FIRST DIVISION

The essential facts of the case, as recounted by the trial court, are as follows:
SOLEDAD LEONOR PEA
SUATENGCO and ANTONIO
ESTEBAN SUATENGCO, Complainants,

G.R. No. 162729

Present:
PUNO, C.J., Chairperson,
CARPIO,
CHICO-NAZARIO,*
VELASCO, JR.,** and
LEONARDO-DE CASTRO,

- versus CARMENCITA O. REYES,

Respondent.

Promulgated:
December 17, 2008

A perusal of the record showed that notwithstanding the leniency

graciously observed by this court in giving defendants several extensions of time to
file their answer with responsive pleading, they failed to do the same thus, upon
motion of plaintiffs counsel, defendants were declared as in default on October 27,
1995 and the ex-parte reception of plaintiffs evidence was delegated to the Clerk of
Court.

x------------------------------------------------------------------------------------------x

At the ex-parte hearing, ATTY. EDMUNDO O. REYES, JR., a lawyer

by profession connected with the Siguion Reyna, Montecillo and Ongsiako Law
Offices, testified that he is the attorney-in-fact of his mother Congresswoman
Carmencita O. Reyes, herein plaintiff, to enter into and execute, among other acts,
any agreement with the defendant Soledad Leonor Pea Suatengco to collect the
amount of around P1.4 MILLION and to hold the same in trust for her as shown by
a Special Power of Attorney marked Exhibits A to A-2.

DECISION

LEONARDO-DE CASTRO, J.:

[1]

This resolves the petition for review on certiorari seeking the modification of the Decision dated October
29, 2003 and the Resolution[2] dated March 10, 2004 of the Court of Appeals (CA) in CA-G.R. CV No.
53185. The assailed decision affirmed with modification the Decision [3] of the Regional Trial Court (RTC) of
Marinduque, Branch 30 in Civil Case No. 95-4 in an action for collection of a sum of money with damages
commenced by herein respondent, Carmencita O. Reyes against herein petitioners, spouses Soledad Leonor
Pea Suatengco (also known as Sylvia Pea Suatengco) and Antonio Esteban Suatengco.

This is an action for Sum of Money with Damages filed by

Carmencita O. Reyes against defendants [petitioners] Spouses Soledad Leonor Pea
and Antonio Esteban Suatengco, wherein plaintiff (respondent) claimed that
sometime in the first quarter of 1994, defendant Sylvia (Soledad) approached her
for the purpose of borrowing a sum of money in order to pay her obligation to
Philippine Phosphate Fertilizer Corporation (Philphos for brevity). On May 31,
1994, plaintiff paid Philphos the amount of P1,336,313.00 and by reason
thereof defendants Spouses Sylvia (Soledad) and Antonio executed on June 24,
1994 a Promissory Note binding themselves jointly and severally to pay plaintiff
the said amount in 31 monthly installments beginning June 30, 1994. Of the
amount, however, only one (1) payment in the amount of P15,000.00 on July 27,
1994 have been made by defendants. That pursuant to a specific clause in the
Promissory Note, defendants 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. As of March 31, 1995 defendants owe plaintiff P1,321,313.00
exclusive of interest, other charges which is already due and demandable but
remains unpaid, hence this collection suit with prayer for moral damages and
attorneys fees.

Confronted with a document styled as Promissory Note dated June 24,

1994 (Exhibit B), he identified the signatures of Soledad Pea Suatengco (also
known as Sylvia Pea Suatengco) (Exhs. B-1, B-5, B-10 and B-13), Antonio
Suatengco (Exhs. B-2, B-6, B-11 and B-14), Atty. Domingo Ganuelas (Exhs. B-3,
B-7, B-9 and B-15) and his own signatures (Exhs. B-4, B-8, B-12 and B-16). That
their signatures were signed in his presence on June 24, 1994 at the Siguion Reyna,
Montecillo and Ongsiako Law Offices. Atty. Domingo Ganuelas was there at the
time to assist and advise defendants before executing the Promissory Note.
He explained that defendants own and manage Goldfields Business
Development Corporation. Of the P1,336,313.00 paid by plaintiff to Philphos
on May 31, 1994, which defendants jointly and severally assumed to pay plaintiff
under the Promissory Note (Exh. B), only P15,000.00 had been paid by them
thereby leaving an outstanding balance of P1,321,313.00 plus 12% interest per

annum computed from May 31, 1994 and attorneys fees equivalent to 20% of
defendants total outstanding balance inclusive of interest, which he believes to be
reasonable based on experience considering that the case will be prosecuted outside
Metro Manila and the long distance would entail quite an amount of travel for
retained counsel.

b) To pay plaintiff moral damages in the amount of P1,000,000.00;

c) To pay plaintiff attorneys fees in the amount of 20% of the sum
collected; and

To corroborate the testimony of Atty. Edmundo O. Reyes, Jr. and to

prove the obligation due as well as the damages prayed for, plaintiff
Congresswoman CARMENCITA O. REYES representative of the lone district of
Marinduque testified that she has been a member of Congress since 1978 until it
was abolished in 1986 but after which re-elected in 1987, 1992 and 1995.
She identified her signature on Exhibit A Special Power of Attorney
(Exhs. A-1 and A-2) as well as her signature on the verification portion of her
complaint (page 8, Record) and affirmed that she had caused the preparation of the
same and that the contents thereof are true and correct.
That on May 31, 1994, she paid Philphos the amount
of P1,336,313.00 representing defendants obligation with Philphos. In return for
the sum she had advanced, defendants agreed to issue the Promissory Note (Exh.
B) for the total amount of indebtedness but out of the said amount
of P1,336,313.00 only P15,000.00 had been paid by them. As a result, her feeling
was hurt and wounded. She felt degraded because after helping them to get out of
their indebtedness without asking for any interest, it would seem that they lost
interest in paying their obligations. She was even more deeply hurt when she found
out that the sheriff of this court who went to their place to take some actions
regarding this case, was even threatened exposing her constituent to such
danger. Said amount is substantial enough to help her constituents because as much
as possible she would not deny them everytime they come to her since it would
really be a matter of life and death for them.[4]

As can be gleaned from the above narration, the RTC declared the petitioners in default for

d) To pay costs of suit.

SO ORDERED.[5]

In their appeal to the CA, petitioners did not question the amount of the judgment debt for
which they were held liable but limited the issue to the award of attorneys fees.

On October 29, 2003, the CA promulgated a decision affirming with modification the trial
courts decision. It upheld the award of attorneys fees equivalent to 20% of the balance of petitioners
obligation and modified the decision of the trial court by lowering the award of moral damages from One
Million Pesos (P1,000,000.00) to Two Hundred Thousand Pesos (P200,000.00). Dispositively, the decision
reads:
WHEREFORE, the assailed decision of Branch 30, of the Regional
Trial Court of Marinduque in Civil Case No. 95-4 is hereby AFFIRMED with
MODIFICATION. The defendant-appellants are ordered to pay plaintiff-appellee
moral damages in the amount of P200,000.00. [6]

failure to file their Answer to the complaint. Thereafter, trial ex parte was delegated to the Clerk of Court to
receive respondents evidence. Testimonial and documentary evidence were all admitted.

Petitioners moved for the reconsideration of the CAs decision, but the same was denied by the
CA in its Resolution dated March 10, 2004.

On November 29, 1995, the lower court rendered its decision, the dispositive portion of which
reads as follows:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and
against defendants ordering defendants:
a) To pay plaintiff actual damages in the amount of P1,321,313.00
plus interest at 12% per annum from May 31, 1994 representing the total
outstanding balance of defendants indebtedness to plaintiff by virtue of the
Promissory Note dated June 24, 1994.

Aggrieved,

petitioners

elevated

the case to this Court via a petition for

on certiorari under Rule 45 of the Rules of Court, submitting thusly

1. The Court of Appeals 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, Exhibit B.

review

2. The Court of Appeals acted with grave abuse of discretion and committed a
mistake of law in not reducing the award of the 12% penalty interest.

Clearly from the foregoing formulation of the issues in the present petition, petitioners do not
dispute the amount of their indebtedness. They only seek a modification of the decision of the CA insofar as
it upheld the RTCs award of attorneys fees equivalent to 20% of their total indebtedness/obligation and the
12% per annum interest of the said obligation.

from May 31, 1994 until fully paid plus attorneys fees equivalent to 5% of the total
outstanding indebtedness.

Strictly speaking, the attorneys fees herein litigated are in the nature of liquidated damages and
not the attorneys fees recoverable as between attorney and client enunciated and regulated by the Rules of
Court.[9] Liquidated damages are those agreed upon by the parties to a contract to be paid in case of breach
thereof.[10] 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

In support of their contention that the award of attorneys fees was illegal or erroneous,

greater liability on the part of the obligor in case of breach of an obligation. It functions to strengthen the

petitioners point to the unqualified rate of 5% stipulated in the promissory note as the stipulated amount

coercive force of obligation and to provide, in effect, for what could be the liquidated damages resulting

which was way lower than the 20% as awarded by the RTC. Petitioners cited the case of Chua v. Court of

from such a breach. The obligor would then be bound to pay the stipulated indemnity without the necessity

Appeals[7] where the Court ruled that is not the province of the court to alter a contract by construction or to

of proof on the existence and on the measure of damages caused by the breach. [11] It is well-settled that so

make a new contract for the parties; its duty is confined to the interpretation of the one which they have

long as such stipulation does not contravene law, morals, or public order, it is strictly binding upon the

made for themselves, without regard to its wisdom or folly, as the court cannot supply material stipulations

obligor. The attorneys fees so provided are awarded in favor of the litigant, not his counsel. [12]

or read into contract words which it does not contain. The testimony of Atty. Edmundo O. Reyes that the
attorneys fees should be 20% of the outstanding balance cannot prevail over the 5% stipulated in the

In this case, there is a contractual stipulation in the Promissory Note that in case of petitioners

promissory note. Citing the case of Baas v. Asia Pacific Finance Corporation, [8] petitioners maintained that

default on the terms and conditions of the said Promissory Note by failing to pay any installment due, then

oral evidence cannot prevail over the written agreement of the parties.

this will render the entire balance of the obligation immediately due and payable. The total obligation of
petitioners amounted to P1,321,313.00 (P1,336,313.00 less P15,000.00) plus the 12% interest per annum of

On the other hand, respondent contend that petitioners have already waived their rights to

the said balance, as well as attorneys fees equivalent to 5% of the total outstanding indebtedness. The

question the award for attorneys fees because in their Appellants Brief filed before the CA, they stated that

Promissory Note was signed by both parties voluntarily, thus the stipulation therein has the force of law

the stipulated attorneys fees was 20% (not 5%) of the total balance of the outstanding indebtedness.

between the parties and should be complied with by them in good faith.

Respondent adds that despite such stipulation, said attorneys fees are subject to judicial control. According to
respondent it was not surprising for the CA to focus on the issue of reasonableness of the said attorneys fees
because petitioners line of argument was focused on the same.

The RTC and CA, in awarding attorneys fees equivalent to 20% of petitioners total obligation,
disregarded the stipulation expressly agreed upon in the Promissory Note and instead increased the award of
attorneys fees by giving weight and value to the testimony of prosecution witness Atty. Reyes. In agreeing to

The petition is partly meritorious.

the reasonableness of the attorneys fees, the CA erroneously took into account the time spent, the extent of
the services rendered, as well as the professional standing of the lawyer. Oral evidence certainly cannot

The fifth paragraph of the Promissory Note executed by petitioners in favor of respondent

prevail over the written agreements of the parties. The courts need only to rely on the faces of the written

undeniably carried a stipulation for attorneys fees and interest in case of the latters default in the payment of

contracts to determine their true intention on the principle that when the parties have reduced their

any installment due. It specifically provided that:

agreements in writing, it is presumed that they have made the writings the only repositories and memorials
of their true agreement.[13]

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

Moreover, it is undeniable from the evidence submitted by respondent herself to the trial court
that the agreement of the parties with respect to attorneys fees is only 5% of the total obligation and the trial

court granted the 20% rate based on the testimony of respondents counsel who opined that the same is the
reasonable amount of attorneys fees, despite the unequivocal agreement of the parties. Even granting that

The stipulated interest in this case is 12% per annum. As of July 1994, the total indebtedness of

petitioners may have erroneously stated that the stipulated attorneys fees is 20% in their appellants brief

petitioners amounted to P1,321,313.00. From then on, the P1,321,313.00 should have earned the stipulated

before the CA, they have nonetheless squarely raised the matter of the lower rate of attorneys fees agreed

interest of 12% per annum plus attorneys fees equivalent to 5% of the total outstanding

upon by the parties in the promissory note before that court in their motion for reconsideration. In our mind,

indebtedness. However, once the judgment becomes final and executory and the amount adjudged is still not

there was essentially no change in petitioners theory of the case before the CA since in their appellants brief

satisfied, legal interest at the rate of 12% applies until full payment. The rate of 12% per annum is proper

and their motion for reconsideration, their main contention remains the same: that the attorneys fees awarded

because the interim period from the finality of judgment, awarding a monetary claim and until payment

by the trial court and affirmed by the CA were unwarranted and contrary to law. Neither can we give

thereof, is deemed to be equivalent to a forbearance of credit. The actual base for the computation of this

credence to respondents assertion that the 5% attorneys fees agreed upon in the promissory note were

12% interest is the amount due upon finality of this decision.[15]

intended only to be the minimum rate as the promissory note never mentioned a minimum.
In sum, we 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 which we deem to be proper under
these circumstances, since it is not intended to be compensation for respondents counsel but was rather in the

WHEREFORE, the Decision dated October 29, 2003 of the Court of Appeals is hereby
MODIFIED in that the amount of attorneys fees is reduced to five percent (5%) of the total balance of the
outstanding indebtedness but the said Decision is AFFIRMED in all other respects.

nature of a penalty or liquidated damages.

On the matter of interest, we affirm the amount of interest awarded by the two courts below,
[14]

there being a written stipulation as to its rate. In Eastern Shipping Lines, Inc. v. Court of Appeals,

we laid

No costs.
SO ORDERED.

down the following guidelines on the imposition of legal interest:

xxx xxx xxx
TERESITA J. LEONARDO-DE CASTRO
Associate Justice
II. With regard particularly to an award of interest in the concept of
actual and compensatory damages, the rate of interest, as well as the accrual
thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a
sum of money, i.e., a loan or forbearance of money, the interest due is that which
may have been stipulated in writing. Furthermore, the interest due shall itself earn
legal interest from the time it is judicially demanded. In the absence of stipulation,
the rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169
of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of
money, is breached, an interest on the amount of damages awarded may be
imposed at the discretion of the court at the rate of 6% per annum xxx
3. When the judgment of the court awarding a sum of money becomes
final and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until
its satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.

WE CONCUR:

REYNATO S. PUNO
Chief Justice
Chairperson

ANTONIO T. CARPIO
Associate Justice

MINITA V. CHICO-NAZARIO
Associate Justice

PRESBITERO J. VELASCO, JR.

