THIRD DIVISION

[G.R. No. 131622. November 27, 1998]

LETICIA Y. MEDEL DR. RAFAEL MEDEL and SERVANDO FRANCO, petitioners,
vs. COURT OF APPEALS, SPOUSES VERONICA R. GONZALES and DANILO G.
GONZALES, JR., doing lending business under the trade name and style
"GONZALES CREDIT ENTERPRISES", respondents.
DECISION
PARDO, J.:

The case before the Court is a petition for review on certiorari, under Rule 45 of the
Revised Rules of Court, seeking to set aside the decision of the Court of Appeals,[1]
and its resolution denying reconsideration,[2] the dispositive portion of which
decision reads as follows:
"WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants are
hereby ordered to pay the plaintiff: the sum of P500,000.00, plus 5.5% per month
interest and 2% service charge per annum effective July 23, 1986, plus 1% per
month of the total amount due and demandable as penalty charges effective August
23, 1986, until the entire amount is fully paid.

"The award to the plaintiff of P50,000.00 as attorney's fees is affirmed. And so is

the imposition of costs against the defendants.

SO ORDERED."[3]

The Court required the respondents to comment on the petition,[4] which was filed
on April 3, 1998,[5] and the petitioners to reply thereto, which was filed on May 29,
1998.[6] We now resolve to give due course to the petition and decide the case.

The facts of the case, as found by the Court of Appeals in its decision, which are
considered binding and conclusive on the parties herein, as the appeal is limited to
questions of law, are as follows:

On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando and
Leticia) obtained a loan from Veronica R. Gonzales (hereafter Veronica), who was
engaged in the money lending business under the name "Gonzales Credit
Enterprises", in the amount of P50,000.00, payable in two months. Veronica gave
only the amount of P47,000.00, to the borrowers, as she retained P3,000.00, as
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advance interest for one month at 6% per month. Servado and Leticia executed a
promissory note for P50,000.00, to evidence the loan, payable on January 7, 1986.

On November 19, 1985, Servando and Leticia obtained from Veronica another loan
in the amount of P90,000.00, payable in two months, at 6% interest per month.
They executed a promissory note to evidence the loan, maturing on January 19,
1986. They received only P84,000.00, out of the proceeds of the loan.

On maturity of the two promissory notes, the borrowers failed to pay the
indebtedness.

On June 11, 1986, Servando and Leticia secured from Veronica still another loan in
the amount of P300,000.00, maturing in one month, secured by a real estate
mortgage over a property belonging to Leticia Makalintal Yaptinchay, who issued a
special power of attorney in favor of Leticia Medel, authorizing her to execute the
mortgage. Servando and Leticia executed a promissory note in favor of Veronica to
pay the sum of P300,000.00, after a month, or on July 11, 1986. However, only the
sum of P275,000.00, was given to them out of the proceeds of the loan.

Like the previous loans, Servando and Medel failed to pay the third loan on maturity.

On July 23, 1986, Servando and Leticia with the latter's husband, Dr. Rafael Medel,
consolidated all their previous unpaid loans totaling P440,000.00, and sought from
Veronica another loan in the amount of P60,000.00, bringing their indebtedness to a
total of P500,000.00, payable on August 23, 1986. The executed a promissory note,
reading as follows:

"Baliwag, Bulacan July 23, 1986

"Maturity Date August 23, 1986

"P500,000.00

"FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to the order of
VERONICA R. GONZALES doing business in the business style of GONZALES CREDIT
ENTERPRISES, Filipino, of legal age, married to Danilo G. Gonzales, Jr., of Baliwag
Bulacan, the sum of PESOS ........ FIVE HUNDRED THOUSAND ..... (P500,000.00)
Philippine Currency with interest thereon at the rate of 5.5 PER CENT per month plus
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2% service charge per annum from date hereof until fully paid according to the
amortization schedule contained herein. (Underscoring supplied)

"Payment will be made in full at the maturity date.

"Should I/WE fail to pay any amortization or portion hereof when due, all the other
installments together with all interest accrued shall immediately be due and
payable and I/WE hereby agree to pay an additional amount equivalent to one per
cent (1%) per month of the amount due and demandable as penalty charges in the
form of liquidated damages until fully paid; and the further sum of TWENTY FIVE
PER CENT (25%) thereon in full, without deductions as Attorney's Fee whether
actually incurred or not, of the total amount due and demandable, exclusive of costs
and judicial or extra judicial expenses. (Underscoring supplied)

"I, WE further agree that in the event the present rate of interest on loan is
increased by law or the Central Bank of the Philippines, the holder shall have the
option to apply and collect the increased interest charges without notice although
the original interest have already been collected wholly or partially unless the
contrary is required by law.

"It is also a special condition of this contract that the parties herein agree that the
amount of peso-obligation under this agreement is based on the present value of
peso, and if there be any change in the value thereof, due to extraordinary inflation
or deflation, or any other cause or reason, then the peso-obligation herein
contracted shall be adjusted in accordance with the value of the peso then
prevailing at the time of the complete fulfillment of obligation.

"Demand and notice of dishonor waived. Holder may accept partial payments and
grant renewals of this note or extension of payments, reserving rights against each
and all indorsers and all parties to this note.

"IN CASE OF JUDICIAL Execution of this obligation, or any part of it, the debtors
waive all his/their rights under the provisions of Section 12, Rule 39, of the Revised
Rules of Court."

On maturity of the loan, the borrowers failed to pay the indebtedness of

P500,000.00, plus interests and penalties, evidenced by the above-quoted
promissory note.
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On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo G.

Gonzales, filed with the Regional Trial Court of Bulacan, Branch 16, at Malolos,
Bulacan, a complaint for collection of the full amount of the loan including interests
and other charges.

In his answer to the complaint filed with the trial court on April 5, 1990, defendant
Servando alleged that he did not obtain any loan from the plaintiffs; that it was
defendants Leticia and Dr. Rafael Medel who borrowed from the plaintiffs the sum of
P500,000.00, and actually received the amount and benefited therefrom; that the
loan was secured by a real estate mortgage executed in favor of the plaintiffs, and
that he (Servando Franco) signed the promissory note only as a witness.

