ATENEO DE DAVAO UNIVERSITY

COLLEGE OF LAW

LAW ON OBLIGATIONS AND CONTRACTS

SP - P

CASE DIGESTS
SECOND EXAM COVERAGE

SUBMITTED TO:

ATTY. BJ BONN D. PUSTA, REB

SUBMITTED BY:

BACCAY, MARIA MONICA

CUTAY, ELOIZA KHEN
REMOROSA, ELLEN
 Ligutan vs CA
G.R. No. 138677. February 12, 2002.

List of Characters and their Roles:

1.) Tolomeo Ligutan and Leonidas dela Llana - defaulted in their loan obligation
2.) Security Bank and Trust Company - the creditor bank

FACTS:
On May 11, 1981, Tolomeo Ligutan and Leonidas dela Llana obtained a loan in the
amount of P120,000.00 from Security Bank and Trust Company. Ligutan and dela Llana
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,
they also agreed to pay 10% of the total amount due by way of attorney’s fees if the
matter were indorsed to a lawyer for collection or if a suit were instituted to enforce
payment.

The obligation matured on September 8, 1981; however, Ligutan and dela Llana failed
to settle the debt. This prompted Security Bank to file a complaint for recovery of the
due amount.

ISSUE: ​Whether or not the reduced penalty interest from 5% a month to 3% a month
was valid?

RULING: Yes, the Court held that the reduced penalty interest was proper.

A penalty clause, expressly recognized by law, is an accessory undertaking to assume

greater liability on the part of an obligor in case of breach of an obligation. 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.

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 the present case, the Court found no reason to modify the reduced penalty interest.
The repeated acts of breach by Ligutan and dela Llana of their contractual obligation
were taken into consideration.
 Pryce Corp vs PAGCOR
G.R. No. 138677. February 12, 2002.

List of Characters and their Roles:

1.) Pryce Properties Corporation (PPC) - made representations with PAGCOR on the
possibility of setting up a casino in Pryce Plaza Hotel, located in Cagayan de Oro City

2.) Philippine Amusement and Gaming Corporation (PAGCOR) - the corporation that
handles gambling casino establishments

FACTS:
On November 11, 1992, PPC and PAGCOR executed a Contract of Lease involving the
ballroom of Pryce Plaza Hotel for a period of three (3) years. They also executed an
addendum to the contract which included a lease of an additional 1000 square meters
of the hotel grounds as living quarters and playground of the casino personnel.

A series of resolutions prohibiting the establishment of a gambling casino in Cagayan

de Oro City were subsequently declared. In the afternoon of December 18, 1992, a
public rally in front of the hotel was staged by some local officials, residents, and
religious leaders. PAGCOR was constrained to suspend casino operations because of
the rally.

PAGCOR resumed casino operations on July 15, 1993, however, another public rally
occurred. Eventually, PAGCOR decided to stop its casino operations in Cagayan de
Oro City. Afterwards, PPC apprised PAGCOR of its outstanding account and its
decision to collect the full rentals in case of pre-termination of the lease. PAGCOR
opposed, alleging that it was not amenable to the payment of the full rentals due to
unforeseen legal circumstances which prevented it from complying with its obligations.

ISSUE: ​Whether or not PAGCOR is liable for the claim of future rentals by PPC?

RULING: Yes, PAGCOR is liable for the claim of future rentals. However, the
amount is equitably reduced.

In obligations with a penal clause, the general rule is that the penalty serves as a
substitute for the indemnity for damages and the payment of interests in case of
noncompliance; that is, if there is no stipulation to the contrary, in which case proof of
actual damages is not necessary for the penalty to be demanded.

The exceptions to the aforementioned rule are as follows: 1) when there is a stipulation
to the contrary, 2) when the obligor is sued for refusal to pay the agreed penalty, and 3)
when the obligor is guilty of fraud. In these cases, the purpose of the penalty is
obviously to punish the obligor for the breach. Hence, the obligee can recover from the
former not only the penalty, but also other damages resulting from the nonfulfillment of
the principal obligation.

In the present case, the first exception applies because Article XX (c) of the contract
provides aside from the payment of the rentals corresponding to the remaining term of
the lease, the lessee shall also be liable for any and all damages, actual or
consequential, resulting from such default and termination of this contract. Having
entered into the Contract voluntarily and with full knowledge of its provisions, PAGCOR
must be held bound to its obligations. It cannot evade further liability for liquidated
damages.

Moreover, a stipulated penalty may nevertheless be equitably reduced by the courts as

provided under Article 1229 of the Civil Code. The question of whether a penalty is
reasonable or iniquitous is addressed to the sound discretion of the courts.

