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 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.

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;

"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.

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:

"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 Peña 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.

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
plaintiff-appellant 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:

"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:

"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. SO ORDERED.

G.R. No. 116285            October 19, 2001

ANTONIO TAN, petitioner, vs. COURT OF APPEALS and the CULTURAL CENTER OF THE
PHILIPPINES, respondents.

DE LEON, JR., J.:

Before us is a petition for review of the Decision1 dated August 31, 1993 and Resolution2 dated July 13, 1994 of
the Court of Appeals affirming the Decision 3 dated May 8, 1991 of the Regional Trial Court (RTC) of Manila,
Branch 27.

The facts are as follows:

On May 14, 1978 and July 6, 1978, petitioner Antonio Tan obtained two (2) loans each in the principal amount
of Two Million Pesos (P2,000,000.00), or in the total principal amount of Four Million Pesos (P4,000,000.00)
from respondent Cultural Center of the Philippines (CCP, for brevity) evidenced by two (2) promissory notes
with maturity dates on May 14, 1979 and July 6, 1979, respectively. Petitioner defaulted but after a few partial
payments he had the loans restructured by respondent CCP, and petitioner accordingly executed a promissory
note (Exhibit "A") on August 31, 1979 in the amount of Three Million Four Hundred Eleven Thousand Four
Hundred Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32) payable in five (5) installments.
Petitioner Tan failed to pay any installment on the said restructured loan of Three Million Four Hundred Eleven
Thousand Four Hundred Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32), the last installment
falling due on December 31, 1980. In a letter dated January 26, 1982, petitioner requested and proposed to
respondent CCP a mode of paying the restructured loan, i.e., (a) twenty percent (20%) of the principal amount
of the loan upon the respondent giving its conformity to his proposal; and (b) the balance on the principal
obligation payable in thirty-six (36) equal monthly installments until fully paid. On October 20, 1983, petitioner
again sent a letter to respondent CCP requesting for a moratorium on his loan obligation until the following year
allegedly due to a substantial deduction in the volume of his business and on account of the peso devaluation.
No favorable response was made to said letters. Instead, respondent CCP, through counsel, wrote a letter dated
May 30, 1984 to the petitioner demanding full payment, within ten (10) days from receipt of said letter, of the
petitioner’s restructured loan which as of April 30, 1984 amounted to Six Million Eighty-Eight Thousand Seven
Hundred Thirty-Five Pesos and Three Centavos (P6,088,735.03).

On August 29, 1984, respondent CCP filed in the RTC of Manila a complaint for collection of a sum of money,
docketed as Civil Case No. 84-26363, against the petitioner after the latter failed to settle his said restructured
loan obligation. The petitioner interposed the defense that he merely accommodated a friend, Wilson Lucmen,
who allegedly asked for his help to obtain a loan from respondent CCP. Petitioner claimed that he has not been
able to locate Wilson Lucmen. While the case was pending in the trial court, the petitioner filed a Manifestation
wherein he proposed to settle his indebtedness to respondent CCP by proposing to make a down payment of
One Hundred Forty Thousand Pesos (P140,000.00) and to issue twelve (12) checks every beginning of the year
to cover installment payments for one year, and every year thereafter until the balance is fully paid. However,
respondent CCP did not agree to the petitioner’s proposals and so the trial of the case ensued.

On May 8, 1991, the trial court rendered a decision, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendant, ordering
defendant to pay plaintiff, the amount of P7,996,314.67, representing defendant’s outstanding account as
of August 28, 1986, with the corresponding stipulated interest and charges thereof, until fully paid, plus
attorney’s fees in an amount equivalent to 25% of said outstanding account, plus P50,000.00, as
exemplary damages, plus costs.

Defendant’s counterclaims are ordered dismissed, for lack of merit.

SO ORDERED.4
The trial court gave five (5) reasons in ruling in favor of respondent CCP. First, it gave little weight to the
petitioner’s contention that the loan was merely for the accommodation of Wilson Lucmen for the reason that
the defense propounded was not credible in itself. Second, assuming, arguendo, that the petitioner did not
personally benefit from the said loan, he should have filed a third party complaint against Wilson Lucmen, the
alleged accommodated party but he did not. Third, for three (3) times the petitioner offered to settle his loan
obligation with respondent CCP. Fourth, petitioner may not avoid his liability to pay his obligation under the
promissory note (Exh. "A") which he must comply with in good faith pursuant to Article 1159 of the New Civil
Code. Fifth, petitioner is estopped from denying his liability or loan obligation to the private respondent.

The petitioner appealed the decision of the trial court to the Court of Appeals insofar as it charged interest,
surcharges, attorney’s fees and exemplary damages against the petitioner. In his appeal, the petitioner asked for
the reduction of the penalties and charges on his loan obligation. He abandoned his alleged defense in the trial
court that he merely accommodated his friend, Wilson Lucmen, in obtaining the loan, and instead admitted the
validity of the same. On August 31, 1993, the appellate court rendered a decision, the dispositive portion of
which reads:

WHEREFORE, with the foregoing modification, the judgment appealed from is hereby AFFIRMED.

SO ORDERED.5

In affirming the decision of the trial court imposing surcharges and interest, the appellate court held that:

We are unable to accept appellant’s (petitioner’s) claim for modification on the basis of alleged partial
or irregular performance, there being none. Appellant’s offer or tender of payment cannot be deemed as
a partial or irregular performance of the contract, not a single centavo appears to have been paid by the
defendant.

However, the appellate court modified the decision of the trial court by deleting the award for exemplary
damages and reducing the amount of awarded attorney’s fees to five percent (5%), by ratiocinating as follows:

Given the circumstances of the case, plus the fact that plaintiff was represented by a government lawyer,
We believe the award of 25% as attorney’s fees and P500,000.00 as exemplary damages is out of
proportion to the actual damage caused by the non-performance of the contract and is excessive,
unconscionable and iniquitous.

In a Resolution dated July 13, 1994, the appellate court denied the petitioner’s motion for reconsideration of the
said decision.

Hence, this petition anchored on the following assigned errors:

THE HONORABLE COURT OF APPEALS COMMITTED A MISTAKE IN GIVING ITS IMPRIMATUR

TO THE DECISION OF THE TRIAL COURT WHICH COMPOUNDED INTEREST ON SURCHARGES.

II

THE HONORABLE COURT OF APPEALS ERRED IN NOT SUSPENDING IMPOSITION OF INTEREST

FOR THE PERIOD OF TIME THAT PRIVATE RESPONDENT HAS FAILED TO ASSIST PETITIONER IN
APPLYING FOR RELIEF OF LIABILITY THROUGH THE COMMISSION ON AUDIT AND THE OFFICE
OF THE PRESIDENT.

III

THE HONORABLE COURT OF APPEALS ERRED IN NOT DELETING AWARD OF ATTORNEY’S

FEES AND IN REDUCING PENALTIES.

Significantly, the petitioner does not question his liability for his restructured loan under the promissory note
marked Exhibit "A". The first question to be resolved in the case at bar is whether there are contractual and
legal bases for the imposition of the penalty, interest on the penalty and attorney’s fees.
The petitioner imputes error on the part of the appellate court in not totally eliminating the award of attorney’s
fees and in not reducing the penalties considering that the petitioner, contrary to the appellate court’s findings,
has allegedly made partial payments on the loan. And if penalty is to be awarded, the petitioner is asking for the
non-imposition of interest on the surcharges inasmuch as the compounding of interest on surcharges is not
provided in the promissory note marked Exhibit "A". The petitioner takes exception to the computation of the
private respondent whereby the interest, surcharge and the principal were added together and that on the total
sum interest was imposed. Petitioner also claims that there is no basis in law for the charging of interest on the
surcharges for the reason that the New Civil Code is devoid of any provision allowing the imposition of interest
on surcharges.

We find no merit in the petitioner’s contention. Article 1226 of the New Civil Code provides that:

In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the
payment of interests in case of non-compliance, 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.

In the case at bar, the promissory note (Exhibit "A") expressly provides for the imposition of both interest and
penalties in case of default on the part of the petitioner in the payment of the subject restructured loan. The
pertinent6 portion of the promissory note (Exhibit "A") imposing interest and penalties provides that:

For value received, I/We jointly and severally promise to pay to the CULTURAL CENTER OF THE
PHILIPPINES at its office in Manila, the sum of THREE MILLION FOUR HUNDRED ELEVEN THOUSAND
FOUR HUNDRED + PESOS (P3,411,421.32) Philippine Currency, xxx.

xxx           xxx           xxx

With interest at the rate of FOURTEEN per cent (14%) per annum from the date hereof until paid.
PLUS THREE PERCENT (3%) SERVICE CHARGE.

In case of non-payment of this note at maturity/on demand or upon default of payment of any portion of
it when due, I/We jointly and severally agree to pay additional penalty charges at the rate of TWO per
cent (2%) per month on the total amount due until paid, payable and computed monthly. Default of
payment of this note or any portion thereof when due shall render all other installments and all existing
promissory notes made by us in favor of the CULTURAL CENTER OF THE PHILIPPINES
immediately due and demandable. (Underscoring supplied)

xxx           xxx           xxx

The stipulated fourteen percent (14%) per annum interest charge until full payment of the loan constitutes the
monetary interest on the note and is allowed under Article 1956 of the New Civil Code. 7 On the other hand, the
stipulated two percent (2%) per month penalty is in the form of penalty charge which is separate and distinct
from the monetary interest on the principal of the loan.

Penalty on delinquent loans may take different forms. In Government Service Insurance System v. Court of
Appeals,8 this Court has ruled that the New Civil Code permits an agreement upon a penalty apart from the
monetary interest. If the parties stipulate this kind of agreement, the penalty does not include the monetary
interest, and as such the two are different and distinct from each other and may be demanded separately.
Quoting Equitable Banking Corp. v. Liwanag,9 the GSIS case went on to state that such a stipulation about
payment of an additional interest rate partakes of the nature of a penalty clause which is sanctioned by law,
more particularly under Article 2209 of the New Civil Code which provides that:

If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest
agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum.

The penalty charge of two percent (2%) per month in the case at bar began to accrue from the time of default by
the petitioner. There is no doubt that the petitioner is liable for both the stipulated monetary interest and the
stipulated penalty charge. The penalty charge is also called penalty or compensatory interest. Having clarified
the same, the next issue to be resolved is whether interest may accrue on the penalty or compensatory interest
without violating the provisions of Article 1959 of the New Civil Code, which provides that:

Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn interest.
However, the contracting parties may by stipulation capitalize the interest due and unpaid, which as
added principal, shall earn new interest.

According to the petitioner, there is no legal basis for the imposition of interest on the penalty charge for the
reason that the law only allows imposition of interest on monetary interest but not the charging of interest on
penalty. He claims that since there is no law that allows imposition of interest on penalties, the penalties should
not earn interest. But as we have already explained, penalty clauses can be in the form of penalty or
compensatory interest. Thus, the compounding of the penalty or compensatory interest is sanctioned by and
allowed pursuant to the above-quoted provision of Article 1959 of the New Civil Code considering that:

First, there is an express stipulation in the promissory note (Exhibit "A") permitting the compounding of
interest. The fifth paragraph of the said promissory note provides that: "Any interest which may be due if not
paid shall be added to the total amount when due and shall become part thereof, the whole amount to bear
interest at the maximum rate allowed by law."10 Therefore, any penalty interest not paid, when due, shall earn
the legal interest of twelve percent (12%) per annum,11 in the absence of express stipulation on the specific rate
of interest, as in the case at bar.

Second, Article 2212 of the New Civil Code provides that "Interest due shall earn legal interest from the time it
is judicially demanded, although the obligation may be silent upon this point." In the instant case, interest
likewise began to run on the penalty interest upon the filing of the complaint in court by respondent CCP on
August 29, 1984. Hence, the courts a quo did not err in ruling that the petitioner is bound to pay the interest on
the total amount of the principal, the monetary interest and the penalty interest.

The petitioner seeks the elimination of the compounded interest imposed on the total amount based allegedly on
the case of National Power Corporation v. National Merchandising Corporation,12 wherein we ruled that the
imposition of interest on the damages from the filing of the complaint is unjust where the litigation was
prolonged for twenty-five (25) years through no fault of the defendant. However, the ruling in the said National
Power Corporation (NPC) case is not applicable to the case at bar inasmuch as our ruling on the issue of
interest in that NPC case was based on equitable considerations and on the fact that the said case lasted for
twenty-five (25) years "through no fault of the defendant." In the case at bar, however, equity cannot be
considered inasmuch as there is a contractual stipulation in the promissory note whereby the petitioner
expressly agreed to the compounding of interest in case of failure on his part to pay the loan at maturity.
Inasmuch as the said stipulation on the compounding of interest has the force of law between the parties and
does not appear to be inequitable or unjust, the said written stipulation should be respected.

The private respondent’s Statement of Account (marked Exhibits "C" to "C-2") 13 shows the following
breakdown of the petitioner’s indebtedness as of August 28, 1986:

Principal P2,838,454.6
8
Interest P 576,167.89
Surcharge P4,581,692.1
0
P7,996,314.6
7

The said statement of account also shows that the above amounts stated therein are net of the partial payments
amounting to a total of Four Hundred Fifty-Two Thousand Five Hundred Sixty-One Pesos and Forty-Three
Centavos (P452,561.43) which were made during the period from May 13, 1983 to September 30, 1983. 14 The
petitioner now seeks the reduction of the penalty due to the said partial payments. The principal amount of the
promissory note (Exhibit "A") was Three Million Four Hundred Eleven Thousand Four Hundred Twenty-One
Pesos and Thirty-Two Centavos (P3,411,421.32) when the loan was restructured on August 31, 1979. As of
August 28, 1986, the principal amount of the said restructured loan has been reduced to Two Million Eight
Hundred Thirty-Eight Thousand Four Hundred Fifty-Four Pesos and Sixty-Eight Centavos (P2,838,454.68).
Thus, petitioner contends that reduction of the penalty is justifiable pursuant to Article 1229 of the New Civil
Code which provides that: "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." Petitioner insists that the penalty should be
reduced to ten percent (10%) of the unpaid debt in accordance with Bachrach Motor Company v. Espiritu.15

There appears to be a justification for a reduction of the penalty charge but not necessarily to ten percent (10%)
of the unpaid balance of the loan as suggested by petitioner. Inasmuch as petitioner has made partial payments
which showed his good faith, a reduction of the penalty charge from two percent (2%) per month on the total
amount due, compounded monthly, until paid can indeed be justified under the said provision of Article 1229 of
the New Civil Code.

In other words, we find the continued monthly accrual of the two percent (2%) penalty charge on the total
amount due to be unconscionable inasmuch as the same appeared to have been compounded monthly.

Considering petitioner’s several partial payments and the fact he is liable under the note for the two percent
(2%) penalty charge per month on the total amount due, compounded monthly, for twenty-one (21) years since
his default in 1980, we find it fair and equitable to reduce the penalty charge to a straight twelve percent (12%)
per annum on the total amount due starting August 28, 1986, the date of the last Statement of Account (Exhibits
"C" to "C-2"). We also took into consideration the offers of the petitioner to enter into a compromise for the
settlement of his debt by presenting proposed payment schemes to respondent CCP. The said offers at
compromise also showed his good faith despite difficulty in complying with his loan obligation due to his
financial problems. However, we are not unmindful of the respondent’s long overdue deprivation of the use of
its money collectible from the petitioner.

The petitioner also imputes error on the part of the appellate court for not declaring the suspension of the
running of the interest during that period when the respondent allegedly failed to assist the petitioner in
applying for relief from liability. In this connection, the petitioner referred to the private respondent’s
letter16 dated September 28, 1988 addressed to petitioner which partially reads:

Dear Mr. Tan:

xxx           xxx           xxx

With reference to your appeal for condonation of interest and surcharge, we wish to inform you that the
center will assist you in applying for relief of liability through the Commission on Audit and Office of
the President xxx.

While your application is being processed and awaiting approval, the center will be accepting your
proposed payment scheme with the downpayment of P160,000.00 and monthly remittances of
P60,000.00 xxx.

xxx           xxx           xxx

The petitioner alleges that his obligation to pay the interest and surcharge should have been suspended because
the obligation to pay such interest and surcharge has become conditional, that is dependent on a future and
uncertain event which consists of whether the petitioner’s request for condonation of interest and surcharge
would be recommended by the Commission on Audit and the Office of the President to the House of
Representatives for approval as required under Section 36 of Presidential Decree No. 1445. Since the condition
has not happened allegedly due to the private respondent’s reneging on its promise, his liability to pay the
interest and surcharge on the loan has not arisen. This is the petitioner’s contention.

It is our view, however, that the running of the interest and surcharge was not suspended by the private
respondent’s promise to assist the petitioners in applying for relief therefrom through the Commission on Audit
and the Office of the President.

First, the letter dated September 28, 1988 alleged to have been sent by the respondent CCP to the petitioner is
not part of the formally offered documentary evidence of either party in the trial court. That letter cannot be
considered evidence pursuant to Rule 132, Section 34 of the Rules of Court which provides that: "The court
shall consider no evidence which has not been formally offered xxx." Besides, the said letter does not contain
any categorical agreement on the part of respondent CCP that the payment of the interest and surcharge on the
loan is deemed suspended while his appeal for condonation of the interest and surcharge was being processed.

Second, the private respondent correctly asserted that it was the primary responsibility of petitioner to inform
the Commission on Audit and the Office of the President of his application for condonation of interest and
surcharge. It was incumbent upon the petitioner to bring his administrative appeal for condonation of interest
and penalty charges to the attention of the said government offices.

On the issue of attorney’s fees, the appellate court ruled correctly and justly in reducing the trial court’s award
of twenty-five percent (25%) attorney’s fees to five percent (5%) of the total amount due.

WHEREFORE, the assailed Decision of the Court of Appeals is hereby AFFIRMED with MODIFICATION in
that the penalty charge of two percent (2%) per month on the total amount due, compounded monthly, is hereby
reduced to a straight twelve percent (12%) per annum starting from August 28, 1986. With costs against the
petitioner. SO ORDERED.

G.R. No. 85161 September 9, 1991

COUNTRY BANKERS INSURANCE CORPORATION and ENRIQUE SY, petitioners, vs. COURT OF

APPEALS and OSCAR VENTANILLA ENTERPRISES CORPORATION, respondents.

Esteban C. Manuel for petitioners.

Augusta Gatmaytan for OVEC.

MEDIALDEA, J.:p

Petitioners seek a review on certiorari of the decision of the Court of Appeals in CA-G.R. CV No. 09504
"Enrique Sy and Country Bankers Insurance Corporation v. Oscar Ventanilla Enterprises Corporation"
affirming in toto the decision of the Regional Trial Court, Cabanatuan City, Branch XXV, to wit:

WHEREFORE, the complaint of the plaintiff Enrique F. Sy is dismissed, and on the counterclaim of the
defendant O. Ventanilla Enterprises Corporation, judgment is hereby rendered:

1. Declaring as lawful, the cancellation and termination of the Lease Agreement (Exh. A) and the
defendant's re-entry and repossession of the Avenue, Broadway and Capitol theaters under lease on
February 11, 1980;

2. Declaring as lawful, the forfeiture clause under paragraph 12 of the Id Lease Agreement, and
confirming the forfeiture of the plaintiffs remaining cash deposit of P290,000.00 in favor of the
defendant thereunder, as of February 11, 1980;

3. Ordering the plaintiff to pay the defendant the sum of P289,534.78, representing arrears in rentals,
unremitted amounts for amusement tax delinquency and accrued interest thereon, with further interest on
said amounts at the rate of 12% per annum (per lease agreement) from December 1, 1980 until the same
is fully paid;

4. Ordering the plaintiff to pay the defendant the amount of P100,000.00, representing the P10,000.00
portion of the monthly lease rental which were not deducted from the cash deposit of the plaintiff from
February to November, 1980, after the forfeiture of the said cash deposit on February 11, 1980, with
interest thereon at the rate of 12% per annum on each of the said monthly amounts of P10,000.00 from
the time the same became due until it is paid;

5. Ordering the plaintiff to pay the defendant through the injunction bond, the sum of P100,000.00,
representing the P10,000.00 monthly increase in rentals which the defendant failed to realize from
February to November 1980 result from the injunction, with legal interest thereon from the finality of
this decision until fully paid;

6. Ordering the plaintiff to pay to the defendant the sum equivalent to ten per centum (10%) of the
above-mentioned amounts of P289,534.78, P100,000.00 and P100,000.00, as and for attorney's fees; and

7. Ordering the plaintiff to pay the costs. (pp. 94-95, Rollo)

The antecedent facts of the case are as follows:

Respondent Oscar Ventanilla Enterprises Corporation (OVEC), as lessor, and the petitioner Enrique F. Sy, as
lessee, entered into a lease agreement over the Avenue, Broadway and Capitol Theaters and the land on which
they are situated in Cabanatuan City, including their air-conditioning systems, projectors and accessories
needed for showing the films or motion pictures. The term of the lease was for six (6) years commencing from
June 13, 1977 and ending June 12,1983. After more than two (2) years of operation of the Avenue, Broadway
and Capitol Theaters, the lessor OVEC made demands for the repossession of the said leased properties in view
of the Sy's arrears in monthly rentals and non-payment of amusement taxes. On August 8,1979, OVEC and Sy
had a conference and by reason of Sy's request for reconsideration of OVECs demand for repossession of the
three (3) theaters, the former was allowed to continue operating the leased premises upon his conformity to
certain conditions imposed by the latter in a supplemental agreement dated August 13, 1979.