Associate Justice

On 9 September 1997, the trial court rendered judgment in favor of respondent. The 9 September
1997 Decision provides:
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 153874

March 1, 2007

Accordingly, therefore, judgment is hereby rendered for the plaintiff [respondent] as against the
defendant [petitioner] and ordering the latter to pay the plaintiff [respondent] the following:
1. The principal amount of P1,404,114.00;
2. Interest Charges in the amount of P504,114.00 plus accrued interest charges at 24%
per annum compounded yearly reckoned from July, 1995 up to the time of full payment;

TITAN CONSTRUCTION CORPORATION, Petitioner,

vs.
UNI-FIELD ENTERPRISES, INC., Respondent.
DECISION
CARPIO, J.:

3. Liquidated Damages in the amount of P324,147.94;

4. Attorneys Fees equivalent to 25% of whatever amount is due and payable and
accumulated appearance fees at P1,000.00 per hearing; and
5. Costs of suits.

The Case
This is a petition for review1 of the 7 January 2002 Decision2 and 20 May 2002 Resolution of the
Court of Appeals in CA-G.R. CV No. 56816. The Court of Appeals affirmed the 9 September 1997
Decision3 of the Regional Trial Court of Quezon City, Branch 224 (trial court) in Civil Case No. Q95-24170.

IT IS SO ORDERED.6
Petitioner appealed to the Court of Appeals. In its 7 January 2002 Decision, the Court of Appeals
denied the appeal for lack of merit and affirmed the trial courts 9 September 1997 Decision.
In its 20 May 2002 Resolution, the Court of Appeals denied petitioners motion for reconsideration.
Hence, this petition.

The Facts
The Ruling of the Court of Appeals
Petitioner Titan Construction Corporation (petitioner) is engaged in the construction business, while
respondent Uni-Field Enterprises, Inc.4 (respondent) is engaged in the business of selling various
construction materials.
From 1990 to 1993, petitioner purchased on credit various construction supplies and materials
from respondent. Petitioners purchases amounted to P7,620,433.12 but petitioner was only able
to pay P6,215,795.70, leaving a balance of P1,404,637.42. On 19 October 1994, respondent sent
a demand letter to petitioner.5 But the balance remained unpaid.
On 26 June 1995, respondent filed with the trial court a complaint for collection of sum of money
with damages against petitioner.
In its Answer dated 18 August 1995, petitioner admitted the purchases but disputed the amount
claimed by respondent. Petitioner also interposed a counterclaim and sought to
recover P204,527.99 from respondent based on damaged vinyl tiles, non-delivery of materials, and
advances for utility expenses, dues, and insurance premiums on the condominium unit turned over
by petitioner to respondent.

The 7 January 2002 Decision of the Court of Appeals reads:

A careful reading of the records of the case shows that in the answer to the complaint, the
existence of the delivery receipts and invoices were not denied by appellant, rather, it admitted the
transactions subject of the instant case. Clearly, if the damages alleged are liquidated or stipulated,
they are deemed admitted when not specifically denied.
xxxx
Further, appellant cannot question the interest rate on overdue accounts as the same was
provided for in the delivery receipts and sales invoices, which have not been denied by it.
Therefore, the terms and conditions therein have become the law between the parties, and both
are bound by said conditions. Failure of a party to contest the terms and conditions results in his
admission thereof.

Appellant asserts that "nowhere is there any stipulation that plaintiff is entitled to a 24% interest".
This is absurd. The Sales Invoices and Delivery Receipts, contained the provision that:
"This invoice is the written contract between Unifield Enterprises, [I]nc. and the above-named
customer. This is payable on demand unless otherwise indicated hereinabove. Interest of 24% per
annum will be charged on overdue accounts, compounded with the outstanding principal obligation
as they accrue. Claims or corrections hereto or in the goods must be communicated in writing to
Uni-field Enterprises within two (2) days from receipt of the goods. x x x Should Unifield
Enterprises, Inc. be constrained to effect collection through Court action and proceedings before
the Fiscals [sic], said customer agrees to pay the following additional sums: (1) 25% liquidated
damages based on the outstanding total obligation; (2) 25% attorneys fees based on the total
claim including said liquidated damages; (3) appearance fees of counsel at P500.00 per hearing in
addition to all other court costs and expenses. x x x"
It is emphasized that contracts are perfected by mere consent; the stipulations of the contract
being the law between the parties, courts have no alternative but to enforce them as they are
agreed upon and written, there being no law or public policy against the stipulated provisions.
Verily, this Court finds no reason to go against the findings of the lower court considering that the
assailed decision was arrived at "after a careful review and perusal of the evidence presented by
both parties in their pleadings filed before the" lower court. 7 (Citations omitted)
The Issues
Petitioner raises the following issues:
1. THE COURT OF APPEALS ERRED IN FINDING LEGAL BASIS FOR [AWARDING]
LIQUIDATED DAMAGES, ATTORNEYS FEES AND INTEREST IN FAVOR OF
RESPONDENT; and
2. THE COURT OF APPEALS ERRED BY OVERLOOKING CERTAIN FACTS OR
CIRCUMSTANCES OF WEIGHT AND INFLUENCE WHICH IF CONSIDERED
WOULD ALTER THE RESULTS OF THE CASE.8
The Ruling of the Court
Factual Findings of the Trial Court and the Court of Appeals
Bind the Court
Petitioner asks the Court to review the records of the case and re-examine the evidence presented
before the trial court and the Court of Appeals.

As a rule, only questions of law may be appealed to the Court by petition for review. The Court is
not a trier of facts, its jurisdiction being limited to errors of law.9 Moreover, factual findings of the
trial court, particularly when affirmed by the Court of Appeals, are generally binding on this
Court.10 In this case, the factual findings of the trial court and the Court of Appeals were based on
substantial evidence which were not refuted with contrary proof by petitioner. We thus find no
reason to disturb the factual findings of the trial court and the Court of Appeals.
On the Award of Interests, Liquidated Damages, and Attorneys Fees
Petitioner insists that the trial court and the Court of Appeals had no legal basis to award interest,
liquidated damages, and attorneys fees because the delivery receipts and sales invoices, which
served as the basis for the award, were not formally offered as evidence by respondent. Petitioner
also alleges that the delivery receipts and sales invoices were in the nature of contracts of
adhesion and petitioner had no option but to accept the conditions imposed by respondent.
While the delivery receipts and sales invoices did not form part of respondents formal offer of
evidence,11 records show that the delivery receipts and sales invoices formed part of petitioners
formal offer of evidence.12 The delivery receipts and sales invoices expressly stipulated the
payment of interest, liquidated damages, and attorneys fees in case of overdue accounts and
collection suits. Petitioner did not only bind itself to pay the principal amount, it also promised to
pay (1) interest of 24% per annum on overdue accounts, compounded with the principal
obligations as they accrue; (2) 25% liquidated damages based on the outstanding total obligation;
and (3) 25% attorneys fees based on the total claim including liquidated damages. Since petitioner
freely entered into the contract, the stipulations in the contract are binding on petitioner. Thus, the
trial court and the Court of Appeals did not err in using the delivery receipts and sales invoices as
basis for the award of interest, liquidated damages, and attorneys fees.
On the allegation that the delivery receipts and sales invoices are in the nature of contracts of
adhesion, the Court has repeatedly held that contracts of adhesion are as binding as ordinary
contracts.13 Those who adhere to the contract are in reality free to reject it entirely and if they
adhere, they give their consent.14 It is true that on some occasions the Court struck down such
contract as void when the weaker party is imposed upon in dealing with the dominant party and is
reduced to the alternative of accepting the contract or leaving it, completely deprived of the
opportunity to bargain on equal footing.15
Considering that petitioner and respondent have been doing business from 1990 to 1993 and that
petitioner is not a small time construction company, petitioner is "presumed to have full knowledge
and to have acted with due care or, at the very least, to have been aware of the terms and
conditions of the contract."16 Petitioner was free to contract the services of another supplier if
respondents terms were not acceptable. Moreover, petitioner failed to show that in its transactions
with respondent it was the weaker party or that it was compelled to accept the terms imposed by
the respondent. In fact, petitioner only questioned the terms of the contract after the trial court
issued its 9 September 1997 Decision. The Court, therefore, upholds the validity of the contract
between petitioner and respondent.
However, the Court will reduce the amount of attorneys fees awarded by the trial court and the
Court of Appeals. In this case, aside from the award of P324,147.94 as liquidated damages, the
trial court and the Court of Appeals also ordered petitioner to pay respondent attorneys fees
"equivalent to 25% of whatever amount is due and payable." 17

The law allows a party to recover attorneys fees under a written agreement. 18 In Barons Marketing
Corporation v. Court of Appeals, the Court ruled that:

CONCHITA CARPIO MORALES

Associate Justice

[T]he attorneys fees here are in the nature of liquidated damages and the stipulation therefor is
aptly called a penal clause. It has been said that so long as such stipulation does not contravene
law, morals, or public order, it is strictly binding upon defendant. The attorneys fees so provided
are awarded in favor of the litigant, not his counsel. 19
On the other hand, the law also allows parties to a contract to stipulate on liquidated damages to
be paid in case of breach.20 A stipulation on liquidated damages is a penalty clause where the
obligor assumes a greater liability in case of breach of an obligation. 21 The obligor is bound to pay
the stipulated amount without need for proof on the existence and on the measure of damages
caused by the breach.22
Articles 122923 and 222724 of the Civil Code empower the courts to reduce the penalty if it is
iniquitous or unconscionable. The determination of whether the penalty is iniquitous or
unconscionable is addressed to the sound discretion of the court and depends on several factors
such as the type, extent, and purpose of the penalty, the nature of the obligation, the mode of
breach and its consequences.25
The Court notes that respondent 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 of P1,404,114.00;
(2) the interest charges of P504,114.00 plus accrued interest charges at 24% per annum
compounded yearly reckoned from July 1995 up to the time of full payment; and (3) liquidated
damages of P324,147.94. Moreover, the liquidated damages and the attorneys fees serve the
same purpose, that is, as penalty for breach of the contract. Therefore, we reduce the award of
attorneys fees to 25% of the principal obligation, or P351,028.50.
WHEREFORE, we AFFIRM the appealed Decision dated 7 January 2002 of the Court of Appeals
in CA-G.R. CV No. 56816 with MODIFICATION as regards the award of attorneys fees. Petitioner
Titan Construction Corporation is ordered to pay respondent Uni-Field Enterprises, Inc. attorneys
fees of P351,028.50.
SO ORDERED.
ANTONIO T. CARPIO
Associate Justice
WE CONCUR:
LEONARDO A. QUISUMBING
Associate Justice
Chairperson

DANTE O. TINGA
Asscociate Justice

PRESBITERO J. VELASCO, JR.

Associate Justice
ATTESTATION
I attest that the conclusions in the above Decision had been reached in consultation before the
case was assigned to the writer of the opinion of the Courts Division.
LEONARDO A. QUISUMBING
Associate Justice
Chairperson
C E R TI F I C ATI O N
Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairpersons Attestation, I
certify that the conclusions in the above Decision had been reached in consultation before the
case was assigned to the writer of the opinion of the Courts Division.
REYNATO S. PUNO
Chief Justice

Remainingbalanceasofthematuritydateshallearnaninterestattherateoftenpercentamonth,
compoundedmonthly.

THIRD DIVISION

Itisfinallyagreedthattheprincipalandsuretyinsolidum,shallpayattorneysfeesattherateoftwentyfive
percent(25%)oftheentireamounttobecollected,incasethisnoteisnotpaidaccordingtothetermsand
conditionssetforth,andsameisreferredtoalawyerforcollection.
[G.R. No. 146942. April 22, 2003]
Incomputingtheinterestandsurcharge,afractionofthemonthshallbeconsideredonefullmonth.

CORAZON

G.
RUIZ, petitioner, vs.
TORRES, respondents.

COURT

OF

APPEALS

and

CONSUELO

Intheeventofanamicablesettlement,theprincipalandsuretyinsolidumshallreimbursetheexpensesof
theplaintiff.
(Sgd.)CorazonRuiz__________________

DECISION
PUNO, J.:

PrincipalSurety

On appeal is the decision [1] of the Court of Appeals in CA-G.R. CV No. 56621 dated 25
August 2000, setting aside the decision [2] of the trial court dated 19 May 1997 and lifting the
permanent injunction on the foreclosure sale of the subject lot covered by TCT No. RT-96686, as
well as its subsequent Resolution [3] dated 26 January 2001, denying petitioners Motion for
Reconsideration.

The consolidated loan of P750,000.00 was secured by a real estate mortgage on a 240square meter lot in New Haven Village, Novaliches, Quezon City, covered by Transfer Certificate of
Title (TCT) No. RT-96686, and registered in the name of petitioner.[7] The mortgage was signed by
Corazon Ruiz for herself and as attorney-in-fact of her husband Rogelio. It was executed on 20
March 1995, or two (2) days before the execution of the subject promissory note. [8]

The facts of the case are as follows:

Petitioner Corazon G. Ruiz is engaged in the business of buying and selling jewelry. [4] She
obtained loans from private respondent Consuelo Torres on different occasions, in the following
amounts: P100,000.00; P200,000.00; P300,000.00; and P150,000.00.[5] Prior to their maturity, the
loans were consolidated under one (1) promissory note dated March 22, 1995, which reads as
follows:[6]
P750,000.00QuezonCity,March22,1995
PROMISSORYNOTE
Forvaluereceived,I,CORAZONRUIZ,asprincipalandROGELIORUIZassuretyinsolidum,jointlyand
severallypromisetopaytotheorderofCONSUELOP.TORRESthesumofSEVENHUNDREDFIFTY
THOUSANDPESOS(P750,000.00)PhilippineCurrency,toearnaninterestattherateofthreepercent
(3%)amonth,forthirteenmonths,payableevery_____ofthemonth,andtostartonApril1995andto
matureonApril1996,subjecttorenewal.
Iftheamountdueisnotpaidondatedue,aSURCHARGEofONEPERCENToftheprincipalloan,for
everymonthdefault,shallbecollected.