In this case, the Court held that the claim for future rentals in the amount of
P7,037,835.40 was highly iniquitous. PAGCOR’s breach was occasioned by events
that, although not fortuitous in law, were in fact real and pressing. PAGCOR suffered a
tremendous loss of expected revenues. Thus, the amount should be equitably reduced.
The advanced rental deposits in the sum of P687,289.50 was imposed as the sufficient
penalty for PAGCOR’s breach.
 Florentino vs Supervalue
G.R. 172384. September 12, 2007

List of Characters and their roles:

1. Florentino - The owner of Empanada royale, a food cart business. A lessee of
Supervalue.
2. Supervalue - a set of stores operating in the country.

FACTS​:
Florentino is a lessee of Supervalue which is a set of stores operating in the country.
Florentino is the owner of Empanada royale a food cart business entered into a contract
of lease with Supervalue. The contract was good for 4 months and after the end of the
contract both the lessee and the lessor have the option to either renew or terminate the
contract. Florentino and Supervalue was able to renew the contract several times that it
even lasted for a year. However, Supervalue terminated the contract with Florentino for
the following violations: failure to open on two separate occasions; closing earlier than
the regular time; introducing a new variety of empanada without the approval of
Supervalue. The store management then ordered the foreclosure of the space and
along with it were the personal belongings of the petitioner. Florentino demanded for the
return of her personal belongings and of the security bond that she have given
Supervalue. The Court of Appeals modified the RTC Judgment and found that the
respondent was justified in forfeiting the security deposits and was not liable to
reimburse the petitioner for the value of the improvements introduced in the leased
premises and to pay for attorney’s fees.

ISSUE​: Whether or not Florentino is entitled to claim for the security bond that she have
posted?

RULING​:
Florentino is entitled to half of the security deposits made with Supervalue because it
would be unconscionable for Florentino to be imposed such penalty. Obligations with a
Penal Clause, Article 1226 provides that in obligations with penal clause, the penalty
shall substitute the indemnity for damages and the payment of interests in case of
noncompliance, if there is no stipulation to the contrary. Nevertheless, damages shall
be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of
the obligation. The penalty may be enforced only when it is demandable in accordance
with the provisions of this CODE. As a rule the courts are not in the liberty to ignore
the freedoms of the parties to agree on such terms and conditions. The courts may
equitably reduce a stipulated penalty in the contracts in two instances: 1. If the principal
obligation has been partly or irregularly complied with; 2. If there has been no
compliance if the penalty is iniquitous or unconscionable in accordance with Article
1229, The judge shall equitably reduce the penalty when the principal obligation has
been partly or irregularly complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is iniquitous or
unconscionable. In the instant case, the forfeiture of the entire amount of the security
deposits in the sum of P192,000.00 was excessive and unconscionable considering that
the gravity of the breaches committed by the petitioner is not of such degree that the
respondent was unduly prejudiced thereby. It is but equitable therefore to reduce the
penalty of the petitioner to 50% of the total amount of security deposits.
 Diamond Builders Conglomerate vs Country Bankers Insurance Corp.
G.R. No. 171820. December 13, 2007

List of Characters and their roles:

1. Rogelio S. Acidre - the sole proprietor of Diamond Builders Conglomeration
2. Marceliano Borja - entered into a compromise agreement with Rogelio Acidre.
3. Country Bankers - the bank where the parties obtained a surety bond.

FACTS​:
The controversy originated from a civil case in RTC Caloocan filed by Marceliano Borja
against Rogelio S. Acidre for Acidre’s breach of his obligation to construct a residential
and commercial building. Rogelio is the sole proprietor of the Diamond Builders
Conglomeration.

To put an end to the foregoing litigation, the parties entered into a Compromise
Agreement which reads in part:

Rogelio should pay the amount of P570,000 as follows:

4. Upon receipt of the amount, Rogelio shall submit in favor of the plaintiff a
performance or surety bond to answer or indemnify plaintiff in the event the building is
not finished on the 75th day.

5. If completed in 75 days, plaintiff shall pay P200,000 and P90,000 as bonus. If failed
to complete on the 75th day, Rogelio shall not be entitled to any further payments and
the performance or surety bond shall be fully implemented by way of penalizing and/or
as award for damages in favor of plaintiff.

In compliance, Rogelio obtained a Surety Bond from Country Bankers in favor of the
Spouses Borja. They also signed an Indemnity Agreement including several employees
of DBC consenting to their joint and several liabilities to Country Bankers in case the
surety bond be executed upon. On April 23, 1992 the Country Bankers received a
Motion for Execution of the surety bond filed by Borja with RTC Caloocan for Rogelio’s
alleged violation of the Compromise Agreement. Consequently, Country Bankers
advised petitioners that in the event it is constrained to pay under the surety bond to
Borja, it shall proceed against petitioners for reimbursement.