In pursuance of their latter agreement, Sy's arrears in rental in the amount of P125,455.76 (as of July 31, 1979)
was reduced to P71,028.91 as of December 31, 1979. However, the accrued amusement tax liability of the three
(3) theaters to the City Government of Cabanatuan City had accumulated to P84,000.00 despite the fact that Sy
had been deducting the amount of P4,000.00 from his monthly rental with the obligation to remit the said
deductions to the city government. Hence, letters of demand dated January 7, 1980 and February 3, 1980 were
sent to Sy demanding payment of the arrears in rentals and amusement tax delinquency. The latter demand was
with warning that OVEC will re-enter and repossess the Avenue, Broadway and Capital Theaters on February
11, 1980 in pursuance of the pertinent provisions of their lease contract of June 11, 1977 and their supplemental
letter-agreement of August 13, 1979. But notwithstanding the said demands and warnings SY failed to pay the
above-mentioned amounts in full Consequently, OVEC padlocked the gates of the three theaters under lease and
took possession thereof in the morning of February 11, 1980 by posting its men around the premises of the Id
movie houses and preventing the lessee's employees from entering the same.

Sy, through his counsel, filed the present action for reformation of the lease agreement, damages and injunction
late in the afternoon of the same day. And by virtue of a restraining order dated February 12, 1980 followed by
an order directing the issuance of a writ of preliminary injunction issued in said case, Sy regained possession
and operation of the Avenue, Broadway and Capital theaters.

As first cause of action, Sy alleged that the amount of deposit — P600,000.00 as agreed upon, P300,000.00 of
which was to be paid on June 13, 1977 and the balance on December 13, 1977 — was too big; and that OVEC
had assured him that said forfeiture will not come to pass. By way of second cause of action, Sy sought to
recover from OVEC the sums of P100,000.00 which Sy allegedly spent in making "major repairs" on Broadway
Theater and the application of which to Sy's due rentals; (2) P48,000.00 covering the cost of electrical current
allegedly used by OVEC in its alleged "illegal connection" to Capitol Theater and (3) P31,000.00 also for the
cost of electrical current allegedly used by OVEC for its alleged "illegal connection" to Broadway Theater and
for damages suffered by Sy as a result of such connection. Under the third cause of action, it is alleged in the
complaint that on February 11, 1980, OVEC had the three theaters padlocked with the use of force, and that as a
result, Sy suffered damages at the rate of P5,000.00 a day, in view of his failure to go thru the contracts he had
entered into with movie and booking companies for the showing of movies at ABC. As fourth cause of action,
Sy prayed for the issuance of a restraining order/preliminary injunction to enjoin OVEC and all persons
employed by it from entering and taking possession of the three theaters, conditioned upon Sy's filing of a
P500,000.00 bond supplied by Country Bankers Insurance Corporation (CBISCO).

OVEC on the other hand, alleged in its answer by way of counterclaims, that by reason of Sy's violation of the
terms of the subject lease agreement, OVEC became authorized to enter and possess the three theaters in
question and to terminate said agreement and the balance of the deposits given by Sy to OVEC had thus become
forfeited; that OVEC would be losing P50,000.00 for every month that the possession and operation of said
three theaters remain with Sy and that OVEC incurred P500,000.00 for attorney's service.

The trial court arrived at the conclusions that Sy is not entitled to the reformation of the lease agreement; that
the repossession of the leased premises by OVEC after the cancellation and termination of the lease was in
accordance with the stipulation of the parties in the said agreement and the law applicable thereto and that the
consequent forfeiture of Sy's cash deposit in favor of OVEC was clearly agreed upon by them in the lease
agreement. The trial court further concluded that Sy was not entitled to the writ of preliminary injunction issued
in his favor after the commencement of the action and that the injunction bond filed by Sy is liable for whatever
damages OVEC may have suffered by reason of the injunction.

On the counterclaim of OVEC the trial court found that the said lessor was deprived of the possession and
enjoyment of the leased premises and also suffered damages as a result of the filing of the case by Sy and his
violation of the terms and conditions of the lease agreement. Hence, it held that OVEC is entitled to recover the
said damages in addition to the arrears in rentals and amusement tax delinquency of Sy and the accrued interest
thereon. From the evidence presented, it found that as of the end of November, 1980, when OVEC finally
regained the possession of the three (3) theaters under lease, Sy's unpaid rentals and amusement tax liability
amounted to P289,534.78. In addition, it held that Sy was under obligation to pay P10,000.00 every month from
February to November, 1980 or the total amount of P100,000.00 with interest on each amount of P10,000.00
from the time the same became due. This P10,000.00 portion of the monthly lease rental was supposed to come
from the remaining cash deposit of Sy but with the consequent forfeiture of the remaining cash deposit of
P290,000.00, there was no more cash deposit from which said amount could be deducted. Further, it adjudged
Sy to pay attorney's fees equivalent to 10% of the amounts above-mentioned.

Finally, the trial court held Sy through the injunction bond liable to pay the sum of P10,000.00 every month
from February to November, 1980. The amount represents the supposed increase in rental from P50,000.00 to
P60,000.00 in view of the offer of one RTG Productions, Inc. to lease the three theaters involved for P60,000.00
a month.

From this decision of the trial court, Sy and (CBISCO) appealed the decision in toto while OVEC appealed
insofar as the decision failed to hold the injunction bond liable for an damages awarded by the trial court.

The respondent Court of Appeals found no ambiguity in the provisions of the lease agreement. It held that the
provisions are fair and reasonable and therefore, should be respected and enforced as the law between the
parties. It held that the cancellation or termination of the agreement prior to its expiration period is justified as it
was brought about by Sy's own default in his compliance with the terms of the agreement and not "motivated by
fraud or greed." It also affirmed the award to OVEC of the amount of P100,000.00 chargeable against the
injunction bond posted by CBISCO which was soundly and amply justified by the trial court.

The respondent Court likewise found no merit in OVECS appeal and held that the trial court did not err in not
charging and holding the injunction bond posted by Sy liable for all the awards as the undertaking of CBISCO
under the bond referred only to damages which OVEC may suffer as a result of the injunction.

From this decision, CBISCO and Sy filed this instant petition on the following grounds:

A. PRIVATE RESPONDENT SHOULD NOT BE ALLOWED TO UNJUSTLY ENRICH OR BE

BENEFITTED AT THE EXPENSE OF THE PETITIONERS.

B. RESPONDENT COURT OF APPEALS CO D SERIOUS ERROR OF LAW AND GRAVE ABUSE

OF DISCRETION IN NOT SETTING OFF THE P100,000.00 SUPPOSED DAMAGE RESULTING
FROM THE INJUNCTION AGAINST THE P290,000.00 REMAINING CASH DEPOSIT OF
PETITIONER ENRIQUE SY.

C. RESPONDENT COURT OF APPEALS FURTHER COMMITTED SERIOUS ERROR OF LAW AND

GRAVE ABUSE OF DISCRETION IN NOT DISMISSING PRIVATE RESPONDENTS COUNTER-
CLAIM FOR FAILURE TO PAY THE NECESSARY DOCKET FEE. (p. 10, Rollo)

We find no merit in petitioners' argument that the forfeiture clause stipulated in the lease agreement would
unjustly enrich the respondent OVEC at the expense of Sy and CBISCO — contrary to law, morals, good
customs, public order or public policy. A provision which calls for the forfeiture of the remaining deposit still in
the possession of the lessor, without prejudice to any other obligation still owing, in the event of the termination
or cancellation of the agreement by reason of the lessee's violation of any of the terms and conditions of the
agreement is a penal clause that may be validly entered into. A penal clause is 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. (Eduardo P. Caguioa, Comments and Cases on Civil Law,
Vol. IV, First Edition, pp. 199-200) As a general rule, in obligations with a penal clause, the penalty shall
substitute the indemnity for damages and the payment of interests in case of non-compliance. This is
specifically provided for in Article 1226, par. 1, New Civil Code. In such case, proof of actual damages suffered
by the creditor is not necessary in order that the penalty may be demanded (Article 1228, New Civil Code).
However, there are exceptions to the rule that the penalty shall substitute the indemnity for damages and the
payment of interests in case of non-compliance with the principal obligation. They are first, when there is a
stipulation to the contrary; second, when the obligor is sued for refusal to pay the agreed penalty; and third,
when the obligor is guilty of fraud (Article 1226, par. 1, New Civil Code). It is evident that in all said cases, the
purpose of the penalty is to punish the obligor. Therefore, the obligee can recover from the obligor not only the
penalty but also the damages resulting from the non-fulfillment or defective performance of the principal
obligation.

In the case at bar, inasmuch as the forfeiture clause provides that the deposit shall be deemed forfeited, without
prejudice to any other obligation still owing by the lessee to the lessor, the penalty cannot substitute for the
P100,000.00 supposed damage resulting from the issuance of the injunction against the P290,000.00 remaining
cash deposit. This supposed damage suffered by OVEC was the alleged P10,000.00 a month increase in rental
from P50,000.00 to P60,000,00), which OVEC failed to realize for ten months from February to November,
1980 in the total sum of P100,000.00. This opportunity cost which was duly proven before the trial court, was
correctly made chargeable by the said court against the injunction bond posted by CBISCO. The undertaking
assumed by CBISCO under subject injunction refers to "all such damages as such party may sustain by reason
of the injunction if the Court should finally decide that the Plaintiff was/were not entitled thereto." (Rollo, p.
101) Thus, the respondent Court correctly sustained the trial court in holding that the bond shall and may
answer only for damages which OVEC may suffer as a result of the injunction. The arrears in rental, the
unmeritted amounts of the amusement tax delinquency, the amount of P100,000.00 (P10,000.00 portions of
each monthly rental which were not deducted from plaintiffs cash deposit from February to November, 1980
after the forfeiture of said cash deposit on February 11, 1980) and attorney's fees which were all charged against
Sy were correctly considered by the respondent Court as damages which OVEC sustained not as a result of the
injunction.

There is likewise no merit to the claim of petitioners that respondent Court committed serious error of law and
grave abuse of discretion in not dismissing private respondent's counterclaim for failure to pay the necessary
docket fee, which is an issue raised for the first time in this petition. Petitioners rely on the rule in Manchester
Development Corporation v. Court of Appeals, G.R. No. 75919, May 7, 1987, 149 SCRA 562 to the effect that
all the proceedings held in connection with a case where the correct docket fees are not paid should be
peremptorily be considered null and void because, for all legal purposes, the trial court never acquired
jurisdiction over the case. It should be remembered however, that in Davao Light and Power Co., Inc. v.
Dinopol, G.R. 75195, August 19, 1988, 164 SCRA 748, this Court took note of the fact that the assailed order
of the trial court was issued prior to the resolution in the Manchester case and held that its strict application to
the case at bar would therefore be unduly harsh. Thus, We allowed the amendment of the complaint by
specifying the amount of damages within a non-extendible period of five (5) days from notice and the re-
assessment of the filing fees. Then, in Sun Insurance Office, Ltd. v. Asuncion, G.R. 79937-38, February 3, 1989,
170 SCRA 274, We held that where the filing of the initiatory pleading is not accompanied by payment of the
docket fee, the court may allow payment of the fee within a reasonable time but in no case beyond the
applicable prescriptive or reglemen tary period.

Nevertheless, OVEC's counterclaims are compulsory so no docket fees are required as the following
circumstances are present: (a) they arise out of or are necessarily connected with the transaction or occurrence
that is subject matter of the opposing party's claim; (b) they do not require for their adjudication the presence of
third parties of whom the court cannot acquire jurisdiction; and (c) the court has jurisdiction to entertain the
claim (see Javier v. Intermediate Appellate Court, G.R. 75379, March 31, 1989, 171 SCRA 605). Whether the
respective claims asserted by the parties arise out of the same contract or transaction within the limitation on
counterclaims imposed by the statutes depends on a consideration of all the facts brought forth by the parties
and on a determination of whether there is some legal or equitable relationship between the ground of recovery
alleged in the counterclaim and the matters alleged as the cause of action by the plaintiff (80 C.J.S. 48). As the
counterclaims of OVEC arise from or are necessarily connected with the facts alleged in the complaint for
reformation of instrument of Sy, it is clear that said counterclaims are compulsory.

ACCORDINGLY, finding no merit in the grounds relied upon by petitioners in their petition, the same is
hereby DENIED and the decision dated June 15, 1988 and the resolution dated September 21, 1988, both of the
respondent Court of Appeals are AFFIRMED. SO ORDERED.

G.R. No. 199650               June 26, 2013

J PLUS ASIA DEVELOPMENT CORPORATION, Petitioner, vs. UTILITY ASSURANCE

CORPORATION, Respondent.

DECISION

VILLARAMA, JR., J.:

Before the Court is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as
amended, assailing the Decision1 dated January 27,2011 and Resolution2 dated December 8, 2011 of the Court
of Appeals (CA) in CA-G.R. SP No. 112808.

The Facts
On December 24, 2007, petitioner J Plus Asia Development Corporation represented by its Chairman, Joo Han
Lee, and Martin E. Mabunay, doing business under the name and style of Seven Shades of Blue Trading and
Services, entered into a Construction Agreement3 whereby the latter undertook to build the former's 72-room
condominium/hotel (Condotel Building 25) located at the Fairways & Bluewaters Golf & Resort in Boracay
Island, Malay, Aklan. The project, costing ₱42,000,000.00, was to be completed within one year or 365 days
reckoned from the first calendar day after signing of the Notice of Award and Notice to Proceed and receipt of
down payment (20% of contract price). The ₱8,400,000.00 down payment was fully paid on January 14,
2008.4 Payment of the balance of the contract price will be based on actual work finished within 15 days from
receipt of the monthly progress billings. Per the agreed work schedule, the completion date of the project was
December 2008.5 Mabuhay also submitted the required Performance Bond6 issued by respondent Utility
Assurance Corporation (UTASSCO) in the amount equivalent to 20% down payment or ₱8.4 million.

Mabunay commenced work at the project site on January 7, 2008. Petitioner paid up to the 7th monthly progress
billing sent by Mabunay. As of September 16, 2008, petitioner had paid the total amount of ₱15,979,472.03
inclusive of the 20% down payment. However, as of said date, Mabunay had accomplished only 27.5% of the
project.7

In the Joint Construction Evaluation Result and Status Report8 signed by Mabunay assisted by Arch. Elwin
Olavario, and Joo Han Lee assisted by Roy V. Movido, the following findings were accepted as true, accurate
and correct:

III STATUS OF PROJECT AS OF 14 NOVEMBER 2008

1) After conducting a joint inspection and evaluation of the project to determine the actual percentage of
accomplishment, the contracting parties, assisted by their respective technical groups, SSB assisted by
Arch. Elwin Olavario and JPLUS assisted by Engrs. Joey Rojas and Shiela Botardo, concluded and
agreed that as of 14 November 2008, the project is only Thirty One point Thirty Nine Percent (31.39%)
complete.

2) Furthermore, the value of construction materials allocated for the completion of the project and
currently on site has been determined and agreed to be ONE MILLION FORTY NINE THOUSAND
THREE HUNDRED SIXTY FOUR PESOS AND FORTY FIVE CENTAVOS (₱1,049,364.45)

3) The additional accomplishment of SSB, reflected in its reconciled and consolidated 8th and 9th
billings, is Three point Eighty Five Percent (3.85%) with a gross value of ₱1,563,553.34 amount
creditable to SSB after deducting the withholding tax is ₱1,538,424.84

4) The unrecouped amount of the down payment is ₱2,379,441.53 after deducting the cost of materials
on site and the net billable amount reflected in the reconciled and consolidated 8th and 9th billings. The
uncompleted portion of the project is 68.61% with an estimated value per construction agreement signed
is ₱27,880,419.52.9 (Emphasis supplied.)

On November 19, 2008, petitioner terminated the contract and sent demand letters to Mabunay and respondent
surety. As its demands went unheeded, petitioner filed a Request for Arbitration 10 before the Construction
Industry Arbitration Commission (CIAC). Petitioner prayed that Mabunay and respondent be ordered to pay the
sums of ₱8,980,575.89 as liquidated damages and ₱2,379,441.53 corresponding to the unrecouped down
payment or overpayment petitioner made to Mabunay.11

In his Answer,12 Mabunay claimed that the delay was caused by retrofitting and other revision works ordered by
Joo Han Lee. He asserted that he actually had until April 30, 2009 to finish the project since the 365 days period
of completion started only on May 2, 2008 after clearing the retrofitted old structure. Hence, the termination of
the contract by petitioner was premature and the filing of the complaint against him was baseless, malicious and
in bad faith.

Respondent, on the other hand, filed a motion to dismiss on the ground that petitioner has no cause of action and
the complaint states no cause of action against it. The CIAC denied the motion to dismiss. Respondent’s motion
for reconsideration was likewise denied.13

In its Answer Ex Abundante Ad Cautelam With Compulsory Counterclaims and Cross-claims, 14 respondent
argued that the performance bond merely guaranteed the 20% down payment and not the entire obligation of
Mabunay under the Construction Agreement. Since the value of the project’s accomplishment already exceeded
the said amount, respondent’s obligation under the performance bond had been fully extinguished. As to the
claim for alleged overpayment to Mabunay, respondent contended that it should not be credited against the 20%
down payment which was already exhausted and such application by petitioner is tantamount to reviving an
obligation that had been legally extinguished by payment. Respondent also set up a cross-claim against
Mabunay who executed in its favor an Indemnity Agreement whereby Mabunay undertook to indemnify
respondent for whatever amounts it may be adjudged liable to pay petitioner under the surety bond.

Both petitioner and respondent submitted their respective documentary and testimonial evidence. Mabunay
failed to appear in the scheduled hearings and to present his evidence despite due notice to his counsel of
record. The CIAC thus declared that Mabunay is deemed to have waived his right to present evidence.15

On February 2, 2010, the CIAC rendered its Decision16 and made the following award:

Accordingly, in view of our foregoing discussions and dispositions, the Tribunal hereby adjudges, orders and
directs:

1. Respondents Mabunay and Utassco to jointly and severally pay claimant the following:

a) ₱4,469,969.90, as liquidated damages, plus legal interest thereon at the rate of 6% per annum
computed from the date of this decision up to the time this decision becomes final, and 12% per
annum computed from the date this decision becomes final until fully paid, and

b) ₱2,379,441.53 as unrecouped down payment plus interest thereon at the rate of 6% per annum
computed from the date of this decision up to the time this decision becomes final, and 12% per
annum computed from the date this decision becomes final until fully paid.

