza's Summary Judgment was improper because petitioners' Complaint
and SBTC's Answer with Counterclaim raise triable issues of fact. The Court of Appeals, therefore, erred
when it sustained Judge Mendoza's Summary Judgment.

b. Assuming (the untrue) that there were no "genuine issues as to any material fact," the awards set out in
Judge Mendoza's Summary Judgment were rendered in violation of rules of evidence and laws and
jurisprudence on interest, penalties and attorney's fees. The appellate court, therefore, committed the
same violation when it upheld Judge Mendoza's Summary Judgment. (Rollo, p. 325).

A Summary Judgment may be rendered by a court upon motion of a party before trial and after submission of pleadings,
admissions, documents and/or affidavits and counter affidavits when it is clear that "except as to the amount of damages,
there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law."
(Rule 34, Rules of Court). By genuine issue is meant an issue of fact which calls for the presentation of evidence Cadirao v.
Estenzo, 132 SCRA 93) as distinguished from an issue which is sham, fictitious, contrived, set up in bad faith, or patently
unsubstantial as not to constitute a genuine issue for trial. (Vergara, Sr. v. Suelto, et al., G.R. No. 74766 December 21, 1987,
Cadirao v. Estenzo supra; Mercado, et al. v. Court of Appeals, G.R. No. L-44001 June 10, 1988) This can be determined by
the court on the basis of the pleadings, admissions, documents, affidavits and/or counter-affidavits submitted by the
parties to the court. (Section 3, Rule 34, Revised Rules of Court; Vergara v. Suelto supra; Cadirao v. Estenzo supra).

The pleadings, admissions and affidavits submitted in court in this case reveal the following facts:

In August 1981, Chemark was granted by respondent bank a credit line of P4.0 million which was increased in February
1982 to P20.0 million, to wit; Export loan line from P2.0 million to P15.00 million; Import LC/TR-from P2.0 million to P5.0
million. The terms and conditions of this P20 million credit are stated in the Credit Line Agreement dated February 8, 1982
(p. 254, Records). On this same day, February 8, 1982 the petitioners executed separate, but with similar terms, indemnity
agreements whereby they bound themselves jointly and severally with Chemark to pay respondent bank upon demand
and without excussion of whatever amount Chemark may be indebted to said bank by virtue of said credit line
accommodation including the substitution, renewals, extensions, increases and other amendments thereof; and that upon
default of Chemark, proper demands to pay were made on the petitioners to comply with their obligations. The three
indemnity agreements binding each of the petitioners contain the following provisions:

INDEMNITY AGREEMENT

KNOW ALL MEN BY THESE PRESENTS: That—

DYNETICS, INC., a corportion duly organized and existing under and by virtue of the laws of the
Philippines, with offices at the FTI Complex, Taguig, Metro Manila for and in consideration of the credit
 accommodation in the total amount of TWENTY MILLION (P20,000,000.00) PESOS granted by the
SECURITY BANK & TRUST COMPANY, a commercial banking corporation duly organized and existing under
and by virtue of the laws of the Philippines, with offices at 6778 Ayala Avenue, Makati, Metro Manila,
hereinafter referred to as the BANK, in favor of CHEMARK ELECTRIC MOTORS, INC., ... a corporation duly
organized and existing under and by virtue of the laws of the Philippines, with offices at the 2nd Floor,
Princess Building, Esteban Street, Legaspi Village, Makati, Metro Manila, hereinafter referred to as the
CLIENT, with the stipulated interests and charges thereon, evidenced by that/those certain AMENDED
CREDIT LINE AGREEMENT made and executed by and between the CLIENT and the BANK on even date
hereby bind(s) himself/themselves jointly and severally with the CLIENT in favor of the BANK for the
payment, upon demand and without benefit of excussion, of whatever amount or amounts the CLIENT
may be indebted to the BANK under and by virtue of aforesaid credit accommodation(s) including the
substitutions, renewals, extensions, increases, amendments, conversions and revivals of the aforesaid
credit accommodation(s), as well as of the amount or amounts of such other obligations that the CLIENT
may owe the BANK, whether direct or indirect, principal or secondary, as appears in the accounts, books
and records of the BANK, plus interest and expenses arising from any agreement or agreements that may
have heretofore been made, or may hereafter be executed by and between the parties thereto, including
the substitutions, renewals, extensions, increases, amendments, conversions and revivals of the aforesaid
credit accommodation(s), and further bind(s) himself/themselves with the CLIENT in favor of the BANK for
the faithful compliance of all the aforesaid credit accommodation(s), all of which are incorporated herein
and made part hereof by reference.

IN WITNESS WHEREOF, these presents are signed at Makati, Metro Manila on this 8th day of February,
1982. ... and/or its trust accounts funding this loan—

DYNETICS, INC.

(SGD.) ANTONIO M. GARCIA (SGD.) DOMINADOR GAMEZ

Signed in the Presence of.

(SGD.) JONA C. CAJUYONG (SGD.) TERESITA A. DE GUZMAN

(Original Records, pp. 306-307)

Both Dynetics and Matrix were authorized by their respective board of directors to execute the indemnity
agreements. In the case of Dynetics, Corporate Secretary Antonio Pastelero certified that during a meeting
of the Board of Directors held on December 29, 1981 at its office address, it was unanimously adopted
that the corporation "... undertake to jointly and severally guarantee the credit line of CHEMARK ELECTRIC
MOTORS, INC. in favor of the SECURITY BANK & TRUST COMPANY, in an amount not to exceed TWENTY
MILLION (20,000,000.00) PESOS" (p. 264, Original Records). In the case of MATRIX, Corporate Secretary
Rene J. Katigbak certified that at the meeting of the Board of Directors held on December 28, 1981, a
resolution was unanimously adopted to have the corporation "... jointly and severally guarantee the credit
line of CHEMARK ELECTRIC MOTORS, INC. in favor of the SECURITY BANK & TRUST COMPANY, in an
amount not to exceed TWENTY MILLION (P20,000,000.00) PESOS. (Original Records, p. 262)