In their separate answer filed on April 10,1990, defendants Leticia and Rafael Medel
alleged that the loan was the transaction of Leticia Yaptinchay, who executed a
mortgage in favor of the plaintiffs over a parcel of real estate situated in San Juan,
Batangas; that the interest rate is excessive at 5.5% per month with additional
service charge of 2% per annum, and penalty charge of 1% per month; that the
stipulation for attorney's fees of 25% ofthe amount due is unconscionable, illegal
and excessive, and that substantial payments made were applied to interest,
penalties and other charges.

After due trial, the lower court declared that the due execution and genuineness of
the four promissory notes had been duly proved, and ruled that although the Usury
Law had been repealed, the interest charged by the plaintiffs on the loans was
unconscionable and "revolting to the conscience". Hence, the trial court applied
"the provision of the New [Civil] Code" that the "legal rate of interest for loan or
forbearance of money, goods or credit is 12% per annum."[7]

Accordingly, on December 9, 1991, the trial court rendered judgment, the

dispositive portion of which reads as follows:

"WHEREFORE, premises considered, judgment is hereby rendered, as follows:

"1. Ordering the defendants Servando Franco and Leticia Medel, jointly and
severally, to pay plaintiffs the amount of P47,000.00 plus 12% interest per annum
from November 7, 1985 and 1% per month as penalty, until the entire amount is
paid in full.

"2. Ordering the defendants Servando Franco and Leticia Y. Medel to plaintiffs,
jointly and severally the amount of P84,000.00 with 12% interest per annum and
1% per cent per month as penalty from November 19,1985 until the whole amount
is fully paid;

"3. Ordering the defendants to pay the plaintiffs, jointly and severally, the amount
of P285,000.00 plus 12% interest per annum and 1% per month as penalty from July
11, 1986, until the whole amount is fully paid;

"4. Ordering the defendants to pay plaintiffs, jointly and severally, the amount of
P50,000.00 as attorney's fees;

"5. All counterclaims are hereby dismissed.

"With costs against the defendants."[8]

In due time, both plaintiffs and defendants appealed to the Court of Appeals.

In their appeal, plaintiffs-appellants argued that the promissory note, which

consolidated all the unpaid loans of the defendants, is the law that governs the
parties. They further argued that Circular No. 416 of the Central Bank prescribing
the rate of interest for loans or forbearance of money, goods or credit at 12% per
annum, applies only in the absence of a stipulation on interest rate, but not when
the parties agreed thereon.

The Court of Appeals sustained the plaintiffs-appellants' contention. It ruled that

"the Usury Law having become 'legally inexistent' with the promulgation by the
Central Bank in 1982 of Circular No. 905, the lender and borrower could agree on
any interest that may be charged on the loan".[9] The Court of Appeals further held
that "the imposition of 'an additional amount equivalent to 1% per month of the
amount due and demandable as penalty charges in the form of liquidated damages
until fully paid' was allowed by law".[10]

Accordingly, on March 21, 1997, the Court of Appeals promulgated it decision

reversing that of the Regional Trial Court, disposing as follows:
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"WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants are
hereby ordered to pay the plaintiffs the sum of P500,000.00, plus 5.5% per month
interest and 2% service charge per annum effective July 23, 1986, plus 1% per
month of the total amount due and demandable as penalty charges effective August
24, 1986, until the entire amount is fully paid.

"The award to the plaintiffs of P50,000.00 as attorney's fees is affirmed. And so is

the imposition of costs against the defendants.

"SO OREDERED."[11]

On April 15, 1997, defendants-appellants filed a motion for reconsideration of the

said decision. By resolution dated November 25, 1997, the Court of Appeals denied
the motion.[12]

Hence, defendants interposed the present recourse via petition for review on
certiorari.[13]

We find the petition meritorious.

Basically, the issue revolves on the validity of the interest rate stipulated upon.
Thus, the question presented is whether or not the stipulated rate of interest at
5.5% per month on the loan in the sum of P500,000.00, that plaintiffs extended to
the defendants is usurious. In other words, is the Usury Law still effective, or has it
been repealed by Central Bank Circular No. 905, adopted on December 22, 1982,
pursuant to its powers under P.D. No. 116, as amended by P.D. No. 1684?

We agree with petitioners that the stipulated rate of interest at 5.5% per month on
the P500,000.00 loan is excessive, iniquitous, unconscionable and exorbitant.13
However, we can not consider the rate "usurious" because this Court has
consistently held that Circulr No. 905 of the Central Bank, adopted on December 22,
1982, has expressly removed the interest ceilings prescribed by the Usury Law[14]
and that the Usury Law is now "legally inexistent".[15]

In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch
61[16] the Court held that CB Circular No. 905 "did not repeal nor in anyway amend
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the Usury Law but simply suspended the latter's effectivity." Indeed, we have held
that "a Central Bank Circular can not repeal a law. Only a law can repeal another
law."[17] In the recent case of Florendo vs. Court of Appeals[18], the Court
reiterated the ruling that "by virtue of CB Circular 905, the Usury Law has been
rendered ineffective". "Usury has been legally non-existent in our jurisdiction.
Interest can now be charged as lender and borrower may agree upon."[19]

Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated
upon by the parties in the promissory note iniquitous or unconscionable, and,
hence, contrary to morals ("contra bonos mores"), if not against the law.[20] The
stipulation is void.[21] The courts shall reduce equitably liquidated damages,
whether intended as an indemnity or a penalty if they are iniquitous or
unconscionable.[22]

Consequently, the Court of Appeals erred in upholding the stipulation of the parties.
Rather, we agree with the trial court that, under the circumstances, interest at 12%
per annum, and an additional 1% a month penalty charge as liquidated damages
may be more reasonable.

WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court
of Appeals promulgated on March 21, 1997, and its resolution dated November 25,
1997. Instead, we render judgment REVIVING and AFFIRMING the decision dated
December 9, 1991, of the Regional Trial Court of Bulacan, Branch 16, Malolos,
Bulacan, in Civil Case No. 134-M-90, involving the same parties.

No pronouncement as to costs in this instance

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. 189871
August 13, 2013
DARIO NACAR, Petitioner,
vs.
GALLERY FRAMES AND/OR FELIPE BORDEY, JR., Respondents.