Thereafter, petitioner obtained three (3) more loans from private respondent, under the
following promissory notes: (1) promissory note dated 21 April 1995, in the amount
of P100,000.00;[9] (2) promissory note dated May 23, 1995, in the amount of P100,000.00;[10] and
(3) promissory note dated December 21, 1995, in the amount of P100,000.00.[11] These combined
loans of P300,000.00 were secured by P571,000.00 worth of jewelry pledged by petitioner to
private respondent.[12]
From April 1995 to March 1996, petitioner paid the stipulated 3% monthly interest on
the P750,000.00 loan,[13] amounting to P270,000.00.[14] After March 1996, petitioner was unable to
make interest payments as she had difficulties collecting from her clients in her jewelry business. [15]
Due to petitioners failure to pay the principal loan of P750,000.00, as well as the interest
payment for April 1996, private respondent demanded payment not only of the P750,000.00 loan,
but also of the P300,000.00 loan.[16] When petitioner failed to pay, private respondent sought the
extra-judicial foreclosure of the aforementioned real estate mortgage. [17]
On September 5, 1996, Acting Clerk of Court and Ex-Officio Sheriff Perlita V. Ele, Deputy
Sheriff In-Charge Rolando G. Acal and Supervising Sheriff Silverio P. Bernas issued a Notice of
Sheriffs Sale of subject lot. The public auction was scheduled on October 8, 1996. [18]
On October 7, 1996, one (1) day before the scheduled auction sale, petitioner filed a
complaint with the RTC of Quezon City docketed as Civil Case No. Q-96-29024, with a prayer for
the issuance of a Temporary Restraining Order to enjoin the sheriff from proceeding with the
foreclosure sale and to fix her indebtedness to private respondent to P706,000.00. The computed
amount of P706,000.00 was based on the aggregate loan of P750,000.00, covered by the March
22, 1995 promissory note, plus the other loans of P300,000.00, covered by separate promissory

notes, plus interest, minus P571,000.00 representing the amount of jewelry pledged in favor of
private respondent.[19]
The trial court granted the prayer for the issuance of a Temporary Restraining Order, [20] and
on 29 October 1996, issued a writ of preliminary injunction. [21] In its Decision dated May 19, 1997, it
ordered the Clerk of Court and Ex-Officio Sheriff to desist with the foreclosure sale of the subject
property, and it made permanent the writ of preliminary injunction. It held that the real estate
mortgage is unenforceable because of the lack of the participation and signature of petitioners
husband. It noted that although the subject real estate mortgage stated that petitioner was
attorney-in-fact for herself and her husband, the Special Power of Attorney was never presented in
court during the trial.[22]
The trial court further held that the promissory note in question is a unilateral contract of
adhesion drafted by private respondent. It struck down the contract as repugnant to public policy
because it was imposed by a dominant bargaining party (private respondent) on a weaker party
(petitioner).[23] Nevertheless, it held that petitioner still has an obligation to pay the private
respondent. Private respondent was further barred from imposing on petitioner the obligation to
pay the surcharge of one percent (1%) per month from March 1996 onwards, and interest of ten
percent (10%) a month, compounded monthly from September 1996 to January 1997. Petitioner
was thus ordered to pay the amount of P750,000.00 plus three percent (3%) interest per month, or
a total of P885,000.00, plus legal interest from date of [receipt of] the decision until the total
amount of P885,000.00 is paid.[24]
Aside from the foregoing, the trial court took into account petitioners proposal to pay her
other obligations to private respondent in the amount of P392,000.00.[25]
The trial court also recognized the expenses borne by private respondent with regard the
foreclosure sale and attorneys fees. As the notice of the foreclosure sale has already been
published, it ordered the petitioner to reimburse private respondent the amount of P15,000.00 plus
attorneys fees of the same amount.[26]
Thus, the trial court computed petitioners obligation to private respondent, as follows:

Private respondents motion for reconsideration was denied in an Order dated July 21, 1997.
Private respondent appealed to the Court of Appeals. The appellate court set aside the
decision of the trial court. It ruled that the real estate mortgage is valid despite the non-participation
of petitioners husband in its execution because the land on which it was constituted is paraphernal
property of petitioner-wife. Consequently, she may encumber the lot without the consent of her
husband.[28] It allowed its foreclosure since the loan it secured was not paid.
Nonetheless, the appellate court declared as invalid the 10% compounded monthly
interest[29] and the 10% surcharge per month stipulated in the promissory notes dated May 23,
1995 and December 1, 1995, [30] and so too the 1% compounded monthly interest stipulated in the
promissory note dated 21 April 1995, [31] for being excessive, iniquitous, unconscionable, and
contrary to morals.It held that the legal rate of interest of 12% per annum shall apply after the
maturity dates of the notes until full payment of the entire amount due, and that the only
permissible rate of surcharge is 1% per month, without compounding. [32] The appellate court also
granted attorneys fees in the amount of P50,000.00, and not the stipulated 25% of the amount
due, following the ruling in the case of Medel v. Court of Appeals.[33]
Now, before this Court, petitioner assigns the following errors:
(1)PUBLICRESPONDENTCOURTOFAPPEALSGRAVELYERREDINRULINGTHATTHE
PROMISSORYNOTEOFP750,000.00ISNOTACONTRACTOFADHESIONDESPITETHECLEAR
SHOWINGTHATTHESAMEISAREADYMADECONTRACTPREPAREDBY(THE)
RESPONDENTCONSUELOTORRESANDDIDNOTREFLECTTHEIRTRUEINTENTIONSASIT
WEIGHEDHEAVILYINFAVOROFRESPONDENTANDAGAINSTPETITIONER.
(2)PUBLICRESPONDENTCOURTOFAPPEALSGRAVELYERREDINDECLARINGTHATTHE
PROPERTYCOVEREDBYTHESUBJECTDEEDOFMORTGAGEOFMARCH20,1995ISA
PARAPHERNALPROPERTYOFTHEPETITIONERANDNOTCONJUGALEVENTHOUGHTHE
ISSUEOFWHETHERORNOTTHEMORTGAGEDPROPERTYISPARAPHERNALWASNEVER
RAISED,NORDISCUSSEDANDARGUEDBEFORETHETRIALCOURT.

PrincipalLoan.P750,000.00
Interest..135,000.00

(3)PUBLICRESPONDENTCOURTOFAPPEALSGRAVELYERREDINDISREGARDINGTHE
TRIALCOURTSCOMPUTATIONOFTHEACTUALOBLIGATIONSOFTHEPETITIONERWITH
(THE)RESPONDENTTORRESEVENTHOUGHTHESAMEISBASEDONEVIDENCESUBMITTED
BEFOREIT.

OtherLoans..392,000.00
The pertinent issues to be resolved are:
PublicationFees.15,000.00

(1) Whether the promissory note of P750,000.00 is a contract of adhesion;

AttorneysFees15,000.00

(2) Whether the real property covered by the subject deed of mortgage dated March 20,
1995 is paraphernal property of petitioner; and

TOTALP1,307,000.00

(3) Whether the rates of interests and surcharges on the obligation of petitioner to private
respondent are valid.

with legal interest from date of receipt of decision until payment of total amount of P1,307,000.00
has been made.[27]

We hold that the promissory note in the case at bar is not a contract of adhesion. In Sweet
Lines, Inc. vs. Teves,[34] this Court discussed the nature of a contract of adhesion as follows:
...therearecertaincontractsalmostalltheprovisionsofwhichhavebeendraftedonlybyoneparty,usually
acorporation.Suchcontractsarecalledcontractsofadhesion,becausetheonlyparticipationoftheother
partyisthesigningofhissignatureorhisadhesionthereto.Insurancecontracts,billsoflading,contractsof
saleoflotsontheinstallmentplanfallintothiscategory.[35]
...itisdraftedonlybyoneparty,usuallythecorporation,andissoughttobeacceptedoradheredtobythe
otherparty...whocannotchangethesameandwhoarethusmadetoadhereheretoonthetakeitorleaveit
basis...[36]
In said case of Sweet Lines,[37] the conditions of the contract on the 4 x 6 inches passenger ticket
are in fine print. Thus we held:
...itishardlyjustandpropertoexpectthepassengerstoexaminetheirticketsreceivedfrom
crowded/congestedcounters,moreoftenthannotduringrushhours,forconditionsthatmaybeprinted
thereon,muchlesschargethemwithhavingconsentedtotheconditions,soprinted,especiallyiftherearea
numberofsuchconditionsinfineprint,asinthiscase.[38]
We further stressed in the said case that the questioned Condition No. 14 was prepared
solely by one party which was the corporation, and the other party who was then a passenger had
no say in its preparation. The passengers have no opportunity to examine and consider the terms
and conditions of the contract prior to the purchase of their tickets. [39]
In the case at bar, the promissory note in question did not contain any fine print provision
which could not have been examined by the petitioner. Petitioner had all the time to go over and
study the stipulations embodied in the promissory note. Aside from the March 22, 1995 promissory
note for P750,000.00, three other promissory notes of different dates and amounts were executed
by petitioner in favor of private respondent. These promissory notes contain similar terms and
conditions, with a little variance in the terms of interests and surcharges. The fact that petitioner
and private respondent had entered into not only one but several loan transactions shows that
petitioner was not in any way compelled to accept the terms allegedly imposed by private
respondent. Moreover, petitioner, in her complaint [40] dated October 7, 1996 filed with the trial court,
never claimed that she was forced to sign the subject note. Paragraph five of her complaint states:
ThatonoraboutMarch22,1995plaintiffwasrequiredbythedefendantTorrestoexecuteapromissorynote
consolidatingherunpaidprincipalloanandinterestswhichsaiddefendantcomputedtobeinthesum
ofP750,000.00...
To be required is certainly different from being compelled. She could have rejected the conditions
made by private respondent. As an experienced business- woman, she ought to understand all the
conditions set forth in the subject promissory note. As held by this Court in Lee, et al. vs. Court of
Appeals, et al.,[41] it is presumed that a person takes ordinary care of his concerns. [42] Hence, the
natural presumption is that one does not sign a document without first informing himself of its
contents and consequences. This presumption acquires greater force in the case at bar where not

only one but several documents were executed at different times by petitioner in favor of private
respondent.
II
We also affirm the ruling of the appellate court that the real property covered by the subject
deed of mortgage is paraphernal property. The property subject of the mortgage is registered in the
name of Corazon G. Ruiz, of legal age, married to Rogelio Ruiz, Filipinos. Thus, title is registered
in the name of Corazon alone because the phrase married to Rogelio Ruiz is merely descriptive of
the civil status of Corazon and should not be construed to mean that her husband is also a
registered owner. Furthermore, registration of the property in the name of Corazon G. Ruiz, of legal
age, married to Rogelio Ruiz is not proof that such property was acquired during the marriage, and
thus, is presumed to be conjugal. The property could have been acquired by Corazon while she
was still single, and registered only after her marriage to Rogelio Ruiz. Acquisition of title and
registration thereof are two different acts. [43] The presumption under Article 116 of the Family Code
that properties acquired during the marriage are presumed to be conjugal cannot apply in the
instant case. Before such presumption can apply, it must first be established that the property was
in fact acquired during the marriage. In other words, proof of acquisition during the marriage is a
condition sine qua non for the operation of the presumption in favor of conjugal ownership. [44] No
such proof was offered nor presented in the case at bar. Thus, on the basis alone of the certificate
of title, it cannot be presumed that said property was acquired during the marriage and that it is
conjugal property. Since there is no showing as to when the property in question was acquired, the
fact that the title is in the name of the wife alone is determinative of its nature as paraphernal, i.e.,
belonging exclusively to said spouse. [45] The only import of the title is that Corazon is the owner of
said property, the same having been registered in her name alone, and that she is married to
Rogelio Ruiz.[46]
III
We now resolve the issue of whether the rates of interests and surcharges on the obligation
of petitioner to private respondent are legal.
The four (4) unpaid promissory notes executed by petitioner in favor of private respondent
are in the following amounts and maturity dates:
(1) P750,000.00, dated March 22, 1995 matured on April 21, 1996;
(2) P100,000.00, dated April 21, 1995 matured on August 21, 1995;
(3) P100,000.00, dated May 23, 1995 matured on November 23, 1995; and
(4) P100,000.00, dated December 21, 1995 matured on March 1, 1996.
The P750,000.00 promissory note dated March 22, 1995 has the following provisions:
(1) 3% monthly interest, from the signing of the note until its maturity date;
(2) 10% compounded monthly interest on the remaining balance at maturity date;
(3) 1% surcharge on the principal loan for every month of default; and
(4) 25% attorneys fees.
The P100,000.00 promissory note dated April 21, 1995 has the following provisions:

(1) 3% monthly interest, from the signing of the note until its maturity date;
(2) 10% monthly interest on the remaining balance at maturity date;
(3) 1% compounded monthly surcharge on the principal loan for every month of default; and
(4) 10% attorneys fees.
The two (2) other P100,000.00 promissory notes dated May 23, 1995 and December 1,
1995 have the following provisions:
(1) 3% monthly interest, from the signing of the note until its maturity date;

damages under Art. 2227 of the New Civil Code, and is separate and distinct from interest
payment.[59] Also referred to as a penalty clause, it is expressly recognized by law. It is an
accessory undertaking to assume greater liability on the part of an obligor in case of breach of an
obligation.[60] The obligor would then be bound to pay the stipulated amount of indemnity without
the necessity of proof on the existence and on the measure of damages caused by the breach.
[61]
Although the courts may not at liberty ignore the freedom of the parties to agree on such terms
and conditions as they see fit that contravene neither law nor morals, good customs, public order
or public policy, a stipulated penalty, nevertheless, may be equitably reduced if it is iniquitous or
unconscionable.[62] In the instant case, the 10% surcharge per month stipulated in the promissory
notes dated May 23, 1995 and December 1, 1995 was properly reduced by the appellate court.
In sum, petitioner shall pay private respondent the following:

(2) 10% compounded monthly interest on the remaining balance at maturity date;
(3) 10% surcharge on the principal loan for every month of default; and
(4) 10% attorneys fees.
We affirm the ruling of the appellate court, striking down as invalid the 10% compounded
monthly interest, the 10% surcharge per month stipulated in the promissory notes dated May 23,
1995 and December 1, 1995, and the 1% compounded monthly interest stipulated in the
promissory note dated April 21, 1995. The legal rate of interest of 12% per annum shall apply after
the maturity dates of the notes until full payment of the entire amount due. Also, the only
permissible rate of surcharge is 1% per month, without compounding. We also uphold the award of
the appellate court of attorneys fees, the amount of which having been reasonably reduced from
the stipulated 25% (in the March 22, 1995 promissory note) and 10% (in the other three
promissory notes) of the entire amount due, to a fixed amount of P50,000.00. However, we
equitably reduce the 3% per month or 36% per annum interest present in all four (4) promissory
notes to 1% per month or 12% per annum interest.
The foregoing rates of interests and surcharges are in accord with Medel vs. Court of
Appeals,[47] Garcia vs. Court of Appeals,[48] Bautista vs. Pilar Development Corporation,
[49]
and the recent case of Spouses Solangon vs. Salazar.[50] This Court invalidated a stipulated
5.5% per month or 66% per annum interest on a P500,000.00 loan in Medel[51] and a 6% per
month or 72% per annum interest on a P60,000.00 loan in Solangon[52] for being excessive,
iniquitous, unconscionable and exorbitant. In both cases, we reduced the interest rate to 12% per
annum. We held that while the Usury Law has been suspended by Central Bank Circular No. 905,
s. 1982, effective on January 1, 1983, and parties to a loan agreement have been given wide
latitude to agree on any interest rate, still stipulated interest rates are illegal if they are
unconscionable. 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.
[53]
On the other hand, in Bautista vs. Pilar Development Corp.,[54] this Court upheld the validity of
a 21% per annum interest on a P142,326.43 loan, and in Garcia vs. Court of Appeals, sustained
the agreement of the parties to a 24% per annum interest on an P8,649,250.00 loan. It is on the
basis of these cases that we reduce the 36% per annum interest to 12%. An interest of 12% per
annum is deemed fair and reasonable. While it is true that this Court invalidated a much higher
interest rate of 66% per annum in Medel[55] and 72% in Solangon[56] it has sustained the validity of
a much lower interest rate of 21% in Bautista[57] and 24% in Garcia.[58] We still find the 36% per
annum interest rate in the case at bar to be substantially greater than those upheld by this Court in
the two (2) aforecited cases.
The 1% surcharge on the principal loan for every month of default is valid. This surcharge
or penalty stipulated in a loan agreement in case of default partakes of the nature of liquidated

1.Principalofloanunderpromissorynotedated
March22,1995...P750,000.00
a.