Chemark then availed of the P20.0 million credit line and executed two (2) promissory notes covering the following
amounts drawn against the Export Loan Line, to wit:

a) The sum of P6,350,750.00 drawn on March 23, 1983 with interest and penalty at the rate indicated in
Promissory Note No. DLS/74/540/83 to mature on June 21, 1983 (p. 255, Original Records)

b) The sum of P8,649,250.00 drawn on August 9, 1983 with interest and penalty ac the rate indicated in
Promissory Note No. DLS/74/1358/83 to mature on September 8, 1983 (p. 256, Original Records)

These obligations were not paid by Chemark when they became due. Hence, the respondent bank demanded from the
petitioners under the indemnity agreements the payment of the outstanding obligations of Chemark.

Undoubtedly, the obligations of the petitioners to the respondents are clearly defined in the pleadings, admissions and the
unrebutted affidavit of Ms. Marquez who handles the Chemark account.

Nevertheless, the petitioners insist that their complaint for declaratory relief tenders genuine issues which should be
threshed out in a full-blown trial, to wit:

xxx xxx xxx

11.1 First Defense: that the principal obligation has not yet matured because SBTC, agreed to allow
Chemark a grace period within which to recover its liquidity and pay the debt.

11.1A This defense is pleaded in the following allegations of the Complaint:

6. In the aftermath of the assassination of Senator Benigno S. Aquino, Jr., on August 21, 1983, the
Philippine economy was plunged into a deep crisis. There was a massive flight of capital; the country's
balance of payments deteriorated; business and industry practically stood still; and the foreign debts of
the country could not be serviced; banks collapsed, the exchange rate between the Philippine Peso and US
Dollar tripled and there was practically no foreign exchange available in the country. The resultant
extremely adverse economic conditions were not foreseen or contemplated by persons or entities who
became parties to a contract. None of the parties to a contract expected nor did they intend that the terms
and conditions they agreed upon would operate under extreme adverse economic conditions.

7. Because of the recent economic developments here and abroad, the failure of one of the stockholders
of Chemark to comply with its commitments and Chemark's inability to collect substantial receivables
from its marketing representatives in the United States, Chemark started to suffer liquidity problems. As a
consequence, it was unable to pay its creditors, among whom is the defendant. However, Chemark had
more than sufficient assets to pay all its obligations including its obligations to the defendant, except that
its liquidity problems prevented it from paying its creditors.

8. Chemark started negotiating with the defendant for the restructuring of its obligations to the latter. For
this purpose, it submitted several proposed courses of action to the defendant whereby in time all of its
obligations to the defendant would be paid.

9. In the meantime, the defendant demanded payment from the plaintiffs of the obligations of Chemark.
Although plaintiffs are not legally liable for the payment of such obligations, they nonetheless, proposed
to the defendant that the latter allow Chemark to recover its liquidity until such time that it shall have
recovered its ability to pay its obligations. An agreement in principle was reached on this proposal and the
defendant committed itself to allow Chemark to recover from its liquidity problems and to refrain from
demanding payment of the loans of Chemark from the plaintiffs. (Emphasis supplied). (Rollo, pp. 328-329).

xxx xxx xxx

11.2 Second Defense: that SBTC and the petitioners did not intend to use petitioners' Indemnity
Agreements as collateral security for Chemark's loans and that SBTC extended the loan solely on
Chemark's viability as a business enterprise.

11.2A The Complaint pleads this defense in the following paragraphs:

5. ... when the defendant finally extended the loan to Chemark, it did so not because of the aforesaid
instruments (referring to the Indemnity Agreements) previously executed by the (petitioners) which, in
the meantime, were no longer valid and effective and intended by the parties as collateral security for
future Chemark loans, but because of defendant's assessment of the viability of Chemark's business
operations and interest income expected to be generated from the loans to Chemark. (Emphasis supplied)
(Rollo, pp. 329-330)

xxx xxx xxx

11.3 Third Defense: that Dynetic's execution of the Indemnity Agreement is contrary to its purposes and is
therefore ultra vires and unenforceable against it.

11.3A This defense is pleaded in the Complaint as follows:

13. Plaintiffs are not liable to the defendant under the Indemnity Agreement instruments xxx for the
following reasons:

xxx xxx xxx

(c) Assuming, without, conceding, that there is a valid consideration for the execution of the aforesaid
instruments and that said instruments continued to be valid and effective when the defendant extended a
credit accommodation to Chemark, said instruments are null and void insofar as Dynetics is concerned as
it is ultra vires, being contrary to the purpose of Dynetics, its powers, licenses and franchise : (Emphasis
supplied) (Rollo, pp. 332-333)
We find no material questions of facts tendered by these defenses as to the main issue on whether or not the petitioners
can be held liable to the respondent bank under their indemnity agreements.

The issue tendered in the first defense is "sham and fictitious" in the light of the terms of the indemnity agreements. Thus,
under the indemnity agreements, the petitioners bound themselves jointly and severally with Chemark in favor of the
respondent bank for the payment, upon demand and without benefit of excussion, of whatever amount or amounts
Chemark may be indebted to the respondent bank under and by virtue of the credit accommodations. (Emphasis supplied)
The economic conditions of the country are immaterial to the issue on the liability of the petitioners under their indemnity
agreements.

The issue raised in the second defense, on whether or not the indemnity agreements were intended as collaterals for
future Chemark loans is likewise sham and fictitious. Under the indemnity agreements, the petitioners bound themselves
to pay whatever amount Chemark may be indebted to the bank "under and by virtue of aforesaid credit accommodation(s)
including the substitutions, renewals, extensions, increases, amendments, conversions and revivals of the aforesaid credit
accommodation(s) ... (Emphasis supplied)

The argument as to whether or not Dynetics' execution of the indemnity agreement is contrary to its purposes and
therefore ultra vires and unenforceable against it does not tender a genuine issue. The record shows that Dynetics was
authorized to execute the indemnity agreements evidenced by the Corporate Secretary's certificate (p. 38, 264 Original
Records).