DECISION
PERALTA, J.:
This is a petition for review on certiorari assailing the Decision dated September 23, 2008 of
the Court of Appeals (CA) in CA-G.R. SP No. 98591, and the Resolution dated October 9, 2009
denying petitioners motion for reconsideration.
The factual antecedents are undisputed.
Petitioner Dario Nacar filed a complaint for constructive dismissal before the Arbitration Branch of
the National Labor Relations Commission (NLRC) against respondents Gallery Frames (GF) and/or
Felipe Bordey, Jr., docketed as NLRC NCR Case No. 01-00519-97.
On October 15, 1998, the Labor Arbiter rendered a Decision in favor of petitioner and found that he
was dismissed from employment without a valid or just cause. Thus, petitioner was awarded
backwages and separation pay in lieu of reinstatement in the amount of P158,919.92. The
dispositive portion of the decision, reads:
With the foregoing, we find and so rule that respondents failed to discharge the burden of showing
that complainant was dismissed from employment for a just or valid cause. All the more, it is clear
from the records that complainant was never afforded due process before he was terminated. As
such, we are perforce constrained to grant complainants prayer for the payments of separation pay
in lieu of reinstatement to his former position, considering the strained relationship between the
parties, and his apparent reluctance to be reinstated, computed only up to promulgation of this
decision as follows:
1

SEPARATION PAY

Date Hired

= August 1990
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Rate
= P198/day
Date of Decision
= Aug. 18, 1998
Length of Service
= 8 yrs. & 1 month
P198.00 x 26 days x 8 months = P41,184.00
BACKWAGES

Date Dismissed
Rate per day
Date of Decisions
a) 1/24/97 to 2/5/98 = 12.36 mos.
P196.00/day x 12.36 mos.
b) 2/6/98 to 8/18/98 = 6.4 months
Prevailing Rate per day
P198.00 x 26 days x 6.4 mos.
T O TAL