1%interestpermonthonprincipalfromMarch22,1995untilfullypaid,
lessP270,000.00paidbypetitionerasinterestfromApril1995toMarch
1996

b.

1%surchargepermonthonprincipalfromMay1996untilfullypaid

2.Principalofloanunderpromissorynotedated
April21,1995..P100,000.00
a.

1%interestpermonthonprincipalfromApril21,1995untilfullypaid

b.

1%surchargepermonthonprincipalfromSeptember1995untilfully
paid

3.Principalofloanunderpromissorynotedated
May23,1995....P100,000.00
a.

1%interestpermonthonprincipalfromMay23,1995untilfullypaid

b.

1%surchargepermonthonprincipalfromDecember1995untilfullypaid

4.Principalofloanunderpromissorynotedated

December1,1995...P100,000.00
a.

1%interestpermonthonprincipalfromDecember1,1995untilfully
paid

b.

1%surchargepermonthonprincipalfromApril1996untilfullypaid

5.Attorneysfees...P50,000.00
Hence, since the mortgage is valid and the loan it secures remains unpaid, the foreclosure
proceedings may now proceed.
IN VIEW WHEREOF, the appealed Decision of the Court of Appeals is AFFIRMED, subject
to the MODIFICATION that the interest rate of 36% per annum is ordered reduced to 12 % per
annum.
SO ORDERED.
Panganiban, Sandoval-Gutierrez, Corona, and Carpio-Morales, JJ., concur.

amount of P7,053.77 and, also in not reflecting in its statement or account an unpaid balance on
the said penalties for delayed payments in the amount of P7,517,178.21 as of October 10, 1979.
Moonwalk answered denying SSS' claims and asserting that SSS had the opportunity to ascertain
the truth but failed to do so.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION

The trial court set the case for pre-trial at which pre-trial conference, the court issued an order
giving both parties thirty (30) days within which to submit a stipulation of facts.
The Order of October 6, 1980 dismissing the complaint followed the submission by the parties on
September 19, 1980 of the following stipulation of Facts:
"1. On October 6, 1971, plaintiff approved the application of defendant Moonwalk for an interim
loan in the amount of THIRTY MILLION PESOS (P30,000,000.00) for the purpose of developing
and constructing a housing project in the provinces of Rizal and Cavite;

G.R. No. 73345. April 7, 1993.

SOCIAL SECURITY SYSTEM, petitioner,
vs.
MOONWALK DEVELOPMENT & HOUSING CORPORATION, ROSITA U. ALBERTO, ROSITA U.
ALBERTO, JMA HOUSE, INC., MILAGROS SANCHEZ SANTIAGO, in her capacity as Register of
Deeds for the Province of Cavite, ARTURO SOLITO, in his capacity as Register of Deeds for Metro
Manila District IV, Makati, Metro Manila and the INTERMEDIATE APPELLATE COURT,
respondents.
The Solicitor General for petitioner.
K.V. Faylona & Associates for private respondents.
DECISION
CAMPOS, JR., J p:
Before Us is a petition for review on certiorari of decision 1 of the then Intermediate Appellate
Court affirming in toto the decision of the former Court of First Instance of Rizal, Seventh Judicial
District, Branch XXIX, Pasay City.
The facts as found by the Appellate Court are as follows:
"On February 20, 1980, the Social Security System, SSS for brevity, filed a complaint in the Court
of First Instance of Rizal against Moonwalk Development & Housing Corporation, Moonwalk for
short, alleging that the former had committed an error in failing to compute the 12% interest due on
delayed payments on the loan of Moonwalk resulting in a chain of errors in the application of
payments made by Moonwalk and, in an unpaid balance on the principal loan agreement in the

"2. Out of the approved loan of THIRTY MILLION PESOS (P30,000,000.00), the sum of
P9,595,000.00 was released to defendant Moonwalk as of November 28, 1973;
"3. A third Amended Deed of First Mortgage was executed on December 18, 1973 Annex `D'
providing for restructuring of the payment of the released amount of P9,595,000.00.
"4. Defendants Rosita U. Alberto and Rosita U. Alberto, mother and daughter respectively, under
paragraph 5 of the aforesaid Third Amended Deed of First Mortgage substituted Associated
Construction and Surveys Corporation, Philippine Model Homes Development Corporation,
Mariano Z. Velarde and Eusebio T. Ramos, as solidary obligors;
"5. On July 23, 1974, after considering additional releases in the amount of P2,659,700.00, made
to defendant Moonwalk, defendant Moonwalk delivered to the plaintiff a promissory note for
TWELVE MILLION TWO HUNDRED FIFTY FOUR THOUSAND SEVEN HUNDRED PESOS
(P12,254,700.00) Annex `E', signed by Eusebio T. Ramos, and the said Rosita U. Alberto and
Rosita U. Alberto;
"6. Moonwalk made a total payment of P23,657,901.84 to SSS for the loan principal of
P12,254,700.00 released to it. The last payment made by Moonwalk in the amount of
P15,004,905.74 were based on the Statement of Account, Annex "F" prepared by plaintiff SSS for
defendant;
"7. After settlement of the account stated in Annex 'F' plaintiff issued to defendant Moonwalk the
Release of Mortgage for Moonwalk's mortgaged properties in Cavite and Rizal, Annexes 'G' and 'H'
on October 9, 1979 and October 11, 1979 respectively.
"8. In letters to defendant Moonwalk, dated November 28, 1979 and followed up by another letter
dated December 17, 1979, plaintiff alleged that it committed an honest mistake in releasing
defendant.

"9. In a letter dated December 21, 1979, defendant's counsel told plaintiff that it had completely
paid its obligations to SSS;
"10. The genuineness and due execution of the documents marked as Annex (sic) 'A' to 'O'
inclusive, of the Complaint and the letter dated December 21, 1979 of the defendant's counsel to
the plaintiff are admitted.
"Manila for Pasay City, September 2, 1980." 2
On October 6, 1990, the trial court issued an order dismissing the complaint on the ground that the
obligation was already extinguished by the payment by Moonwalk of its indebtedness to SSS and
by the latter's act of cancelling the real estate mortgages executed in its favor by defendant
Moonwalk. The Motion for Reconsideration filed by SSS with the trial court was likewise dismissed
by the latter.
These orders were appealed to the Intermediate Appellate Court. Respondent Court reduced the
errors assigned by the SSS into this issue: ". . . are defendants-appellees, namely, Moonwalk
Development and Housing Corporation, Rosita U. Alberto, Rosita U. Alberto, JMA House, Inc. still
liable for the unpaid penalties as claimed by plaintiff-appellant or is their obligation extinguished?"
3 As We have stated earlier, the respondent Court held that Moonwalk's obligation was
extinguished and affirmed the trial court.

"2. As we have explained under No. 1, contrary to what the plaintiff-appellant states in its Brief,
what is sought to be recovered in this case is not the 12% interest on the loan but the 12% penalty
for failure to pay on time the amortization. What is sought to be enforced therefore is the penal
clause of the contract entered into between the parties.
Now, what is a penal clause. A penal clause has been defined as
"an accessory obligation which the parties attach to a principal obligation for the purpose of
insuring the performance thereof by imposing on the debtor a special presentation (generally
consisting in the payment of a sum of money) in case the obligation is not fulfilled or is irregularly
or inadequately fulfilled" (3 Castan 8th Ed. p. 118).
Now an accessory obligation has been defined as that attached to a principal obligation in order to
complete the same or take its place in the case of breach (4 Puig Pea Part 1 p. 76). Note
therefore that an accessory obligation is dependent for its existence on the existence of a principal
obligation. A principal obligation may exist without an accessory obligation but an accessory
obligation cannot exist without a principal obligation. For example, the contract of mortgage is an
accessory obligation to enforce the performance of the main obligation of indebtedness. An
indebtedness can exist without the mortgage but a mortgage cannot exist without the
indebtedness, which is the principal obligation. In the present case, the principal obligation is the
loan between the parties. The accessory obligation of a penal clause is to enforce the main
obligation of payment of the loan. If therefore the principal obligation does not exist the penalty
being accessory cannot exist.

Hence, this Petition wherein SSS raises the following grounds for review:
"First, in concluding that the penalties due from Moonwalk are "deemed waived and/or barred," the
appellate court disregarded the basic tenet that waiver of a right must be express, made in a clear
and unequivocal manner. There is no evidence in the case at bar to show that SSS made a clear,
positive waiver of the penalties, made with full knowledge of the circumstances.
Second, it misconstrued the ruling that SSS funds are trust funds, and SSS, being a mere trustee,
cannot perform acts affecting the same, including condonation of penalties, that would diminish
property rights of the owners and beneficiaries thereof. (United Christian Missionary Society v.
Social Security Commission, 30 SCRA 982, 988 [1969]).
Third, it ignored the fact that penalty at the rate of 12% p.a. is not inequitable.
Fourth, it ignored the principle that equity will cancel a release on the ground of mistake of fact." 4
The same problem which confronted the respondent court is presented before Us: Is the penalty
demandable even after the extinguishment of the principal obligation?
The former Intermediate Appellate Court, through Justice Eduard P. Caguioa, held in the negative.
It reasoned, thus:

Now then when is the penalty demandable? A penalty is demandable in case of non performance
or late performance of the main obligation. In other words in order that the penalty may arise there
must be a breach of the obligation either by total or partial non fulfillment or there is non fulfillment
in point of time which is called mora or delay. The debtor therefore violates the obligation in point of
time if there is mora or delay. Now, there is no mora or delay unless there is a demand. It is
noteworthy that in the present case during all the period when the principal obligation was still
subsisting, although there were late amortizations there was no demand made by the creditor,
plaintiff-appellant for the payment of the penalty. Therefore up to the time of the letter of plaintiffappellant there was no demand for the payment of the penalty, hence the debtor was no in mora in
the payment of the penalty.
However, on October 1, 1979, plaintiff-appellant issued its statement of account (Exhibit F)
showing the total obligation of Moonwalk as P15,004,905.74, and forthwith demanded payment
from defendant-appellee. Because of the demand for payment, Moonwalk made several payments
on September 29, October 9 and 19, 1979 respectively, all in all totalling P15,004,905.74 which
was a complete payment of its obligation as stated in Exhibit F. Because of this payment the
obligation of Moonwalk was considered extinguished, and pursuant to said extinguishment, the
real estate mortgages given by Moonwalk were released on October 9, 1979 and October 10,
1979 (Exhibits G and H). For all purposes therefore the principal obligation of defendant-appellee
was deemed extinguished as well as the accessory obligation of real estate mortgage; and that is
the reason for the release of all the Real Estate Mortgages on October 9 and 10, 1979
respectively.
Now, besides the Real Estate Mortgages, the penal clause which is also an accessory obligation
must also be deemed extinguished considering that the principal obligation was considered

extinguished, and the penal clause being an accessory obligation. That being the case, the
demand for payment of the penal clause made by plaintiff-appellant in its demand letter dated
November 28, 1979 and its follow up letter dated December 17, 1979 (which parenthetically are
the only demands for payment of the penalties) are therefore ineffective as there was nothing to
demand. It would be otherwise, if the demand for the payment of the penalty was made prior to the
extinguishment of the obligation because then the obligation of Moonwalk would consist of: 1) the
principal obligation 2) the interest of 12% on the principal obligation and 3) the penalty of 12% for
late payment for after demand, Moonwalk would be in mora and therefore liable for the penalty.
Let it be emphasized that at the time of the demand made in the letters of November 28, 1979 and
December 17, 1979 as far as the penalty is concerned, the defendant-appellee was not in default
since there was no mora prior to the demand. That being the case, therefore, the demand made
after the extinguishment of the principal obligation which carried with it the extinguishment of the
penal clause being merely an accessory obligation, was an exercise in futility.
3. At the time of the payment made of the full obligation on October 10, 1979 together with the 12%
interest by defendant-appellee Moonwalk, its obligation was extinguished. It being extinguished,
there was no more need for the penal clause. Now, it is to be noted that penalty at anytime can be
modified by the Court. Even substantial performance under Art. 1234 authorizes the Court to
consider it as complete performance minus damages. Now, Art, 1229 Civil Code of the Philippines
provides:
"ART. 1229. The judge shall equitably reduce the penalty when the principal obligation has been
partly or irregularly complied with by the debtor. Even if there has been no performance, the
penalty may also be reduced by the courts if it is iniquitous or unconscionable."
If the penalty can be reduced after the principal obligation has been partly or irregularly complied
with by the debtor, which is nonetheless a breach of the obligation, with more reason the penal
clause is not demandable when full obligation has been complied with since in that case there is
no breach of the obligation. In the present case, there has been as yet no demand for payment of
the penalty at the time of the extinguishment of the obligation, hence there was likewise an
extinguishment of the penalty.
Let Us emphasize that the obligation of defendant-appellee was fully complied with by the debtor,
that is, the amount loaned together with the 12% interest has been fully paid by the appellee. That
being so, there is no basis for demanding the penal clause since the obligation has been
extinguished. Here there has been a waiver of the penal clause as it was not demanded before the
full obligation was fully paid and extinguished. Again, emphasis must be made on the fact that
plaintiff-appellant has not lost anything under the contract since in got back in full the amount loan
(sic) as well as the interest thereof. The same thing would have happened if the obligation was
paid on time, for then the penal clause, under the terms of the contract would not apply. Payment
of the penalty does not mean gain or loss of plaintiff-appellant since it is merely for the purpose of
enforcing the performance of the main obligation has been fully complied with and extinguished,
the penal clause has lost its raison d' entre." 5
We find no reason to depart from the appellate court's decision. We, however, advance the
following reasons for the denial of this petition.