Despite the question on the status of the Omnibus Motion filed by Rogelio, the Sheriff
arrived at the Country Bankers office and the latter was constrained to pay the amount
of the surety bond in this case. The Motion was denied. Country Bankers demanded
from the petitioners the reimbursement.
Petitioners wrote Country Bankers stating that the voluntary payment of the surety bond
done by the surety prevented them from contesting the validity of the issuance of the
Writ of Execution. This prompted Country Bankers to file for recovery of sum of money.

ISSUE​: Whether the penal clause under the compromise agreement is applicable in this
case.

RULING​:
A compromise judgment is a decision rendered by the court sanctioning the agreement
between the parties concerning the determination of the controversy at hand. It is
stamped with judicial imprimatur, and done by two parties putting an end to a lawsuit,
adjusting their difficulties by mutual consent in the manner which they agree on. Upon
court approval, it transcends its identity as a mere contract as it becomes a judgment.
As a rule, compromise judgments are non-appealable.

If a party fails or refuse to abide by the compromise agreement, the other party may
either enforce the compromise or regard it as rescinding and insist upon original
demand. The Compromise Agreement between Borja and Rogelio explicitly provided
that in case of the failure to complete construction in 75 days, the full implementation of
the surety bound as be made as penalty to the default, as an award of damages to
Borja. Therefore, the payment made by Country Bankers to Borja was proper.
 Rivera vs Spouses Chua
G.R. No. 184458. January 14, 2015

List of Characters and their roles:

1. Rodrigo Rivera - obtained loan from Sps. Chua
2. Sps. Salvador and Violeta Chua – lends money to Rivera

FACTS:
In February 24, 1995, Rivera obtained a loan with a Promissory note, he promises to
pay spouses Chua the sum of One Hundred Twenty Thousand Philippine Currency
(P120,000.00) on December 31, 1995. And failure on his part to pay the amount of
(P120,000.00) One Hundred Twenty Thousand Pesos on December 31, 1995 he
agreed to pay the sum equivalent to five percent (5%) interest monthly from the date of
default until the entire obligation is fully paid for. And should the note be referred to a
lawyer for collection, he agreed to pay the further sum equivalent to twenty percent
(20%) of the total amount due and payable as and for attorney’s fees which in no case
shall be less than P5,000.00 and to pay in addition the cost of suit and other incidental
litigation expense.
In October 1998, almost three years from the date of payment stipulated in the
promissory note, Rivera, as partial payment for the loan, issued and delivered to the
Spouses Chua, as payee, a check dated 30 December1998, drawn against Rivera’s
current account with the Philippine Commercial International Bank (PCIB) in the amount
of P25,000.00. On 21 December 1998, the Spouses Chua received another check
presumably issued byRivera but upon presentment for payment, the two checks were
dishonored for the reason “account closed.”As of May 31, 1999, the amount due the
Spouses Chua was pegged at P366,000.00 covering the principal ofP120,000.00 plus
five percent (5%) interest per month from 1 January 1996 to 31 May 1999. The Spouses
Chua alleged that they have repeatedly demanded payment from Rivera to no avail.

ISSUE: ​Whether or not the Promissory note in this case contained a penal clause?

RULING:
The Supreme Court ​did not consider the stipulation on payment of interest in this case
as a penal clause although Rivera, as obligor, assumed to pay additional 5% monthly
interest on the principal amount of P120,000.00 upon default.

The penal clause is generally undertaken to insure performance and works as either, or
both, punishment and reparation. It is an exception to the general rules on recovery of
losses and damages. As an exception to the general rule, a penal clause must be
specifically set forth in the obligation.
The stipulation in the Promissory Note is designated as payment of interest, not as a
penal clause, and is simply an indemnity for damages incurred by the Spouses Chua
because Rivera defaulted in the payment of the amount of P120,000.00. The measure
of damages for Rivera's delay is limited to the interest stipulated in the Promissory Note.
In apt instances, in default of stipulation, the interest is that provided by law.
 ​Buenaventura vs Metropolitan Bank
G.R. No. 167082. August 03, 2016

List of Characters and their roles:

1. Teresita Buenaventura – executed a promissory note to Metropolitan Bank
2. Metropolitan Bank- a lender to Buenaventura