= January 24, 1997

= P196.00
= Aug. 18, 1998
= P62,986.56
= P62,986.00
= P32,947.20
= P95.933.76

xxxx
WHEREFORE, premises considered, judgment is hereby rendered finding respondents guilty of
constructive dismissal and are therefore, ordered:
To pay jointly and severally the complainant the amount of sixty-two thousand nine hundred eightysix pesos and 56/100 (P62,986.56) Pesos representing his separation pay;
To pay jointly and severally the complainant the amount of nine (sic) five thousand nine hundred
thirty-three and 36/100 (P95,933.36) representing his backwages; and
All other claims are hereby dismissed for lack of merit.
SO ORDERED.
Respondents appealed to the NLRC, but it was dismissed for lack of merit in the Resolution dated
February 29, 2000. Accordingly, the NLRC sustained the decision of the Labor Arbiter. Respondents
filed a motion for reconsideration, but it was denied.
Dissatisfied, respondents filed a Petition for Review on Certiorari before the CA. On August 24,
2000, the CA issued a Resolution dismissing the petition. Respondents filed a Motion for
Reconsideration, but it was likewise denied in a Resolution dated May 8, 2001.
Respondents then sought relief before the Supreme Court, docketed as G.R. No. 151332. Finding
no reversible error on the part of the CA, this Court denied the petition in the Resolution dated April
17, 2002.
An Entry of Judgment was later issued certifying that the resolution became final and executory on
May 27, 2002. The case was, thereafter, referred back to the Labor Arbiter. A pre-execution
conference was consequently scheduled, but respondents failed to appear.
On November 5, 2002, petitioner filed a Motion for Correct Computation, praying that his backwages
be computed from the date of his dismissal on January 24, 1997 up to the finality of the Resolution
of the Supreme Court on May 27, 2002. Upon recomputation, the Computation and Examination
Unit of the NLRC arrived at an updated amount in the sum of P471,320.31.
On December 2, 2002, a Writ of Execution was issued by the Labor Arbiter ordering the Sheriff to
collect from respondents the total amount of P471,320.31. Respondents filed a Motion to Quash Writ
of Execution, arguing, among other things, that since the Labor Arbiter awarded separation pay
of P62,986.56 and limited backwages of P95,933.36, no more recomputation is required to be made
of the said awards. They claimed that after the decision becomes final and executory, the same
cannot be altered or amended anymore. On January 13, 2003, the Labor Arbiter issued an
Order denying the motion. Thus, an Alias Writ of Execution was issued on January 14, 2003.
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Respondents again appealed before the NLRC, which on June 30, 2003 issued a
Resolution granting the appeal in favor of the respondents and ordered the recomputation of the
judgment award.
On August 20, 2003, an Entry of Judgment was issued declaring the Resolution of the NLRC to be
final and executory. Consequently, another pre-execution conference was held, but respondents
failed to appear on time. Meanwhile, petitioner moved that an Alias Writ of Execution be issued to
enforce the earlier recomputed judgment award in the sum of P471,320.31.
The records of the case were again forwarded to the Computation and Examination Unit for
recomputation, where the judgment award of petitioner was reassessed to be in the total amount of
only P147,560.19.
Petitioner then moved that a writ of execution be issued ordering respondents to pay him the original
amount as determined by the Labor Arbiter in his Decision dated October 15, 1998, pending the
finalcomputation of his backwages and separation pay.
On January 14, 2003, the Labor Arbiter issued an Alias Writ of Execution to satisfy the judgment
award that was due to petitioner in the amount of P147,560.19, which petitioner eventually received.
Petitioner then filed a Manifestation and Motion praying for the re-computation of the monetary
award to include the appropriate interests.
On May 10, 2005, the Labor Arbiter issued an Order granting the motion, but only up to the amount
ofP11,459.73. The Labor Arbiter reasoned that it is the October 15, 1998 Decision that should be
enforced considering that it was the one that became final and executory. However, the Labor Arbiter
reasoned that since the decision states that the separation pay and backwages are computed only
up to the promulgation of the said decision, it is the amount of P158,919.92 that should be executed.
Thus, since petitioner already received P147,560.19, he is only entitled to the balance
of P11,459.73.
Petitioner then appealed before the NLRC, which appeal was denied by the NLRC in its
Resolution dated September 27, 2006. Petitioner filed a Motion for Reconsideration, but it was
likewise denied in the Resolution dated January 31, 2007.
Aggrieved, petitioner then sought recourse before the CA, docketed as CA-G.R. SP No. 98591.
On September 23, 2008, the CA rendered a Decision denying the petition. The CA opined that since
petitioner no longer appealed the October 15, 1998 Decision of the Labor Arbiter, which already
became final and executory, a belated correction thereof is no longer allowed. The CA stated that
there is nothing left to be done except to enforce the said judgment. Consequently, it can no longer
be modified in any respect, except to correct clerical errors or mistakes.
Petitioner filed a Motion for Reconsideration, but it was denied in the Resolution dated October 9,
2009.
Hence, the petition assigning the lone error:
I
WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED,
COMMITTED GRAVE ABUSE OF DISCRETION AND DECIDED CONTRARY TO LAW IN
UPHOLDING THE QUESTIONED RESOLUTIONS OF THE NLRC WHICH, IN TURN, SUSTAINED
THE MAY 10, 2005 ORDER OF LABOR ARBITER MAGAT MAKING THE DISPOSITIVE PORTION
OF THE OCTOBER 15, 1998 DECISION OF LABOR ARBITER LUSTRIA SUBSERVIENT TO AN
OPINION EXPRESSED IN THE BODY OF THE SAME DECISION.
Petitioner argues that notwithstanding the fact that there was a computation of backwages in the
Labor Arbiters decision, the same is not final until reinstatement is made or until finality of the
decision, in case of an award of separation pay. Petitioner maintains that considering that the
October 15, 1998 decision of the Labor Arbiter did not become final and executory until the April 17,
2002 Resolution of the Supreme Court in G.R. No. 151332 was entered in the Book of Entries on
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May 27, 2002, the reckoning point for thecomputation of the backwages and separation pay should
be on May 27, 2002 and not when the decision of the Labor Arbiter was rendered on October 15,
1998. Further, petitioner posits that he is also entitled to the payment of interest from the finality of
the decision until full payment by the respondents.
On their part, respondents assert that since only separation pay and limited backwages were
awarded to petitioner by the October 15, 1998 decision of the Labor Arbiter, no more recomputation
is required to be made of said awards. Respondents insist that since the decision clearly stated that
the separation pay and backwages are computed only up to [the] promulgation of this decision, and
considering that petitioner no longer appealed the decision, petitioner is only entitled to the award as
computed by the Labor Arbiter in the total amount of P158,919.92. Respondents added that it was
only during the execution proceedings that the petitioner questioned the award, long after the
decision had become final and executory. Respondents contend that to allow the further
recomputation of the backwages to be awarded to petitioner at this point of the proceedings would
substantially vary the decision of the Labor Arbiter as it violates the rule on immutability of
judgments.
The petition is meritorious.
The instant case is similar to the case of Session Delights Ice Cream and Fast Foods v. Court of
Appeals (Sixth Division), wherein the issue submitted to the Court for resolution was the propriety
of the computation of the awards made, and whether this violated the principle of immutability of
judgment. Like in the present case, it was a distinct feature of the judgment of the Labor Arbiter in
the above-cited case that the decision already provided for the computation of the payable
separation pay and backwages due and did not further order the computation of the monetary
awards up to the time of the finality of the judgment. Also in Session Delights, the dismissed
employee failed to appeal the decision of the labor arbiter. The Court clarified, thus:
In concrete terms, the question is whether a re-computation in the course of execution of the labor
arbiters original computation of the awards made, pegged as of the time the decision was rendered
and confirmed with modification by a final CA decision, is legally proper. The question is posed,
given that the petitioner did not immediately pay the awards stated in the original labor arbiters
decision; it delayed payment because it continued with the litigation until final judgment at the CA
level.
A source of misunderstanding in implementing the final decision in this case proceeds from the way
the original labor arbiter framed his decision. The decision consists essentially of two parts.
The first is that part of the decision that cannot now be disputed because it has been confirmed with
finality. This is the finding of the illegality of the dismissal and the awards of separation pay in lieu of
reinstatement, backwages, attorneys fees, and legal interests.
The second part is the computation of the awards made. On its face, the computation the labor
arbiter made shows that it was time-bound as can be seen from the figures used in the computation.
This part, being merely a computation of what the first part of the decision established and declared,
can, by its nature, be re-computed. This is the part, too, that the petitioner now posits should no
longer be re-computed because the computation is already in the labor arbiters decision that the CA
had affirmed. The public and private respondents, on the other hand, posit that a re-computation is
necessary because the relief in an illegal dismissal decision goes all the way up to reinstatement if
reinstatement is to be made, or up to the finality of the decision, if separation pay is to be given in
lieu reinstatement.
That the labor arbiters decision, at the same time that it found that an illegal dismissal had taken
place, also made a computation of the award, is understandable in light of Section 3, Rule VIII of the
then NLRC Rules of Procedure which requires that a computation be made. This Section in part
states:
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[T]he Labor Arbiter of origin, in cases involving monetary awards and at all events, as far as
practicable, shall embody in any such decision or order the detailed and full amount awarded.
Clearly implied from this original computation is its currency up to the finality of the labor arbiters
decision. As we noted above, this implication is apparent from the terms of the computation itself,
and no question would have arisen had the parties terminated the case and implemented the
decision at that point.
However, the petitioner disagreed with the labor arbiters findings on all counts i.e., on the finding
of illegality as well as on all the consequent awards made. Hence, the petitioner appealed the case
to the NLRC which, in turn, affirmed the labor arbiters decision. By law, the NLRC decision is final,
reviewable only by the CA on jurisdictional grounds.
The petitioner appropriately sought to nullify the NLRC decision on jurisdictional grounds through a
timely filed Rule 65 petition for certiorari. The CA decision, finding that NLRC exceeded its authority
in affirming the payment of 13th month pay and indemnity, lapsed to finality and was subsequently
returned to the labor arbiter of origin for execution.
It was at this point that the present case arose. Focusing on the core illegal dismissal portion of the
original labor arbiters decision, the implementing labor arbiter ordered the award re-computed; he
apparently read the figures originally ordered to be paid to be the computation due had the case
been terminated and implemented at the labor arbiters level. Thus, the labor arbiter re-computed the
award to include the separation pay and the backwages due up to the finality of the CA decision that
fully terminated the case on the merits. Unfortunately, the labor arbiters approved computation went
beyond the finality of the CA decision (July 29, 2003) and included as well the payment for awards
the final CA decision had deleted specifically, the proportionate 13th month pay and the indemnity
awards. Hence, the CA issued the decision now questioned in the present petition.
We see no error in the CA decision confirming that a re-computation is necessary as it essentially
considered the labor arbiters original decision in accordance with its basic component parts as we
discussed above. To reiterate, the first part contains the finding of illegality and its monetary
consequences; the second part is the computation of the awards or monetary consequences of the
illegal dismissal, computed as of the time of the labor arbiters original decision.
Consequently, from the above disquisitions, under the terms of the decision which is sought to be
executed by the petitioner, no essential change is made by a recomputation as this step is a
necessary consequence that flows from the nature of the illegality of dismissal declared by the Labor
Arbiter in that decision. A recomputation (or an original computation, if no previous computation has
been made) is a part of the law specifically, Article 279 of the Labor Code and the established
jurisprudence on this provision that is read into the decision. By the nature of an illegal dismissal
case, the reliefs continue to add up until full satisfaction, as expressed under Article 279 of the Labor
Code. The recomputation of the consequences of illegal dismissal upon execution of the decision
does not constitute an alteration or amendment of the final decision being implemented. The illegal
dismissal ruling stands; only the computation of monetary consequences of this dismissal is
affected, and this is not a violation of the principle of immutability of final judgments.
That the amount respondents shall now pay has greatly increased is a consequence that it cannot
avoid as it is the risk that it ran when it continued to seek recourses against the Labor Arbiters
decision. Article 279 provides for the consequences of illegal dismissal in no uncertain terms,
qualified only by jurisprudence in its interpretation of when separation pay in lieu of reinstatement is
allowed. When that happens, the finality of the illegal dismissal decision becomes the reckoning
point instead of the reinstatement that the law decrees. In allowing separation pay, the final decision
effectively declares that the employment relationship ended so that separation pay and backwages
are to be computed up to that point.
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Finally, anent the payment of legal interest. In the landmark case of Eastern Shipping Lines, Inc. v.
Court of Appeals, the Court laid down the guidelines regarding the manner of computing legal
interest, to wit:
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the
Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on
the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or
until the demand can be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate
of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.
Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No.
796 dated May 16, 2013, approved the amendment of Section 2 of Circular No. 905, Series of 1982
and, accordingly, issued Circular No. 799, Series of 2013, effective July 1, 2013, the pertinent
portion of which reads:
The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following revisions
governing the rate of interest in the absence of stipulation in loan contracts, thereby amending
Section 2 of Circular No. 905, Series of 1982:
Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and the
rate allowed in judgments, in the absence of an express contract as to such rate of interest, shall be
six percent (6%) per annum.
Section 2. In view of the above, Subsection X305.1 of the Manual of Regulations for Banks and
Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank Financial
Institutions are hereby amended accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that
would govern the parties, the rate of legal interest for loans or forbearance of any money, goods or
credits and the rate allowed in judgments shall no longer be twelve percent (12%) per annum as
reflected in the case of Eastern Shipping Lines and Subsection X305.1 of the Manual of
Regulations for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for
Non-Bank Financial Institutions, before its amendment by BSP-MB Circular No. 799 but will now
be six percent (6%) per annum effective July 1, 2013. It should be noted, nonetheless, that the new
rate could only be applied prospectively and not retroactively. Consequently, the twelve percent
32