This was not rebutted.

Indeed, we find no genuine issues raised in the complaint which can not be resolved by the pleadings, admissions and the
affidavit of Charis Marquez submitted to the court. As the appellate court said:

Dynetics, Garcia and Matrix attempted to avoid liability by trying hard to create factual issues fit for trial.
The attempt is but a hodgepodge of legal arguments and conclusions which can be resolved without the
rituals of trial. Thus, Dynetics urges that there is need for trial to determine whether it can be compelled
to pay considering that SEC by its Order of September 27, 1984 has prohibited Chemark from paying its
creditors. The issue is strictly legal and can be decided by determining the character of liability of Dynetics
as joint and solidary debtor. Dynetics also argues that it raised the issue of lack of consideration which
must be tried on the merits. The issue deserves scant consideration for the parties' Indemnity Agreement
specifies the consideration to be the grant of credit accommodation to Chemark in the sum of P20 M. Also
what is posed is a legal issue resolvable in light of the character of Dynetics as a joint and solidary debtor.
Dynetics also asseverates that it did not intend its Indemnity Agreement as collaterals for future Chemark
loans. This is a clear pretense considering that again under its Indemnity Agreement, Dynetics clearly
bound itself to pay whatever amount Chemark may be indebted to Security Bank "under and by virtue of
the aforesaid credit accommodation(s) including the substitutions, renewals, extensions, increases,
amendments, conversions and revivals of aforesaid credit accommodation(s.)" There is nothing on record
to substantiate the pretense of mistake of Dynetics. (Rollo, p. 121)

xxx xxx xxx

Then Dynetics argues that it has raised the issue of novation in light of the new loan contracts between
Security Bank and Chemark. Again, the alleged new contracts are established facts and need not be the
subject of trial. Upon their basis, the court can conclude whether there is novation of contract. (Rollo, P.
125)

The petitioners also assail the awards of penalty charges at 36% per annum and interest at 18% and 24% per annum
respectively on the loans. They contend that the interests are excessive and are not sustained by the evidence because the
rate of interest stipulated in the promissory notes is only 11 % per annum.

The lower courts based the computation of interests and penalty charges on the affidavit of Charis Marquez, Assistant
Manager of the Corporate Banking Group of Security Bank & Trust Co. Marquez was the account officer who handled the
account of Chemark. The pertinent portions of the affidavit read as follows:

22. As per statements of Accounts dated June l5, 1985, under the said promissory notes (Annexes "2" and
"3" hereof) covered by the subject Indemnity Agreements (Annexes "4", "7" and "8" hereof), the total
outstanding obligation of Dynetics, Inc., Matrix Management & Trading Corporation and Antonio M.
Garcia to Security Bank & Trust Co. was P38,189,038.27, including interest and charges. Attached hereto
as Annexes "9" and "l0" are copies of said Statements of Accounts dated June 15, 1985;

23. In the said Statements of Accounts dated June 15, 1985, we charged 18% and 25% per annum,
respectively, because the subject loans (Annexes "2" and "3" hereof) were intended to be rediscounted at
the Central Bank at 11% per annum. However, when Chemark Electric Motors, Inc. failed to give us the
 required letter of credit which was a requirement of the Central Bank, we charged them 18% and 24%
instead of 11% interest per annum. These higher interest charges were based on and authorized under
our Credit Proposal, copies of which are hereto attached as Annexes "11" to "11-B". (Original Records, p.
252)

The increased interest rates are expressly provided for in the amended credit line agreement and in the two promissory
notes executed by Chemark in favor of Security Bank & Trust Co. We find no reversible error in the award of interests.

The penalty of 36% per annum is provided in the promissory notes (Annexes "3", "4" Affidavit), as follows:

If this note is not fully paid when due, the undersigned shall pay, in addition to the stipulated interest, a
penalty of 3% per month on the total outstanding principal and interest due and unpaid. ... (Original
Records, p. 256)

The affidavit and supporting documents were attached to the respondent bank's motion for summary judgment. The
petitioners failed to oppose Marquez' affidavit in their "Oppositions" to the motion for summary judgment. Neither did
they submit counter- affidavits, as was their right, to oppose these amounts due from them including the increased
interests and penalty charges. Under these circumstances, the respondent bank was entitled to summary judgment
(Philippine National Bank v. Phil. Leather Co., Inc., et al. 105 Phil. 400; See also Mercado, et al. v. Court of
Appeals supra).<äre||anº•1àw>  As earlier stated, the lower court committed no reversible error in awarding the
questioned interests. We cannot, however, agree with the appellate court as regards the award of penalty charges at 36%
per annum.

Penalty interests are in the nature of liquidated damages (Cumagun v. Philippine American Insurance Co., Inc., et al. G.R.
No. 81453 August 15, 1988; Lambert v. Fox, 26 Phil. 588) and may be equitably reduced by the courts if they are iniquitous
or unconscionable. (See Articles 1229, 2227, New Civil Code).

The records show that on the first loan, the principal of which is P6,350,750.00, the penalty charges as of June 15, 1986 are
already equivalent to P6,774,378.06 (p. 265, Original Records) and that on the second loan, the principal of which is
P8,649,250.00 the penalty charges as of June 15, 1985 are equivalent to P8,662,008.53. (p. 266, Original Records) The
P6,774,378.06 penalty charges in the first loan would have been earned by the private respondent after only 725 days (1
year and 360 days) of delay in the payment of the loan while the P8,662,008.53 penalty charges would have been earned
by the private respondent after only 646 days (1 year and 281 days) of delay in the payment of the loan. The figures from
1985 to 1988 would amount to several times the principal loans.