It being understood that respondent Utassco’s liability shall in no case exceed ₱8.4 million.

2. Respondent Mabunay to pay to claimant the amount of ₱98,435.89, which is respondent Mabunay’s
share in the arbitration cost claimant had advanced, with legal interest thereon from January 8, 2010
until fully paid.

3. Respondent Mabunay to indemnify respondent Utassco of the amounts respondent Utassco will have
paid to claimant under this decision, plus interest thereon at the rate of 12% per annum computed from
the date he is notified of such payment made by respondent Utassco to claimant until fully paid, and to
pay Utassco ₱100,000.00 as attorney’s fees.

SO ORDERED.17

Dissatisfied, respondent filed in the CA a petition for review under Rule 43 of the 1997 Rules of Civil
Procedure, as amended.

In the assailed decision, the CA agreed with the CIAC that the specific condition in the Performance Bond did
not clearly state the limitation of the surety’s liability. Pursuant to Article 1377 18 of the Civil Code, the CA said
that the provision should be construed in favor of petitioner considering that the obscurely phrased provision
was drawn up by respondent and Mabunay. Further, the appellate court stated that respondent could not
possibly guarantee the down payment because it is not Mabunay who owed the down payment to petitioner but
the other way around. Consequently, the completion by Mabunay of 31.39% of the construction would not lead
to the extinguishment of respondent’s liability. The ₱8.4 million was a limit on the amount of respondent’s
liability and not a limitation as to the obligation or undertaking it guaranteed.

However, the CA reversed the CIAC’s ruling that Mabunay had incurred delay which entitled petitioner to the
stipulated liquidated damages and unrecouped down payment. Citing Aerospace Chemical Industries, Inc. v.
Court of Appeals,19 the appellate court said that not all requisites in order to consider the obligor or debtor in
default were present in this case. It held that it is only from December 24, 2008 (completion date) that we
should reckon default because the Construction Agreement provided only for delay in the completion of the
project and not delay on a monthly basis using the work schedule approved by petitioner as the reference point.
Hence, petitioner’s termination of the contract was premature since the delay in this case was merely
speculative; the obligation was not yet demandable.

The dispositive portion of the CA Decision reads:

WHEREFORE, premises considered, the instant petition for review is GRANTED. The assailed Decision dated
13 January 2010 rendered by the CIAC Arbitral Tribunal in CIAC Case No. 03-2009 is hereby REVERSED and
SET ASIDE. Accordingly, the Writ of Execution dated 24 November 2010 issued by the same tribunal is
hereby ANNULLED and SET ASIDE.

SO ORDERED.20

Petitioner moved for reconsideration of the CA decision while respondent filed a motion for partial
reconsideration. Both motions were denied.

The Issues

Before this Court petitioner seeks to reverse the CA insofar as it denied petitioner’s claims under the
Performance Bond and to reinstate in its entirety the February 2, 2010 CIAC Decision. Specifically, petitioner
alleged that –

A. THE COURT OF APPEALS SERIOUSLY ERRED IN NOT HOLDING THAT THE

ALTERNATIVE DISPUTE RESOLUTION ACT AND THE SPECIAL RULES ON ALTERNATIVE
DISPUTE RESOLUTION HAVE STRIPPED THE COURT OF APPEALS OF JURISDICTION TO
REVIEW ARBITRAL AWARDS.

B. THE COURT OF APPEALS SERIOUSLY ERRED IN REVERSING THE ARBITRAL AWARD

ON AN ISSUE THAT WAS NOT RAISED IN THE ANSWER. NOT IDENTIFIED IN THE TERMS
OF REFERENCE, NOT ASSIGNED AS ANERROR, AND NOT ARGUED IN ANY OF THE
PLEADINGS FILED BEFORE THE COURT.

C. THE COURT OF APPEALS SERIOUSLY ERRED IN RELYING ON THE CASE OF

AEROSPACE CHEMICAL INDUSTRIES, INC. v. COURT OF APPEALS, 315 SCRA 94, WHICH
HAS NOTHING TO DO WITH CONSTRUCTION AGREEMENTS.21

Our Ruling

On the procedural issues raised, we find no merit in petitioner’s contention that with the institutionalization of
alternative dispute resolution under Republic Act (R.A.) No. 9285, 22 otherwise known as the Alternative
Dispute Resolution Act of 2004, the CA was divested of jurisdiction to review the decisions or awards of the
CIAC. Petitioner erroneously relied on the provision in said law allowing any party to a domestic arbitration to
file in the Regional Trial Court (RTC) a petition either to confirm, correct or vacate a domestic arbitral award.

We hold that R.A. No. 9285 did not confer on regional trial courts jurisdiction to review awards or decisions of
the CIAC in construction disputes. On the contrary, Section 40 thereof expressly declares that confirmation by
the RTC is not required, thus:

SEC. 40. Confirmation of Award. – The confirmation of a domestic arbitral award shall be governed by Section
23 of R.A. 876.

A domestic arbitral award when confirmed shall be enforced in the same manner as final and executory
decisions of the Regional Trial Court.

The confirmation of a domestic award shall be made by the regional trial court in accordance with the Rules of
Procedure to be promulgated by the Supreme Court.

A CIAC arbitral award need not be confirmed by the regional trial court to be executory as provided under E.O.
No. 1008. (Emphasis supplied.)

Executive Order (EO) No. 1008 vests upon the CIAC original and exclusive jurisdiction over disputes arising
from, or connected with, contracts entered into by parties involved in construction in the Philippines, whether
the dispute arises before or after the completion of the contract, or after the abandonment or breach thereof. By
express provision of Section 19 thereof, the arbitral award of the CIAC is final and unappealable, except on
questions of law, which are appealable to the Supreme Court. With the amendments introduced by R.A. No.
7902 and promulgation of the 1997 Rules of Civil Procedure, as amended, the CIAC was included in the
enumeration of quasijudicial agencies whose decisions or awards may be appealed to the CA in a petition for
review under Rule 43. Such review of the CIAC award may involve either questions of fact, of law, or of fact
and law.23

Petitioner misread the provisions of A.M. No. 07-11-08-SC (Special ADR Rules) promulgated by this Court
and which took effect on October 30, 2009. Since R.A. No. 9285 explicitly excluded CIAC awards from
domestic arbitration awards that need to be confirmed to be executory, said awards are therefore not covered by
Rule 11 of the Special ADR Rules,24 as they continue to be governed by EO No. 1008, as amended and the rules
of procedure of the CIAC. The CIAC Revised Rules of Procedure Governing Construction Arbitration 25 provide
for the manner and mode of appeal from CIAC decisions or awards in Section 18 thereof, which reads:

SECTION 18.2 Petition for review. – A petition for review from a final award may be taken by any of the
parties within fifteen (15) days from receipt thereof in accordance with the provisions of Rule 43 of the Rules of
Court.

As to the alleged error committed by the CA in deciding the case upon an issue not raised or litigated before the
CIAC, this assertion has no basis. Whether or not Mabunay had incurred delay in the performance of his
obligations under the Construction Agreement was the very first issue stipulated in the Terms of
Reference26 (TOR), which is distinct from the issue of the extent of respondent’s liability under the Performance
Bond.

Indeed, resolution of the issue of delay was crucial upon which depends petitioner’s right to the liquidated
damages pursuant to the Construction Agreement. Contrary to the CIAC’s findings, the CA opined that delay
should be reckoned only after the lapse of the one-year contract period, and consequently Mabunay’s liability
for liquidated damages arises only upon the happening of such condition.

We reverse the CA.

Default or mora on the part of the debtor is the delay in the fulfillment of the prestation by reason of a cause
imputable to the former. It is the non-fulfillment of an obligation with respect to time.27

Article 1169 of the Civil Code provides:

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.

xxxx

It is a general rule that one who contracts to complete certain work within a certain time is liable for the damage
for not completing it within such time, unless the delay is excused or waived.28

The Construction Agreement provides in Article 10 thereof the following conditions as to completion time for
the project

1. The CONTRACTOR shall complete the works called for under this Agreement within ONE (1)
YEAR or 365 Days reckoned from the 1st calendar day after signing of the Notice of Award and Notice
to Proceed and receipt of down payment.

2. In this regard the CONTRACTOR shall submit a detailed work schedule for approval by OWNER
within Seven (7) days after signing of this Agreement and full payment of 20% of the agreed contract
price. Said detailed work schedule shall follow the general schedule of activities and shall serve as basis
for the evaluation of the progress of work by CONTRACTOR.29

In this jurisdiction, the following requisites must be present in order that the debtor may be in default: (1) that
the obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the
creditor requires the performance judicially or extrajudicially.30

In holding that Mabunay has not at all incurred delay, the CA pointed out that the obligation to perform or
complete the project was not yet demandable as of November 19, 2008 when petitioner terminated the contract,
because the agreed completion date was still more than one month away (December 24, 2008). Since the parties
contemplated delay in the completion of the entire project, the CA concluded that the failure of the contractor to
catch up with schedule of work activities did not constitute delay giving rise to the contractor’s liability for
damages.
We cannot sustain the appellate court’s interpretation as it is inconsistent with the terms of the Construction
Agreement. Article 1374 of the Civil Code requires that the various stipulations of a contract shall be
interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly.
Here, the work schedule approved by petitioner was intended, not only to serve as its basis for the payment of
monthly progress billings, but also for evaluation of the progress of work by the contractor. Article 13.01 (g)
(iii) of the Construction Agreement provides that the contractor shall be deemed in default if, among others, it
had delayed without justifiable cause the completion of the project "by more than thirty (30) calendar days
based on official work schedule duly approved by the OWNER."31

Records showed that as early as April 2008, or within four months after Mabunay commenced work activities,
the project was already behind schedule for reasons not attributable to petitioner. In the succeeding months,
Mabunay was still unable to catch up with his accomplishment even as petitioner constantly advised him of the
delays, as can be gleaned from the following notices of delay sent by petitioner’s engineer and construction
manager, Engr. Sheila N. Botardo:

April 30, 2008

Seven Shades of Blue

Boracay Island
Malay, Aklan

Attenti : Mr. Martin

on Mabunay
General Manager
: Engr. Reynaldo
Thru
Gapasin
Project : Villa Beatriz
Subject : Notice of Delay

Dear Mr. Mabunay:

This is to formalize our discussion with your Engineers during our meeting last April 23, 2008 regarding the
delay in the implementation of major activities based on your submitted construction schedule. Substantial
delay was noted in concreting works that affects your roof framing that should have been 40% completed as of
this date. This delay will create major impact on your over-all schedule as the finishing works will all be
dependent on the enclosure of the building.

In this regard, we recommend that you prepare a catch-up schedule and expedite the delivery of critical
materials on site. We would highly appreciate if you could attend our next regular meeting so we could
immediately address this matter. Thank you.

Very truly yours,

Engr. Sheila N. Botardo

Construction Manager – LMI/FEPI32

October 15, 2008

xxxx

Dear Mr. Mabunay,

We have noticed continuous absence of all the Engineers that you have assigned on-site to administer and
supervise your contracted work. For the past two (2) weeks, your company does not have a Technical
Representative manning the jobsite considering the critical activities that are in progress and the delays in
schedule that you have already incurred. In this regard, we would highly recommend the immediate
replacement of your Project Engineer within the week.

We would highly appreciate your usual attention on this matter.

x x x x33

November 5, 2008

xxxx

Dear Mr. Mabunay,

This is in reference to your discussion during the meeting with Mr. Joohan Lee last October 30, 2008 regarding
the construction of the Field Office and Stock Room for Materials intended for Villa Beatriz use only. We
understand that you have committed to complete it November 5, 2008 but as of this date there is no
improvement or any ongoing construction activity on the said field office and stockroom.

We are expecting deliveries of Owner Supplied Materials very soon, therefore, this stockroom is badly needed.
We will highly appreciate if this matter will be given your immediate attention.

Thank you.

x x x x34

November 6, 2008

xxxx

Dear Mr. Mabunay,

We would like to call your attention regarding the decrease in your manpower assigned on site. We have
observed that for the past three (3) weeks instead of increasing your manpower to catch up with the delay it was
reduced to only 8 workers today from an average of 35 workers in the previous months.

Please note that based on your submitted revised schedule you are already delayed by approximately 57% and
this will worsen should you not address this matter properly.

We are looking forward for [sic] your cooperation and continuous commitment in delivering this project as per
contract agreement.

x x x x35

Subsequently, a joint inspection and evaluation was conducted with the assistance of the architects and
engineers of petitioner and Mabunay and it was found that as of November 14, 2008, the project was only
31.39% complete and that the uncompleted portion was 68.61% with an estimated value per Construction
Agreement as ₱27,880,419.52. Instead of doubling his efforts as the scheduled completion date approached,
Mabunay did nothing to remedy the delays and even reduced the deployment of workers at the project site.
Neither did Mabunay, at anytime, ask for an extension to complete the project. Thus, on November 19, 2008,
petitioner advised Mabunay of its decision to terminate the contract on account of the tremendous delay the
latter incurred. This was followed by the claim against the Performance Bond upon the respondent on
December 18, 2008.

Petitioner’s claim against the Performance Bond included the liquidated damages provided in the Construction
Agreement, as follows:

ARTICLE 12 – LIQUIDATED DAMAGES:

12.01 Time is of the essence in this Agreement. Should the CONTRACTOR fail to complete the PROJECT
within the period stipulated herein or within the period of extension granted by the OWNER, plus One (1)
Week grace period, without any justifiable reason, the CONTRACTOR hereby agrees –

a. The CONTRACTOR shall pay the OWNER liquidated damages equivalent to One Tenth of One
Percent (1/10 of 1%) of the Contract Amount for each day of delay after any and all extensions and the
One (1) week Grace Period until completed by the CONTRACTOR.
 b. The CONTRACTOR, even after paying for the liquidated damages due to unexecuted works and/or
delays shall not relieve it of the obligation to complete and finish the construction.

Any sum which maybe payable to the OWNER for such loss may be deducted from the amounts retained under
Article 9 or retained by the OWNER when the works called for under this Agreement have been finished and
completed.

Liquidated Damage[s] payable to the OWNER shall be automatically deducted from the contractors collectibles
without prior consent and concurrence by the CONTRACTOR.

12.02 To give full force and effect to the foregoing, the CONTRACTOR hereby, without necessity of any
further act and deed, authorizes the OWNER to deduct any amount that may be due under Item (a) above, from
any and all money or amounts due or which will become due to the CONTRACTOR by virtue of this
Agreement and/or to collect such amounts from the Performance Bond filed by the CONTRACTOR in this
Agreement.36 (Emphasis supplied.)

Liability for liquidated damages is governed by Articles 2226 to 2228 of the Civil Code, which provide:

ART. 2226. Liquidated damages are those agreed upon by the parties to a contract, to be paid in case of breach
thereof.

ART. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if
they are iniquitous or unconscionable.

ART. 2228. When the breach of the contract committed by the defendant is not the one contemplated by the
parties in agreeing upon the liquidated damages, the law shall determine the measure of damages, and not the
stipulation.

A stipulation for liquidated damages is attached to an obligation in order to ensure 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.37 The amount agreed upon answers for damages
suffered by the owner due to delays in the completion of the project. 38 As a precondition to such award,
however, there must be proof of the fact of delay in the performance of the obligation.39

Concededly, Article 12.01 of the Construction Agreement mentioned only the failure of the contractor to
complete the project within the stipulated period or the extension granted by the owner. However, this will not
defeat petitioner’s claim for damages nor respondent’s liability under the Performance Bond. Mabunay was
clearly in default considering the dismal percentage of his accomplishment (32.38%) of the work he contracted
on account of delays in executing the scheduled work activities and repeated failure to provide sufficient
manpower to expedite construction works. The events of default and remedies of the Owner are set forth in
Article 13, which reads:

ARTICLE 13 – DEFAULT OF CONTRACTOR:

13.01 Any of the following shall constitute an Event of Default on the part of the CONTRACTOR.

xxxx

g. In case the CONTRACTOR has done any of the following:

(i.) has abandoned the Project

(ii.) without reasonable cause, has failed to commence the construction or has suspended the progress of
the Project for twenty-eight days

(iii.) without justifiable cause, has delayed the completion of the Project by more than thirty (30)
calendar days based on official work schedule duly approved by the OWNER

(iv.) despite previous written warning by the OWNER, is not executing the construction works in
accordance with the Agreement or is persistently or flagrantly neglecting to carry out its obligations
under the Agreement.
 (v.) has, to the detriment of good workmanship or in defiance of the Owner’s instructions to the
contrary, sublet any part of the Agreement.

13.02 If the CONTRACTOR has committed any of the above reasons cited in Item 13.01, the OWNER may
after giving fourteen (14) calendar days notice in writing to the CONTRACTOR, enter upon the site and expel
the CONTRACTOR therefrom without voiding this Agreement, or releasing the CONTRACTOR from any of
its obligations, and liabilities under this Agreement. Also without diminishing or affecting the rights and powers
conferred on the OWNER by this Agreement and the OWNER may himself complete the work or may employ
any other contractor to complete the work. If the OWNER shall enter and expel the CONTRACTOR under this
clause, the OWNER shall be entitled to confiscate the performance bond of the CONTRACTOR to compensate
for all kinds of damages the OWNER may suffer. All expenses incurred to finish the Project shall be charged to
the CONTRACTOR and/or his bond. Further, the OWNER shall not be liable to pay the CONTRACTOR until
the cost of execution, damages for the delay in the completion, if any, and all; other expenses incurred by the
OWNER have been ascertained which amount shall be deducted from any money due to the CONTRACTOR
on account of this Agreement. The CONTRACTOR will not be compensated for any loss of profit, loss of
goodwill, loss of use of any equipment or property, loss of business opportunity, additional financing cost or
overhead or opportunity losses related to the unaccomplished portions of the work.40 (Emphasis supplied.)

As already demonstrated, the contractor’s default in this case pertains to his failure to substantially perform the
work on account of tremendous delays in executing the scheduled work activities. Where a party to a building
construction contract fails to comply with the duty imposed by the terms of the contract, a breach results for
which an action may be maintained to recover the damages sustained thereby, and of course, a breach occurs
where the contractor inexcusably fails to perform substantially in accordance with the terms of the contract.41

The plain and unambiguous terms of the Construction Agreement authorize petitioner to confiscate the
Performance Bond to answer for all kinds of damages it may suffer as a result of the contractor’s failure to
complete the building. Having elected to terminate the contract and expel the contractor from the project site
under Article 13 of the said Agreement, petitioner is clearly entitled to the proceeds of the bond as
indemnification for damages it sustained due to the breach committed by Mabunay. Such stipulation allowing
the confiscation of the contractor’s performance bond partakes of the nature of a penalty clause. A penalty
clause, expressly recognized by law, is an accessory undertaking to assume greater liability on the part of the
obligor in case of breach of an obligation. It functions to strengthen the coercive force of obligation and to
provide, in effect, for what could be the liquidated damages resulting from such a breach. 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. It is well-settled that so long as such stipulation does not contravene
law, morals, or public order, it is strictly binding upon the obligor.42

Respondent, however, insists that it is not liable for the breach committed by Mabunay because by the terms of
the surety bond it issued, its liability is limited to the performance by said contractor to the extent equivalent to
20% of the down payment. It stresses that with the 32.38% completion of the project by Mabunay, its liability
was extinguished because the value of such accomplishment already exceeded the sum equivalent to 20% down
payment (₱8.4 million).

The appellate court correctly rejected this theory of respondent when it ruled that the Performance Bond
guaranteed the full and faithful compliance of Mabunay’s obligations under the Construction Agreement, and
that nowhere in law or jurisprudence does it state that the obligation or undertaking by a surety may be
apportioned.

The pertinent portions of the Performance Bond provide:

The conditions of this obligation are as follows:

Whereas the JPLUS ASIA, requires the principal SEVEN SHADES OF BLUE CONSTRUCTION AND
DEVELOPMENT, INC. to post a bond of the abovestated sum to guarantee 20% down payment for the
construction of Building 25 (Villa Beatriz) 72-Room Condotel, The Lodgings inside Fairways and Bluewater,
Boracay Island, Malay, Aklan.