Article 1226 of the Civil Code provides:

"Art. 1226. In obligations with a penal clause, he penalty shall substitute the indemnity for
damages and the payment of interests in case of noncompliance, if there is no stipulation to the
contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty
of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the provisions of this
Code." (Emphasis Ours.)
A penal clause is an accessory undertaking to assume greater liability in case of breach. 6 It has a
double function: (1) to provide for liquidated damages, and (2) to strengthen the coercive force of
the obligation by the threat of greater responsibility in the event of breach. 7 From the foregoing, it
is clear that a penal clause is intended to prevent the obligor from defaulting in the performance of
his obligation. Thus, if there should be default, the penalty may be enforced. One commentator of
the Civil Code wrote:
"Now when is the penalty deemed demandable in accordance with the provisions of the Civil
Code? We must make a distinction between a positive and a negative obligation. With regard to
obligations which are positive (to give and to do), the penalty is demandable when the debtor is in
mora; hence, the necessity of demand by the debtor unless the same is excused . . ." 8
When does delay arise? Under the Civil Code, delay begins from the time the obligee judicially or
extrajudicially demands from the obligor the performance of the obligation.
"Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation."
There are only three instances when demand is not necessary to render the obligor in default.
These are the following:
"(1) When the obligation or the law expressly so declares;
(2) When from the nature and the circumstances of the obligation it appears that the designation of
the time when the thing is to be delivered or the service is to be rendered was a controlling motive
for the establishment of the contract; or
(3) When the demand would be useless, as when the obligor has rendered it beyond his power to
perform." 9
This case does not fall within any of the established exceptions. Hence, despite the provision in the
promissory note that "(a)ll amortization payments shall be made every first five (5) days of the
calendar month until the principal and interest on the loan or any portion thereof actually released
has been fully paid," 10 petitioner is not excused from making a demand. It has been established
that at the time of payment of the full obligation, private respondent Moonwalk has long been

delinquent in meeting its monthly arrears and in paying the full amount of the loan itself as the
obligation matured sometime in January, 1977. But mere delinquency in payment does not
necessarily mean delay in the legal concept. To be in default ". . . is different from mere delay in
the grammatical sense, because it involves the beginning of a special condition or status which
has its own peculiar effects or results." 11 In order that the debtor may be in default it is necessary
that the following requisites be present: (1) that the obligation be demandable and already
liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the
performance judicially and extrajudicially. 12 Default generally begins from the moment the creditor
demands the performance of the obligation. 13
Nowhere in this case did it appear that SSS demanded from Moonwalk the payment of its monthly
amortizations. Neither did it show that petitioner demanded the payment of the stipulated penalty
upon the failure of Moonwalk to meet its monthly amortization. What the complaint itself showed
was that SSS tried to enforce the obligation sometime in September, 1977 by foreclosing the real
estate mortgages executed by Moonwalk in favor of SSS. But this foreclosure did not push through
upon Moonwalk's requests and promises to pay in full. The next demand for payment happened on
October 1, 1979 when SSS issued a Statement of Account to Moonwalk. And in accordance with
said statement, Moonwalk paid its loan in full. What is clear, therefore, is that Moonwalk was never
in default because SSS never compelled performance. Though it tried to foreclose the mortgages,
SSS itself desisted from doing so upon the entreaties of Moonwalk. If the Statement of Account
could properly be considered as demand for payment, the demand was complied with on time.
Hence, no delay occurred and there was, therefore, no occasion when the penalty became
demandable and enforceable. Since there was no default in the performance of the main obligation
payment of the loan SSS was never entitled to recover any penalty, not at the time it made
the Statement of Account and certainly, not after the extinguishment of the principal obligation
because then, all the more that SSS had no reason to ask for the penalties. Thus, there could
never be any occasion for waiver or even mistake in the application for payment because there
was nothing for SSS to waive as its right to enforce the penalty did not arise.
SSS, however, in buttressing its claim that it never waived the penalties, argued that the funds it
held were trust funds and as trustee, the petitioner could not perform acts affecting the funds that
would diminish property rights of the owners and beneficiaries thereof. To support its claim, SSS
cited the case of United Christian Missionary Society v. Social Security Commission. 14
We looked into the case and found out that it is not applicable to the present case as it dealt not
with the right of the SSS to collect penalties which were provided for in contracts which it entered
into but with its right to collect premiums and its duty to collect the penalty for delayed payment or
non-payment of premiums. The Supreme Court, in that case, stated:

"Note that the above case refers to the condonation of the penalty for the non remittance of the
premium which is provided for by Section 22(a) of the Social Security Act . . . In other words, what
was sought to be condoned was the penalty provided for by law for non remittance of premium for
coverage under the Social Security Act.
The case at bar does not refer to any penalty provided for by law nor does it refer to the non
remittance of premium. The case at bar refers to a contract of loan entered into between plaintiff
and defendant Moonwalk Development and Housing Corporation. Note, therefore, that no
provision of law is involved in this case, nor is there any penalty imposed by law nor a case about
non-remittance of premium required by law. The present case refers to a contract of loan payable
in installments not provided for by law but by agreement of the parties. Therefore, the ratio
decidendi of the case of United Christian Missionary Society vs. Social Security Commission which
plaintiff-appellant relies is not applicable in this case; clearly, the Social Security Commission,
which is a creature of the Social Security Act cannot condone a mandatory provision of law
providing for the payment of premiums and for penalties for non remittance. The life of the Social
Security Act is in the premiums because these are the funds from which the Social Security Act
gets the money for its purposes and the non-remittance of the premiums is penalized not by the
Social Security Commission but by law.
xxx xxx xxx
It is admitted that when a government created corporation enters into a contract with private party
concerning a loan, it descends to the level of a private person. Hence, the rules on contract
applicable to private parties are applicable to it. The argument therefore that the Social Security
Commission cannot waive or condone the penalties which was applied in the United Christian
Missionary Society cannot apply in this case. First, because what was not paid were installments
on a loan but premiums required by law to be paid by the parties covered by the Social Security
Act. Secondly, what is sought to be condoned or waived are penalties not imposed by law for
failure to remit premiums required by law, but a penalty for non payment provided for by the
agreement of the parties in the contract between them . . ." 15
WHEREFORE, in view of the foregoing, the petition is DISMISSED and the decision of the
respondent court is AFFIRMED. LLpr
SO ORDERED.
Narvasa, C .J ., Padilla, Regalado and Nocon, JJ ., concur.

"No discretion or alternative is granted respondent Commission in the enforcement of the law's
mandate that the employer who fails to comply with his legal obligation to remit the premiums to
the System within the prescribed period shall pay a penalty of three (3%) per month. The
prescribed penalty is evidently of a punitive character, provided by the legislature to assure that
employers do not take lightly the State's exercise of the police power in the implementation of the
Republic's declared policy "to develop, establish gradually and perfect a social security system
which shall be suitable to the needs of the people throughout the Philippines and (to) provide
protection to employers against the hazards of disability, sickness, old age and death . . ."
Thus, We agree with the decision of the respondent court on the matter which We quote, to wit:

TCBTC618818March9,1978P371,319.58
TCBTC618817June9,1979P371,319.58
FIRST DIVISION

TCBTC618816September9,1979P371,319.58
TCBTC618814December9,1979P371,319.58

[G.R. No. 112590.* July 12, 2001]

TCBTC618828March9,1980P371,319.58
MBTC06659490September30,197860,000.00

STATE INVESTMENT HOUSE, INC., petitioner, vs. COURT OF APPEALS, LOMUYON TIMBER
INDUSTRIES, INC., AMANDA MALONJAO and RUFINO MALONJAO, respondents.

(Exhs.C1,D1,E1,F1andGtoG7).

DECISION

TCBTC(TheConsolidatedBankandTrustCorporation)checkswerealldrawnbyAmandaMalonjaotothe
orderofpayeeLomuyonwhichinturn,indorsedthecheckstoplaintiff.TheMBTC(MetropolitanBankand
TrustCompany)checkwasdrawnbyoneAntoniettaMalonjaoRoquetotheorderofpayeeAmanda
Malonjaowhointurn,indorsedsaidchecktoplaintiff.

This is a petition for review of the decision of the Court of Appeals affirming in toto the decision of
the Regional Trial Court, National Capital Region, Branch 38 in Civil Case No. 83-18464 for a sum of
money.

Whenplaintiffpresentedthechecksforpaymenttothedraweebanks,thesameweredishonoredforhaving
beendrawnagainstinsufficientfunds(Exhs.HtoH7)exceptforTCBTC618821.

KAPUNAN, J.:

The undisputed facts, as quoted from the respondent courts decision are as follows:
OnMarch9,1978,LomuyonTimberIndustries,Inc.(hereafter,Lomuyon)agreedtoselltoplaintiffits
receivablesatadiscountonawithrecoursebasis(Exh.A).Itwasagreedinthatsalethatshouldareceivable
remainunpaid,plaintiff,atitsdiscretion,mayimposeapenaltyfeeof3%permonth.Tosecurethepayment
ofthereceivables,theMalonjaosalsoexecutedinfavorofplaintiff,arealestatemortgageovertheirreal
propertycoveredbyTransferCertificatesofTitleNos.(445856)S65586andNo.(162775)S65585(Exh.
B).
Pursuanttotheiragreement,onMarch9,10and15,1978andJuly19,1978,Lomuyonsoldtoplaintifffora
totalconsiderationofP2,558,073.75(Exhs.C,D,EandF),variousreceivablesconsistingofchecksas
follows:
TCBTC618821June9,1978P371,319.58
TCBTC618820September9,1978P371,319.58
TCBTC618819December9,1978P371,319.58

Plaintiffmaderepeatedwrittendemandsondefendantstomakegoodthecheckstheyindorsedandtopaythe
penaltychargesithasimposedthereon,(Exhs.I,J,K,L,L1,MandN).
Defendantsfailedtopaythevalueofthechecks.Plaintiffthusdecidedtoundertakeforeclosureofthereal
estatemortgage.
OnOctober6,1982,plaintifffiledwiththeProvincialSheriffofRizalapetitionforextrajudicialforeclosure
ofrealestatemortgagedatedSeptember28,1981.Insaidpetition,plaintiffallegedamongothers,thatasof
saiddate,September28,1981,defendantsoutstandingobligation,inclusiveofinterestandcharges,is
P4,809,187.12(Exh.O).
OnFebruary14,1983,theProvincialSheriffsoldatpublicauction,defendantsmortgagedpropertiesto
plaintiffwhowasthehighestbidderforP4,233,874.00.Thefollowingday,theProvincialSheriffissueda
CertificateofSale(Exh.P).
OnJune27,1983,plaintifffiledthecomplaintallegingthatafterdeductingthepriceofthemortgaged
propertiesfromdefendantsoutstandingobligation,thereremainsadeficiencyofP2,601,147.62asof
February14,1983,whichasofMay31,1983amountedtoP2,876,929.27inclusiveofinterestand
charges.Asanalternativecauseofaction,plaintiffallegedthatitisentitledtorecoverfromthedefendant

thetotalvalueofthechecksamountingtoP2,239,237.10.Plaintifffurtherprayedthatitbeawarded
exemplarydamages,attorneysfeesandlitigationexpenses(Records,pp.138).

THUS,AFTERDEDUCTINGTHEAUCTIONPRICEOFTHEMORTGAGEDPROPERTIESINTHE
AMOUNTOFP4,233,874.00,THEBALANCEWOULDBEP2,601,141.62.

Intheiranswer,defendantsadmittedhavingincurredtheobligationwiththeplaintiffbroughtaboutbythe
dishonorofthechecks.However,defendantscontendedthatplaintiffscomputationoftheiroutstanding
obligationiserroneous.Thus,bywayofspecialaffirmativedefenses,defendantsallegedthat:

II.THELOWERCOURTERREDINFINDINGTHATSIHIHADALREADYFULLYRECOVEREDITS
RECEIVABLESFROMTHEDEFENDANTS.

12.xxx.
13.Thecomplaintstatesnocauseofaction;
14.Thevalueofthemortgagedpropertiessoldatpublicauctionismorethansufficienttocoverthe
obligationofthedefendants;
15.Theallegedpurchasepriceofthemortgagedpropertiessoldatpublicauctionisunconscionablyvery
verylow;
16.Assumingforthesakeofargument,thattheoutstandingobligationofthedefendantsasofSeptember26,
1981(sic)wasP4,809,187.12perstatementofaccountasallegedinthecomplaintandtheallegedpurchase
priceatpublicauctionwasP4,233,874.00,thedeficiencywouldonlybeP575,313.12andnotP2,601,147.62
aserroneouslyallegedinthecomplaint.
17.Nodemandwasevermadeuponthedefendant;
18.Theinterestandchargesmadebyplaintiffisusuriousandunconscionable(id.,pp.9192).[1]
On January 11, 1981, the trial court rendered its decision with the following dispositive portion:
WHEREFORE,inviewofalltheforegoing,judgmentisherebyrendered:
1. Declaring that the plaintiff is not entitled to any deficiency amount from the defendants;
2. Dismissing defendants counterclaim; and
3. Ordering the plaintiff and defendants to pay the costs of suit.
SOORDERED.[2]
On appeal, petitioner assigned the following errors committed by the trial court:
I.THELOWERCOURTERREDINNOTFINDINGTHATDEFENDANTSAPPELLEESOBLIGATION
TOSIHIASOFTHETIMEOFFORECLOSUREAUCTIONSALEAMOUNTEDTOP6,835,021.62

III.THELOWERCOURTERREDINFINDINGTHATSIHIISNOTENTITLEDTOANY
DEFICIENCYAMOUNTFROMTHEDEFENDANTS.[3]
On August 27, 1992, the respondent court rendered the assailed decision disallowing the claim for
deficiency on the finding that the penalty charges imposed by petitioner on the principal obligation were
highly iniquitous and unconscionable. The subsequent motion for reconsideration was, likewise,
denied. Hence, petitioner filed the instant petition raising the sole issue that:
THECOURTOFAPPEALSGROSSLYMISAPPRECIATEDTHEFACTSANDAPPLICABLE
LAWBYNOTDECLARINGTHATSIHIISSTILLENTITLEDTOTHEDEFICIENCYAFTER
THEFORECLOSUREAUCTIONSALE.[4]
In disallowing the claim for deficiency, the respondent court found that the proceeds of the auction
sale was sufficient to cover the principal obligation of the private respondent including interest, penalty and
other charges. Both the respondent court and the trial court took particular attention on the penalty charge of
3% a month which was imposed on the principal obligation as a result of their default in payments.
Undaunted by the disallowance of its claim in the August 27, 1992 decision, petitioner reiterated its position
in a motion for reconsideration, averring that the respondent court and the trial court failed to reconcile the
figures due it.
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.
There is no dispute that the payment of penalty is sanctioned by the law, although the penalty may be
reduced by the courts if it is iniquitous or unconscionable. [5] Petitioner argues that while it recognizes the
authority of the court to reduce the penalty if it is iniquitous or unconscionable, the court, however, does not
have the authority to delete the payment of the penalty charges altogether for this is in clear contravention
of Article 1229and the law of contracts between the parties.
This contention is not well-taken.
The Court does not find any reversible error committed by the respondent court in ruling that the
petitioner was no longer entitled to recover any deficiency amount after the foreclosure sale on February 14,
1983. Per Statement of Account dated September 21, 1981, the obligation of the private respondent was
computed to be P4,809,187.12 inclusive of interest and penalty charges. Since the private respondent failed
to fulfill its obligation, petitioner then decided to foreclose the real estate mortgage on two properties of the

private respondent. At the time of the auction sale on February 14, 1983, the properties were sold in the
amount of P4,223,874.00 with the petitioner as the highest bidder. Deducting this amount from the
outstanding obligation of P4,809,187.12 as stipulated in the Statement of Account, there would therefore be a
balance of only about P575,313.12.
Whether or not the alleged deficiency from the foreclosure sale was P575,313.12 or P2,601,147.62 as
claimed by petitioner was of no moment. The respondent court disallowed the payment of the deficiency
altogetherbecause 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:
xxx[F]romthevariouschecksthedefendantshadsoldoriginallytotheplaintiffatthebeginningoftheir
transactions,itisshownthattheamountincludinginterestsandothercharges,isP2,970,556.64.Foratwo
yearperiodfromJune9,1978toMarch9,1980anduptoSeptember26,1981theamountgrewto
P4,809.187.12.Inotherwords,themoneyoftheplaintiffhasalreadyearnedinterestsandotherchargesto
moreorlessP1,638,630.48.Asallegedinplaintiffscomplaint,thetotalamountpurchasedbyplaintiffwas
onlyforP2,500,000.00.ThereisreasontobelievethattheP2,970,566.64representedbythevariouschecks
includetherein,theinterestandotherchargesupontheirmaturitydates.Deductingtheamountof
P2,500,000.00fromP2,970,556.64isP420,556.64.Inbrief,theinterestsandchargesthatplaintiffhas
alreadyearnedfromthetimeithasforecloseddefendants'propertieshaspassedtheP2,000,000.00.[6]
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 of Rizal Commercial Banking Corporation vs. Court of Appeals,[7] we held that:
xxx