We agree with the petitioner that the penalty charges are excessive and unconscionable. The interest charges are enough
punishment for the petitioners' failure to comply with their obligations.

Finally, the petitioners question the amount for attorney's fees equivalent to 10% of their obligation.

Again, Chemark's promissory notes provide for the award of attorney's fees in case of default to pay the loans, to wit:

xxx xxx xxx

If this note is not fully paid when due, the undersigned shall pay, in addition to the stipulated interest, a
penalty of 3% per month on the total outstanding principal and interest due and unpaid. The undersigned
shall also pay, as and for attorney's fee, a sum equivalent to 20% of the total amount due under this note
plus expenses and costs of collection, in case this note is placed in the hands of an attorney for collection.
(See Annexes "2", "3", Affidavit of Charis Marquez) (Original Records, p. 255)

The award for attorney's fees is justified and, in fact, is even lower than that agreed upon by the parties.

WHEREFORE, the instant petition is DISMISSED. The questioned decision and resolution of the Court of Appeals are
AFFIRMED except for the award of penalty charges which is stricken from the judgment. The Temporary Restraining Order
issued on March 30, 1988 is LIFTED. Costs against the petitioners
SECOND DIVISION G.R. No. 115851, June 20, 2001 LA JOLLA, INC., PETITIONER, VS. COURT OF APPEALS AND PELAGIA VIRAY
DE AGUILAR, RESPONDENTS.

DECISION

DE LEON, JR., J.:

Before us is a petition for review on certiorari of the Decision[1] and the Resolution[2] of the Court of Appeals dated
February 21, 1994 and June 10, 1994, respectively, which extended the period of lease of private respondent Pelagia Viray
de Aguilar over a portion of the building situated at No. 440 Rizal Avenue, Sta. Cruz, Manila to two (2) years from finality of
decision.

Petitioner is the owner of the land and building situated at Nos. 434 and 440 Rizal Avenue, Sta. Cruz, Manila having
acquired the same through a Deed of Sale with Mortgage on October 13, 1964. Private respondent, as early as then, was
an occupant of a portion of the building situated at 440 Rizal Avenue, Sta. Cruz, Manila by way of a verbal contract of sub-
lease on a month-to-month basis from a certain Leon Co Santos.

It appears that on November 14, 1964, petitioner notified the private respondent that it was terminating her lease over the
premises in question effective December 31, 1964 and demanded that she vacate the premises, since petitioner intended
that the building be demolished for the construction of a new building. When private respondent failed to vacate despite
demand, and further failed to pay the rentals from November 1, 1964, petitioner instituted an ejectment suit against
private respondent. On March 27, 1965, a decision[3] was rendered in favor of petitioner, the dispositive portion of which
reads:

IN VIEW OF THE FOREGOING, judgment by default is hereby rendered for the plaintiff and against the defendant, ordering
the latter and all persons claiming under her to vacate the premises described in the complaint, to pay the sum of
P1,200.00 as monthly rental from November 1, 1964 until said premises are actually vacated, to pay also the sum of
P300.00 as and for attorney's fees, plus costs.

SO ORDERED.

Private respondent appealed from said decision, but her appeal was dismissed by the then Court of First Instance of
Manila, Branch XV, in its Order dated November 26, 1965.[4] Undaunted, private respondent interposed a petition for
review with the Court of Appeals; however, the same was dismissed.[5] The said decision became final and executory on
October 23, 1966. Nonetheless, private respondent interposed an appeal by certiorari with this Court, which petition was
dismissed by the Court, for being moot and academic, after considering private respondent's manifestation that she was
still occupying the leased premises based on adjusted monthly rentals.[6]

On August 6, 1976, petitioner instituted the second suit for ejectment against private respondent on the strength of
private respondent's refusal to accede to the 50% increase of the monthly rental which was then at P2,400.00 and to
vacate the premises in question. On June 8, 1978, a decision[7] was rendered by the City Court of Manila, Branch II, the
dispositive portion of which, in part, reads:

Therefore, its is the considered finding of this Court that [La Jolla, Inc.] has proved by more than a preponderance of
evidence, the allegations contained in its complaint and hereby orders [Pelagia Viray de Aguilar] to vacate the premises
leased, to pay the increase in rentals from November, 1974 to December, 1975 in the total amount of P18,800.00 to pay
monthly rental at the rate of P3,600.00 from January, 1976, until [Pelagia Viray de Aguilar] actually vacates the premises,
and to pay the costs of suit. All sums deposited in Court by [Pelagia Viray de Aguilar] shall be credited to [her] liabilities and
deducted therefrom, the balance payable to [La Jolla, Inc.]. xxx

SO ORDERED.

On appeal, the Court of First Instance of Manila, Branch XXIV, rendered a decision[8] on July 3, 1979, the decretal portion
of which reads:

PREMISES CONSIDERED, the judgment appealed from is hereby modified to the end that [Pelagia Viray de Aguilar] is
ordered to pay the [La Jolla, Inc.] the amount of P10,456.32 as reasonable increase in rental of the premises in question for
the period covering November, 1974 to December, 1975 within thirty (30) days from receipt of this Decision, and,
thereafter, to pay the monthly sum of P3,186.88 until [Pelagia Viray de Aguilar] finally vacates the premises. Without
pronouncement as to costs.

SO ORDERED.

No appeal from said decision was filed, hence, it became final and executory.