33

34

35

36

37

38

39

40

13

(12%) per annum legal interest shall apply only until June 30, 2013. Come July 1, 2013 the new rate
of six percent (6%) per annum shall be the prevailing rate of interest when applicable.
Corollarily, in the recent case of Advocates for Truth in Lending, Inc. and Eduardo B. Olaguer v.
Bangko Sentral Monetary Board, this Court affirmed the authority of the BSP-MB to set interest
rates and to issue and enforce Circulars when it ruled that the BSP-MB may prescribe the maximum
rate or rates of interest for all loans or renewals thereof or the forbearance of any money, goods or
credits, including those for loans of low priority such as consumer loans, as well as such loans made
by pawnshops, finance companies and similar credit institutions. It even authorizes the BSP-MB to
prescribe different maximum rate or rates for different types of borrowings, including deposits and
deposit substitutes, or loans of financial intermediaries.
Nonetheless, with regard to those judgments that have become final and executory prior to July 1,
2013, said judgments shall not be disturbed and shall continue to be implemented applying the rate
of interest fixed therein.
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern
Shipping Lines are accordingly modified to embody BSP-MB Circular No. 799, as
follows:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasidelicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII
on Damages of the Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
41

42

1.

When the obligation is breached, and it consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 6% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

2.

When an obligation, not constituting a loan or forbearance of money, is breached, an

interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6%
per annum. No interest, however, shall be adjudged on unliquidated claims or damages, except when or until
the demand can be established with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially
(Art. 1169, Civil Code), but when such certainty cannot be so reasonably established at the time the demand
is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual base for the

3.

computation of legal interest shall, in any case, be on the amount finally adjudged.
When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be
6% per annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.

And, in addition to the above, judgments that have become final and executory prior to July 1, 2013,
shall not be disturbed and shall continue to be implemented applying the rate of interest fixed
therein.
WHEREFORE, premises considered, the Decision dated September 23, 2008 of the Court of
Appeals in CA-G.R. SP No. 98591, and the Resolution dated October 9, 2009 are REVERSED and
SET ASIDE. Respondents are Ordered to Pay petitioner:
(1) backwages computed from the time petitioner was illegally dismissed on January 24, 1997 up to
May 27, 2002, when the Resolution of this Court in G.R. No. 151332 became final and executory;

14

(2) separation pay computed from August 1990 up to May 27, 2002 at the rate of one month pay per
year of service; and
(3) interest of twelve percent (12%) per annum of the total monetary awards, computed from May
27, 2002 to June 30, 2013 and six percent (6%) per annum from July 1, 2013 until their full
satisfaction.
The Labor Arbiter is hereby ORDERED to make another recomputation of the total monetary
benefits awarded and due to petitioner in accordance with this Decision.
SO ORDERED.

SECOND DIVISION

FILINVEST LAND, INC.,

P e t i t i o n e r,

- versus -

HON. COURT OF APPEALS, PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY,

and PACIFIC EQUIPMENT CORPORATION,
15

R e s p o n d e n t s.

G.R. No.138980

Present:

PUNO,
Chairman,
AUSTRIA-MARTINEZ,
CALLEJO, SR.,
TINGA and
CHICO-NAZARIO, JJ.

Promulgated:

September 20, 2005

x--------------------------------------------------x
16

DECISION

CHICO-NAZARIO, J.:
This is a petition for review on certiorari of the Decision[1] of the Court of Appeals
dated 27 May 1999 affirming the dismissal by the Regional Trial Court of Makati,
Branch 65,[2] of the complaint for damages filed by Filinvest Land, Inc. (Filinvest)
against herein private respondents Pacific Equipment Corporation (Pecorp) and
Philippine American General Insurance Company.