Likewise, 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 [8] 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. We
quote with favor the respondent courts ratiocination:
Thelowercourtdidnoterrinitsrulingunderitsstatementthatsinceplaintiffhadalreadyrecoveredfullythe
receivablesfromthedefendants,thecourt,consideringthattheplaintiffforthetwopropertiesforeclosedby
itbiddedtheamountofP4,233,874.00,farandabovetheamountithadoriginallygiventothedefendants
whichwasonlyoverP2,000,000.00,itisrathermostshockingandunconscionableforplaintifftostillcollect
fromthedefendantstheallegedcollectiblesofP2,601,147.62with3%penaltycharges.Theplaintiffshould
havestoppedimposingthe3%penaltychargesandotherburdenswhenithadconsolidatedfinallythetwo
titlesofthepropertiesithadforeclosed(Decision,p.8).Afterdueconsiderationandreflectiononallthe
factualcircumstancesobtaininginthecaseatbar,itisOuropinionthatthelowercourtproperlyexercisedits
discretionunderArticle1229oftheCivilCodetoreducethepenaltychargesforbeinghighlyandgrossly
unconscionable.xxx[9]
While the Court recognizes the right of the parties to enter into contracts and are expected ro comply
with the terms and obligations, this rule is not absolute. The Court allowed to temper interest rates when
necessary.Article 1229 of the New Civil Code clearly provides:

Ontheissueofpaymentofsurchargesandpenalties,wepartlyagreethatGOYUspitifulsituationmustbe
takenintoaccount.Wedonotagree,however,thatpaymentofanyamountassurchargesandpenalties
shouldaltogetherbedeleted.xxx

ART.1229.Thejudgeshallequitablyreducethepenaltywhentheprincipalobligationhasbeenpartlyor
irregularlycompliedwithbythedebtor.Eveniftherehasbeennoperformance,thepenaltymayalsobe
reducedbythecourtsifitisiniquitousorunconscionable.

Surchargesandpenaltiesagreedtobepaidbythedebtorincaseofdefaultpartakeofthenatureofliquidated
damages,coveredbySection4,Chapter3,TitleXVIIIoftheCivilCode.Article2227thereofprovides:

Likewise, Article 2227 provides:

ART.2227.Liquidateddamages,whetherintendedasanindemnityorpenalty,shallbeequitablyreducedif
theyareiniquitousandunconscionable.
Inexercisingthisvestedpowertodeterminewhatisiniquitousandunconscionable,theCourtmustconsider
thecircumstancesofeachcase.ItshouldbestressedthattheCourtwillnotmakeanysweepingrulingthat
surchargesandpenaltiesimposedbybanksfornonpaymentoftheloansextendedbythemaregenerally
iniquitousandunconscionable.Whatmaybeiniquitousandunconscionableinonecase,maybetotallyjust
andequitableinanother.Thisprovisionoflawwillhavetobeappliedtotheestablishedfactsofanygiven
case.GiventhecircumstancesunderwhichGOYUfounditselfaftertheoccurrenceofthefire,theCourt
rulesthesurchargesratesranginganywherefrom9%to27%,plusthepenaltychargesof36%,tobe
definitelyiniquitousandunconscionable.xxx

ART.2227.Liquidateddamages,whetherintendedasanindemnityorpenalty,shallbeequitablyreducedif
theyareiniquitousandunconscionable.
ACCORDINGLY, the judgment appealed from is hereby AFFIRMED.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Puno, Pardo, and Ynares-Santiago, JJ., concur.

The facts as summarized by the Court of Appeals in its decision being challenged are:
OnAugust22,1986,theplaintiffsappellantsexecutedadeedorrealestatemortgageinwhichthey
mortgagedaparceloflandsituatedinSta.Maria,Bulacan,infavorofthedefendantappellee,tosecure
paymentofaloanofP60,000.00payablewithinaperiodoffour(4)months,withinterestthereonattherate
of6%permonth(Exh.B).
OnMay27,1987,theplaintiffsappellantsexecutedadeedofrealestatemortgageinwhichtheymortgaged
thesameparceloflandtothedefendantappellee,tosecurepaymentofaloanofP136,512.00,payable
withinaperiodofone(1)year,withinterestthereonatthelegalrate(Exh.1).

THIRD DIVISION

[G.R. No. 125944. June 29, 2001]

SPOUSES DANILO SOLANGON and URSULA SOLANGON, petitioners, vs. JOSE AVELINO
SALAZAR, respondent.
DECISION
SANDOVAL-GUTIERREZ, J.:
Petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, of
the decision of the Court of Appeals in CA-G.R. CV No. 37899, affirming the decision of the Regional Trial
Court, Branch 16, Malolos, Bulacan, in Civil Case No. 375-M-91, Spouses Danilo and Ursula Solangon vs.
Jose Avelino Salazar for annulment of mortgage. The dispositive portion of the RTC decision reads:

OnDecember29,1990,theplaintiffsappellantsexecutedadeedofrealestatemortgageinwhichthey
mortgagedthesameparceloflandinfavorofdefendantappellee,tosecurepaymentofaloanintheamount
ofP230,000.00payablewithinaperiodoffour(4)months,withinterestthereonatthelegalrate(Exh.2,
Exh.C).
Thisactionwasinitiatedbytheplaintiffsappellantstopreventtheforeclosureofthemortgaged
property.Theyallegedthattheyobtainedonlyoneloanformthedefendantappellee,andthatwasforthe
amountofP60,000.00,thepaymentofwhichwassecuredbythefirstoftheabovementioned
mortgages.Thesubsequentmortgagesweremerelycontinuationsofthefirstone,whichisnullandvoid
becauseitprovidedforunconscionablerateofinterest.Moreover,thedefendantappelleeassuredthemthat
hewillnotforeclosethemortgageaslongastheypaythestipulatedinterestuponmaturityorwithina
reasonabletimethereafter.TheyhavealreadypaidthedefendantappelleeP78,000.00andtendered
P47,000.00more,butthelatterhasinitiatedforeclosureproceedingsfortheirallegedfailuretopaytheloan
P230,000.00plusinterest.
Ontheotherhand,thedefendantappelleeJoseAvelinoSalazarclaimedthattheabovedescribedmortgages
wereexecutedtosecurethreeseparateloansofP60,000.00P136,512.00andP230,000.00,andthatthefirst
twoloanswerepaid,butthelastonewasnot.Hedeniedhavingrepresentedthathewillnotforeclosethe
mortgageaslongastheplaintiffsappellantspayinterest.
In their petition, spouses Danilo and Ursula Solangon ascribe to the Court of Appeals the following
errors:

WHEREFORE,judgmentisherebyrenderedagainsttheplaintiffsinfavorofthedefendantSalazar,as
follows:

1.TheCourtofAppealserredinholdingthatthree(3)mortgagecontractswereexecutedbytheparties
insteadofone(1);

1. Ordering the dismissal of the complaint;

2. Ordering the dissolution of the preliminary injunction issued on July 8, 1991;
3. Ordering the plaintiffs to pay the defendant the amount of P10,000.00 by way of attorneys
fees; and
4. To pay the costs.
SOORDERED.[1]

2.TheCourtofAppealserredinrulingthataloanobligationsecuredbyarealestatemortgagewithan
interestof72%percentperannumor6%permonthisnotunconscionable;
4.TheCourtofAppealserredinholdingthattheloanofP136,512.00HASNOTBEENPAIDwhenthe
mortgageehimselfstatesinhisANSWERthatthesamewasalreadypaid;and
5.TheCourtofAppealserredinnotresolvingtheSPECIFICISSUESraisedbytheappellants.

In his comment, respondent Jose Avelino Salazar avers that the petition should not be given due
course as it raises questions of facts which are not allowed in a petition for review on certiorari.
We find no merit in the instant petition.
The core of the present controversy is the validity of the third contract of mortgage which was
foreclosed.
Petitioners contend that they obtained from respondent Avelino Salazar only one (1) loan in the
amount of P60,000.00 secured by the first mortgage of August 1986. According to them, they signed the
third mortgage contract in view of respondents assurance that the same will not be foreclosed. The trial
court, which is in the best position to evaluate the evidence presented before it, did not give credence to
petitioners corroborated testimony and ruled:
Thetestimonyisimprobable.TherealestatemortgagewassignednotonlybyUrsulaSolangonbutalsoby
herhusbandincludingthePromissoryNoteappendedtoit.Signingadocumentwithoutknowingitscontents
iscontrarytocommonexperience.TheuncorroboratedtestimonyofUrsulaSolangoncannotbegiven
weight.[2]
Petitioners likewise insist that, contrary to the finding of the Court of appeals, they had paid the
amount of P136,512.00, or the second loan. In fact, such payment was confirmed by respondent Salazar in
his answer to their complaint.
It is readily apparent that petitioners are raising issues of fact in this petition. In a petition for review
under Rule 45 of the 1997 Rules of Civil Procedure, as amended, only questions of law may be raised and
they must be distinctly set forth. The settled rule is that findings of fact of the lower courts (including the
Court of Appeals) are final and conclusive and will not be reviewed on appeal except: (1) when the
conclusion is a finding grounded entirely on speculation, surmises or conjectures; (2) when the inference
made is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion; (4) when the
judgment is based on a misapprehension of facts; (5) when the findings of facts are conflicting; (6) when the
Court of Appeals, in making its findings, went beyond the issues of the case and such findings are contrary to
the admission of both appellant and appellee; (6) when the findings of the Court of Appeals are contrary to
those of the trial court; and (7) when the findings of fact are conclusions without citation of specific evidence
on which they are based.[3]
None of these instances are extant in the present case.
Parenthetically, petitioners are questioning the rate of interest involved here. They maintain that the
Court of Appeals erred in decreeing that the stipulated interest rate of 72% per annum or 6% per month
is not unconscionable.
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. Obviously, this was in consonance with our ruling
in Liam Law v. Olympic Sawmill Co.[4]
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 by C.B. Circular No. 905, 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. [5] In Medel v. Court of Appeals,[6] this court had the
occasion to rule on this question - whether or not the stipulated rate of interest at 5.5% per month on a loan
amounting to P500,000.00 is usurious. While decreeing that the aforementioned interest was not usurious,

this
Court
held
that
the
same
being iniquitous, unconscionable and exorbitant, thus:

must

be

equitably

reduced

for

Weagreewithpetitionersthatthestipulatedrateofinterestat5.5%permonthontheP500,000.00
loanisexcessive,iniquitous,unconscionableandexorbitant.However,wecannotconsidertherate
usuriousbecausethisCourthasconsistentlyheldthatCircularNo.905oftheCentralBank,adoptedon
December22,1982,hasexpresslyremovedtheinterestceilingsprescribedbytheUsuryLawandthatthe
UsuryLawisnowlegallyinexistent.
InSecurityBankandTrustCompanyvs.RegionalTrialCourtofMakati,Branch61theCourtheldthatCB
CircularNo.905didnotrepealnorinanywayamendtheUsuryLawbutsimplysuspendedthelatters
effectivity.Indeed,wehaveheldthataCentralBankCircularcannotrepealalaw.Onlyalawcanrepeal
anotherlaw.IntherecentcaseofFlorendov.CourtofAppeals,theCourtreiteratedtherulingthatbyvirtue
ofCBCircular905,theUsuryLawhasbeenrenderedineffective.UsuryLawhasbeenlegallynonexistent
inourjurisdiction.Interestcannowbechargedaslenderandborrowermayagreeupon.
Nevertheless,wefindtheinterestat5.5%permonth,or66%perannum,stipulateduponbythe
partiesinthepromissorynoteiniquitousorunconscionable,andhence,contrarytomorals(contra
bonosmores),ifnotagainstthelaw.Thestipulationisvoid.Thecourtsshallreduceequitably
liquidateddamages,whetherintendedasanindemnityorapenaltyiftheyareiniquitousor
unconscionable.(Emphasissupplied)
In the case at bench, 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.
WHEREFORE, the appealed decision of the Court of Appeals is AFFIRMED subject to the
MODIFICATION that the interest rate of 72% per annum is ordered reduced to 12 % per annum.
SO ORDERED.
Melo, (Chairman), Vitug, Panganiban, and Gonzaga-Reyes, JJ., concur.

stipulated that interest at 12% on the amount due for attorneys fees and collection (Exh. BB). [1] On
September 7, 1987, defendant paid plaintiff the amount of P300,000.00 out of its total purchases
as above-stated (Exh. S), thereby leaving an unpaid account on the aforesaid deliveries
of P3,802,478.20. On several occasions, plaintiff wrote defendant demanding payment of its
outstanding obligations due plaintiff (Exhs. L, M, N, and P). In response, defendant wrote plaintiff
on October 5, 1987 requesting the latter if it could pay its outstanding account in monthly
installments of P500,000.00 plus 1% interest per month commencing on October 15, 1987 until full
payment (Exh. O and O-4). Plaintiff, however, rejected defendants offer and accordingly reiterated
its demand for the full payment of defendants account (Exh. P). [2]

THIRD DIVISION

[G. R. No. 126486. February 9, 1998]

BARONS MARKETING CORP., petitioner, vs. COURT OF APPEALS and PHELPS DODGE
PHILS., INC. respondents.
DECISION
KAPUNAN, J.:
The instant petition raises two issues: (1) whether or not private respondent is guilty of
abuse of right; and (2) whether or not private respondent is entitled to interest and attorneys fees.
The facts are undisputed:
On August 31, 1973, plaintiff [Phelps Dodge, Philippines, Inc. private respondent herein] appointed
defendant [petitioner Barons Marketing, Corporation] as one of its dealers of electrical wires and
cables effective September 1, 1973 (Exh. A). As such dealer, defendant was given by plaintiff 60
days credit for its purchases of plaintiffs electrical products. This credit term was to be reckoned
from the date of delivery by plaintiff of its products to defendant (Exh. 1).
During the period covering December 1986 to August 17, 1987, defendant purchased, on credit,
from plaintiff various electrical wires and cables in the total amount of P4,102,438.30 (Exh. B to
K).These wires and cables were in turn sold, pursuant to previous arrangements, by defendant to
MERALCO, the former being the accredited supplier of the electrical requirements of the
latter. Under the sales invoices issued by plaintiff to defendant for the subject purchases, it is

On 29 October 1987, private respondent Phelps Dodge Phils., Inc. filed a complaint before
the Pasig Regional Trial Court against petitioner Barons Marketing Corporation for the recovery of
P3,802,478.20 representing the value of the wires and cables the former had delivered to the
latter, including interest. Phelps Dodge likewise prayed that it be awarded attorneys fees at the rate
of 25% of the amount demanded, exemplary damages amounting to at least P100,000.00, the
expenses of litigation and the costs of suit.
Petitioner, in its answer, admitted purchasing the wires and cables from private respondent
but disputed the amount claimed by the latter. Petitioner likewise interposed a counterclaim against
private respondent, alleging that it suffered injury to its reputation due to Phelps Dodges acts. Such
acts were purportedly calculated to humiliate petitioner and constituted an abuse of rights.
After hearing, the trial court on 17 June 1991 rendered its decision, the dispositive portion of
which reads:
WHEREFORE, from all the foregoing considerations, the Court finds Phelps Dodge Phils., Inc. to
have preponderantly proven its case and hereby orders Barons Marketing, Inc. to pay Phelps
Dodge the following:
1. P3,108,000.00 constituting the unpaid balance of defendants purchases from plaintiff and
interest thereon at 12% per annum computed from the respective expiration of the 60 day credit
term, vis--vis the various sales invoices and/or delivery receipts;
2. 25% of the preceding obligation for and as attorneys fees;
3. P10,000.00 as exemplary damages;
4. Costs of suit.[3]
Both parties appealed to respondent court. Private respondent claimed that the trial court
should have awarded it the sum of P3,802,478.20, the amount which appeared in the body of the
complaint and proven during the trial rather than P3,108,000.00. The latter amount appears in
petitioners prayer supposedly as a result of a typographical error.
On the other hand, petitioner reiterated its claims for damages as a result of creditors
abuse. It also alleged that private respondent failed to prove its cause of action against it.