On February 11, 1989, petitioner notified private respondent of the termination of her lease effective February 28, 1989
over the property situated in 440 Rizal Avenue, Sta. Cruz, Manila on the grounds that (a) the lease being on a month-to-
month basis, it is terminated at the end of every month; and (b) violation of the terms and conditions of the lease by sub-
leasing a portion of the premises without the consent of the owner. Petitioner, therefore, demanded that private
respondent vacate the subject premises by February 28, 1989.[9]

Private respondent failed to vacate the leased premised despite demand, hence, petitioner filed the third complaint for
ejectment, dated August 31, 1989, raising as an additional cause of action the petitioner's right to receive reasonable
compensation from private respondent in the amount of P15,000.00 for the unauthorized use by private respondent of the
premises as well as attorney's fees and litigation expenses in the amount of P20,000.00, plus exemplary damages and
costs.[10]

In her Answer, private respondent interposed as an affirmative defense, among others, that petitioner had no cause of
action, that petitioner's claim was barred by prior judgment in the second ejectment suit, Civil Case No. 121890, and that
petitioner could not demand an increase in rental since the amount fixed at P3,186.88 a month in said prior decision had
become res judicata.[11]

On May 6, 1992, a decision[12] was rendered by the Metropolitan Trial Court of Manila, Branch V, the decretal portion of
which reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and against the defendant
PELAGIA VIRAY DE AGUILAR ordering the latter and all the persons claiming rights under her to vacate the premises located
at No. 440 Rizal Avenue, Sta. Cruz, Manila and deliver the peaceful possession thereof to the plaintiff; to pay the plaintiff
the amount of P15,000.00 a month as reasonable compensation for the use and occupation of said premises from March
1989 until such time as defendant shall have actually vacated the same; ordering the defendant to pay the sum of
P10,000.00 as and for attorney's fees and expenses of litigation plus the costs of suit.

SO ORDERED.
On appeal, the above decision was affirmed by the Regional Trial Court of Manila, Branch 4.[13] Thereafter, private
respondent interposed a petition for review before the Court of Appeals. Acting on the petition, the appellate court issued
on February 21, 1994 its decision,[14] the decretal portion of which reads:

"WHEREFORE, the MTC decision in Civil Case No. 129779 CV, and that of the RTC in Civil Case no. 92-61720 subject of this
petition for review are hereby MODIFIED to read as follows:

The lease of defendant-petitioner Pelagia Viray de Aguilar over the premises at No. 440 Rizal Avenue, Sta. Cruz, Manila is
hereby extended and fixed for a period of two (2) years from the date of finality of this decision at a prospective monthly
rental of P15,000.00; and, for the use and occupation of the subject premises from March 1989 until the date of finality of
this decision, defendant-petitioner is ordered to pay plaintiff-respondent La Jolla, Inc. a reasonable compensation for the
use and occupation of the subject premises at the rate of P9,000.00 monthly, provided that whatever monthly amounts
defendant-petitioner has paid, by way of rental or for use of said premises during the period, shall be deducted from or
offset against such compensation; and, furthermore, defendant-petitioner shall pay P10,000.00 attorney's fees and
expenses of litigation plus the costs of suit. No pronouncement as to costs in this petition."[15]

SO ORDERED.

To support its decision to extend the period of lease to two (2) years from the finality of decision, the appellate court
declared:

It is undisputed that defendant has been leasing the premises for more than 45 years as of 1992. The record does not show
that she has ever defaulted in the payment of rentals. Because of the length of time she has leased the subject premises, it
is our sense that in the broader interest of justice and equity the lease in question should be extended and fixed for a
period of two (2) years under the authority of Art. 1687 of the Civil Code. This article provides that "even though a monthly
rent is paid, and no period for the lease has been set, the courts may fix a longer term for the lease after the lessee has
occupied the premises for over one year. x x x ." The reason for this provision, according to Mr. Justice Paras, in his Civil
Code of the Philippines Annotated (Vol. V, Twelfth Edition [1990], pp. 382-383), is obviously to reward the long-staying
lessee.

That the courts have authority to fix the period of lease under Art. 1687 was enunciated in F.S. Divinagracia Agro
Commercial, Inc. v. Court of Appeals (No. L-47350, 104 SCRA, 180, 186 [1981]). There the Supreme Court ruled that if Art.
1686 and Art. 1197 of the Civil Code are jointly considered, it will at once be evident that "the court is accorded the power
to fix a longer term for the lease, which power is potestative or discretionary in nature. This prerogative is addressed to the
court's sound judgment and is controlled by equitable considerations. x x x ."

Furthermore, that this Court can here effect the extension of the lease in question and fix its term by this decision is also
authorized by F.S. Divinagracia Agro Commercial in these words:

"x x x The exercise of the power given to the Court in Article 1687 to extend the period of the lease when the defendant
has been in occupancy of the premises for more than a year, does not contemplate a separate action for that purpose.
That power may be exercised as an incident in the action for ejectment itself and by the court having jurisdiction over it
(Ramirez vs. Sy Chit, 21 SCRA 1364). Moreover, We cannot lose sight of the fact that it would be an idle and costly
procedure to require the lessee to file another action to have the term of the lease fixed, with all the possible delays and
inconveniences attendant upon a lawsuit."[16]

Partial Reconsideration of the above decision was sought by petitioner La Jolla, Inc. contending, among others, that the
extension was not within the issues raised in the case and granting such a relief violated petitioner's constitutional right to
due process. However, the appellate court, in a Resolution dated June 10, 1994, denied reconsideration of its decision.[17]

Hence, the instant petition anchored on a lone error, to wit:

Respondent Court gravely abused its discretion in motu propio, extending the period of private respondent's lease
notwithstanding the same being for a definite period.

The instant petition is meritorious.

Article 1687 of the Civil Code, which the respondent Court of Appeals cited to support the extension of the lease, provides:

If the period for the lease has not been fixed, it is understood to be from year to year, if the rent agreed upon is annual;
from month to month, if it is monthly; from week to week, if the rent is weekly; and from day to day, if the rent is paid
daily. However, even though a monthly rent is paid, and no period for the lease has been set, the courts may fix a longer
term for the lease after the lessee has occupied the premises for over one year. If the rent is weekly, the court may
likewise determine a longer period after the lessee has been in possession of over six months. In the case of daily rent, the
court may also fix a longer period after the lessee has stayed in the place for over one month.