The essential facts of the case, as recounted by the trial court, are as follows:

On 26 April 1978, Filinvest Land, Inc. (FILINVEST, for brevity), a corporation

engaged in the development and sale of residential subdivisions, awarded to
defendant Pacific Equipment Corporation (PACIFIC, for brevity) the development of
its residential subdivisions consisting of two (2) parcels of land located at Payatas,
Quezon City, the terms and conditions of which are contained in an Agreement.
(Annex A, Complaint). To guarantee its faithful compliance and pursuant to the
agreement, defendant Pacific posted two (2) Surety Bonds in favor of plaintiff which
were issued by defendant Philippine American General Insurance (PHILAMGEN, for
brevity). (Annexes B and C, Complaint).

Notwithstanding three extensions granted by plaintiff to defendant Pacific, the latter

failed to finish the contracted works. (Annexes G, I and K, Complaint). On 16
October 1979, plaintiff wrote defendant Pacific advising the latter of its intention to
takeover the project and to hold said defendant liable for all damages which it had
incurred and will incur to finish the project. (Annex L, Complaint).

On 26 October 1979, plaintiff submitted its claim against defendant Philamgen

under its performance and guarantee bond (Annex M, Complaint) but Philamgen
refused to acknowledge its liability for the simple reason that its principal,
defendant Pacific, refused to acknowledge liability therefore. Hence, this action.

In defense, defendant Pacific claims that its failure to finish the contracted work was
due to inclement weather and the fact that several items of finished work and
change order which plaintiff refused to accept and pay for caused the disruption of
work. Since the contractual relation between plaintiff and defendant Pacific created
a reciprocal obligation, the failure of the plaintiff to pay its progressing bills estops it
17

from demanding fulfillment of what is incumbent upon defendant Pacific. The

acquiescence by plaintiff in granting three extensions to defendant Pacific is
likewise a waiver of the formers right to claim any damages for the delay. Further,
the unilateral and voluntary action of plaintiff in preventing defendant Pacific from
completing the work has relieved the latter from the obligation of completing the
same.

On the other hand, Philamgen contends that the various amendments made on the
principal contract and the deviations in the implementation thereof which were
resorted to by plaintiff and co-defendant Pacific without its (defendant Philamgens)
written consent thereto, have automatically released the latter from any or all
liability within the purview and contemplation of the coverage of the surety bonds it
has issued. Upon agreement of the parties to appoint a commissioner to assist the
court in resolving the issues confronting the parties, on 7 July 1981, an order was
issued by then Presiding Judge Segundo M. Zosa naming Architect Antonio
Dimalanta as Court Commissioner from among the nominees submitted by the
parties to conduct an ocular inspection and to determine the amount of work
accomplished by the defendant Pacific and the amount of work done by plaintiff to
complete the project.

On 28 November 1984, the Court received the findings made by the Court
Commissioner. In arriving at his findings, the Commissioner used the construction
documents pertaining to the project as basis. According to him, no better basis in
the work done or undone could be made other than the contract billings and
payments made by both parties as there was no proper procedure followed in
terminating the contract, lack of inventory of work accomplished, absence of
appropriate record of work progress (logbook) and inadequate documentation and
system of construction management.

Based on the billings of defendant Pacific and the payments made by plaintiff, the
work accomplished by the former amounted to P11,788,282.40 with the exception
of the last billing (which was not acted upon or processed by plaintiff) in the amount
of P844,396.42. The total amount of work left to be accomplished by plaintiff was
based on the original contract amount less value of work accomplished by
defendant Pacific in the amount of P681,717.58 (12,470,000-11,788,282.42).

As regards the alleged repairs made by plaintiff on the construction deficiencies, the
Court Commissioner found no sufficient basis to justify the same. On the other
hand, he found the additional work done by defendant Pacific in the amount of
P477,000.00 to be in order.

18

On 01 April 1985, plaintiff filed its objections to the Commissioners Resolution on

the following grounds:

a)
Failure of the commissioner to conduct a joint survey which according
to the latter is indispensable to arrive at an equitable and fair resolution of the
issues between the parties;

b)
The cost estimates of the commissioner were based on pure
conjectures and contrary to the evidence; and,

c)
The commissioner made conclusions of law which were beyond his
assignment or capabilities.

In its comment, defendant Pacific alleged that the failure to conduct joint survey
was due to plaintiffs refusal to cooperate. In fact, it was defendant Pacific who
initiated the idea of conducting a joint survey and inventory dating back 27
November 1983. And even assuming that a joint survey were conducted, it would
have been an exercise in futility because all physical traces of the actual conditions
then obtaining at the time relevant to the case had already been obliterated by
plaintiff.

On 15 August 1990, a Motion for Judgment Based on the Commissioners Resolution

was filed by defendant Pacific.

On 11 October 1990, plaintiff filed its opposition thereto which was but a rehash of
objections to the commissioners report earlier filed by said plaintiff.[3]

On the basis of the commissioners report, the trial court dismissed Filinvests
complaint as well as Pecorps counterclaim. It held:

In resolving this case, the court observes that the appointment of a Commissioner
was a joint undertaking among the parties. The findings of facts of the
Commissioner should therefore not only be conclusive but final among the parties.
The court therefore agrees with the commissioners findings with respect to
19

1.

Cost to repair deficiency or defect P532,324.02

2.

Unpaid balance of work done by defendant - P1,939,191.67

3.

Additional work/change order (due to defendant) P475,000.00

The unpaid balance due defendant therefore is P1,939,191.67. To this amount

should be added additional work performed by defendant at plaintiffs instance in
the sum of P475,000.00. And from this total of P2,414,191.67 should be deducted
the sum of P532,324.01 which is the cost to repair the deficiency or defect in the
work done by defendant. The commissioner arrived at the figure of P532,324.01 by
getting the average between plaintiffs claim of P758,080.37 and defendants
allegation of P306,567.67. The amount due to defendant per the commissioners
report is therefore P1,881,867.66.

Although the said amount of P1,881,867.66 would be owing to defendant Pacific,

the fact remains that said defendant was in delay since April 25, 1979. The third
extension agreement of September 15, 1979 is very clear in this regard. The
pertinent paragraphs read:

a)
You will complete all the unfinished works not later than Oct. 15, 1979. It is
agreed and understood that this date shall DEFINITELY be the LAST and FINAL
extension & there will be no further extension for any cause whatsoever.

b)
We are willing to waive all penalties for delay which have accrued since April
25, 1979 provided that you are able to finish all the items of the contracted works
as per revised CPM; otherwise you shall continue to be liable to pay the penalty up
to the time that all the contracted works shall have been actually finished, in
addition to other damages which we may suffer by reason of the delays incurred.