Whereas, said contract required said Principal to give a good and sufficient bond in the above-stated sum to
secure the full and faithful performance on his part of said contract.

It is a special provision of this undertaking that the liability of the surety under this bond shall in no case exceed
the sum of ₱8,400,000.00 Philippine Currency.
Now, Therefore, if the Principal shall well and truly perform and fulfill all the undertakings, covenants, terms,
conditions and agreements stipulated in said contract, then this obligation shall be null and void; otherwise to
remain in full force and effect.43 (Emphasis supplied.)

While the above condition or specific guarantee is unclear, the rest of the recitals in the bond unequivocally
declare that it secures the full and faithful performance of Mabunay’s obligations under the Construction
Agreement with petitioner. By its nature, a performance bond guarantees that the contractor will perform the
contract, and usually provides that if the contractor defaults and fails to complete the contract, the surety can
itself complete the contract or pay damages up to the limit of the bond. 44 Moreover, the rule is that if the
language of the bond is ambiguous or uncertain, it will be construed most strongly against a compensated surety
and in favor of the obligees or beneficiaries under the bond, in this case petitioner as the Project Owner, for
whose benefit it was ostensibly executed.45

The imposition of interest on the claims of petitioner is likewise in order. As we held in Commonwealth
Insurance Corporation v. Court of Appeals46

Petitioner argues that it should not be made to pay interest because its issuance of the surety bonds was made on
the condition that its liability shall in no case exceed the amount of the said bonds.

We are not persuaded. Petitioner’s argument is misplaced.

Jurisprudence is clear on this matter. As early as Tagawa vs. Aldanese and Union Gurantee Co. and reiterated in
Plaridel Surety & Insurance Co., Inc. vs. P.L. Galang Machinery Co., Inc., and more recently, in Republic vs.
Court of Appeals and R & B Surety and Insurance Company, Inc., we have sustained the principle that if a
surety upon demand fails to pay, he can be held liable for interest, even if in thus paying, its liability becomes
more than the principal obligation. The increased liability is not because of the contract but because of the
default and the necessity of judicial collection.

Petitioner’s liability under the suretyship contract is different from its liability under the law.1âwphi1 There is
no question that as a surety, petitioner should not be made to pay more than its assumed obligation under the
surety bonds. However, it is clear from the above-cited jurisprudence that petitioner’s liability for the payment
of interest is not by reason of the suretyship agreement itself but because of the delay in the payment of its
obligation under the said agreement.47 (Emphasis supplied; citations omitted.)

WHEREFORE, the petition for review on certiorari is GRANTED. The Decision dated January 27, 2011 and
Resolution dated December 8, 2011 of the Court of Appeals in CA-G.R. SP No. 112808 are hereby
REVERSED and SET ASIDE.

The Award made in the Decision dated February 2, 2010 of the Construction Industry Arbitration Commission
Is hereby REINSTATED with the following MODIFICATIONS:

"Accordingly, in view of our foregoing discussions and dispositions, the Tribunal hereby adjudges, orders and
directs:

1) Respondent Utassco to pay to petitioner J Plus Asia Development Corporation the full amount of the
Performance Bond, ₱8,400,000.00, pursuant to Art. 13 of the Construction Agreement dated December
24, 2007, with interest at the rate of 6% per annum computed from the date of the filing of the complaint
until the finality of this decision, and 12% per annum computed from the date this decision becomes
final until fully paid; and

2) Respondent Mabunay to indemnify respondent Utassco of the amounts respondent Utassco will have
paid to claimant under this decision, plus interest thereon at the rate of 12% per annum computed from
the date he is notified of such payment made by respondent Utassco to claimant until fully paid, and to
pay Utassco ₱100,000.00 as attorney's fees.

SO ORDERED.

With the above modifications, the Writ of Execution dated November 24, 2010 issued by the CIAC Arbitral
Tribunal in CIAC Case No. 03-2009 is hereby REINSTATED and UPHELD.

No pronouncement as to costs. SO ORDERED.

G.R. No. 137557               October 30, 2000

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. HON. COURT OF APPEALS and

SPOUSES NILO and ESPERANZA DE LA PEÑA, respondents.

DECISION

MENDOZA, J.:

This is a petition for review on certiorari of the decision,1 dated August 7, 1998, and resolution,2 dated February
11, 1999, of the Court of Appeals affirming with modification the decision of the Regional Trial Court, Branch
172, Valenzuela, enjoining petitioner from rescinding the contract it had executed covering the sale of a parcel
of land and ordering respondent spouses, as vendees, to pay petitioner the amount of ₱54,200.00.

The facts are undisputed:

Petitioner Development Bank of the Philippines is the owner of a parcel of land in Bulacan (now Lawang Bato,
Valenzuela, Metro Manila)3 as evidenced by TCT No. 13351(202029). On August 8, 1983, it sold the land to
respondent spouses Nilo and Esperanza De La Peña under a Deed of Conditional Sale for ₱207,000.00.4 The
Deed of Conditional Sale stipulated:

That the down payment shall be ₱41,400.00 and the balance of P165,600.00 to be paid in six (6) years on the
semi-annual amortization plan at 18% interest per annum. The first amortization of ₱23,126.14 shall be due and
payable six (6) months from the date of execution of the Deed of Conditional Sale and all subsequent
amortizations shall be due and payable every six (6) months thereafter;

After the execution of the contract, the spouses De La Peña constructed a house on the said lot and began living
there. They also introduced other improvements therein by planting fruit trees and building a small
garage.5 Pursuant to their contract with the DBP, respondent spouses De La Peña made the following payments:
OR. DATE AMOUNT
NO.
261122 June 22, 1983 P 36,000.00
355399 August 4, 1983 5,400.00
828029 March 22, 6,000.00
1984
862947 June 4, 1984 21,000.00
123013 November 15, 3,000.00
3 1984
136591 Feb. 8, 1985 6,000.00
4
154527 March 11, 6,000.00
2 1985
154951 April 8, 1985 6,000.00
1
154964 May 3, 1985 6,000.00
1
171417 July 9, 1985 11,400.00
1
189368 November 29, 11,400.00
3 1985
225766 July 3, 1986 10,000.00
1
234922 September 3, 15,000.00
9 1986
 252906 November 4, 16,000.00
5 1986
283051 August 18, 21,000.00
3 1987
334216 October 12, 10,000.00
6 1988
336703 December 9, 10,000.00
9 1988
336719 January 10, 10,000.00
3 1989
336750 February 10, 10,000.00
0 1989
346177 March 9, 1989 18,000.00
8
353200 April 10, 1989 18,800.00
8
361723 August 28, ₱33,000.00
5 1989
TOTAL ₱289,600.0
06

After making the above payments, Esperanza De La Peña went to petitioner DBP and asked for the execution of
a Deed of Absolute Sale and for the issuance of the title to the property. 7 On January 5, 1989, however,
respondent spouses De La Peña were informed by DBP through a letter that there was still a balance of
₱221,86.85, broken down as follows, owing from them:

₱150,765.3
Principal
5
Regular
57,121.13
Interest
Additional
9,799.01
Interest
Penalty
4,182.36
Charges
₱ 221,867.
TOTAL
858

In another letter, dated July 11, 1989, DBP demanded from respondent spouses the payment of this amount,
which had increased to ₱225,855.86 as of June 30, 1989, otherwise, it would rescind the sale. 9 In reply,
respondent spouses, in a letter dated August 11, 1989, proposed a settlement of the amount through semi-annual
payments over a period of five years.10

As the parties failed to reach an agreement, respondent spouses filed a complaint against petitioner on January
30, 1990 for specific performance and damages with injunction before the Regional Trial Court, Valenzuela,
Metro Manila.11 The case was assigned to Branch 172 of the court. The complaint was later amended to include
a prayer for the issuance of a temporary restraining order to enjoin the defendant from rescinding the sale and
selling the land to interested buyers.12

On March 30, 1993, the trial court rendered a decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered,

1. Dismissing the complaint, as plaintiffs have still to pay the defendant the sum of ₱54,200.00 as
interest to be able to sue for specific performance;
 2. The writ of preliminary injunction is hereby declared permanent;

3. Defendant to pay plaintiffs attorney’s fees in the amount of ₱30,000.00; and

4. Defendant to pay the costs of suit.

SO ORDERED.13

Petitioner filed an appeal with the Court of Appeals which rendered a decision, dated August 8, 1997, affirming
with modification the ruling of the trial court. The dispositive portion of its decision reads:

WHEREFORE, with the MODIFICATION that the grant of attorney’s fees is deleted, the appealed Decision is
AFFIRMED.14

In its resolution, dated February 11, 1999, the Court of Appeals likewise denied petitioner’s motion for
reconsideration.15

Hence, this petition. Petitioner now contends:

1. BOTH THE TRIAL COURT AND THE COURT OF APPEALS GAVE A MANIFESTLY
MISTAKEN AND ABSURD CONSTRUCTION OF THE DEED OF CONDITIONAL SALE
CONTRACT (ANNEX "E").

2. THE HONORABLE COURT OF APPEALS GRAVELY ERRED AND COMMITTED

REVERSIBLE ERROR WHEN IT AFFIRMED THE TRIAL COURT’S ISSUANCE OF THE
INJUNCTION AGAINST PETITIONER DBP PERMANENT. 16

First. The Court of Appeals held:

A careful reading of the aforequoted provisions reveals that while the period of payment (six years) and the
amount of the first amortization (P23,126.14) are stipulated, the amount that the vendees should pay semi-
annually is not specified. Since the Deed of Conditional Sale executed by the parties is a contract of adhesion,
i.e., a ready-made contract to which appellees merely affixed their assent or "adhesion", as the court a quo
correctly found, a restrictive construction of the obscure provision regarding the amount of semi-annual
amortizations should be made against the drafter DBP (PAL vs. Court of Appeals, 255 SCRA 48, BPI Credit vs.
Court of Appeals, 204 SCRA 611; Maersk Lines vs. Court of Appeals, 222 SCRA 108; Angeles vs. Calasaz,
135 SCRA 323). It is not disputed that appellant Bank was the party responsible for the preparation of the Deed
of Conditional Sale. Any ambiguity in the contract whose terms are susceptible of different interpretations must
be read against appellant as the party which drafted the contract (Nacu vs. Court of Appeals, 231 SCRA 237).
Thus the contract of the parties must be interpreted, in so far as the manner and amounts of amortization is
concerned, to be at the option of the vendees, subject only to the condition that the latter should pay the balance
of the purchase price within a period of six years.17

The questioned provision states:

That the down payment shall be ₱41,400.00 and the balance of ₱165,600.00 to be paid in six (6) years on the
semi-annual amortization plan at 18% interest per annum. The first amortization of ₱23,126.14 shall be due and
payable six (6) months from the date of execution of the Deed of Conditional Sale and all subsequent
amortizations shall be due and payable every six (6) months thereafter;18

Contrary to the ruling of the Court of Appeals that the above stipulation fails to specify the monthly
amortization, we find no ground for construing any ambiguity against the DBP as the party responsible therefor.
As stipulated in the Deed of Conditional Sale, the first amortization was in the amount of ₱23,126.14 to be paid
six months from the date of the execution of the contract. Subsequent amortizations were due and payable every
six months thereafter. Such stipulation cannot be construed other than that the subsequent amortizations should
be in the same amount as the first, to be paid every six months thereafter. There being no other basis for the
payment of the subsequent amortizations, the reasonable conclusion one can reach is that subsequent payments
shall be made in the same amount as the first payment.

With regard to the remaining monetary obligation of the private respondents, the question is whether respondent
spouses could be held liable for the interests and penalty charges considering that they had already paid the full
amount of the principal obligation and petitioner DBP did not object to the late payments made by them.
The contract provided that "[t]he first amortization of P23,236.14 shall be due and payable six (6) months from
the date of execution of the Deed of Conditional Sale and all subsequent amortizations shall be due and payable
every six (6) months thereafter." As the contract was executed on August 8, 1983, 19 the first amortization
became due on February 8, 1994 while the next one fell due on August 8 of that year. The subsequent
amortizations were to be paid every six months thereafter, i.e., on February 8 and August 8 of the following
years. Respondent spouses failed to comply with the schedule of payment of amortizations, their payments
having been actually made as follows:

OR. NO.
DATE AMOUNT

P 36,000.0
261122 June 22, 1983
0
355399 August 4, 1983 5,400.00
March 22,
828029 6,000.00
1984
862947 June 4, 1984 21,000.00
123013 November 15,
3,000.00
3 1984
136591
Feb. 8, 1985 6,000.00
4
154527 March 11,
6,000.00
2 1985
154951
April 8, 1985 6,000.00
1
154964
May 3, 1985 6,000.00
1
171417
July 9, 1985 11,400.00
1
189368 November 29,
11,400.00
3 1985
225766
July 3, 1986 10,000.00
1
234922 September 3,
15,000.00
9 1986
252906 November 4,
16,000.00
5 1986
283051 August 18,
21,000.00
3 1987
334216 October 12,
10,000.00
6 1988
336703 December 9,
10,000.00
9 1988
336719 January 10,
10,000.00
3 1989
336750 February 10,
10,000.00
0 1989
346177
March 9, 1989 18,000.00
8
353200
April 10, 1989 18,800.00
8
 361723 August 28, ₱
5 1989 33,000.00
TOTA
₱ 289,600.0020
L

As private respondents failed to pay on time, they incurred additional interests and penalty charges which were
applied to the payments they already made, pursuant to their contract which provides in pertinent parts as
follows:

8. That the sale shall be subject to penalty charges and additional interest as follows:

a) On sale accounts with amortizations (principal past due and/or regular interest) or portion thereof in arrears
for thirty (30) days or less:

i. Additional interest at the basic sale interest per annum computed on total amortizations past due,
irrespective of age.

ii. No penalty charge.

b) On sale accounts with amortizations or portion thereof in arrears for more than thirty (30) days:

i. Additional interest as provided above, plus

ii. Penalty charge of 8% per annum.21

The payments made by respondent spouses were applied to their obligation, including interests, in the following
manner:22

DATE OR TOTAL PRINCIPA REGULAR ADDITIO- PENALTY ADVANCES

NUM- L INTEREST NAL CHARGES /INT. ON
BER INTERES ADV.
T
6-22-83 261122 P36,000.00 P36,000.00 Down-     -
)
8-04-83 355399 5,400.00 5,400.00 ) Payment      
3-22-84 828029 6,000.00 - P5,443.75 P490.35 P65.90 -
6-04-84 862947 21,000.00 10,409.95 9,460.25 645 .22 286.82 P197.76
11-15-84 230123 3,000.00 - 1,665.66 1,018.71 315.63 -
2-08-85 365914 6,000.00 - 4,837.37 804.84 357.79 -
3-11-85 1545272 6,000.00 - 5,006.03 891.28 102.69 -
4-08-85 1549510 6,000.00 - 5,103.08 697.54 199.38 -
5-03-85 1549641 6,000.00 - 5,324.97 524.97 150.06 -
7-09-85 1714171 11,400.00 4,428.85 5,514.20 1,133.31 323.94 -
11-29-85 1893683 11,000.00 - 6,352.80 3,757.49 889.91 -
7-03-86 2257661 10,000.00 - - 7,693.45 2,306.55 -
9-03-86 2349229 15,000.00 - 9,640.76 4,519.05 840.19 -
11-04-6 2529065 16,000.00 - 11,120.74 3,813.72 1,065.54 -
8-18-87 2830513 21,000.00 - - 5,664.24 5,335.76 -
10-13-88 3342166 10,000.00 - - - 10,000.00 -
12-09-88 3367039 10,000.00 - - 4,937.64 5,062.36 -
1-10-89 3367193 10,000.00 - - 8,766.53 1,233.47 -
 2-10-89 3367500 10,000.00 - - 8,805.08 1,194.92 -
3-10-89 3461778 18,000.00 - - 16,920.72 1,079.28 -
4-10-89 3532008 18,800.00 - 5,786.19 11,646.64 1,367.17 -
8-28-89 3617235 33,000.00 - 12,880.57 14,122.69 5,996.74 -
    P289,600.00 P56,238.50 P88,136.37 P106,853.4 P38,173.90 P197.76
7

Hence, as of June 30, 1989, over and above their payments in the total amount of ₱289,600.00, respondent
spouses still owed DBP the amount of ₱225,855.86.23 By August 15, 1990, this amount ballooned to
P260,945.85, broken down as follows:24

Amount of Loan ₱ 207,000.00

UNMATURED OBLIGATION
Principal Matured (8-8-89)
MATURED OBLIGATION
Principal ₱ 150,761.50
Advances 0.00
Regular Interest 57,113.73
AI on PPD & RI 37,086.71
RI on Advances 0.00
Penalty Charge 15,983.91
----------------
Sub Total 260,945.85
TOTAL OBLIGATION 260,945.85
======
Daily Interest on UP P 0.00
Daily Interest on PDO P 150.97
The Court of Appeals ruled:

It is to be noted that appellant did not question the tender of payment by the appellees-vendees in different
amounts and on different dates as aforestated. It did not call attention to the amortizations paid by vendees as
being wrong or improper. Appellant in fact unqualifiedly accepted the payments. This is tantamount to a waiver
on its part to demand for the "correct amount of the amortization, applying the ruling of the Supreme Court in
Ocampo vs. Court of Appeals (233 SCRA 551) that the vendor’s unqualified acceptance of payments after the
expiration of the period precludes the vendor from raising the issue of late payments and constitutes a waiver of
the period. It was only after the appellees asked the appellant to execute the final Deed of Sale that the bank
started to demand for payment under its interpretation of the Deed of Conditional Sale threatening rescission
thereof, otherwise. As the unqualified acceptance of the payments constituted a waiver of the "correctness" of
the amortizations, the same likewise constituted a waiver of the ground to rescind under Art. 1592 of the Civil
Code (Ocampo vs. CA, supra).

On the remaining monetary obligation of plaintiffs, we quote with favor and hereby adopt the following
computation of the trial court:

"However, considering the terms of the Deed of Conditional Sale that plaintiffs must pay 18% per annum for
the balance of ₱165,600.00, that amount of interest is the only amount due from plaintiffs covering a period of
six years, or a total of ₱178,200.00. As plaintiffs had paid already a total of ₱289,600.00, the amount of
₱165,000.00 must be deducted therefrom which results to an overpayment of ₱124,000.00 on the principal.
With this amount of ₱124,000.00 all what plaintiffs must pay will only be the amount of ₱54,200.00 as interest
due on the principal amount of ₱165,000.00."25

The reliance on Ocampo v. Court of Appeals26 is misplaced insofar as respondent court used the ruling in said
case to justify its position that petitioner waived "the correct amount of amortization" to be paid by private
respondents. The case of Ocampo did not involve interests to be paid by the buyer to the seller in case of late
payments. That case involved a judicial rescission made by the seller because of the first buyer’s late payments.
In that case, the seller executed a contract of sale in favor of the first buyer, stipulating therein that payments
should be made in six months. The buyer failed to pay the consideration in full within the period agreed upon.
However, the seller accepted a partial payment of the balance even if made after the expiration of the period.
The buyer had her adverse claim annotated on the title of the seller. Later, the seller sold the land to a second
buyer who was able to secure a title in his name. This Court ruled in that case that the seller was precluded from
raising the issue of late payments because his unqualified acceptance of payments after the expiration of the six-
month period was a waiver of the period. The Court did not rule in that case that acceptance of late payments
was a waiver on the "correct amount of amortization" due to the seller. No mention in fact was made by the
Court in Ocampo of the interests to be paid by the buyer.

On the other hand, in this case, the interest and penalty charges to be paid by private respondents in case of
delay in payments were expressly stipulated in the Conditional Contract of Sale. Under the Civil Code, parties
to a contract can make stipulations therein provided they are not contrary to law, morals, good customs, public
order or public policy.27 There being no question as to the validity of the Conditional Contract of Sale, the DBP
correctly applied the provision on interests and penalty charges when private respondents failed to pay on the
dates agreed upon. No further notice to private respondents had to be given to them.