This Court has settled that the power of the court to "fix a longer term for lease is potestative or discretionary - 'may' is the
word - to be exercised or not in accordance with the particular circumstances of the case; a longer term to be granted
where equities come into play, demanding extension, to be denied where none appear, always with due deference to the
parties freedom to contract."[18]

In the case at bar, it is undisputed that the lease was verbal, that the rentals were paid monthly, and that proper demand
and notice by the lessor to vacate was given. Under existing jurisprudence, a verbal contract of lease between owner and
lessee on a month-to-month basis is a lease with definite period and such expires after the last day of any given thirty-day
period, upon proper demand and notice by the lessor to vacate.[19] Thus, the appellate court should not have extended
the period of lease considering that the potestative authority of the courts to fix a longer term for a lease under Article
1687 of the Civil Code applies only to cases where there is no period fixed by the parties.[20]

Furthermore, Article 1675 of the Civil Code excludes cases falling under Article 1673 (which provides among others, that
the lessor may judicially eject the lessee when the period agreed upon or that which is fixed has expired) from the cases
wherein, pursuant to Article 1687, courts may fix a longer period of lease. All these considered, this Court holds that the
Court of Appeals erred in granting an extension period of two (2) years for the lease when the underlying facts and
circumstance of the case did not warrant the same.

Where petitioner have been deprived of its possession over the leased premises for so long a time, and it is shown that,
indeed, the private respondent was the recipient of substantial benefits while petitioner was unable to have the full use
and enjoyment of a considerable portion of its valuable property, such militates against further deprivation by fixing a
period of extension. Basic common law principle of fairness and equity shuns property entailment that borders on
perpetuity to the exclusion of the owner. Be that as it may, since this case has been pending from the time it was filed in
1994 until now, private respondent has effectively obtained an extension of nearly seven (7) years which is long enough for
her to find another place.[21]

WHEREFORE, the subject petition is hereby GRANTED. The Decision and the Resolution of the Court of Appeals dated
February 21, 1994 and June 10, 1994, respectively, in CA-G.R. SP No. 29608 are hereby MODIFIED by deleting the extension
of the lease for a period of two (2) years.

SO ORDERED.
G.R. No. 141761             July 28, 2006

BANKARD, INC., petitioner,
vs.
DR. ANTONIO NOVAK FELICIANO, respondent.

DECISION

PUNO, J.:

Before us is a petition for review under Rule 45 of the May 31, 1999 Decision 1 and January 28, 2000 Resolution2 of the
Court of Appeals in CA-G.R. CV No. 56734 which modified the July 22, 1997 Decision 3 of the Regional Trial Court (RTC) of
Makati City, Branch 148, in Civil Case No. 95-1492.

The facts are as follows:

Respondent Dr. Antonio Novak Feliciano is the holder of PCIBank Mastercard No. 5407-2610-0000-5864, issued and
managed by petitioner Bankard, Inc. An extension of the card, PCIBank Mastercard No. 5407-2611-0000-5863, was issued
to his wife, Mrs. Marietta N. Feliciano.

On June 19, 1995, respondent used his PCIBank Mastercard No. 5407-2610-0000-5864 to pay a breakfast bill in Toronto,
Canada. The card was, however, dishonored for payment. Respondent's guests, Dr. Bellaflor Bumanlag and three other
Filipino doctors based in Canada, had to pay the bill. Respondent immediately called the US toll-free number of petitioner
to inquire on the cause of dishonor. He was informed that the reason was the nonpayment of his last billing statement.
Respondent denied that he failed to pay, and requested the person on the line to verify the correct status of his credit card
again. Respondent likewise called his secretary in the Philippines to confirm the fact of payment, and requested her to
advise petitioner's office in Manila.

The following day, respondent met with Dr. Bumanlag to reimburse her for the cost of the breakfast the previous day.
Thereafter, Dr. Bumanlag accompanied the respondent to the Eddie Bauer Fairview Mall, a prestigious mall in Toronto,
where the latter bought several dressing items. Respondent presented his PCIBank Mastercard No. 5407-2610-0000-5864
for payment. Again, the card was dishonored to the embarrassment of the respondent. Worse, the manager of the
department store confiscated the card in front of Dr. Bumanlag and other shoppers. Respondent protested but the
manager called security and forcibly retained the card. To end the commotion that ensued, respondent just asked for a
receipt for the confiscated card.

On October 5, 1995, respondent filed a complaint against petitioner Bankard, Inc. and Mastercard International for breach
of contractual rights and damages before the RTC-Makati City, docketed as Civil Case No. 95-1492. Respondent alleged that
he is a holder in good standing for more than ten (10) years of PCIBank Mastercard No. 5407-2610-0000-5864, and that
petitioner and Mastercard International reneged on their agreement by suspending the services of the card without notice
to him. As a result of the suspension and confiscation of his card in Toronto, Canada, respondent suffered social
humiliation, embarrassment and besmirched reputation. The Canadian-based doctors, who were his guests during the
breakfast meeting in Toronto and whom he expected to donate at least fifty thousand Canadian dollars to his charitable
clinic in Makati, withdrew their contributions because of the incidents. Respondent prayed for P1,000,000.00 in actual
damages representing the peso equivalent of the aborted contributions, P1,000,000.00 for moral damages, P200,000.00
for exemplary damages, and P100,000.00 for attorney's fees and costs of suit.