Defendant Pacific therefore became liable for delay when it did not finish the project
on the date agreed on October 15, 1979. The court however, finds the claim of
P3,990,000.00 in the form of penalty by reason of delay (P15,000.00/day from April
25, 1979 to Jan. 15, 1980) to be excessive. A forfeiture of the amount due
defendant from plaintiff appears to be a reasonable penalty for the delay in finishing
the project considering the amount of work already performed and the fact that
plaintiff consented to three prior extensions.

20

The foregoing considered, this case is dismissed. The counterclaim is

likewise dismissed.

No Costs.[4]

The Court of Appeals, finding no reversible error in the appealed decision, affirmed
the same.

Hence, the instant petition grounded solely on the issue of whether or not the
liquidated damages agreed upon by the parties should be reduced considering that:
(a) time is of the essence of the contract; (b) the liquidated damages was fixed by
the parties to serve not only as penalty in case Pecorp fails to fulfill its obligation on
time, but also as indemnity for actual and anticipated damages which Filinvest may
suffer by reason of such failure; and (c) the total liquidated damages sought is only
32% of the total contract price, and the same was freely and voluntarily agreed
upon by the parties.

At the outset, it should be stressed that as only the issue of liquidated damages has
been elevated to this Court, petitioner Filinvest is deemed to have acquiesced to the
other matters taken up by the courts below. Section 1, Rule 45 of the 1997 Rules of
Court states in no uncertain terms that this Courts jurisdiction in petitions for
review on certiorari is limited to questions of law which must be distinctly set
forth.[5] By assigning only one legal issue, Filinvest has effectively cordoned off
any discussion into the factual issue raised before the Court of Appeals.[6] In effect,
Filinvest has yielded to the decision of the Court of Appeals, affirming that of the
trial court, in deferring to the factual findings of the commissioner assigned to the
parties case. Besides, as a general rule, factual matters cannot be raised in a
petition for review on certiorari. This Court at this stage is limited to reviewing
errors of law that may have been committed by the lower courts.[7] We do not
perceive here any of the exceptions to this rule; hence, we are restrained from
conducting further scrutiny of the findings of fact made by the trial court which
have been affirmed by the Court of Appeals. Verily, factual findings of the trial
court, especially when affirmed by the Court of Appeals, are binding and conclusive
on the Supreme Court.[8] Thus, it is settled that:

(a) Based on Pecorps billings and the payments made by Filinvest, the balance of
work to be accomplished by Pecorp amounts to P681,717.58 representing 5.47% of
21

the contract work. This means to say that Pecorp, at the time of the termination of
its contract, accomplished 94.53% of the contract work;

(b) The unpaid balance of work done by Pecorp amounts to P1,939,191.67;

(c) The additional work/change order due Pecorp amounts to P475,000.00;

(d) The cost to repair deficiency or defect, which is for the account of Pecorp, is
P532,324.02; and

(e) The total amount due Pecorp is P1,881,867.66.

Coming now to the main matter, Filinvest argues that the penalty in its
entirety should be respected as it was a product of mutual agreement and it
represents only 32% of the P12,470,000.00 contract price, thus, not shocking and
unconscionable under the circumstances. Moreover, the penalty was fixed to
provide for actual or anticipated liquidated damages and not simply to ensure
compliance with the terms of the contract; hence, pursuant to Laureano v. Kilayco,
[9] courts should be slow in exercising the authority conferred by Art. 1229 of the
Civil Code.

We are not swayed.

There is no question that the penalty of P15,000.00 per day of delay was mutually
agreed upon by the parties and that the same is sanctioned by law. A penal clause
is an accessory undertaking to assume greater liability in case of breach.[10] It is
attached to an obligation in order to insure performance[11] 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.
[12] Article 1226 of the Civil Code states:

Art. 1226.
In obligations with a penal clause, the penalty shall substitute the
indemnity for damages and the payment of interests in case of noncompliance, if
there is no stipulation to the contrary. Nevertheless, damages shall be paid if the
22

obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the
obligation.

The penalty may be enforced only when it is demandable in accordance with the
provisions of this Code.

As a general rule, courts are not at liberty to ignore the freedom of the parties to
agree on such terms and conditions as they see fit as long as they are not contrary
to law, morals, good customs, public order or public policy.[13] Nevertheless, courts
may equitably reduce a stipulated penalty in the contract in two instances: (1) if the
principal obligation has been partly or irregularly complied; and (2) even if there has
been no compliance if the penalty is iniquitous or unconscionable in accordance
with Article 1229 of the Civil Code which 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.

In herein case, the trial court ruled that the penalty charge for delay pegged at
P15,000.00 per day of delay in the aggregate amount of P3,990,000.00 -- was
excessive and accordingly reduced it to P1,881,867.66 considering the amount of
work already performed and the fact that [Filinvest] consented to three (3) prior
extensions. The Court of Appeals affirmed the ruling but added as well that the
penalty was unconscionable as the construction was already not far from
completion. Said the Court of Appeals:

Turning now to plaintiffs appeal, We likewise agree with the trial court that a
penalty interest of P15,000.00 per day of delay as liquidated damages or
P3,990,000.00 (representing 32% penalty of the P12,470,000.00 contract price) is
unconscionable considering that the construction was already not far from
completion. Penalty interests are in the nature of liquidated damages and may be
equitably reduced by the courts if they are iniquitous or unconscionable (Garcia v.
Court of Appeals, 167 SCRA 815, Lambert v. Fox, 26 Phil. 588). The judge shall
23

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 (Art.
1229, New Civil Code). Moreover, plaintiffs right to indemnity due to defendants
delay has been cancelled by its obligations to the latter consisting of unpaid works.