The Court of Appeals likewise erred in disregarding paragraph 8 of the contract on interests and penalty charges
and concluding that the unpaid balance of private respondents was merely in the amount of ₱54,200.00. In
determining the amount of ₱54,200.00, both the trial court and respondent Court of Appeals erroneously took
into account only the 18% annual interest on the remaining balance of ₱165,000.00:

In computing the liability of private respondents, the trial court determined what constitutes 18% of the
principal amount of ₱165,600.00 and then multiplied such amount by six, the number of years the loan is to be
paid, the product of which was ₱178,200.00. From the payments made by private respondents in the amount of
₱289,600.00, the remaining balance of ₱165,600.00 was deducted, which resulted in the overpayment of
₱124,000. This supposed overpayment of ₱124,000.00 was then deducted from the amount of interest, as
determined by the trial court, which is P178,200.00, resulting in the difference of P54,200.00. This final amount
of P54,200.00, decided by the trial court and affirmed by the Court of Appeals, was the final remaining balance
of private respondents. However, the computation is erroneous. Following the method adopted by the trial
court, the product of 18% of the principal amount of P165,600.00 (P29,808.00) multiplied by six is
P178,848.00. Hence, from the amount of P178,848.00 must be subtracted the supposed overpayment of
P124,000.00, resulting in the difference of P54,848.00.28

Article 1374 of the Civil Code provides that "the various stipulations of a contract shall be interpreted together,
attributing to the doubtful ones that sense which may result from all of them taken jointly." In the same vein,
Rule 130, §11 of the Rules on Evidence states that "In the construction of an instrument where there are several
provisions or particulars, such a construction is, if possible, to be adopted as will give effect to all."
Accordingly, the annual interest of 18% must be construed together with paragraph 8 of the Deed of
Conditional Sale imposing additional interests and penalty in case of arrears in making payments. Hence, upon
failure of private respondents to pay their amortizations on the prescribed dates, they incurred interests and
penalty charges at the stipulated rates. Private respondents cannot be allowed to renege on their obligation on
the ground that what they had paid was in excess of the principal obligation in the amount of P207,000.00. Nor
can private respondents demand fulfillment of petitioner’s obligation to execute a final deed of sale and deliver
the title to the land in their favor when they have not yet fully paid their principal obligation with the accrued
interests thereto. "[N]either the law nor the courts will extricate a party from an unwise or undesirable contract
he or she entered into with all the required formalities and with full awareness of its consequences."29

Be that as it may, we find the interests to be excessive. It is noteworthy that the interests paid by private
respondents, which amounted to P233,361.50,30 including therein the regular interest, additional interest, penalty
charges, and interest on advances, is more than the principal obligation in the amount of P207,000.00, which
private respondents owed. Moreover, the additional interest of 18% alone amounted to P106,853.45,31 which is
almost half of what was already paid by private respondents.

Article 1229 of the Civil Code states that "Even if there has been no performance, the penalty may also be
reduced by the courts if it is iniquitous or unconscionable." In Barons Marketing Corp. v. Court of
Appeals,32 the Court reduced the 25% penalty charge to cover the attorney’s fees and collection fees, which was
in addition to the 12% annual interest, to 10% for being manifestly exorbitant. Likewise, in Palmares v. Court
of Appeals,33 the Court eliminated altogether the payment of the penalty charge of 3% per month for being
excessive and unwarranted under the circumstances. It ruled in that case:

Upon the matter of penalty interest, we agree with the Court of Appeals that the economic impact of the penalty
interest of three percent (3%) per month on total amount due but unpaid should be equitably reduced. The
purpose for which the penalty interest is intended - that is, to punish the obligor - will have been sufficiently
served by the effects of compounded interest. Under the exceptional circumstances in the case at bar, e.g., the
original amount loaned was only P15,000.00; partial payment of P8,600.00 was made on due date; and the
heavy (albeit still lawful) regular compensatory interest, the penalty interest stipulated in the parties’ promissory
note is iniquitous and unconscionable and may be equitably reduced further by eliminating such penalty interest
altogether.34

In the instant case, private respondents made regular payments to petitioner DBP in compliance with their
principal obligation. They failed only to pay on the dates stipulated in the contract. This indicates the absence of
bad faith on the part of private respondents and their willingness to comply with the terms of the contract.
Moreover, of their principal obligation in the amount of ₱207,000.00, private respondents have already paid
₱289,600.00 in favor of petitioner. These circumstances convince us of the necessity to equitably reduce the
interest due to petitioner and we do so by reducing to 10% the additional interest of 18% per annum computed
on total amortizations past due. The penalty charge of 8% per annum is sufficient to cover whatever else
damages petitioner may have incurred due to private respondents’ delay in paying the amortizations, such as
attorney’s fees and litigation expenses.

Second. Petitioner contends that private respondents have not established a clear legal right so as to be entitled
to an injunction because they are still liable to pay additional interests in accordance with the contract executed
between them.35 The contention has no merit.

In its order, dated March 8, 1990, the trial court issued a writ of preliminary injunction to prevent petitioner
from rescinding the contract with private respondents and selling the land to other interested persons. The trial
court stated:

After studying the respective positions of both parties, the Court believes that plaintiffs are entitled to the writ
of preliminary injunction prayed for under Section 3 Rule 58 of the Revised Rules of Court. This is because the
Court wants to thresh out the issue of whether or not the Deed of Conditional Sale which plaintiffs contend is
embodied in a contract of adhesion was really made for the disadvantage, damage and prejudice of plaintiffs;
the issue of whether or not despite the payment of P289,6000.00 by plaintiffs over and above the stipulated
consideration for the lot in the amount of P207,000.00, still entitles DBP to rescind the said Deed of Conditional
Sale and sell it to other persons. These two issues and other issues which it believes will come up as the case
proceeds, need be resolved first, before DBP is allowed to proceed with its intended rescission of the Contract
and sale of the lot to other persons, otherwise, in the event plaintiffs’ contention stand would be found
meritorious and tenable, the judgment in their favor would become moot and academic which would ultimately
cause irreparable damage to them.

WHEREFORE, in view of the foregoing, let the Writ of Preliminary Injunction prayed for issue, provided
plaintiffs post an injunction bond in the amount of P200,000.00 conditional that it shall be liable together with
the principals, spouses Nilo Dela Peña and Esperanza Dela Peña, to defendant, in the event it shall be found out
that plaintiffs are not entitled to the writ of preliminary injunction prayed for.36

In its decision, dated March 30, 1993, the trial court declared permanent the writ of preliminary injunction
issued in favor of private respondents.37 Its ruling was subsequently affirmed by the Court of Appeals.38

Two requisites are necessary if a preliminary injunction is to issue, namely: (1) the existence of a right to be
protected and (2) the facts against which the injunction is to be directed are violative of said right.39

As to the question whether private respondents have a right to be protected, we hold that they do. Injunction
may be resorted to for the preservation or protection of the rights of the complainant and for no other purpose
during the pendency of the principal action.40 In the case at bar, private respondents applied for an injunction in
order to prevent petitioner DBP from rescinding the sale and selling the land to other interested buyers. They
are entitled to such writ because petitioner DBP had no right to rescind the sale and deprive them of any right of
possession over the property.

In the first place, there was no substantial breach in the performance of private respondents’ obligation. Article
1191 of the Civil Code provides that "The power to rescind obligations is implied in reciprocal ones, in case one
of the obligors should not comply with what is incumbent upon him. The injured party may choose between the
fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become impossible. . . ." Rescission of a
contract will not be permitted for a slight or casual breach, but only such substantial and fundamental breach as
would defeat the very object of the parties in making the agreement. 41 Private respondents made regular
payments to petitioner DBP. Their fault consisted only of their failure to pay the installments on the dates
stipulated in the contract, for which they were charged additional interests and penalty charges. In the second
place, private respondents stopped their payments to the DBP only after they had paid ₱289,600.00 because of
their belief that they had already complied with their obligation to petitioner. Lastly, notwithstanding private
respondents’ delay in paying the amortizations, petitioner DBP unqualifiedly accepted the payments made by
them. Hence, petitioner lost its right to rescind the sale on the basis of such late payments. In an analogous case,
we held:

In the instant case, the sellers gave the buyers until May 1979 to pay the balance of the purchase price. After the
latter failed to pay installments due, the former made no judicial demand for rescission of the contract nor did
they execute any notarial act demanding the same, as required under Article 1592. Consequently, the buyers
could lawfully make payments even after the May 1979 deadline, as in fact they paid several installments, an
act which cannot but be construed as a waiver of the right to rescind. When the sellers, instead of availing of
their right to rescind, accepted and received delayed payments of installments beyond the period stipulated, and
the buyers were in arrears, the sellers in effect waived and are now estopped from exercising said right to
rescind.42

Private respondents, therefore, had the right to prevent the former from rescinding the sale and selling the
property in question. The first requisite had been met.

As to the second requisite, it was expressly stipulated in the contract that should rescission take place, private
respondents, as the vendees, shall waive whatever right they may have acquired over the property and that all
sums of money paid by them shall be considered and treated as rentals for the use of the property. In addition,
private respondents shall vacate the property, waiving whatever expenses they may have incurred in the
property in the form of improvement or under any concept, without any right of reimbursement. 43 Clearly, the
act sought to be enjoined by the injunction was violative of the rights that private respondents have acquired
over the property. What they stood to lose in case petitioner decides to rescind the sale is material and
substantial. Not only would they forfeit all the payments they have made in favor of petitioner, they would also
lose their right of possession over the property.

There was indeed an urgent and permanent necessity for the issuance of the writ to protect private respondents’
rights over the property.

As held in one case:44

The controlling reason for the existence of the judicial power to issue the writ is that the court may thereby
prevent a threatened or continuous irremediable injury to some of the parties before their claims can be
thoroughly investigated and advisedly adjudicated. It is to be resorted only when there is a pressing necessity to
avoid injurious consequences which cannot be remedied under any standard of compensation.

Had no injunction been issued petitioner would have rescinded the sale and sold the property to other parties,
and private respondents would have lost what they have paid to petitioner and any right they may have acquired
over the property even without the benefit of a trial. The complaint of respondent spouses would have been
rendered moot and academic as the property would be in possession of an innocent purchaser for value and
private respondents would be powerless to recover the same. Such a situation cannot be countenanced. Hence,
we hold that both the trial court and the Court of Appeals correctly issued the writ of preliminary injunction
against petitioner.

WHEREFORE, the decision of the Court of Appeals is hereby AFFIRMED with the MODIFICATION that
the additional interest is reduced to 10% per annum computed on total amortizations past due, irrespective of
age. SO ORDERED.

[G.R. No. 141434. September 23, 2003.]

ANTONIO LO, Petitioner, v. THE HON. COURT OF APPEALS AND NATIONAL ONIONS

GROWERS COOPERATIVE MARKETING ASSOCIATION, INC., Respondents.

DECISION

CORONA, J.:

Assailed in the instant petition for review on certiorari under Rule 45 of the Rules of Court is the May 26, 1998
decision 1 of the Court of Appeals modifying the decision of the Regional Trial Court of Malabon, Branch
74:chanrob1es virtual 1aw library
WHEREFORE, the assailed decision is hereby AFFIRMED with the MODIFICATION that the penalty
imposed for each day of delay in surrendering the leased property is reduced from P5,000.00 to P1,000.00 per
day of delay. 2

At the core of the present controversy are two parcels of land measuring a total of 2,147 square meters, with an
office building constructed thereon, located at Bo. Potrero, Malabon, Metro Manila and covered by TCT Nos.
M-13166 and M-13167.chanrob1es virtua1 1aw 1ibrary

Petitioner acquired the subject parcels of land in an auction sale on November 9, 1995 for P20,170,000 from the
Land Bank of the Philippines (Land Bank).

Private respondent National Onion Growers Cooperative Marketing Association, Inc., an agricultural
cooperative, was the occupant of the disputed parcels of land under a subsisting contract of lease with Land
Bank. The lease was valid until December 31, 1995.

Upon the expiration of the lease contract, petitioner demanded that private respondent vacate the leased
premises and surrender its possession to him. Private respondent refused on the ground that it was, at the time,
contesting petitioner’s acquisition of the parcels of land in question in an action for annulment of sale,
redemption and damages.

On February 23, 1996, petitioner filed an action for ejectment before the Metropolitan Trial Court of Malabon,
Branch 55. He asked, inter alia, for the imposition of the contractually stipulated penalty of P5,000 per day of
delay in surrendering the possession of the property to him. On September 3, 1996, the trial court decided the
case in favor of petitioner:chanrob1es virtual 1aw library

WHEREFORE, premises considered, the Court considers the allegations of the complaint to be true and duly
substantiated except as to the amount of damages and attorney’s fees, which are reduced accordingly, a decision
is hereby rendered in favor of the plaintiffs and against the defendant, ordering the latter and all persons
claiming rights under it:chanrob1es virtual 1aw library

1) To vacate the leased premises immediately and turn over the same peacefully to the plaintiffs;

2) To pay plaintiff Antonio Lo the sum of P5,000.00 for every day of delay from the time defendant is supposed
to have vacated the premises;

3) To pay the sum of P36,000.00 a month from January 1996 until it finally vacates the premises as payment for
reasonable compensation for the use and occupancy thereof;

4) To pay the sum of P20,000.00 by way of reasonable attorney’s fees; and

5) To pay the costs of suit. 3

On appeal to the Regional Trial Court of Malabon, Branch 74, the MTC decision was affirmed in toto on
August 29, 1997. 4 Private respondent’s subsequent motion for reconsideration of the RTC decision was denied
on November 26, 1997.

From the adverse decision of the trial court, private respondent elevated the case to the Court of Appeals via a
petition for review.

On May 26, 1999, the Court of Appeals rendered its assailed decision affirming the decision of the trial court,
with the modification that the penalty imposed upon private respondent for the delay in turning over the leased
property to petitioner was reduced from P 5,000 to P1000 per day.

Unsatisfied with the decision of the Court of Appeals, petitioner filed the instant petition for review, raising the
sole issue of the alleged lack of authority of the Court of Appeals to reduce the penalty awarded by the trial
court, the same having been stipulated by the parties in their Contract of Lease.chanrob1es virtua1 1aw 1ibrary

The petition has no merit.

Generally, 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 if it is iniquitous or
unconscionable, or if the principal obligation has been partly or irregularly complied with. 5

This power of the courts is explicitly sanctioned by Article 1229 of the Civil Code which provides:chanrob1es
virtual 1aw library

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.

The question of whether a penalty is reasonable or iniquitous is addressed to the sound discretion of the court
and depends on several factors, including, but not limited to, the following: 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. 6

In this case, the stipulated penalty was reduced by the appellate court for being unconscionable and iniquitous.
As provided in the Contract of Lease, private respondent was obligated to pay a monthly rent of P30,000. On
the other hand, the stipulated penalty was pegged at P5,000 for each day of delay or P150,000 per month, an
amount five times the monthly rent. This penalty was not only exorbitant but also unconscionable, taking into
account that private respondent’s delay in surrendering the leased premises was because of a well-founded
belief that its right of preemption to purchase the subject premises had been violated. Considering further that
private respondent was an agricultural cooperative, collectively owned by farmers with limited resources,
ordering it to pay a penalty of P150,000 per month on top of the monthly rent of P30,000 would seriously
deplete its income and drive it to bankruptcy. In Rizal Commercial Banking Corp. v. Court of Appeals, 7 the
Court tempered the penalty charges after taking into account the debtor’s pitiful financial condition.

Accordingly, we rule that the Court of Appeals did not commit any reversible error in the exercise of its
discretion when it reduced the award of penalty damages from P5,000 to P1,000 for each day of delay.

WHEREFORE, petition is hereby DENIED. The decision of the Court of Appeals reducing the amount of
penalty damages against private respondent is AFFIRMED. SO ORDERED.

G.R. No. 147349             February 13, 2004

MANILA INTERNATIONAL AIRPORT AUTHORITY (MIAA), petitioner vs. ALA INDUSTRIES

CORPORATION, respondent.

DECISION

PANGANIBAN, J.:

Foreseeable difficulties that occur during the Christmas season and cause a delay do not constitute a fortuitous
event. The difficulties in processing claims during that period are not "acts of God" that would excuse
noncompliance with judicially approved obligations.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the February 28, 2001
Decision2 of the Court of Appeals (CA) in CA-GR CV No. 59518. The dispositive part of the Decision reads:

"WHEREFORE, the appealed final order is hereby REVERSED. The Court a quo is ordered to issue a Writ
of Execution directing the branch sheriff to enforce [Respondent] ALA Industries’ unpaid claim against
[Petitioner] Manila International Airport Authority (MIAA) in the total amount of ₱7,171,835.53."3

The Facts

The facts of the case are narrated by the CA as follows:

"[Petitioner] MIAA conducted a public bidding for a contract involving the structural repair and waterproofing
of the International Passenger Terminal (IPT) and International Container Terminal (ICT) buildings of the
Ninoy Aquino International Airport (NAIA). Out of eleven bidders, [Respondent] ALA submitted the second
lowest and most advantageous bid. The contract was awarded to [respondent] in the amount of ₱32,000,000.00
when it agreed to reduce the price from ₱36,000.00.4 On June 28, 1993, the contract was executed providing,
inter alia, the following terms:

‘ARTICLE I

‘SCOPE OF WORK

‘1.1 The CONTRACTOR shall furnish all materials, labor, tools, plans, equipment and other services
and [perform] all operations necessary to complete the structural repair and waterproofing of IPT and
ICT buildings, all in accordance with the plans and specifications and subject to the terms and
conditions of the Bid Documents. The CONTRACTOR shall likewise be responsible for the removal,
hauling, disposal of materials used in the work area including cleaning thereof during and after
completion of the work.

‘1.2 The CONTRACTOR guarantees and warrants the availability, quality and genuineness of all the
materials it will supply, deliver and use in the construction.

‘1.3 The CONTRACTOR warrants further that all works stipulated in the Contract shall be done in good
and acceptable condition and to make good at the CONTRACTOR’s expense any imperfections or
defects which the MIAA or its representative may discover during the progress of the work within one
(1) year from and after acceptance in writing of the said work by the MIAA, as provided in the General
Conditions and Specifications.

x x x           x x x          x x x

‘ARTICLE IV

‘CONTRACT PRICE/MANNER OF PAYMENT

‘4.1 In consideration of the full, satisfactory and faithful performance by the CONTRACTOR of all its
undertakings and obligations defined in and provided for under this agreement, the MIAA agrees to pay
the CONTRACTOR the total amount of PESOS: THIRTY TWO MILLION [AND] 00/100
(₱32,000,000.00) Philippine Currency, payable as follows:

4.1.1 Initial payment shall be made upon submission of work accomplishment of not less than
15%;

4.1.2 Subsequent payments shall be for work accomplished as measured, verified and approved
by MIAA. Such progress billings shall indicate actual work accomplishments and shall be
subject to the approval of MIAA, which approval shall not be unreasonably withheld.

4.1.3 Progress billings shall be paid by the MIAA periodically but not more than once a month
within 30 calendar days from receipt hereof.’

"The contract contains escalation clauses and price adjustments. [Respondent] made the necessary repairs and
waterproofing. After submission of its progress billings to [petitioner], [respondent] received partial payments.
Progress billing No. 6 remained unpaid despite repeated demands by [respondent].

"On June 30, 1994, [petitioner] unilaterally rescinded the contract on the ground that [respondent] failed to
complete the project within the agreed completion date. On September 16, 1994, [petitioner] advised
[respondent] of a committee formed to determine the extent of the work done which was given until September
30, 1994 to submit its findings. Just the same, [respondent] was not fully paid.

"On October 20, 1994, [respondent] objected to the rescission made by [petitioner] and reiterated its claims. As
of the filing of the complaint for sum of money and damages on July 18, 1995, [respondent] was seeking to
recover from [petitioner] ₱10,376,017.00 as the latter’s outstanding obligation and ₱1,642,112.84 due from the
first to [the] fifth progress billings.