On 25 June 1996, the Court of Appeals rendered a decision modifying the decision of the
trial court, thus:

ART. 19. Every person must, in the exercise of his rights and in the performance of his duties, act
with justice, give everyone his due, and observe honesty and good faith.

WHEREFORE, from all the foregoing considerations, the Court finds Phelps Dodge Phils., Inc. to
have preponderantly proven its case and hereby orders Barons Marketing, Inc. to pay Phelps
Dodge the following:

Petitioner now invokes Article 19 and Article 21 [8] of the Civil Code, claiming that private
respondent abused its rights when it rejected petitioners offer of settlement and subsequently filed
the action for collection considering:

1. P3,802,478.20 constituting the unpaid balance of defendants purchases from plaintiff and
interest thereon at 12% per annum computed from the respective expiration of the 60 day credit
term, vis--vis the various sales invoices and/or delivery receipts; and

xxx that the relationship between the parties started in 1973 spanning more than 13 years before
the complaint was filed, that the petitioner had been a good and reliable dealer enjoying a good
credit standing during the period before it became delinquent in 1987, that the relationship
between the parties had been a fruitful one especially for the private respondent, that the petitioner
exerted its outmost efforts to settle its obligations and avoid a suit, that the petitioner did not evade
in the payment of its obligation to the private respondent, and that the petitioner was just asking a
small concession that it be allowed to liquidate its obligation to eight (8) monthly installments
of P500,000.00 plus 1% interest per month on the balance which proposal was supported by postdated checks.[9]

2. 5% of the preceding obligation for and as attorneys fees.

No costs.[4]
Petitioner Barons Marketing is now before this Court alleging that respondent court erred
when it held (1) private respondent Phelps Dodge not guilty of creditors abuse, and (2) petitioner
liable to private respondent for interest and attorneys fees.
I
Petitioner does not deny private respondents rights to institute an action for collection and
to claim full payment. Indeed, petitioners right to file an action for collection is beyond cavil.
[5]
Likewise, private respondents right to reject petitioners offer to pay in installments is guaranteed
by Article 1248 of the Civil Code which states:

Expounding on its theory, petitioner states:

In the ordinary course of events, a suit for collection of a sum of money filed in court is done for the
primary purpose of collecting a debt or obligation. If there is an offer by the debtor to pay its debt or
obligation supported by post-dated checks and with provision for interests, the normal response of
a creditor would be to accept the offer of compromise and not file the suit for collection. It is of
common knowledge that proceedings in our courts would normally take years before an action is
finally settled. It is always wiser and more prudent to accept an offer of payment in installment
rather than file an action in court to compel the debtor to settle his obligation in full in a single
payment.

ART. 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled
partially to receive the prestations in which the obligation consists. Neither may the debtor be
required to make partial payments.
However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and
the debtor may effect the payment of the former without waiting for the liquidation of the latter.
Under this provision, the prestation , i.e., the object of the obligation, must be performed in one act,
not in parts.
Tolentino concedes that the right has its limitations:
Partial Prestations. Since the creditor cannot be compelled to accept partial performance, unless
otherwise stipulated, the creditor who refuses to accept partial prestations does not incur in delay
or mora accipiendi, except when there is abuse of right or if good faith requires acceptance.[6]
Indeed, the law, as set forth in Article 19 of the Civil Code, prescribes a primordial limitation on all
rights by setting certain standards that must be observed in the exercise thereof .[7] Thus:

xxx.
xxx. Why then did private respondent elect to file a suit for collection rather than accept petitioners
offer of settlement, supported by post-dated checks, by paying monthly installments of
P500,000.00 plus 1% per month commencing on October 15, 1987 until full payment? The answer
is obvious. The action of private respondent in filling a suit for collection was an abuse of right and
exercised for the sole purpose of prejudicing and injuring the petitioner.[10]
Petitioner prays that the Court order private respondent to pay petitioner moral and
exemplary damages, attorneys fees, as well as the costs of suit. It likewise asks that it be allowed
to liquidate its obligation to private respondent, without interests, in eight equal monthly
installments.
Petitioners theory is untenable.
Both parties agree that to constitute an abuse of rights under Article 19 the defendant must
act with bad faith or intent to prejudice the plaintiff. They cite the following comments of Tolentino
as their authority:

Test of Abuse of Right. Modern jurisprudence does not permit acts which, although not unlawful,
are anti-social. There is undoubtedly an abuse of right when it is exercised for the only purpose of
prejudicing or injuring another. When the objective of the actor is illegitimate, the illicit act cannot
be concealed under the guise of exercising a right. The principle does not permit acts which,
without utility or legitimate purpose cause damage to another, because they violate the concept of
social solidarity which considers law as rational and just. Hence, every abnormal exercise of a
right, contrary to its socio-economic purpose, is an abuse that will give rise to liability. The exercise
of a right must be in accordance with the purpose for which it was established, and must not be
excessive or unduly harsh; there must be no intention to injure another. Ultimately, however, and in
practice, courts, in the sound exercise of their discretion, will have to determine all the facts and
circumstances when the exercise of a right is unjust, or when there has been an abuse of right. [11]
The question, therefore, is whether private respondent intended to prejudice or injure
petitioner when it rejected petitioners offer and filed the action for collection.
We hold in the negative. It is an elementary rule in this jurisdiction that good faith is
presumed and that the burden of proving bad faith rests upon the party alleging the same. [12] In the
case at bar, petitioner has failed to prove bad faith on the part of private respondent. Petitioners
allegation that private respondent was motivated by a desire to terminate its agency relationship
with petitioner so that private respondent itself may deal directly with Meralco is simply
not supported by the evidence. At most, such supposition is merely speculative.
Moreover,
we
find
that
private
respondent
was
driven
by
very
legitimate reasons for rejecting petitioners offer and instituting the action for collection before the
trial court. As pointed out by private respondent, the corporation had its own cash position to
protect in order for it to pay its own obligations. This is not such a lame and poor rationalization as
petitioner purports it to be. For if private respondent were to be required to accept petitioners offer,
there would be no reason for the latter to reject similar offers from its other debtors. Clearly, this
would be inimical to the interests of any enterprise, especially a profit-oriented one like private
respondent. It is plain to see that what we have here is a mere exercise of rights, not
an abuse thereof. Under these circumstances, we do not deem private respondent to have acted in
a manner contrary to morals, good customs or public policy as to violate the provisions of Article
21 of the Civil Code.
Consequently, petitioners prayer for moral and exemplary damages must thus be
rejected. Petitioners claim for moral damages is anchored on Article 2219 (10) of the Civil Code
which states:
ART. 2219. Moral damages may be recovered in the following and analogous cases:

not exemplary damages should be awarded. [13] As we have observed above, petitioner has failed
to discharge this burden.
It may not be amiss to state that petitioners contract with private respondent has the force
of law between them.[14] Petitioner is thus bound to fulfill what has been expressly stipulated
therein.[15] In the absence of any abuse of right, private respondent cannot be allowed to perform its
obligation under such contract in parts. Otherwise, private respondents right under Article 1248 will
be negated, the sanctity of its contract with petitioner defiled. The principle of autonomy of
contracts[16] must be respected.
II
Under said contract, petitioner is liable to private respondent for the unpaid balance of its
purchases from private respondent plus 12% interest. Private respondents sales invoices
expressly provide that:
xxx. Interest at 12% per annum will be charged on all overdue account plus 25% on said amount
for attorneys fees and collection. xxx.[17]
It may also be noted that the above stipulation, insofar as it provides for the payment of
25% on said amount for attorneys fees and collection (sic), constitutes what is known as a penal
clause.[18]Petitioner is thus obliged to pay such penalty in addition to the 12% annual interest, there
being an express stipulation to that effect.
Petitioner nevertheless urges this Court to reduce the attorneys fees for being grossly
excessive, considering the nature of the case which is a mere action for collection of a sum of
money. It may be pointed out however that the above penalty is supposed to answer not only for
attorneys fees but for collection fees as well. Moreover:
x x x the attorneys fees here provided is not, strictly speaking, the attorneys fees recoverable as
between attorney and client spoken of and regulated by the Rules of Court. Rather, the attorneys
fees here are in the nature of liquidated damages and the stipulation therefor is aptly called a penal
clause. It has been said that so long as such stipulation does not contravene law, morals, or public
order, it is strictly binding upon defendant. The attorneys fees so provided are awarded in favor of
the litigant, not his counsel. It is the litigant, not counsel, who is the judgment creditor entitled to
enforce the judgment by execution.[19]
Nonetheless, courts are empowered to reduce such penalty if the same is iniquitous or
unconscionable. Article 1229 of the Civil Code states thus:

xxx.
(10) Acts and actions referred to in articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.

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. (Underscoring
supplied.)

xxx.
Having ruled that private respondents acts did not transgress the provisions of Article 21, petitioner
cannot be entitled to moral damages or, for that matter, exemplary damages. While the amount of
exemplary damages need not be proved, petitioner must show that he is entitled to moral,
temperate or compensatory damages before the court may consider the question of whether or

The sentiments of the law are echoed in Article 2227 of the same Code:

ART. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably
reduced if they are iniquitous or unconscionable.
It is true that we have upheld the reasonableness of penalties in the form of attorneys fees
consisting of twenty-five percent (25%) of the principal debt plus interest. [20] In the case at bar,
however, the interest alone runs to some four and a half million pesos (P4.5M), even exceeding
the principal debt amounting to almost four million pesos (P4.0M). Twenty five percent (25%) of the
principal and interest amounts to roughly two million pesos (P2M). In real terms, therefore, the
attorneys fees and collection fees are manifestly exorbitant. Accordingly, we reduce the same to
ten percent (10%) of the principal.
Private respondent, however, argues that petitioner failed to question the award of attorneys
fees on appeal before respondent court and raised the issue only in its motion for
reconsideration.Consequently, petitioner should be deemed to have waived its right to question
such award.
Private respondents attempts to dissuade us from reducing the penalty are futile. The Court
is clothed with ample authority to review matters, even if they are not assigned as errors in their
appeal, if it finds that their consideration is necessary in arriving at a just decision of the case. [21]
WHEREFORE, the decision of the Court of Appeals is hereby MODIFIED in that the
attorneys and collection fees are reduced to ten percent (10%) of the principal but is AFFIRMED in
all other respects.
SO ORDERED.
Narvasa, C.J., Romero, Francisco, and Purisima, JJ., concur.

upon the signing of the contract; P50,000 on or before September 28, 1936; P300,000 on or before
December 24, 1936; P200,000 on or before March 24, 1937. It was agreed that should the
purchaser fail to pay the amounts paid for itself. One of the clauses of the deed also states that the
purchaser may form a corporation called the Manila Racing Club, Inc., to whom he may transfer all
his rights and obligations under the contract.
The purchaser Campos made the down payment P50,000 upon signing the contract and on
September 28, 1938 paid the second installment of P50,000.
On October 22, 1936, the Manila Racing Club, Inc., was organized and Campos transferred to it all
his rights and obligations under his contract with the Manila Jockey Club.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-46533

October 28, 1939

THE MANILA RACING CLUB, INC., plaintiff-appellant,

vs.
THE MANILA JOCKEY CLUB, ET AL., defendants-appellees.
Sotto & Sotto for appellant.
Araneta, Zaragoza and Araneta for appellees, Manila Jockey Club et al.
Orense and Belmonte for appellees Napkil Vda, de Bautista and Montenegro de Butte.

AVANCEA, C. J.:p
On September 18, 1936 Rafael J. Campos entered a contract (Exhibit C) with the Manila Jockey
Club, an unregistered partnership, whereby he purchased from it the parcel of land described in
transfer certificate of title No. 8724 with its improvements, the good-will, and certain personal
property. The price agreed upon in this transaction is P1,200,000 payable as follows: P50,000

As the third installment of P300,000 became due on December 24, 1936, and the purchaser could
not pay it, the vendor, on January 11, 1937, declared the contract cancelled and kept the amount
of P100,000 already paid, corresponding to the first installments. The purchaser was, however,
granted an extension until January 22, 1937, to revive the contract by paying the P300,000, but
having failed to do this, the partners of the vendor ratified on January 23, 1937, the cancellation of
the contract agreed upon by its board of directors and the forfeiture of the P100,000 paid by the
purchaser. Although the plaintiff contends that the Manila Jockey Club granted to purchaser
Campos an indefinite time to pay the P300,000, corresponding to the third installment, there is no
sufficient evidence thereof and, on the contrary, Campos admits, and defendants' evidence so
indicate, that January 22, 1937, was the last extension granted to him to make this
payment.lwphi1.nt
On March 23, 1937 the Manila Jockey Club, Inc., was organized and to it were transferred all the
properties, rights and actions of the Manila Jockey Club.
This action is filed by the plaintiff against the Manila Jockey Club and its partners for the recovery
from them of the forfeited amount of P100,000 and for the payment of P50,000 as damages. The
appealed judgment absolves the defendants.
Assuming these facts to be true, if the clause of the contract referring to the forfeiture of the
P100,000 already paid, should the purchaser Campos fail to pay the subsequent installments, is
valid, the case does not present any difficulty because the contract is clear on this point.
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 (article 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. Viewing
concretely the true effects thereof in the present case, the amount forfeited constitutes only eight
per cent of the stipulated price, which is not excessive if considered as profit which would have
been obtained had the contract been complied with. There is, moreover, evidence that the
defendants, 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.