FACTS:
On January 20, 1997 and April 17, 1997, Teresita Buenaventura executed Promissory
Note Nos. 232663 and 232711, ​in the amount of P1,500,000.00 and payable to
Metropolitan Bank and Trust Company with interest and credit evaluation and
supervision fee at the rate of 17.532% ​per annum​, while PN No. 232711 was to mature
on April 7, 1998, with interest and CESF at the rate of 14.239% ​per annum.​ Both PNs
provide for penalty of 18% ​per annum on the unpaid principal from date of default until
full payment of the obligation. Despite demands, there remained unpaid on PN Nos.
232663 and 232711 the amounts of P2,061,208.08 and P1,492,236.37, respectively, as
of July 15, 1998, inclusive of interest and penalty. Consequently, Metropolitan Bank filed
an action against appellant for recovery of said amounts, interest, penalty and attorney's
fees.
In answer, Buenaventura averred that in 1997, she received from her nephew, Rene
Imperial, three postdated checks drawn against Metropolitan Bank in Tabaco branch
check No. TA 1270484889PA dated January 5, 1998 in the amount of P1,200,000.00,
Check No. 1270482455PA dated March 31, 1998 in the amount of P1,197,000.00 and
Check No. TA1270482451PA dated March 31, 1998 in the amount of P500,000.00 (or
"subject checks"), as partial payments for the purchase of her properties; that she
rediscounted the subject checks with Metropolitan Bank Timog Branch, for which she
was required to execute the PNs to secure payment thereof; and that she is a mere
guarantor and cannot be compelled to pay unless and until appellee shall have
exhausted all the properties of Imperial.

ISSUE: ​Whether or not Buenaventura is liable for the penalty charge in the promissory
notes?

RULING:
The PNs provide, in clear language, that Buenaventura is primarily liable thereunder
and such penalty was expressly stipulated in the promissory notes.

A penal clause is an accessory undertaking attached to a principal obligation. It has for

its purposes, firstly, to provide for liquidated damages; and, ​secondly, to strengthen the
coercive force of the obligation by the threat of greater responsibility in the event of
breach of obligation.
Therefore, Buenaventura shall pay the Metropolitan Bank (1) the principal sum of
P1,500,000.00 under Promissory Note No. 232711, plus interest at the rate of 14.239%
per annum commencing on August 3, 1998 until fully paid; (2) the principal sum of
P1,200,000.00 under Promissory Note No. 232663, plus interest at the rate of 17.532%
per annum commencing on August 3, 1998 until fully paid; (3) penalty interest on the
unpaid principal amounts at the rate of 18% ​per annum commencing on August 3, 1998
until fully paid.
 Filinvest Land vs CA
G.R. No. 138980. September 20, 2005.

List of Characters and their Roles:

1.) Filinvest Land, Inc. (Filinvest) - engaged in the development and sale of residential
subdivisions

2.) Pacific Equipment Corporation (Pacific) - was awarded the development of

Filinvest’s two parcels of land in Quezon City

3.) Philippine American General Insurance Company (Philamgen) - issued the two (2)
Surety Bonds posted by Pacific

FACTS:
On August 26, 1978, Filinvest awarded to Pacific the development of its residential
subdivisions consisting of two (2) parcels of land located in Quezon City, the terms and
conditions of which are contained in an Agreement. To guarantee its faithful compliance
and pursuant to the agreement, Pacific posted two (2) Surety Bonds in favor of Filinvest
which were issued by Philamgen. Despite the three extensions granted by Filinvest,
Pacific failed to finish the contracted works.

Filinvest wrote Pacific of its intention to take over the project and to hold Pacific liable
for all damages which it had incurred and will incur to finish the project. On October 26,
1979, Filinvest submitted its claim against Philamgen under its performance and
guarantee bond, but Philamgen refused to acknowledge its liability because its principal,
Pacific, refused to acknowledge its own liability. This prompted Filinvest to file a
complaint for damages against Pacific and Philamgen.

ISSUE: ​Whether or not the stipulated penalty of Php 15,000 per day of delay as agreed
upon by the parties is valid?

RULING: No, the Court deemed the penalty unconscionable considering Pacific’s
substantial compliance in good faith.

A penal clause is an accessory undertaking to assume greater liability in case of

breach. It is attached to an obligation in order to insure performance and 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.

As a general rule, courts are not at liberty to ignore the freedom of the parties to agree
on such terms and conditions as they see fit as long as they are not contrary to law,
morals, good customs, public order or public policy. Nevertheless, courts may equitably
reduce a stipulated penalty in the contract in two instances: (1) if the principal obligation
has been partly or irregularly complied; and (2) even if there has been no compliance if
the penalty is iniquitous or unconscionable in accordance with Article 1229 of the Civil
Code.

In the present case, the penalty of Php 15,000 per day of delay was mutually agreed
upon by the parties and the same is sanctioned by law. However, it was settled that the
project was already 94.53% complete and that Filinvest did agree to extend the period
for completion of the project, which extensions Filinvest included in computing the
amount of the penalty. There has been substantial compliance in good faith on the part
of Pacific which renders unconscionable the application of the full force of the penalty.
Thus, the reduction thereof is clearly warranted.