In defense, petitioner claimed due diligence before suspending the privileges of respondent's credit card. Petitioner alleged
that on June 13, 1995, it received a fraud alert or warning bulletin 4 from Bank International Indonesia. A fraud alert or
warning bulletin is a notice by telex 5 or telephone addressed to the issuer of a card when a fraudulent or counterfeit use of
the card has been detected or suspected by an acquirer. In the June 13, 1995 fraud alert, PCIBank Mastercard No. 5407-
2611-0000-5863 was listed as having had a suspected counterfeit transaction in Indonesia on June 11, 1995. Petitioner's
fraud analyst, Mr. Ferdinand Lopez, then accessed petitioner's directory of cardholders to identify the holder of PCIBank
Mastercard No. 5407-2611-0000-5863. The directory showed that the principal cardholder for PCIBank Mastercard No.
5407-2611-0000-5863 was respondent Dr. Antonio Novak Feliciano, and that the credit card was the extension card issued
to his wife, Marietta Feliciano. Mr. Lopez immediately called respondent at his clinic but the latter was not there. Neither
he nor his wife was at home. Consequently, Mr. Lopez left his name, telephone number, and a message for respondent to
return his call, to the woman who answered the phone. He likewise inquired from the woman whether respondent and his
wife were in the country or whether they had just arrived from abroad. The woman answered "no." With that information
and considering that Indonesia has a high incidence of counterfeit credit card transactions, Mr. Lopez concluded that the
transaction involving PCIBank Mastercard No. 5407-2611-0000-5863 was counterfeit. He sent a notice of card account
blocking to the Authorization Department. He likewise sent a written notice to the Felicianos that PCIBank Mastercard No.
5407-2611-0000-5863 had a counterfeit movement in another country and that petitioner is temporarily suspending the
services of the card including the principal card, PCIBank Mastercard No. 5407-2610-0000-5864, pending investigation on
the matter. The Felicianos were required to submit an affidavit of disclaim and photocopies of their passports. The
Felicianos did not respond to the notification.

On July 22, 1997, the trial court decided the case in favor of respondent. 6It found that petitioner's negligence was the
immediate and proximate cause of respondent's injury. Although the claim for actual damages was disallowed for lack of
proof, petitioner was ordered to pay: (1) P1,000,000.00 as moral damages, (2) P200,000.00 as exemplary damages, and
(3) P100,000.00 for attorney's fees and costs of suit. Petitioner was likewise ordered to restore respondent's good name
with the merchant establishment in Canada which confiscated his Mastercard, and to return the card with apologies to
respondent.

Petitioner assailed the decision in a petition for review with the Court of Appeals. In its Decision dated May 31, 1999, 7the
Court of Appeals affirmed the trial court's finding of negligence on the part of the petitioner. However, the appellate court
modified the trial court's decision by deleting the award for exemplary damages, and by reducing moral damages
to P800,000.00, and attorney's fees and costs of suit to P50,000.00. Actual damages was still disallowed for lack of proof.
Petitioner's motion for partial reconsideration was denied. Hence, this petition.

Petitioner assigns the following errors:

I.

THE COURT OF APPEALS ERRED IN AWARDING RESPONDENT MORAL DAMAGES IN THE EXCESSIVE AND
UNPRECEDENTED AMOUNT OF P800,000.00, WITHOUT ANY LEGAL OR FACTUAL BASIS, CONSIDERING THAT:

A. NO EVIDENCE WAS PRESENTED TO SHOW THAT PETITIONER ACTED FRAUDULENTLY OR IN BAD FAITH
OR IN A WANTON, RECKLESS AND OPPRESSIVE MANNER IN SUSPENDING RESPONDENT'S CREDIT CARD.

B. EVEN AS IT WAS RESPONDENT'S DUTY TO AFFIRMATIVELY PROVE HIS CLAIM FOR MORAL DAMAGES,
PETITIONER HAS DULY ESTABLISHED THAT IT WAS PROMPTED TO SUSPEND THE CREDIT CARD OF
RESPONDENT SOLELY TO PROTECT ITSELF AND THE RESPONDENT FROM ANYONE WRONGFULLY USING
HIS CREDIT CARD AND NOT OUT OF MALICE, OR ANY DELIBERATE INTENT TO CAUSE HARM TO
RESPONDENT.

C. CONTRARY TO THE FINDINGS OF THE TRIAL COURT WHICH THE COURT OF APPEALS AFFIRMED,
PETITIONER WAS NOT GUILTY OF NEGLIGENCE IN SUSPENDING RESPONDENT'S CREDIT CARD.
ASSUMING ARGUENDO THAT PETITIONER WAS NEGLIGENT IN DOING SO, THE SAME DOES NOT
WARRANT A FINDING OF MALICE OR BAD FAITH AS TO JUSTIFY GRANTING AN AWARD OF MORAL
DAMAGES IN THE STAGGERING AMOUNT OF P800,000.00.

D. IN THE ABSENCE OF AN AWARD OF ACTUAL DAMAGES, RESPONDENT IS NOT ENTITLED TO MORAL

DAMAGES.

E. THE HONORABLE COURT HAS REPEATEDLY ADMONISHED AGAINST GRANTING EXCESSIVE MORAL
DAMAGES WHICH ARE NOT INTENDED TO ENRICH A COMPLAINANT AT THE EXPENSE OF A DEFENDANT.

II.

THE COURT OF APPEALS ERRED IN AWARDING ATTORNEY'S FEES TO RESPONDENT CONSIDERING THAT
PETITIONER ACTED IN GOOD FAITH AND WITH DUE DILIGENCE IN SUSPENDING RESPONDENT'S CREDIT CARD.

III.

THE COURT OF APPEALS ERRED IN TOTALLY DISREGARDING THE CONTRACT BETWEEN THE PARTIES WHICH,
AMONG OTHERS, EXPRESSLY STIPULATES THAT RESPONDENT WOULD HOLD PETITIONER "FREE AND HARMLESS
FROM ANY CLAIM OF DAMAGES ARISING FROM THE FAILURE OF ANY ACCREDITED ESTABLISHMENT TO HONOR"
HIS CREDIT CARD.