"With the filing of [respondent’s] sur-rejoinder to [petitioner’s] rejoinder, the trial Court directed the parties to
proceed to arbitration on July 16, 1996. The Court a quo’s ruling is based on Article XXVII of the contract that
provides for arbitration.
"Both parties executed a compromise agreement, assisted by their counsels, and jointly filed in court a motion
for judgment based on compromise agreement.

RTC Disposition

"On November 4, 1997, the Court a quo rendered judgment approving the compromise agreement. The
pertinent portions of the compromise read as follows:

‘1. As full and complete payment of its claims against [petitioner] arising from their waterproofing
contract subject of this case, [respondent] accepts [petitioner]’s offer of payment in the amount of FIVE
MILLION NINE HUNDRED FORTY SIX THOUSAND TWO HUNDRED NINETY FOUR AND
31/100 (₱5,946,294.31).

‘2. [Petitioner] shall pay [respondent] said amount of FIVE MILLION NINE HUNDRED FORTY SIX
THOUSAND TWO HUNDRED NINETY FOUR AND 31/100 (₱5,946,294.31) within a period of
thirty (30) days from receipt of a copy of the Order of the Court approving this Compromise Agreement.

‘3. Failure of the [petitioner] to pay said amount to [respondent] within the period above stipulated shall
entitle the [respondent] to a writ of execution from this Honorable Court to enforce all its
claims5 pleaded in the Complaint.

‘4. In consideration of the Implementation of this Compromise Agreement, [respondent] agrees to waive
all its claims against the [petitioner] as pleaded in the Complaint, and [petitioner] also agrees to waive
all its claims, rights and interests pleaded in the answer, and all such other claims that it has or may have
in connection with, related to or arising from the Waterproofing Contract subject of this case with
[respondent].

‘Finding the aforesaid COMPROMISE AGREEMENT not to be contrary to law, moral[s], good customs,
public order, and public policy, the Court hereby approves the same and renders judgment in conformity with
the terms and conditions of the said COMPROMISE AGREEMENT, enjoining the parties to comply with the
provisions thereof strictly and in good faith without pronouncement as to costs.

‘SO ORDERED.’

"For [petitioner’s] failure to pay within the period above stipulated, [respondent] filed a motion for execution to
enforce its claim in the total amount of ₱13,118,129.84. [Petitioner] filed a comment and attributed the delays
to its being a government agency. In its effort to render [respondent’s] motion for execution moot and
academic, [petitioner] paid [respondent] ₱5,946,294.31 on February 2, 1998.

"On February 16, 1998, the trial court denied [respondent’s] motion for execution. It also denied the motion for
reconsideration, ruling as follows:

‘The delay in complying with the Compromise Agreement having been satisfactorily explained by the Office of
the Government Counsel, the Motion for Reconsideration of the order denying [respondent’s] Motion for
Execution is denied.’

"SO ORDERED."6

Ruling of the Court of Appeals

Reversing the trial court, the CA ordered it to issue a writ of execution to enforce respondent’s claim to the
extent of petitioner’s remaining balance. The appellate court ratiocinated that a judgment rendered in
accordance with a compromise agreement was immediately executory, and that a delay of almost two months
was not substantial compliance therewith.

Hence this Petition.7

Issues

Petitioner raises the following issues for our consideration:

"I. Whether or not the slight delay of petitioner in complying with its obligation under the Compromise
Agreement is a valid ground for the enforcement of private respondent’s claim under the Complaint.

"II. Whether or not the delay of petitioner in complying with its obligation under the Compromise Agreement is
justified under the principle that no person shall be responsible for those events which could not be foreseen, or
which though foreseen, were inevitable.

"III. Whether or not private respondent is estopped from enforcing its claim under the Complaint considering
that it already enjoyed the benefits of the Compromise Agreement."8

The foregoing may be summed up in one issue: Whether there was a fortuitous event that excused petitioner
from complying with the terms and conditions of the judicially approved Compromise Agreement.

The Court’s Ruling

The Petition has no merit.

Sole Issue:

Delay in Payment by Reason of a Fortuitous Event

A compromise agreement is a contract whereby the parties make reciprocal concessions to resolve their
differences,9 thus avoiding litigation10 or putting an end to one that has already commenced. 11 Generally favored
in law,12 such agreement is a bilateral act or transaction that is binding on the contracting parties and is
expressly acknowledged by the Civil Code as a juridical agreement between them. 13 Provided it is not contrary
to law, morals, good customs, public order or public policy,14 it is immediately executory.15

Judicial Compromise

Final and Executory

In a long line of cases, we have consistently held that "x x x ‘a compromise once approved by final orders of the
court has the force of res judicata 16 between the parties and should not be disturbed except for vices of consent
or forgery.’ Hence, ‘a decision on a compromise agreement is final and executory x x x.’" 17 Such agreement has
the force of law18 and is conclusive between the parties.19 It transcends its identity as a mere contract binding
only upon the parties thereto, as it becomes a judgment that is subject to execution in accordance with the
Rules.20 Judges therefore have the ministerial and mandatory duty to implement and enforce it.21

To be valid, a compromise agreement is merely required by law, first, to be based on real claims; second, to be
actually agreed upon in good faith. 22 Both conditions are present in this case. The claims of the parties are valid,
and the agreement done without any fraud or vice of consent.

Without a doubt, each of the parties herein entered into Compromise Agreement freely and voluntarily. When
they carefully negotiated the terms and provisions thereof, they were adequately assisted by their respective
counsels -- petitioner, no less than by the Office of the Government Corporate Counsel (OGCC). 23 Each party
agreed to something that neither might have actually wanted, except for the peace that would be brought by the
avoidance of a protracted litigation. Hence, the Agreement must govern their relations.

The Christmas Season

Not a Fortuitous Event

The failure to pay on the date stipulated was clearly a violation of the Agreement. Within thirty days from
receipt of the judicial Order approving it -- on December 20, 1997 -- payment should have been made, but was
not. Thus, nonfulfillment of the terms of the compromise justified execution. 24 It is the height of absurdity for
petitioner to attribute to a fortuitous event its delayed payment. Petitioner’s explanation is clearly "a gratuitous
assertion that borders on callousness."25 The Christmas season cannot be cited as an act of God that would
excuse a delay in the processing of claims by a government entity that is subject to routine accounting and
auditing rules.

A fortuitous event is one that cannot be foreseen or, though foreseen, is inevitable. 26 It has the following
characteristics:
"x x x (a) [T]he cause of the unforeseen and unexpected occurrence, or the failure of the debtor to comply with
his obligations, must be independent of human will; (b) it must be impossible to foresee the event which
constitutes the caso fortuito, or if it can be foreseen, it must be impossible to avoid; (c) the occurrence must be
such as to render it impossible for the debtor to fulfill his obligation in a normal manner; and (d) the obligor
must be free from any participation in the aggravation of the injury resulting to the creditor."27

None of these elements appears in this case.

First, processing claims against the government and subjecting these to the usual accounting and
auditing procedures are certainly not only foreseeable and expectable, but also dependent upon the
human will. Liquidation and payment resulting therefrom can be deliberately delayed or speeded up.

Second, the Christmas season is not a caso fortuito, but a regularly occurring event. It is in fact
foreseeable, and its occurrence has absolutely nothing to do with the processing of claims.

Further, in order to claim exemption from liability by reason of a fortuitous event, such event should be
the sole and proximate cause of the injury to or the loss or destruction of the object of the contract 28 or
compromise, which was the payment to be made by petitioner. Certainly, this payment was not lost or
destroyed, but merely delayed, thus causing injury to respondent. Granting arguendo such loss or
destruction, the Christmas season could not have been the sole and proximate cause thereof.

Third, the occurrence of the Christmas season did not at all render impossible the normal fulfillment of
the obligation of petitioner; otherwise, few claims would ever be paid during this period. It ought to
have taken appropriate measures to ensure that a delay would be avoided. When it entered into the
Agreement, it knew fully well that the 30-day period for it to pay its obligation would end during the
Christmas season. Thus, it cannot now be allowed to renege on its commitment.

Fourth, petitioner cannot argue that it is free from any participation in the delay. It should have laid out
on the compromise table the problems that would be caused by a deadline falling during the Christmas
season. Furthermore, it should have explained to respondent that government accounts would be
examined carefully and thoroughly to the last detail, in strict compliance 29 with accounting and auditing
rules issued by and pursuant to the constitutional mandate of the Commission on Audit.30

Indeed, the liquidation of government obligations involves a long process beginning with the preparation of
disbursement vouchers; followed by the processing of requests for allotment as supported by vouchers, job
orders and requisitions; and ending with the issuance of the corresponding checks. 31 Without first securing the
necessary certification as to the availability of funds and allotment against which expenditures may be properly
charged,32 no funds shall be disbursed; and no expenditures chargeable against any authorized allotments shall
be incurred or authorized by agency heads.

Moreover, it is important to note that under government accounting principles, "no contract involving the
expenditure of public funds shall be made until there is an appropriation therefor, the unexpended balance of
which, free of other obligations, is sufficient to cover the proposed expenditure." 33 In the present case, there was
already an antecedent appropriation for the contract when petitioner entered into it. Obviously, prior planning
had not taken into account the liquidation process in the conduct of the compromise.

The sheer neglect shown by petitioner in failing to consider these matters aggravated the resulting injury
suffered by respondent. The former cannot be allowed to hide now behind its government cloak.

Fortuitous Event

Negated by Negligence

The act-of-God doctrine requires all human agencies to be excluded from creating the cause of the
mischief.34 Such doctrine cannot be invoked to protect a person who has failed to take steps to forestall the
possible adverse consequences of loss35 or injury. Since the delay in payment in the present case was partly a
result of human participation -- whether from active intervention or neglect -- the whole occurrence was
humanized and was therefore outside the ambit of a caso fortuito.

Furthermore, none of the requisites we have earlier mentioned are present in this case, a fact that clearly
prevents petitioner from being excused from liability.36 Under the rules of evidence, the burden of proving that a
loss is due to a caso fortuito rests upon the party invoking it.37 This responsibility, it failed to discharge.
Verily, an assiduous scrutiny of the records convinces us that it was negligent, 38 and that it thereby incurred a
delay in the performance of its contractual obligation under the judicial compromise. It thus created an undue
risk or injury to respondent by failing to exercise that reasonable degree of care, precaution or vigilance that the
circumstances justly demanded,39 and that an ordinarily prudent person would have done.40

Court Without Power to Alter a Judicial Compromise

"The principle of autonomy of contracts must be respected." 41 The Compromise Agreement was a contract
perfected by mere consent;42 hence, it should have been respected. Item 3 thereof provided that failure of
petitioner to pay within the stipulated period would entitle respondent to a writ of execution to enforce all the
claims that had been pleaded by the latter in the Complaint. This provision must be upheld, because the
Agreement supplanted the Complaint itself. Although judicial approval was not required for the perfection of
that Agreement once it was granted, it could not and must not be disturbed except for vices of consent or
forgery.43

No such infirmity can be found in the subject Compromise Agreement. Its terms are clear and leave no doubt as
to their intention. Thus, the literal meaning of its stipulations must control. 44 It "must be strictly interpreted and
x x x understood as including only matters specifically determined therein or which, by necessary inference
from its wording, must be deemed included."45

The lower court was without power to relieve petitioner from an obligation it had voluntarily assumed, simply
because the Agreement later turned out to be unwise, disastrous or foolish. 46 It had no authority to impose upon
the parties a judgment different from or against the terms and conditions of their Compromise Agreement. 47 It
could not alter a contract by construction or make a new one for the parties; "its duty is confined to the
interpretation of the one which they have made for themselves without regard to its wisdom or folly as the court
cannot supply material stipulations or read into the contract words which it does not contain." 48 It could not
even set aside its judgment without declaring in an incidental hearing that the Agreement was vitiated by any of
the grounds enumerated in Article 2038 of the Civil Code.49 Above all, neither the Agreement nor the court’s
approval of it was ever questioned or assailed by the parties.

Basic is the rule that if a party fails or refuses to abide by a compromise agreement, the other may either enforce
it or regard it as rescinded and insist upon the original demand. 50 For failure of petitioner to abide by the judicial
compromise, respondent chose to enforce it. The latter’s course of action was in accordance with the very
stipulations in the Agreement that the lower court could not change.51

Respondent is thus entitled to a writ of execution for the total amount contained in the Compromise Agreement.
The Court cannot reduce it. The partial payment made by petitioner does not at all contravene Article 1229 of
the Civil Code,52 which is applicable only to contracts that are the subjects of litigation, not to final and
executory judgments.53

Estoppel Inapplicable

Petitioner’s attempt to put respondent in estoppel must be struck down. "In estoppel, a person, who by his act or
conduct has induced another to act in a particular manner, is barred from adopting an inconsistent position,
attitude or course of conduct that thereby causes loss or injury to another." 54 No such inconsistency is present
here. From the very start, respondent was already asking the courts to enforce all its claims, pursuant to the
Agreement. It has not shown any act or conduct that would leads us to believe that by accepting petitioner’s
partial payment, it has dropped all claims to which it is entitled.

Certainly, an obligation may be extinguished by payment,55 but this rule applies when the creditor "receives and
acknowledges full payment"56 from the debtor. Respondent has neither acknowledged full payment nor led
petitioner to believe that it has. Lack of reservation or protest does not ipso facto constitute a waiver of claims.
Because estoppel should be applied with caution, the action that gives rise to it must be deliberate and
unequivocal.57

In the present case, respondent continued to pursue the execution of its total demand of P13,118,129.84, even
after receiving ₱5,946,294.31 from petitioner. This continued pursuit signified the former’s intent not to waive
its total claim. Hence, it cannot be considered estopped from enforcing such claim.

The appellate court was correct in strictly following the Agreement by deducting the amount received by
respondent from the latter’s total claim. Besides, "questions raised on appeal must be within the issues framed
by the parties and, consequently, issues not raised in the trial court cannot be raised for the first time on
appeal."58 Any assertion of equity must finally be struck down "when dilatory schemes exist."59

WHEREFORE, the Petition is hereby DENIED, and the assailed Decision AFFIRMED. Costs against
petitioner. SO ORDERED.

G.R. No. 149004             April 14, 2004

RESTITUTA M. IMPERIAL, petitioner, vs. ALEX A. JAUCIAN, respondent.

DECISION

PANGANIBAN, J.:

Iniquitous and unconscionable stipulations on interest rates, penalties and attorney’s fees are contrary to morals.
Consequently, courts are granted authority to reduce them equitably. If reasonably exercised, such authority
shall not be disturbed by appellate courts.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the July 19, 2000
Decision2 and the June 14, 2001 Resolution3 of the Court of Appeals (CA) in CA-GR CV No. 43635. The
decretal portion of the Decision is as follows:

"WHEREFORE, premises considered, the appealed Decision of the Regional Trial Court, 5th Judicial
Region, Branch 21, Naga City, dated August 31, 1993, in Civil Case No. 89-1911 for Sum of Money, is
hereby AFFIRMED in toto."4

The assailed Resolution denied petitioner’s Motion for Reconsideration.

The dispositive portion of the August 31, 1993 Decision, promulgated by the Regional Trial Court (RTC) of
Naga City (Branch 21) and affirmed by the CA, reads as follows:

"Wherefore, Judgment is hereby rendered declaring Section I, Central Bank Circular No. 905, series of
1982 to be of no force and legal effect, it having been promulgated by the Monetary Board of the
Central Bank of the Philippines with grave abuse of discretion amounting to excess of jurisdiction;
declaring that the rate of interest, penalty, and charges for attorney’s fees agreed upon between the
parties are unconscionable, iniquitous, and in violation of Act No. 2655, otherwise known as the Usury
Law, as amended; and ordering Defendant to pay Plaintiff the amount of FOUR HUNDRED
SEVENTY-EIGHT THOUSAND, ONE HUNDRED NINETY-FOUR and 54/100 (₱478,194.54)
PESOS, Philippine currency, with regular and compensatory interests thereon at the rate of twenty-eight
(28%) per centum per annum, computed from August 31, 1993 until full payment of the said amount,
and in addition, an amount equivalent to ten (10%) per centum of the total amount due and payable, for
attorney’s fees, without pronouncement as to costs."5

The Facts

The CA summarized the facts of the case in this wise:

"The present controversy arose from a case for collection of money, filed by Alex A. Jaucian against
Restituta Imperial, on October 26, 1989. The complaint alleges, inter alia, that defendant obtained from
plaintiff six (6) separate loans for which the former executed in favor of the latter six (6) separate
promissory notes and issued several checks as guarantee for payment. When the said loans became
overdue and unpaid, especially when the defendant’s checks were dishonored, plaintiff made repeated
oral and written demands for payment.

"Specifically, the six (6) separate loans obtained by defendant from plaintiff on various dates are as
follows:

(a) November 13, ₱

1987 50,000.00
 (b) December 28,
40,000.00
1987
(c) January 6,
30,000.00
1988
(d) January 11,
50,000.00
1988
(e) January 12,
50,000.00
1988
(f) January 13,
100,000.00
1988

₱320,000.
Total 00

"The loans were covered by six (6) separate promissory notes executed by defendant. The face value of
each promissory notes is bigger [than] the amount released to defendant because said face value already
include[d] the interest from date of note to date of maturity. Said promissory notes, which indicate the
interest of 16% per month, date of issue, due date, the corresponding guarantee checks issued by
defendant, penalties and attorney’s fees, are the following:

1. Exhibit ‘D’ – for loan of ₱40,000.00 on December 28, 1987, with face value of ₱65,000.00;

2. Exhibit ‘E’ – for loan of ₱50,000.00 on January 11, 1988, with face value of ₱82,000.00;

3. Exhibit ‘F’ – for loan of ₱50,000.00 on January 12, 1988, with face value of ₱82,000.00;

4. Exhibit ‘G’ – for loan of ₱100,000.00 on January 13, 1988, with face value of ₱164,000.00;

5. Exhibit ‘H’ – This particular promissory note covers the second renewal of the original loan of
₱50,000.00 on November 13, 1987, which was renewed for the first time on March 16, 1988
after certain payments, and which was renewed finally for the second time on January 4, 1988
also after certain payments, with a face value of ₱56,240.00;

6. Exhibit ‘I’ – This particular promissory note covers the second renewal of the original loan of
₱30,000.00 on January 6, 1988, which was renewed for the first time on June 4, 1988 after
certain payments, and which was finally renewed for the second time on August 6, 1988, also
after certain payments, with [a] face value of ₱12,760.00;

"The particulars about the postdated checks, i.e., number, amount, date, etc., are indicated in each of the
promissory notes. Thus, for Exhibit ‘D’, four (4) PB checks were issued; for Exhibit ‘E’ four (4) checks;
for Exhibit ‘F’ four (4) checks; for Exhibit ‘G’ four (4) checks; for Exhibit ‘H’ one (1) check; for
Exhibit ‘I’ one (1) check;

"The arrangement between plaintiff and defendant regarding these guarantee checks was that each time a
check matures the defendant would exchange it with cash.

"Although, admittedly, defendant made several payments, the same were not enough and she always
defaulted whenever her loans mature[d]. As of August 16, 1991, the total unpaid amount, including
accrued interest, penalties and attorney’s fees, [was] ₱2,807,784.20.

"On the other hand, defendant claims that she was extended loans by the plaintiff on several occasions,
i.e., from November 13, 1987 to January 13, 1988, in the total sum of ₱320,000.00 at the rate of sixteen
percent (16%) per month. The notes mature[d] every four (4) months with unearned interest
compounding every four (4) months if the loan [was] not fully paid. The loan releases [were] as follows:

(a) November 13, ₱

1987 50,000.00
(b) December 28, 40,000.00
 1987
(c) January 6,
30,000.00
1988
(d) January 11,
50,000.00
1988
(e) January 12,
50,000.00
1988
(f) January 13,
100,000.00
1988

₱320,000.
Total 00

"The loan on November 13, 1987 and January 6, 1988 ha[d] been fully paid including the usurious
interests of 16% per month, this is the reason why these were not included in the complaint.