This Court finds no fault in the cost estimates of the court-appointed commissioner
as to the cost to repair deficiency or defect in the works which was based on the
average between plaintiffs claim of P758,080.37 and defendants P306,567.67
considering the following factors: that plaintiff did not follow the standard practice
of joint survey upon take over to establish work already accomplished, balance of
work per contract still to be done, and estimate and inventory of repair (Exhibit
H). As for the cost to finish the remaining works, plaintiffs estimates were
brushed aside by the commissioner on the reasoned observation that plaintiffs
cost estimate for work (to be) done by the plaintiff to complete the project is based
on a contract awarded to another contractor (JPT), the nature and magnitude of
which appears to be inconsistent with the basic contract between defendant
PECORP and plaintiff FILINVEST.[14]

We are hamstrung to reverse the Court of Appeals as it is rudimentary that the

application of Article 1229 is essentially addressed to the sound discretion of the
court.[15] As it is settled that the project was already 94.53% complete and that
Filinvest did agree to extend the period for completion of the project, which
extensions Filinvest included in computing the amount of the penalty, the reduction
thereof is clearly warranted.

Filinvest, however, hammers on the case of Laureano v. Kilayco,[16] decided in

1915, which cautions courts to distinguish between two kinds of penalty clauses in
order to better apply their authority in reducing the amount recoverable. We held
therein that:

. . . [I]n any case wherein there has been a partial or irregular compliance with the
provisions in a contract for special indemnification in the event of failure to comply
with its terms, courts will rigidly apply the doctrine of strict construction against the
enforcement in its entirety of the indemnification, where it is clear from the terms of
the contract that the amount or character of the indemnity is fixed without regard to
the probable damages which might be anticipated as a result of a breach of the
terms of the contract; or, in other words, where the indemnity provided for is
essentially a mere penalty having for its principal object the enforcement of
24

compliance with the contract. But the courts will be slow in exercising the
jurisdiction conferred upon them in article 1154[17] so as to modify the terms of an
agreed upon indemnification where it appears that in fixing such indemnification the
parties had in mind a fair and reasonable compensation for actual damages
anticipated as a result of a breach of the contract, or, in other words, where the
principal purpose of the indemnification agreed upon appears to have been to
provide for the payment of actual anticipated and liquidated damages rather than
the penalization of a breach of the contract. (Emphases supplied)

Filinvest contends that the subject penalty clause falls under the second type, i.e.,
the principal purpose for its inclusion was to provide for payment of actual
anticipated and liquidated damages rather than the penalization of a breach of the
contract. Thus, Filinvest argues that had Pecorp completed the project on time, it
(Filinvest) could have sold the lots sooner and earned its projected income that
would have been used for its other projects.

Unfortunately for Filinvest, the above-quoted doctrine is inapplicable to herein

case. The Supreme Court in Laureano instructed that a distinction between a
penalty clause imposed essentially as penalty in case of breach and a penalty
clause imposed as indemnity for damages should be made in cases where there has
been neither partial nor irregular compliance with the terms of the contract. In
cases where there has been partial or irregular compliance, as in this case, there
will be no substantial difference between a penalty and liquidated damages insofar
as legal results are concerned.[18] The distinction is thus more apparent than real
especially in the light of certain provisions of the Civil Code of the Philippines which
provides in Articles 2226 and Article 2227 thereof:

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.

25

Thus, we lamented in one case that (t)here is no justification for the Civil
Code to make an apparent distinction between a penalty and liquidated damages
because the settled rule is that there is no difference between penalty and
liquidated damages insofar as legal results are concerned and that either may be
recovered without the necessity of proving actual damages and both may be
reduced when proper.[19]

Finally, Filinvest advances the argument that while it may be true that courts
may mitigate the amount of liquidated damages agreed upon by the parties on the
basis of the extent of the work done, this contemplates a situation where the full
amount of damages is payable in case of total breach of contract. In the instant
case, as the penalty clause was agreed upon to answer for delay in the completion
of the project considering that time is of the essence, the parties thus clearly
contemplated the payment of accumulated liquidated damages despite, and
precisely because of, partial performance.[20] In effect, it is Filinvests position
that the first part of Article 1229 on partial performance should not apply precisely
because, in all likelihood, the penalty clause would kick in in situations where Pecorp
had already begun work but could not finish it on time, thus, it is being penalized for
delay in its completion.

The above argument, albeit sound,[21] is insufficient to reverse the ruling of

the Court of Appeals. It must be remembered that the Court of Appeals not only
held that the penalty should be reduced because there was partial compliance but
categorically stated as well that the penalty was unconscionable. Otherwise stated,
the Court of Appeals affirmed the reduction of the penalty not simply because there
was partial compliance per se on the part of Pecorp with what was incumbent upon
it but, more fundamentally, because it deemed the penalty unconscionable in the
light of Pecorps 94.53% completion rate.

In Ligutan v. Court of Appeals,[22] we pointed out that the question of whether a

penalty is reasonable or iniquitous can be partly subjective and partly objective as
its resolution would depend on such factors as, but not necessarily confined to, the
type, extent and purpose of the penalty, the nature of the obligation, the mode of
breach and its consequences, the supervening realities, the standing and
relationship of the parties, and the like, the application of which, by and large, is
addressed to the sound discretion of the court.[23]

In herein case, there has been substantial compliance in good faith on the
part of Pecorp which renders unconscionable the application of the full force of the
penalty especially if we consider that in 1979 the amount of P15,000.00 as penalty
for delay per day was quite steep indeed. Nothing in the records suggests that
Pecorps delay in the performance of 5.47% of the contract was due to it having
26

acted negligently or in bad faith. Finally, we factor in the fact that Filinvest is not
free of blame either as it likewise failed to do that which was incumbent upon it, i.e.,
it failed to pay Pecorp for work actually performed by the latter in the total amount
of P1,881,867.66. Thus, all things considered, we find no reversible error in the
Court of Appeals exercise of discretion in the instant case.

Before we write finis to this legal contest that had spanned across two and a half
decades, we take note of Pecorps own grievance. From its Comment and
Memorandum, Pecorp, likewise, seeks affirmative relief from this Court by praying
that not only should the instant case be dismissed for lack of merit, but that
Filinvest should likewise be made to pay what the Court Commissioner found was
due defendant in the total amount of P2,976,663.65 plus 12% interest from 1979
until full payment thereof plus attorneys fees.[24] Pecorp, however, cannot
recover that which it seeks as we had already denied, in a Resolution dated 21 June
2000, its own petition for review of the 27 May 1999 decision of the Court of
Appeals. Thus, as far as Pecorp is concerned, the ruling of the Court of Appeals has
already attained finality and can no longer be disturbed.

WHEREFORE, premises considered, the Decision of the Court of Appeals dated 27

May 1999 is AFFIRMED. No pronouncement as to costs.

SO ORDERED.

27

28