Tolomeo Ligutan and Leonidas De la Llana v Hon.

Court of Appeals and Security Bank and

Trust Company

Date: Feb 12, 2002

Ponente: J. Vitug

Facts:
 Ligutan and Llana (P) obtained a loan of 120k pesos from Security Bank
o Bound themselves jointly and severally to pay
o 15.189% per annum interest
o penalty of 5% every month on principal and interest in case of default
o to pay 10% atty fees if matters were indorsed to a lawyer for collection or to
enforce payment
 Obligation matured on Sept 8 1981
 The ban however granted the extension but only until Dec 29 1981
 May 20 1982 - Ligutan and Llana failed to settle debt despite demand and debt
amounted to 114k pesos already
 Sept 30 1982 – sent final demand letter to pay within 5 days
 Nov 3 1982 – filed a case before RTC Makati for recovery of amount
 Ligutan and Llama failed to present evidence so TC moved the case submitted for
submission
 2 years after, Ligutan and Llama filed an MR to be able to present evidence but
denied
 RTC – Security Bank won
o 114,416 pesos 15.189%, 2% service charge and 5% per month penalty
charge until fully paid
o 10% of total indebtedness as atty fees
o pay cost of suit
 P appealed to CA
 CA modified RTC decision
o Interest should commence upon demand and not when complaint filed
 114,416 pesos with interest 15.189% from may 20, 1982
 From 5% to 3% per monthly penalty from may 20, 1982
 10% of total indebtedness as atty fees
 P filed an omnibus motion for reconsideration and to admit newly discovered
evidence
o Ligutan and his wife executed a real estate mortgage on Jan 18 1984 to
secure the debt and it was foreclosed without them being informed.
Furthermore, the proceeds were not credited on their debt
 CA denied Motion
o New evidence has been known to them when the first motion for
reconsideration was filed
 P appealed to SC
Issue:
WON penalty is reasonable (YES)
WON 10% of indebtedness is excessive (NO)
WON CA erred in not admitting P new trial motion (NO)
WON CA erred that there was a novation of the cause of action (NO)

Held:
 A penalty clause, expressly recognized by law, is an accessory undertaking to
assume greater liability on the part of the obligor in case of breach of an
obligation
 It functions to strengthen the coercive force of the obligation and to provide, in
effect, for what could be liquidated damages resulting to breach
o Bound to pay stipulated indemnity without the necessity of proof on the
existence and measure of damage caused by the breach
o They can agree on terms and conditions as long as not contrary to law,
morals, good customs, public order, and public policy
 Courts can equitably reduce if unconscionable or irregularly complied with
 Penalty is subjective and partly objective depending on the ff (not exclusive)
o Type, extent, nature of penalty
o Nature of the obligation
o Mode of breach and its consequences
o Supervening realities
o Standing and relationship of parties
 Addressed to the sound discretion of the court
o Penalty can even be deleted if theres substantial compliance in good faith
by the obligor
o When clause itself suffers from fatal infirmity
o Exceptional circumstances warrant it
 CA exercised good judgement when penalty reduced to 3%
o Despite repeated breach of P on their obli, SC sees no cogent reason to
modify ruling of CA
 P brought up the 15.189% interest praying it be lowered\
o SC: It was brought up only now and was not brought up before the lower
courts
o SC: sees that 15.189% is not excessive on its face
o SC: The essence 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 isnot necessarily preclusive of interest
 The two being distinct concepts which may separately be
demanded
 Does not necessarily follow that if the Court does not allow
fill surcharges and penalty, the interest rates may be
lowered as well
 On the 10% of debt as atty fees
o SC agrees with CA as reasonable and this has been agreed upon by the
parties
 On new trial or admit newly discovered evidence and alleged novation
 o Even if admitted it would not have extinguished the original obligation
 No stipulation that the mortgage would apply to supersede the
existing loan agreements
 It is mere an accessory contract
 Dispositive: Petition Denied