"Defendant alleges that all the above amounts were released respectively by checks drawn by the
plaintiff, and the latter must produce these checks as these were returned to him being the drawer if only
to serve the truth. The above amount are the real amount released to the defendant but the plaintiff by
masterful machinations made it appear that the total amount released was ₱462,600.00. Because in his
computation he made it appear that the true amounts released was not the original amount, since it
include[d] the unconscionable interest for four months.

"Further, defendant claims that as of January 25, 1989, the total payments made by defendants [were] as
follows:

a. Paid releases on November 13, 1987 of

₱50,000.00 and January 6, 1988 of ₱30,000.00
these two items were not included in the
complaint affirming the fact that these were ₱
paid 80,000.00
b. Exhibit ‘26’ Receipt 231,000.00
c. Exhibit ‘8-25’ Receipt 65,300.00
d. Exhibit ‘27’ Receipt 65,000.00

Total ₱441,780.0
0
Less: 320,000.00

₱121,780.0
Excess Payment 0

"Defendant contends that from all perspectives the above excess payment of ₱121,780.00 is more than
the interest that could be legally charged, and in fact as of January 25, 1989, the total releases have been
fully paid.

"On 31 August 1993, the trial court rendered the assailed decision."6

Ruling of the Court of Appeals

On appeal, the CA held that without judicial inquiry, it was improper for the RTC to rule on the
constitutionality of Section 1, Central Bank Circular No. 905, Series of 1982. Nonetheless, the appellate court
affirmed the judgment of the trial court, holding that the latter’s clear and detailed computation of petitioner’s
outstanding obligation to respondent was convincing and satisfactory.
Hence, this Petition.7

The Issues

Petitioner raises the following arguments for our consideration:

"1. That the petitioner has fully paid her obligations even before filing of this case.

"2. That the charging of interest of twenty-eight (28%) per centum per annum without any writing is
illegal.

"3. That charging of excessive attorney’s fees is hemorrhagic.

"4. Charging of excessive penalties per month is in the guise of hidden interest.

"5. The non-inclusion of the husband of the petitioner at the time the case was filed should have
dismissed this case."8

The Court’s Ruling

The Petition has no merit.

First Issue:

Computation of Outstanding Obligation

Arguing that she had already fully paid the loan before the filing of the case, petitioner alleges that the two
lower courts misappreciated the facts when they ruled that she still had an outstanding balance of ₱208,430.

This issue involves a question of fact. Such question exists when a doubt or difference arises as to the truth or
the falsehood of alleged facts; and when there is need for a calibration of the evidence, considering mainly the
credibility of witnesses and the existence and the relevancy of specific surrounding circumstances, their relation
to each other and to the whole, and the probabilities of the situation.9

It is a well-entrenched rule that pure questions of fact may not be the subject of an appeal by certiorari under
Rule 45 of the Rules of Court, as this remedy is generally confined to questions of law. 10 The jurisdiction of this
Court over cases brought to it is limited to the review and rectification of errors of law allegedly committed by
the lower court. As a rule, the latter’s factual findings, when adopted and affirmed by the CA, are final and
conclusive and may not be reviewed on appeal.11

Generally, this Court is not required to analyze and weigh all over again the evidence already considered in the
proceedings below.12 In the present case, we find no compelling reason to overturn the factual findings of the
RTC -- that the total amount of the loans extended to petitioner was ₱320,000, and that she paid a total of only
₱116,540 on twenty-nine dates. These findings are supported by a preponderance of evidence. Moreover, the
amount of the outstanding obligation has been meticulously computed by the trial court and affirmed by the CA.
Petitioner has not given us sufficient reason why her cause falls under any of the exceptions to this rule on the
finality of factual findings.

Second Issue:

Rate of Interest

The trial court, as affirmed by the CA, reduced the interest rate from 16 percent to 1.167 percent per month or
14 percent per annum; and the stipulated penalty charge, from 5 percent to 1.167 percent per month or 14
percent per annum.

Petitioner alleges that absent any written stipulation between the parties, the lower courts should have imposed
the rate of 12 percent per annum only.

The records show that there was a written agreement between the parties for the payment of interest on the
subject loans at the rate of 16 percent per month. As decreed by the lower courts, this rate must be equitably
reduced for being iniquitous, unconscionable and exorbitant. "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."13

In Medel v. CA,14 the Court found the stipulated interest rate of 5.5 percent per month, or 66 percent per annum,
unconscionable. In the present case, the rate is even more iniquitous and unconscionable, as it amounts to 192
percent per annum. When the agreed rate is iniquitous or unconscionable, it is considered "contrary to morals, if
not against the law. [Such] stipulation is void."15

Since the stipulation on the interest rate is void, it is as if there were no express contract thereon. 16 Hence, courts
may reduce the interest rate as reason and equity demand. We find no justification to reverse or modify the rate
imposed by the two lower courts.

Third and Fourth Issue:

Penalties and Attorney’s Fees

Article 1229 of the Civil Code states thus:

"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 exercising this power to determine what is iniquitous and unconscionable, courts must consider the
circumstances of each case.17 What may be iniquitous and unconscionable in one may be totally just and
equitable in another. In the present case, iniquitous and unconscionable was the parties’ stipulated penalty
charge of 5 percent per month or 60 percent per annum, in addition to regular interests and attorney’s fees. Also,
there was partial performance by petitioner when she remitted ₱116,540 as partial payment of her principal
obligation of ₱320,000. Under the circumstances, the trial court was justified in reducing the stipulated penalty
charge to the more equitable rate of 14 percent per annum.

The Promissory Note carried a stipulation for attorney’s fees of 25 percent of the principal amount and accrued
interests. Strictly speaking, this covenant on attorney’s fees is different from that mentioned in and regulated by
the Rules of Court.18 "Rather, the attorney’s fees here are in the nature of liquidated damages and the stipulation
therefor is aptly called a penal clause."19 So long as the stipulation does not contravene the law, morals, public
order or public policy, it is binding upon the obligor. It is the litigant, not the counsel, who is the judgment
creditor entitled to enforce the judgment by execution.

Nevertheless, it appears that petitioner’s failure to comply fully with her obligation was not motivated by ill will
or malice. The twenty-nine partial payments she made were a manifestation of her good faith. Again, Article
1229 of the Civil Code specifically empowers the judge to reduce the civil penalty equitably, when the principal
obligation has been partly or irregularly complied with. Upon this premise, we hold that the RTC’s reduction of
attorney’s fees -- from 25 percent to 10 percent of the total amount due and payable -- is reasonable.

Fifth Issue:

Non-Inclusion of Petitioner’s Husband

Petitioner contends that the case against her should have been dismissed, because her husband was not included
in the proceedings before the RTC.

We are not persuaded. The husband’s non-joinder does not warrant dismissal, as it is merely a formal
requirement that may be cured by amendment. 20 Since petitioner alleges that her husband has already passed
away, such an amendment has thus become moot.

WHEREFORE, the Petition is DENIED. Costs against petitioner. SO ORDERED.

G.R. No. 119729 January 21, 1997

ACE-AGRO DEVELOPMENT CORPORATION, petitioner, vs. COURT OF APPEALS and COSMOS

BOTTLING CORPORATION, respondents.

MENDOZA, J.:
This case originated in a complaint for damages for breach of contract which petitioner filed against private
respondent. From the decision of the Regional Trial Court, Branch 72, Malabon, Metro Manila, finding private
respondent guilty of breach of contract and ordering it to pay damages, private respondent appealed to the Court
of Appeals which reversed the trial court's decision and dismissed the complaint for lack of merit. Petitioner in
turn moved for a reconsideration, but its motion was denied. Hence, this petition for review on certiorari.

The facts are as follows:

Petitioner Ace-Agro Development Corporation and private respondent Cosmos Bottling Corporation are
corporations duly organized and existing under Philippine laws. Private respondent Cosmos Bottling Corp. is
engaged in the manufacture of soft drinks. Since 1979 petitioner Ace-Agro Development Corp. (Ace-Agro) had
been cleaning soft drink bottles and repairing wooden shells for Cosmos, rendering its services within the
company premises in San Fernando, Pampanga. The parties entered into service contracts which they renewed
every year. On January 18, 1990, they signed a contract covering the period January 1, 1990 to December 31,
1990. Private respondent had earlier contracted the services of Aren Enterprises in view of the fact that
petitioner could handle only from 2,000 to 2,500 cases a day and could not cope with private respondent's daily
production of 8,000 cases. Unlike petitioner, Aren Enterprises rendered service outside private respondent's
plant.

On April 25, 1990, fire broke out in private respondent's plant, destroying, among other places, the area where
petitioner did its work. As a result, petitioner's work was stopped.

On May 15, 1990, petitioner asked private respondent to allow it to resume its service, but petitioner was
advised that on account of the fire, which had "practically burned all . . . old soft drink bottles and wooden
shells," private respondent was terminating their contract.

Petitioner expressed surprise at the termination of the contract and requested private respondent, on June 13,
1990, to reconsider its decision and allow petitioner to resume its work in order to "cushion the sudden impact
of the unemployment of many of [its] workers." As it received no reply from private respondent, petitioner, on
June 20, 1990, informed its employees of the termination of their employment. Petitioner's memorandum 1 read:

MEMORANDUM TO : All Workers/Union Members

THRU : Mr. Angelito B. Catalan
Local Chapter President
Bisig Manggagawa sa Ace Agro-NAFLU

This is to inform you that the Cosmos Bottling Corp. has sent a letter to Ace Agro-Development
Corp. terminating our contract with them.

However, we are still doing what we can to save our contract and resume our operations, though
this might take some time.

We will notify you whatever would be the outcome of our negotiation with them in due time.

Truly yours,

ACE AGRO-
DEVELOPMENT CORP.

(Sgd.) ANTONIO L.
ARQUIZA
Manager

This led the employees to file a complaint for illegal dismissal before the Labor Arbiter against petitioner and
private respondent.

On July 17, 1990, petitioner sent another letter to private respondent, reiterating its request for reconsideration.
Its letter2 read:

COSMOS BOTTLING CORPORATION

San Isidro MacArthur Highway
San Fernando, Pampanga
 Attention: Mr. Norman P. Uy
General Services Manager

Gentlemen:

In our letter to you dated June 13, 1990 seeking your kind reconsideration of your sudden drastic
decision to terminate our mutually beneficial contract of long standing, it is more than a month
now but our office has not received a reply from you.

Our workers, who have been anxiously waiting for the resumption of the operations and who are
the ones most affected by your sudden decision, are now becoming restless due to the financial
difficulties they are now suffering.

We are, therefore, again seeking for the reconsideration of your decision to help alleviate the
sufferings of the displaced workers, which we also have to consider for humanitarian reason.

Yours very truly,

ACE AGRO-
DEVELOPMENT CORP.

(Sgd.) ANTONIO I.
ARQUIZA
Manager

In response, private respondent advised petitioner on August 28, 1990 that the latter could resume the repair of
wooden shells under terms similar to those contained in its contract but work had to be done outside the
company premises. Private respondent's letter 3 read:

MR. ANTONIO I. ARQUIZA

Manager
ACE-AGRO DEVELOPMENT CORPORATION
165 J.P. Bautista Street
Malabon, Metro Manila

Dear Mr. Arquiza:

We are pleased to inform you that COSMOS BOTTLING CORPORATION, San Fernando Plant
is again accepting job-out contract for the repair of our wooden shells.

Work shall be done outside the premises of the plant and under similar terms you previously had
with the company. We intend to give you priority so please see or contact me at my office
soonest for the particulars regarding the job.

Here is looking forward to doing business with you at the earliest possible time.

(Sgd.) DANILO M. DE
CASTRO
Plant General Manager

Petitioner refused the offer, claiming that to do its work outside the company's premises would make it
(petitioner) incur additional costs for transportation which "will eat up the meager profits that [it] realizes from
its original contract with Cosmos." In subsequent meetings with Danilo M. de Castro, Butch Ceña and Norman
Uy of Cosmos, petitioner's manager, Antonio I. Arquiza, asked for an extension of the term of the contract in
view of the suspension of work. But its request was apparently turned down.

On November 7, 1990, private respondent advised petitioner that the latter could then resume its work inside the
plant in accordance with its original contract with Cosmos. Private respondent's letter 4 stated:

MR. ANTONIO I. ARQUIZA

General Manager
Ace-Agro Development Corporation
 165 J. P. Bautista St., Malabon
Metro Manila

Dear Mr. Arquiza:

This is to officially inform you that you can now resume the repair of wooden shells inside the
plant according to your existing contract with the Company.

Please see Mr. Ener G. Ocampo, OIC-PDGS, on your new job site in the Plant.

Very truly yours,

COSMOS BOTTLING
CORPORATION

(Sgd.) MICHAEL M.
ALBINO
VP-Luzon/Plant General
Manager

On November 17, 1990, petitioner rejected private respondent's offer, this time, citing the fact that there was a
pending labor case. Its letter 5 to private respondent stated:

Mr. Michael M. Albino

VP-Luzon/Plant General Manager
Cosmos Bottling Corporation
San Fernando, Pampanga

Dear Mr. Albino,

This is in connection with your letter dated November 7, 1990 regarding the resumption of the
repair of your wooden shells inside San Fernando, Pampanga Plant according to the existing
contract with your company.

At present, there is a pending case before the Department of Labor and Employment in San
Fernando, Pampanga which was a result of the premature termination of the said existing
contract with your company. In view of that, we find it proper for us to work for the resolution of
the said pending case and include in the Compromise Agreement the matter of the resumption of
the repair of wooden shells in your San Fernando, Pampanga Plant.

Thank you very much.

Very truly yours,

ACE AGRO-
DEVELOPMENT CORP.

(Sgd.) ANTONIO I.
ARQUIZA
Manager

On January 3, 1991, petitioner brought this case against private respondent for breach of contract and damages
in the Regional Trial Court of Malabon. It complained that the termination of its service contract was illegal and
arbitrary and that, as a result, it stood to lose profits and to be held liable to its employees for backwages,
damages and/or separation pay.

On January 16, 1991, a decision was rendered in the labor case, finding petitioner liable for the claims of its
employees. Petitioner was ordered to reinstate the employees and pay them backwages. However, private
respondent Cosmos was absolved from the employees' claims on the ground that there was no privity of
contract between them and private respondent.
On the other hand, in its decision rendered on November 21, 1991, the RTC found private respondent guilty of
breach of contract and ordered it to pay damages to petitioner. Petitioner's claim for reimbursement for what it
had paid to its employees in the labor case was denied. The dispositive portion of the trial court's decision read:

WHEREFORE, premises considered, judgment is hereby rendered in favor of plaintiff Ace-Agro

Development Corporation and against defendant Cosmos Bottling Corporation, ordering the
latter to pay to the former the following:

a) The amount of P1,008,418.01 as actual damages;

b) P100,000.00 as corrective or exemplary damages;

c) The amount of P50,000.00 as and for attorney's fees; and

d) Costs and expenses of litigation.

Defendant's counterclaims are dismissed.

SO ORDERED.

Private respondent appealed to the Court of Appeals, which on December 29, 1994, reversed the trial court's
decision and dismissed petitioner's complaint. The appellate court found that it was petitioner which had refused
to resume work, after failing to secure an extension of its contract. Petitioner now seeks a review of the Court of
Appeals' decision.

First. Petitioner claims that the appellate court erred "in ruling that respondent was justified in unilaterally
terminating the contract on account of a force majeure." Quite possibly it did not understand the appellate
court's decision, or it would not be contending that there was no valid cause for the termination of the contract
but only for its suspension. The following is what the appellate court said: 6

Article 1231 of the New Civil Code on extinguishment of obligations does not specifically
mention unilateral termination as a mode of extinguishment of obligation but, according to
Tolentino, "there are other causes of extinguishment of obligations which are not expressly
provided for in this chapter" (Tolentino, Civil Code of the Phils., Vol. IV, 1986 ed., p. 273). He
further said:

But in some contracts, either because of its indeterminate duration or because of

the nature of the prestation which is its object, one of the parties may free himself
from the contractual tie by his own will (unilateral extinguishment); . . . (p. 274-
275, Ibid)

And that was just what defendant-appellant did when it unilaterally terminated the agreement it
had with plaintiff-appellee by sending the May 23, 1990 letter. As per its letter, the reason given
by defendant-appellant for unilaterally terminating the agreement was because the April 25, 1990
fire practically burned all of the softdrink bottles and wooden shells which plaintiff-appellee was
working on under the agreement. What defendant-appellant was trying to say was that the
prestation or the object of their agreement had been lost and destroyed in the above-described
fire. Apparently, the defendant-appellant would like this situation to fall within what —
according to Tolentino — would be:

. . . (O)bligations may be extinguished by the happening of unforeseen events,

under whose influence the obligation would never have been contracted, because
in such cases, the very basis upon which the existence of the obligation is founded
would be wanting.

Both parties admitted that the April 25, 1990 fire was a force majeure or unforeseen event and
that the same even burned practically all the softdrink bottles and wooden shells — which are the
objects of the agreement. But the story did not end there.

It is true that defendant-appellant still had other bottles that needed cleaning and wooden shells
that needed repairing (pp.  110-111, orig. rec.); therefore, the suspension of the work of the
plaintiff-appellee brought about by the fire is, at best, temporary as found by the trial court.
 Hence, plaintiff-appellee's letters of reconsideration of the termination of the agreement
addressed to defendant-appellant dated June 13, 1990 and July 17, 1990.

It is obvious that what petitioner thought was the appellate court's ruling is merely its summary of private
respondent's allegations. Precisely the appellate court, does not agree with private respondent, that is why, in the
last paragraph of the above excerpt, the court says that there was no cause for terminating the contract but at
most a "temporary suspension of work." The court thus rejects private respondent's claim that, as a result of the
fire, the obligation of contract must be deemed to have been extinguished.

Nonetheless, the Court of Appeals found that private respondent had reconsidered its decision to terminate the
contract and tried to accommodate the request of petitioner, first, by notifying petitioner on August 28, 1990
that it could resume work provided that this was done outside the premises and, later, on November 7, 1990, by
notifying petitioner that it could then work in its premises, under the terms of their contract. However, petitioner
unjustifiably refused the offer because it wanted an extension of the contract to make up for the period of
inactivity. As the Court of Appeals said in its decision: 7

It took defendant-appellant time to make a reply to plaintiff-appellee's letters. But when it did on August
28, 1990, it granted plaintiff-appellee priority to resume its work under the terms of their agreement (but
outside its premises), and the plaintiff-appellee refused the same on the ground that working outside the
defendant-appellant's San Fernando Plant would mean added transportation costs that would offset any
profit it would earn.

The appellee was without legal ground to refuse resumption of work as offered by the appellant, under
the terms of their above agreement. It could not legally insist on staying inside property it did not own,
nor was under lease to
it . . . . In its refusal to resume its work because of the additional transportation costs to be brought about
by working outside the appellant's San Fernando plant, the appellee could be held liable for damages for
breach of contract.

xxx xxx xxx

Thereafter, appellant sent its November 7, 1990 letter to appellee, this time specifically stating that
plaintiff-appellee can now resume work in accordance with their existing agreement. This time, it could
not be denied that by the tenor of the letter, appellant was willing to honor its agreement with appellee,
that it had finally made a reconsideration of appellee's plea to resume work under the contract. But
again, plaintiff-appellee refused this offer to resume work.

Why did the appellee refuse to resume work? Its November 17, 1990 letter stated that it had something
to do with the settlement of the NLRC case filed against it by its employees. But that was not the real
reason. In his cross-examination, the witness for appellee stated that its real reason for refusing to
resume work with the appellant was — as in its previous refusal — because it wanted an extension of
the period or duration of the contract beyond December 31, 1991, to cover the period within which it
was unable to work.