IV.
 THE COURT OF APPEALS ERRED IN NOT FINDING THAT RESPONDENT WAS CONTRIBUTORILY NEGLIGENT IN
CONTINUING TO USE HIS CREDIT CARD ON 20 JUNE 1995 DESPITE THE FACT THAT IT HAD ALREADY BEEN
PREVIOUSLY DISHONORED THE DAY BEFORE WHEN HE FIRST ATTEMPTED TO USE IT AFTER HIS PURPORTED
BREAKFAST MEETING WITH SOME DOCTORS.

We shall now resolve the issue of whether petitioner is liable to respondent for moral damages and attorney's fees.

The award of moral damages is governed by Section 1, Chapter 3, Title XVIII, Book IV of the  Civil Code. Article 2220
provides:

Willful injury to property may be a legal ground for awarding moral damages if the court should find that, under
the circumstances, such damages are justly due. The same rule applies to breaches of contract where the
defendant acted fraudulently or in bad faith. (emphasis added)

Under the foregoing, moral damages may be recovered in culpa contractual where the defendant acted in bad faith or
with malice in the breach of the contract. 8Malice or bad faith implies moral obliquity or a conscious and intentional design
to do a wrongful act for a dishonest

purpose.9However,a conscious or intentional design need not always be present since negligence may occasionally be so
gross as to amount to malice or bad faith.10 Bad faith, in the context of Art. 2220 of the Civil Code,
includes gross  negligence.11 Thus, we have held in a number of cases that moral damages may be awarded in culpa
contractual or breach of contract when the defendant acted fraudulently or in bad faith, or is guilty of gross negligence
amounting to bad faith, or in wanton disregard of his contractual obligations. 12

Petitioner alleged that it suspended the privileges of respondent's credit card only after it received the fraud alert from
Indonesia, and after its fraud analyst, Mr. Lopez, tried to contact both the respondent and his wife at his clinic and at
home. At first blush, bad faith or malice appears not to be attributable to petitioner. However, we find that its efforts at
personally contacting respondent regarding the suspension of his credit card fall short of the degree of diligence required
by the circumstances.

Petitioner received the fraud alert on June 13, 1995. The following day, petitioner's fraud analyst tried to call up
respondent at his clinic and at home, to no avail. Apart from this attempt, however, no further effort was exerted to
personally inform respondent about the cancellation of his card. Petitioner had more than enough time within which to do
so considering that it was not until four (4) days later or June 18, 1995 that respondent left for Canada. But, petitioner's
Mr. Lopez contented himself with just leaving a message with an unidentified woman in respondent's house for the latter
to return his call. Before receiving the return call, respondent's PCIBank Mastercard No. 5407-2610-0000-5864 and that of
his wife, PCIBank Mastercard No. 5407-2611-0000-5863, had been blocked on June 15, 1995. To be sure, a notice of card
account blocking was sent to respondent. However, by the ordinary course of mail, the notice was not expected to reach
respondent for several days yet. Despite the possibility that respondent or his wife may have occasion to use their credit
cards, petitioner's fraud analyst made no further attempt to contact and warn them. Thus, respondent left for Canada on
June 18, 1995 armed with his PCIBank Mastercard No. 5407-2610-0000-5864 but totally unaware that the card had been
blocked three (3) days previously, and that he was not to use the same.

Petitioner claims that it suspended respondent's card to protect him from fraudulent transactions. However, while
petitioner's motive has to be lauded, we find it lamentable that petitioner was not equally zealous in protecting
respondent from potentially embarrassing and humiliating situations that may arise from the unsuspecting use of his
suspended PCIBank Mastercard No. 5407-2610-0000-5864. Considering the widespread use of access devices in
commercial and other transactions,13 petitioner and other issuers of credit cards should not only guard against fraudulent
uses of credit cards but should also be protective of genuine uses thereof by the true cardholders. In the case at bar, the
duty is much more demanding for the evidence shows that respondent is a credit cardholder for more than ten (10) years
in good standing, and has not been shown to have violated any of the provisions of his credit card agreement with
petitioner. Considering the attendant circumstances, we find petitioner to have been grossly negligent in suspending
respondent's credit card. To reiterate, moral damages may be awarded in a breach of contract when the defendant acted
fraudulently or in bad faith, or is guilty of gross negligence amounting to bad faith. 14

With respect to the amount of moral damages to be awarded, the well-entrenched principle is that the grant thereof
depends upon the discretion of the court considering the circumstances of each case. 15 In the case at bar, it is undisputed
that respondent's PCIBank Mastercard No. 5407-2610-0000-5864 was dishonored in a foreign country where the
respondent was not expected to have family members or close friends nearby to lend him a helping hand. It was twice
dishonored in public places. Worse, the card was first dishonored during a breakfast-cum-business meeting with respected
medical colleagues based in that country. Respondent had absolutely no inkling then that there was a problem with his
card. Moreover, he had no reason to think that something was amiss since he is a member in good standing for more than
ten (10) years and had no previous bad experience with the card. However, since moral damages are patently not meant to
enrich the complainant at the expense of the defendant and should only be commensurate with the actual loss or injury
suffered,16 we reduce the amount awarded by the Court of Appeals from P800,000.00 to P500,000.00.
We likewise affirm the award for attorney's fees. Plaintiff was compelled to litigate to protect his interest, and the lower
courts deemed it just and equitable to award him attorney's fees. 17 The respondent had to vindicate his rights up to the
highest court of the land.

IN VIEW WHEREOF, the petition is DENIED. The assailed Decision of the Court of Appeals, dated May 31, 1999, granting
moral damages and attorney's fees to respondent, as well as its Resolution dated January 28, 2000 in CA-G.R. CV No.
56734, is AFFIRMED with the sole modification that the amount of moral damages is REDUCED to P500,000.00.