On the other hand, the allegation that the defendants were responsible for non-compliance with the
contract is in no wise justified. It is said that the majority of the members of the Manila Jockey Club
promised to subscribe to one-half of the shares of the plaintiff, and for failure to live up to this
promise, the money to pay the third installment of P300,000 could not be raised. There is,
however, no sufficient evidence of such promise which, according to Campos, was merely verbal.
Furthermore, Campos himself attributes the failure to pay the third installment to the fact that the
public, due to the state of the stock market, did not respond to the expectations of the
incorporators of the plaintiff. But it seems that even this is not the cause of the breach, for on the
date the third installment became due, the plaintiff had subscribed shares of its capital stock in the
amount of P600,000, paid in part and the remainder payable on demand. The deduction from all
this is that the breach of the contract cannot be attributed to the defendants and, much less, to the
company which, it is also alleged, the defendants brought into being to defeat the organization of
the plaintiff.

collection or if a suit were instituted to enforce payment. The obligation matured on 8 September
1981; the bank, however, granted an extension but only up until 29 December 1981.

In view of the foregoing considerations, the appealed judgment is affirmed, with the costs to the
appellant. So ordered.

Two years later, or on 23 October 1987, petitioners filed a motion for reconsideration of the
order of the trial court declaring them as having waived their right to present evidence and prayed
that they be allowed to prove their case. The court a quo denied the motion in an order, dated 5
September 1988, and on 20 October 1989, it rendered its decision, [1] the dispositive portion of
which read:

Villa-Real, Imperial, Diaz, Laurel, Concepcion and Moran, JJ., concur.

Despite several demands from the bank, petitioners failed to settle the debt which, as of 20
May 1982, amounted to P114,416.10. On 30 September 1982, the bank sent a final demand letter
to petitioners informing them that they had five days within which to make full payment. Since
petitioners still defaulted on their obligation, the bank filed on 3 November 1982, with the Regional
Trial Court of Makati, Branch 143, a complaint for recovery of the due amount.
After petitioners had filed a joint answer to the complaint, the bank presented its evidence
and, on 27 March 1985, rested its case. Petitioners, instead of introducing their own evidence, had
the hearing of the case reset on two consecutive occasions. In view of the absence of petitioners
and their counsel on 28 August 1985, the third hearing date, the bank moved, and the trial court
resolved, to consider the case submitted for decision.

WHEREFORE,judgmentisherebyrenderedinfavoroftheplaintiffandagainstthedefendants,orderingthe
lattertopay,jointlyandseverally,totheplaintiff,asfollows:
THIRD DIVISION
"1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per annum,
2% service charge and 5% per month penalty charge, commencing on 20 May
1982 until fully paid;
[G.R. No. 138677. February 12, 2002]

"2. To pay the further sum equivalent to 10% of the total amount of indebtedness for
and as attorneys fees; and
"3. To pay the costs of the suit.[2]

TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA, petitioners, vs. HON. COURT OF

APPEALS & SECURITY BANK & TRUST COMPANY, respondents.
DECISION
VITUG, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court,
assailing the decision and resolutions of the Court of Appeals in CA-G.R. CV No. 34594, entitled
"Security Bank and Trust Co. vs. Tolomeo Ligutan, et al."
Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained on 11 May 1981 a loan in
the amount of P120,000.00 from respondent Security Bank and Trust Company. Petitioners
executed a promissory note binding themselves, jointly and severally, to pay the sum borrowed
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 if the matter were indorsed to a lawyer for

Petitioners interposed an appeal with the Court of Appeals, questioning the rejection by the
trial court of their motion to present evidence and assailing the imposition of the 2% service
charge, the 5% per month penalty charge and 10% attorney's fees. In its decision[3] of 7 March
1996, the appellate court affirmed the judgment of the trial court except on the matter of the 2%
service charge which was deleted pursuant to Central Bank Circular No. 783. Not fully satisfied
with the decision of the appellate court, both parties filed their respective motions for
reconsideration.[4] Petitioners prayed for the reduction of the 5% stipulated penalty for being
unconscionable. The bank, on the other hand, asked that the payment of interest and penalty be
commenced not from the date of filing of complaint but from the time of default as so stipulated in
the contract of the parties.
On 28 October 1998, the Court of Appeals resolved the two motions thusly:
WefindmeritinplaintiffappelleesclaimthattheprincipalsumofP114,416.00withinterestthereonmust
commencenotonthedateoffilingofthecomplaintaswehavepreviouslyheldinourdecisionbutonthe
datewhentheobligationbecamedue.

Defaultgenerallybeginsfromthemomentthecreditordemandstheperformanceoftheobligation.However,
demandisnotnecessarytorendertheobligorindefaultwhentheobligationorthelawsoprovides.
Inthecaseatbar,defendantsappellantsexecutedapromissorynotewheretheyundertooktopaythe
obligationonitsmaturitydate'withoutnecessityofdemand.'Theyalsoagreedtopaytheinterestincaseof
nonpaymentfromthedateofdefault.
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Whilewemaintainthatdefendantsappellantsmustbeboundbythecontractwhichtheyacknowledgedand
signed,wetakecognizanceoftheirpleafortheapplicationoftheprovisionsofArticle1229xxx.
Consideringthatdefendantsappellantspartiallycompliedwiththeirobligationunderthepromissorynoteby
thereductionoftheoriginalamountofP120,000.00toP114,416.00andinorderthattheywillfinallysettle
theirobligation,itisourviewandwesoholdthatintheinterestofjusticeandpublicpolicy,apenaltyof3%
permonthor36%perannumwouldsuffice.
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WHEREFORE,thedecisionsoughttobereconsideredisherebyMODIFIED.Thedefendants
appellantsTolomeoLigutanandLeonidasdelaLlanaareherebyorderedtopaytheplaintiff
appelleeSecurityBankandTrustCompanythefollowing:
1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per
annum and 3% per month penalty charge commencing May 20, 1982 until
fully paid;
2. The sum equivalent to 10% of the total amount of the indebtedness as and
for attorneys fees.[5]
On 16 November 1998, petitioners filed an omnibus motion for reconsideration and to admit
newly discovered evidence,[6] alleging that while the case was pending before the trial court,
petitioner Tolomeo Ligutan and his wife Bienvenida Ligutan executed a real estate mortgage on 18
January 1984 to secure the existing indebtedness of petitioners Ligutan and dela Llana with the
bank.Petitioners contended that the execution of the real estate mortgage had the effect
of novating the contract between them and the bank. Petitioners further averred that the mortgage
was extrajudiciallyforeclosed on 26 August 1986, that they were not informed about it, and the
bank did not credit them with the proceeds of the sale. The appellate court denied the omnibus
motion for reconsideration and to admit newly discovered evidence, ratiocinating that such a
second motion for reconsideration cannot be entertained under Section 2, Rule 52, of the 1997
Rules of Civil Procedure. Furthermore, the appellate court said, the newly-discovered evidence
being invoked by petitioners had actually been known to them when the case was brought on
appeal and when the first motion for reconsideration was filed. [7]
Aggrieved by the decision and resolutions of the Court of Appeals, petitioners elevated their
case to this Court on 9 July 1999 via a petition for review on certiorari under Rule 45 of the Rules
of Court, submitting thusly -

I. The respondent Court of Appeals seriously erred in not holding that the 15.189%
interest and the penalty of three (3%) percent per month or thirty-six
(36%) percent per annum imposed by private respondent bank on
petitioners loan obligation are still manifestly exorbitant, iniquitous
and unconscionable.
II. The respondent Court of Appeals gravely erred in not reducing to a reasonable
level the ten (10%) percent award of attorneys fees which is highly
and grossly excessive, unreasonable and unconscionable.
III. The respondent Court of Appeals gravely erred in not admitting petitioners newly
discovered evidence which could not have been timely produced
during the trial of this case.
IV. The respondent Court of Appeals seriously erred in not holding that there was
a novation of the cause of action of private respondents complaint in
the instant case due to the subsequent execution of the real estate
mortgage during the pendency of this case and the subsequent
foreclosure of the mortgage.[8]
Respondent bank, which did not take an appeal, would, however, have it that the penalty
sought to be deleted by petitioners was even insufficient to fully cover and compensate for the cost
of money brought about by the radical devaluation and decrease in the purchasing power of the
peso, particularly vis-a-vis the U.S. dollar, taking into account the time frame of its occurrence. The
Bank would stress that only the amount of P5,584.00 had been remitted out of the entire loan of
P120,000.00.[9]
A penalty clause, expressly recognized by law,[10] is an accessory undertaking to assume
greater liability on the part of an obligor in case of breach of an obligation. It functions to strengthen
the coercive force of the obligation[11] and to provide, in effect, for what could be the liquidated
damages resulting from such a breach. The obligor would then be bound to pay the stipulated
indemnity without the necessity of proof on the existence and on the measure of damages caused
by the breach.[12] Although a court may not at liberty ignore the freedom of the parties to agree on
such terms and conditions as they see fit that contravene neither law nor morals, good customs,
public order or public policy, a stipulated penalty, nevertheless, may be equitably reduced by the
courts if it is iniquitous or unconscionable or if the principal obligation has been partly or irregularly
complied with.[13]
The question of whether a penalty is reasonable or iniquitous can be partly subjective and
partly objective. Its resolution would depend on such factors as, but not necessarily confined to,
the type, extent and purpose of the penalty, the nature of the obligation, the mode of breach and its
consequences, the supervening realities, the standing and relationship of the parties, and the like,
the application of which, by and large, is addressed to the sound discretion of the
court. In Rizal Commercial Banking Corp. vs. Court of Appeals,[14] just an example, the Court has
tempered the penalty charges after taking into account the debtors pitiful situation and its offer to
settle the entire obligation with the creditor bank. The stipulated penalty might likewise be reduced
when a partial or irregular performance is made by the debtor.[15] The stipulated penalty might even
be deleted such as when there has been substantial performance in good faith by the obligor,
[16]
when the penalty clause itself suffers from fatal infirmity, or when exceptional circumstances so
exist as to warrant it.[17]
The Court of Appeals, exercising its good judgment in the instant case, has reduced 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..
Anent the stipulated interest of 15.189% per annum, petitioners, for the first time, question
its reasonableness and prays that the Court reduce the amount. This contention is a fresh issue
that has not been raised and ventilated before the courts below. In any event, the interest
stipulation, on its face, does not appear as being that excessive. The essence or rationale for the
payment of interest, quite often referred to as cost of money, is not exactly the same as that of a
surcharge or a penalty. A penalty stipulation is not necessarily preclusive of interest, if there is an
agreement to that effect, the two being distinct concepts which may separately be demanded.
[18]
What may justify a court in not allowing the creditor to impose full surcharges and penalties,
despite an express stipulation therefor in a valid agreement, may not equally justify the nonpayment or reduction of interest. Indeed, the interest prescribed in loan financing arrangements is
a fundamental part of the banking business and the core of a bank's existence. [19]
Petitioners next assail the award of 10% of the total amount of indebtedness by way of
attorney's fees for being grossly excessive, exorbitant and unconscionable vis-a-vis the time spent
and the extent of services rendered by counsel for the bank and the nature of the case. Bearing in
mind that the rate of attorneys fees has been agreed to by the parties and intended to answer not
only for litigation expenses but also for collection efforts as well, the Court, like the appellate court,
deems the award of 10% attorneys fees to be reasonable.
Neither can the appellate court be held to have erred in rejecting petitioners' call for a new
trial or to admit newly discovered evidence. As the appellate court so held in its resolution of 14
May 1999UnderSection2,Rule52ofthe1997RulesofCivilProcedure,nosecondmotionforreconsiderationofa
judgmentorfinalresolutionbythesamepartyshallbeentertained.Consideringthattheinstantmotionis
alreadyasecondmotionforreconsideration,thesamemustthereforebedenied.
Furthermore,itwouldappearfromtherecordsavailabletothiscourtthatthenewlydiscoveredevidence
beinginvokedbydefendantsappellantshaveactuallybeenexistentwhenthecasewasbroughtonappealto
thiscourtaswellaswhenthefirstmotionforreconsiderationwasfiled.Hence,itisquitesurprisingwhy
defendantsappellantsraisedtheallegednewlydiscoveredevidenceonlyatthisstagewhentheycouldhave
donesointheearlierpleadingsfiledbeforethiscourt.
Theproprietyoracceptabilityofsuchasecondmotionforreconsiderationisnotcontingentuponthe
avermentof'new'groundstoassailthejudgment,i.e.,groundsotherthanthosetheretoforepresentedand
rejected.Otherwise,attainmentoffinalityofajudgmentmightbestayedoffindefinitely,dependingonthe
partysingenuousnessorclevernessinconceivingandformulating'additionalflaws'or'newlydiscovered
errors'therein,orthinkingupsomeinjuryorprejudicetotherightsofthemovantforreconsideration.[20]
At any rate, the subsequent execution of the real estate mortgage as security for the existing loan
would not have resulted in the extinguishment of the original contract of loan because
of novation.Petitioners acknowledge that the real estate mortgage contract does not contain any
express stipulation by the parties intending it to supersede the existing loan agreement between
the petitioners and the bank. [21] Respondent bank has correctly postulated that the mortgage is but
an accessory contract to secure the loan in the promissory note.

Extinctive novation requires, first, a previous valid obligation; second, the agreement of all
the parties to the new contract; third, the extinguishment of the obligation; and fourth, the validity of
the new one.[22] In order that an obligation may be extinguished by another which substitutes the
same, it is imperative that it be so declared in unequivocal terms, or that the old and the new
obligation be on every point incompatible with each other. [23] An obligation to pay a sum of money
is not extinctively novated by a new instrument which merely changes the terms of payment or
adding compatible covenants or where the old contract is merely supplemented by the new one.
[24]
When not expressed, incompatibility is required so as to ensure that the parties have indeed
intended such novationdespite their failure to express it in categorical terms. The incompatibility, to
be sure, should take place in any of the essential elements of the obligation, i.e., (1) the juridical
relation or tie, such as from a mere commodatum to lease of things, or from negotiorum gestio to
agency, or from a mortgage to antichresis,[25] or from a sale to one of loan;[26] (2) the object or
principal conditions, such as a change of the nature of the prestation; or (3) the subjects, such as
the substitution of a debtor [27] or the subrogation of the creditor. Extinctive novation does not
necessarily imply that the new agreement should be complete by itself; certain terms and
conditions may be carried, expressly or by implication, over to the new obligation.
WHEREFORE, the petition is DENIED.
SO ORDERED.
Melo, (Chairman), Panganiban, Sandoval-Gutierrez, and Carpio, JJ., concur.