The agreement between the appellee and the appellant is with a resolutory period, beginning from
January 1, 1990 and ending on December 31, 1990. When the fire broke out on April 25, 1990, there
resulted a suspension of the appellee's work as per agreement. But this suspension of work due to force
majeure did not merit an automatic extension of the period of the agreement between them. According
to Tolentino:

The stipulation that in the event of a fortuitous event or force majeure the contract shall be deemed
suspended during the said period does not mean that the happening of any of those events stops the
running of the period the contract has been agreed upon to run. It only relieves the parties from the
fulfillment of their respective obligations during that time. If during six of the thirty years fixed as the
duration of a contract, one of the parties is prevented by force majeure to perform his obligation during
those years, he cannot after the expiration of the thirty-year period, be compelled to perform his
obligation for six more years to make up for what he failed to perform during the said six years, because
it would in effect be an extension of the term of the contract. The contract is stipulated to run for thirty
years, and the period expires on the thirtieth year; the period of six years during which performance by
one of the parties is prevented by force majeure cannot be deducted from the period stipulated.
 In fine, the appellant withdrew its unilateral termination of its agreement with appellee in its letter dated
November 7, 1990. But the appellee's refusal to resume work was, in effect, a unilateral termination of
the parties' agreement — an act that was without basis. When the appellee asked for an extension of the
period of the contract beyond December 31, 1990 it was, in effect, asking for a new contract which
needed the consent of defendant-appellant. The appellee might be forgiven for its first refusal
(pertaining to defendant-appellant's August 28, 1990 letter), but the second refusal must be construed as
a breach of contract by plaintiff-appellee. . . .

The Court of Appeals was right that petitioner had no basis for refusing private respondent's offer unless
petitioner was allowed to carry out its work in the company premises. That petitioner would incur additional
cost for transportation was not a good reason for its refusal. Petitioner has not shown that on August 28, 1990,
when it was notified of the private respondent's offer, the latter's premises had so far been restored so as to
permit petitioner to resume work there. In fact, even when petitioner was finally allowed to resume work within
the plant, it was not in the former work place but in a new one, which shows that private respondent's reason for
not granting petitioner's request was not just a pretext.

Nor was petitioner justified in refusing to resume work on November 7 when it was again notified by petitioner
to work. Although it cited the pending labor case as reason for turning down private respondent's offer, it would
appear that the real reason for petitioner's refusal was the fact that the term of the contract was expiring in two
months and its request for an extension was not granted. But, as the appellate court correctly ruled, the
suspension of work under the contract was brought about by force majeure. Therefore, the period during which
work was suspended did not justify an extension of the term of the contract. 8 For the fact is that the contract
was subject to a resolutory period which relieved the parties of their respective obligations but did not stop the
running of the period of their contract.

The truth of the matter is that while private respondent had made efforts towards accommodation, petitioner
was unwilling to make adjustments as it insisted that it "cannot profitably resume operation under the same
terms and conditions [of] the terminated contract but with an outside work venue [as] transportation costs alone
will eat up the meager profit that Ace-Agro realizes from its original contract." 9 While this so-called "job-out"
offer of private respondent had the effect of varying the terms of the contract in the sense that it could increase
its cost, what petitioner did not seem to realize was that the change was brought about by circumstances not of
private respondent's making.

Again when private respondent finally advised petitioner on November 7, 1990 to work under the strict terms of
its contract and inside the plant, petitioner thought only of its interest by insisting that the contract be extended.
Petitioner's manager, Antonio I. Arquiza, testified that he tried to secure a term extension for his company but
his request was turned down because the management of private respondent wanted a new contract after the
expiration of the contract on December 31, 1990. Arquiza testified. 10

A [Butch Ceña] told me that Cosmos is agreeable to allow us to resume our operation and when I
inquired about the extension of the contract he told me that I better refer the matter to Mr.
Norman Uy.

x x x           x x x          x x x

Q Did you see Mr. Norman Uy?

A Yes, sir, when I went to see Mr. Norman Uy he asked me why I was there and he told me why
I did not start operation I told him that what we are expecting that Mr. Ceña would give me the
formal letter regarding the resumption of the operation and honoring of contract and he said that
our price was so high and if we are willing to use said contract and when I said yes he told me
that we will just send you a letter considering that another contractor repairing our damaged
shells and cleaning of dirty bottles. When I asked him that does that mean that the meeting I had
with Mr. Ceña, he told me that was null and void and he told me that Mr. Ceña want a new
contract.

As already stated, because the suspension of work was due to force majeure, there was no justification for
petitioner's demand for an extension of the terms of the contract. Private respondent was justified in insisting
that after the expiration of the contract, the parties must negotiate a new one as they had done every year since
the start of their business relations in 1979.
Second. Petitioner slams the Court of Appeals for ruling that "it was [petitioner's] unjustified refusal which
finally terminated the contract between the parties." This contention is likewise without merit. Petitioner may
not be responsible for the termination of the contract, but neither is private respondent, since the question in this
case is whether private respondent is guilty of breach of contract. The trial court held that private respondent
committed a breach of contract because, even as its August 28, 1990 letter allowed petitioner to resume work,
private respondent's offer was limited to the repairs of wooden shells and this had to be done outside the
company's premises. On the other hand, the final offer made on November 7, 1990, while allowing the "repair
of wooden shells [to be done] inside the plant according to your contract with the company," was still limited to
the repair of the wooden shells, when the fact was that the parties' contract was both for the repair of wooden
crates and for the cleaning of soft drink bottles.

But this was not the petitioner's complaint. There was never an issue whether the company's offer included the
cleaning of bottles. Both parties understood private respondent's offer as including the cleaning of empty soft
drink bottles and the repair of the wooden crates. Rather, the discussions between petitioner and private
respondent's representatives focused first, on the insistence of petitioner that it be allowed to work inside the
company plant and, later, on its request for the extension of the life of the contract.

Petitioner claims that private respondent had a reason to want to terminate the contract and that was to give the
business to Aren Enterprises, as the latter offered its services at a much lower rate than petitioner. Aren
Enterprises' rate was P2.50 per shell while petitioner's rates were P4.00 and P6.00 per shell for ordinary and
super sized bottles, respectively. 11

The contention has no basis in fact. The contract between private respondent and Aren Enterprises had been
made on March 29, 1990 — before the fire broke out. The contract between petitioner and private respondent
did not prohibit the hiring by private respondent of another service contractor. With private respondent hitting
production at 8,000 bottles of soft drinks per day, petitioner could clearly not handle the business, since it could
clean only 2,500 bottles a day. 12 These facts show that although Aren Enterprises' rate was lower than
petitioner's, they did not affect private respondent's business relation with petitioner. Despite private
respondent's contract with Aren Enterprises, private respondent continued doing business with petitioner and
would probably have done so were it not for the fire. On the other hand, Aren Enterprises could not be
begrudged for being allowed to continue rendering service even after the fire because it was doing its work
outside private respondent's plant. For that matter, after the fire, private respondent on August 28, 1990 offered
to let petitioner resume its service provided this was done outside the plant.

Petitioner may not be to blame for the failure to resume work after the fire, but neither is private respondent.
Since the question is whether private respondent is guilty of breach of contract, the fact that private respondent
is blameless can only lead to the conclusion that the appealed decision is correct.

WHEREFORE, the petition for review is DENIED and the decision of the Court of Appeals is AFFIRMED. SO
ORDERED.

G.R. No. 177921               December 4, 2013

METRO CONCAST STEEL CORPORATION, SPOUSES JOSE S. DYCHIAO AND TIUOH YAN,
SPOUSES GUILLERMO AND MERCEDES DYCHIAO, AND SPOUSES VICENTE AND FILOMENA
DYCHIAO, Petitioners, vs. ALLIED BANK CORPORATION, Respondent.

RESOLUTION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari 1 are the Decision2 dated February 12, 2007 and the
Resolution3 dated May 10, 2007 of the Court of Appeals (CA) in CA-G.R. CV No. 86896 which reversed and
set aside the Decision4 dated January 17, 2006 of the Regional Trial Court of Makati, Branch 57 (RTC) in Civil
Case No. 00-1563, thereby ordering petitioners Metro Concast Steel Corporation (Metro Concast), Spouses Jose
S. Dychiao and Tiu Oh Yan, Spouses Guillermo and Mercedes Dychiao, and Spouses Vicente and Filomena
Duchiao (individual petitioners) to solidarily pay respondent Allied Bank Corporation (Allied Bank) the
aggregate amount of ₱51,064,094.28, with applicable interests and penalty charges.

The Facts
On various dates and for different amounts, Metro Concast, a corporation duly organized and existing under and
by virtue of Philippine laws and engaged in the business of manufacturing steel, 5 through its officers, herein
individual petitioners, obtained several loans from Allied Bank. These loan transactions were covered by a
promissory note and separate letters of credit/trust receipts, the details of which are as follows:

Date Document Amount

December 13, Promissory Note No. ₱2,000,000.
1996 96-213016 00
November 7, Trust Receipt No. 96-
1995 2023657 ₱608,603.04
Trust Receipt No. 96- ₱3,753,777.
May 13, 1996 9605228 40
Trust Receipt No. 96- ₱4,602,648.
May 24, 1996 9605249 08
March 21, Trust Receipt No. 97- ₱7,289,757.
1997 20472410 79
Trust Receipt No. 96- ₱17,340,360
June 7, 1996 20328011 .73
Trust Receipt No. 95-
July 26, 1995 20194312 ₱670,709.24
August 31, Trust Receipt No. 95-
1995 20205313 ₱313,797.41
November 16, Trust Receipt No. 96- ₱13,015,109
1995 20243914 .87
Trust Receipt No. 96-
July 3, 1996 20355215 ₱401,608.89
Trust Receipt No. 95-
June 20, 1995 20171016 ₱750,089.25
December 13, Trust Receipt No. 96-
1995 37908917 ₱92,919.00
December 13, Trust Receipt No.
1995 96/20258118 ₱224,713.58

The interest rate under Promissory Note No. 96-21301 was pegged at 15.25% per annum (p.a.), with penalty
charge of 3% per month in case of default; while the twelve (12) trust receipts uniformly provided for an
interest rate of 14% p.a. and 1% penalty charge. By way of security, the individual petitioners executed several
Continuing Guaranty/Comprehensive Surety Agreements19 in favor of Allied Bank. Petitioners failed to settle
their obligations under the aforementioned promissory note and trust receipts, hence, Allied Bank, through
counsel, sent them demand letters,20 all dated December 10, 1998, seeking payment of the total amount of
₱51,064,093.62, but to no avail. Thus, Allied Bank was prompted to file a complaint for collection of sum of
money21 (subject complaint) against petitioners before the RTC, docketed as Civil Case No. 00-1563. In their
second22 Amended Answer,23 petitioners admitted their indebtedness to Allied Bank but denied liability for the
interests and penalties charged, claiming to have paid the total sum of ₱65,073,055.73 by way of interest
charges for the period covering 1992 to 1997.24

They also alleged that the economic reverses suffered by the Philippine economy in 1998 as well as the
devaluation of the peso against the US dollar contributed greatly to the downfall of the steel industry, directly
affecting the business of Metro Concast and eventually leading to its cessation. Hence, in order to settle their
debts with Allied Bank, petitioners offered the sale of Metro Concast’s remaining assets, consisting of
machineries and equipment, to Allied Bank, which the latter, however, refused. Instead, Allied Bank advised
them to sell the equipment and apply the proceeds of the sale to their outstanding obligations. Accordingly,
petitioners offered the equipment for sale, but since there were no takers, the equipment was reduced into ferro
scrap or scrap metal over the years. In 2002, Peakstar Oil Corporation (Peakstar), represented by one Crisanta
Camiling (Camiling), expressed interest in buying the scrap metal. During the negotiations with Peakstar,
petitioners claimed that Atty. Peter Saw (Atty. Saw), a member of Allied Bank’s legal department, acted as the
latter’s agent. Eventually, with the alleged conformity of Allied Bank, through Atty. Saw, a Memorandum of
Agreement25 dated November 8, 2002 (MoA) was drawn between Metro Concast, represented by petitioner Jose
Dychiao, and Peakstar, through Camiling, under which Peakstar obligated itself to purchase the scrap metal for
a total consideration of ₱34,000,000.00, payable as follows:

(a) ₱4,000,000.00 by way of earnest money – ₱2,000,000.00 to be paid in cash and the other
₱2,000,000.00 to be paid in two (2) post-dated checks of ₱1,000,000.00 each;26 and

(b) the balance of ₱30,000,000.00 to be paid in ten (10) monthly installments of ₱3,000,000.00, secured
by bank guarantees from Bankwise, Inc. (Bankwise) in the form of separate post-dated checks.27

Unfortunately, Peakstar reneged on all its obligations under the MoA.1âwphi1 In this regard, petitioners
asseverated that:

(a) their failure to pay their outstanding loan obligations to Allied Bank must be considered as force
majeure ; and

(b) since Allied Bank was the party that accepted the terms and conditions of payment proposed by
Peakstar, petitioners must therefore be deemed to have settled their obligations to Allied Bank. To
bolster their defense, petitioner Jose Dychiao (Jose Dychiao) testified 28 during trial that it was Atty. Saw
himself who drafted the MoA and subsequently received 29 the ₱2,000,000.00 cash and the two (2)
Bankwise post-dated checks worth ₱1,000,000.00 each from Camiling. However, Atty. Saw turned over
only the two (2) checks and ₱1,500,000.00 in cash to the wife of Jose Dychiao.30

Claiming that the subject complaint was falsely and maliciously filed, petitioners prayed for the award of moral
damages in the amount of ₱20,000,000.00 in favor of Metro Concast and at least ₱25,000,000.00 for each
individual petitioner, ₱25,000,000.00 as exemplary damages, ₱1,000,000.00 as attorney’s fees, ₱500,000.00
for other litigation expenses, including costs of suit.

The RTC Ruling

After trial on the merits, the RTC, in a Decision31 dated January 17, 2006, dismissed the subject complaint,
holding that the "causes of action sued upon had been paid or otherwise extinguished." It ruled that since Allied
Bank was duly represented by its agent, Atty. Saw, in all the negotiations and transactions with Peakstar –
considering that Atty. Saw

(a) drafted the MoA,

(b) accepted the bank guarantee issued by Bankwise, and

(c) was apprised of developments regarding the sale and disposition of the scrap metal – then it stands to
reason that the MoA between Metro Concast and Peakstar was binding upon said bank.

The CA Ruling

Allied Bank appealed to the CA which, in a Decision32 dated February 12, 2007, reversed and set aside the
ruling of the RTC, ratiocinating that there was "no legal basis in fact and in law to declare that when Bankwise
reneged its guarantee under the [MoA], herein [petitioners] should be deemed to be discharged from their
obligations lawfully incurred in favor of [Allied Bank]."33

The CA examined the MoA executed between Metro Concast, as seller of the ferro scrap, and Peakstar, as the
buyer thereof, and found that the same did not indicate that Allied Bank intervened or was a party thereto. It
also pointed out the fact that the post-dated checks pursuant to the MoA were issued in favor of Jose Dychiao.
Likewise, the CA found no sufficient evidence on record showing that Atty. Saw was duly and legally
authorized to act for and on behalf of Allied Bank, opining that the RTC was "indulging in hypothesis and
speculation"34 when it made a contrary pronouncement. While Atty. Saw received the earnest money from
Peakstar, the receipt was signed by him on behalf of Jose Dychiao.35

It also added that "[i]n the final analysis, the aforesaid checks and receipts were signed by [Atty.] Saw either as
representative of [petitioners] or as partner of the latter’s legal counsel, and not in anyway as representative of
[Allied Bank]."36
Consequently, the CA granted the appeal and directed petitioners to solidarily pay Allied Bank their
corresponding obligations under the aforementioned promissory note and trust receipts, plus interests, penalty
charges and attorney’s fees. Petitioners sought reconsideration 37 which was, however, denied in a
Resolution38 dated May 10, 2007. Hence, this petition.

The Issue Before the Court

At the core of the present controversy is the sole issue of whether or not the loan obligations incurred by the
petitioners under the subject promissory note and various trust receipts have already been extinguished.

The Court’s Ruling

Article 1231 of the Civil Code states that obligations are extinguished either by payment or performance, the
loss of the thing due, the condonation or remission of the debt, the confusion or merger of the rights of creditor
and debtor, compensation or novation.

In the present case, petitioners essentially argue that their loan obligations to Allied Bank had already been
extinguished due to Peakstar’s failure to perform its own obligations to Metro Concast pursuant to the MoA.
Petitioners classify Peakstar’s default as a form of force majeure in the sense that they have, beyond their
control, lost the funds they expected to have received from the Peakstar (due to the MoA) which they would, in
turn, use to pay their own loan obligations to Allied Bank. They further state that Allied Bank was equally
bound by Metro Concast’s MoA with Peakstar since its agent, Atty. Saw, actively represented it during the
negotiations and execution of the said agreement. Petitioners’ arguments are untenable. At the outset, the Court
must dispel the notion that the MoA would have any relevance to the performance of petitioners’ obligations to
Allied Bank. The MoA is a sale of assets contract, while petitioners’ obligations to Allied Bank arose from
various loan transactions. Absent any showing that the terms and conditions of the latter transactions have been,
in any way, modified or novated by the terms and conditions in the MoA, said contracts should be treated
separately and distinctly from each other, such that the existence, performance or breach of one would not
depend on the existence, performance or breach of the other. In the foregoing respect, the issue on whether or
not Allied Bank expressed its conformity to the assets sale transaction between Metro Concast and Peakstar (as
evidenced by the MoA) is actually irrelevant to the issues related to petitioners’ loan obligations to the bank.
Besides, as the CA pointed out, the fact of Allied Bank’s representation has not been proven in this case and
hence, cannot be deemed as a sustainable defense to exculpate petitioners from their loan obligations to Allied
Bank. Now, anent petitioners’ reliance on force majeure, suffice it to state that Peakstar’s breach of its
obligations to Metro Concast arising from the MoA cannot be classified as a fortuitous event under
jurisprudential formulation. As discussed in Sicam v. Jorge:39

Fortuitous events by definition are extraordinary events not foreseeable or avoidable.1âwphi1 It is therefore, not
enough that the event should not have been foreseen or anticipated, as is commonly believed but it must be one
impossible to foresee or to avoid. The mere difficulty to foresee the happening is not impossibility to foresee the
same. To constitute a fortuitous event, the following elements must concur: (a) the cause of the unforeseen and
unexpected occurrence or of the failure of the debtor to comply with obligations must be independent of
human will; (b) it must be impossible to foresee the event that constitutes the caso fortuito or, if it can be
foreseen, it must be impossible to avoid; (c) the occurrence must be such as to render it impossible for the
debtor to fulfill obligations in a normal manner; and (d) the obligor must be free from any participation in
the aggravation of the injury or loss.40 (Emphases supplied)

While it may be argued that Peakstar’s breach of the MoA was unforseen by petitioners, the same us clearly not
"impossible"to foresee or even an event which is independent of human will." Neither has it been shown that
said occurrence rendered it impossible for petitioners to pay their loan obligations to Allied Bank and thus,
negates the former’s force majeure theory altogether. In any case, as earlier stated, the performance or breach of
the MoA bears no relation to the performance or breach of the subject loan transactions, they being separate and
distinct sources of obligations. The fact of the matter is that petitioners’ loan obligations to Allied Bank remain
subsisting for the basic reason that the former has not been able to prove that the same had already been
paid41 or, in any way, extinguished. In this regard, petitioners’ liability, as adjudged by the CA, must perforce
stand. Considering, however, that Allied Bank’s extra-judicial demand on petitioners appears to have been
made only on December 10, 1998, the computation of the applicable interests and penalty charges should be
reckoned only from such date.

WHEREFORE, the petition is DENIED. The Decision dated February 12, 2007 and Resolution dated May 10,
2007 of the Court of Appeals in CA-G.R. CV No. 86896 are hereby AFFIRMED with MODIFICATION
reckoning the applicable interests and penalty charges from the date of the extrajudicial demand or on
December 10, 1998. The rest of the appellate court’s dispositions stand.

SO ORDERED.