FIRST DIVISION

[G.R. No. 160533. January 12, 2005.]

FIRST FIL-SIN LENDING CORPORATION, petitioner, vs.
GLORIA D. PADILLO, respondent.

DECISION

YNARES-SANTIAGO, J :
p

Before us is a petition for review under Rule 45 of the Rules of Court, seeking a reversal
of the Court of Appeals' decision in CA-G.R. CV No. 75183 1 dated October 16, 2003,
which reversed and set aside the decision of the Regional Trial Court of Manila, Branch
21 in Civil Case No. 00-96235.
On July 22, 1997, respondent Gloria D. Padillo obtained a P500,000.00 loan from
petitioner First Fil-Sin Lending Corp. On September 7, 1997, respondent obtained
another P500,000.00 loan from petitioner. In both instances, respondent executed a
promissory note and disclosure statement. 2
For the first loan, respondent made 13 monthly interest payments of P22,500.00 each
before she settled the P500,000.00 outstanding principal obligation on February 2, 1999.
As regards the second loan, respondent made 11 monthly interest payments of
P25,000.00 each before paying the principal loan of P500,000.00 on February 2, 1999. 3
In sum, respondent paid a total of P792,500.00 for the first loan and P775,000.00 for the
second loan.
DAETcC

On January 27, 2000, respondent filed an action for sum of money against herein
petitioner before the Regional Trial Court of Manila. Alleging that she only agreed to pay
interest at the rates of 4.5% and 5% per annum, respectively, for the two loans, and not
4.5% and 5% per month, respondent sought to recover the amounts she allegedly paid in
excess of her actual obligations.
2005cdjur

On October 12, 2001, 4 the trial court dismissed respondent's complaint, and on the
counterclaim, ordered her to pay petitioner P311,125.00 with legal interest from February
3, 1999 until fully paid plus 10% of the amount due as attorney's fees and costs of the
suit. 5 The trial court ruled that by issuing checks representing interest payments at 4.5%

and 5% monthly interest rates, respondent is now estopped from questioning the
provisions of the promissory notes.
On appeal, the Court of Appeals (CA) reversed and set aside the decision of the court a
quo, the dispositive portion of which reads:
IN VIEW OF ALL THE FOREGOING, the appealed decision is REVERSED
and SET ASIDE and a new one entered: (1) ordering First Fil-Sin Lending
Corporation to return the amount of P114,000.00 to Gloria D. Padillo, and (2)
deleting the award of attorney's fees in favor of appellee. Other claims and
counterclaims are dismissed for lack of sufficient causes. No pronouncement as
to cost.
SO ORDERED. 6

The appellate court ruled that, based on the disclosure statements executed by respondent,
the interest rates should be imposed on a monthly basis but only for the 3-month term of
the loan. Thereafter, the legal interest rate will apply. The CA also found the penalty
charges pegged at 1% per day of delay highly unconscionable as it would translate to
365% per annum. Thus, it was reduced to 1% per month or 12% per annum.
aIcSED

Hence, the instant petition on the following assignment of errors:

I
THE COURT OF APPEALS ERRED IN FINDING THAT THE
APPLICABLE INTEREST SHOULD BE THE LEGAL INTEREST OF
TWELVE PER CENT (12%) PER ANNUM DESPITE THE CLEAR
AGREEMENT OF THE PARTIES ON ANOTHER APPLICABLE RATE.
II
THE COURT OF APPEALS ERRED IN IMPOSING A PENALTY
COMPUTED AT THE RATE OF TWELVE PER CENT (12%) PER ANNUM
DESPITE THE CLEAR AGREEMENT OF THE PARTIES ON ANOTHER
APPLICABLE RATE.
III
THE COURT OF APPEALS ERRED IN DELETING THE ATTORNEY'S
FEES AWARDED BY THE REGIONAL TRIAL COURT. 7

Petitioner maintains that the trial court and the CA are correct in ruling that the interest
rates are to be imposed on a monthly and not on a per annum basis. However, it insists

that the 4.5% and 5% monthly interest shall be imposed until the outstanding obligations
have been fully paid.
aATESD

As to the penalty charges, petitioner argues that the 12% per annum penalty imposed by
the CA in lieu of the 1% per day as agreed upon by the parties violates their freedom to
stipulate terms and conditions as they may deem proper.
Petitioner finally contends that the CA erred in deleting the trial court's award of
attorney's fees arguing that the same is anchored on sound and legal ground.
Respondent, on the other hand, avers that the interest on the loans is per annum as
expressly stated in the promissory notes and disclosure statements. The provision as to
annual interest rate is clear and requires no room for interpretation. Respondent asserts
that any ambiguity in the promissory notes and disclosure statements should not favor
petitioner since the loan documents were prepared by the latter.
We agree with respondent.

CIaDTE

Perusal of the promissory notes and the disclosure statements pertinent to the July 22,
1997 and September 7, 1997 loan obligations of respondent clearly and unambiguously
provide for interest rates of 4.5% per annum and 5% per annum, respectively. Nowhere
was it stated that the interest rates shall be applied on a monthly basis.
Thus, when the terms of the agreement are clear and explicit that they do not justify an
attempt to read into it any alleged intention of the parties, the terms are to be understood
literally just as they appear on the face of the contract. 8 It is only in instances when the
language of a contract is ambiguous or obscure that courts ought to apply certain
established rules of construction in order to ascertain the supposed intent of the parties.
However, these rules will not be used to make a new contract for the parties or to rewrite
the old one, even if the contract is inequitable or harsh. They are applied by the court
merely to resolve doubts and ambiguities within the framework of the agreement. 9
The lower court and the CA mistook the Loan Transactions Summary for the Disclosure
Statement. The former was prepared exclusively by petitioner and merely summarizes the
payments made by respondent and the income earned by petitioner. There was no
mention of any interest rates and having been prepared exclusively by petitioner, the
same is self serving. On the contrary, the Disclosure Statements were signed by both
parties and categorically stated that interest rates were to be imposed annually, not
monthly.
As such, since the terms and conditions contained in the promissory notes and disclosure
statements are clear and unambiguous, the same must be given full force and effect. The
expressed intention of the parties as laid down on the loan documents controls.

Also, reformation cannot be resorted to as the documents have not been assailed on the
ground of mutual mistake. When a party sues on a written contract and no attempt is
made to show any vice therein, he cannot be allowed to lay claim for more than what its
clear stipulations accord. His omission cannot be arbitrarily supplied by the courts by
what their own notions of justice or equity may dictate. 10
Notably, petitioner even admitted that it was solely responsible for the preparation of the
loan documents, and that it failed to correct the pro forma note "p.a." to "per month". 11
Since the mistake is exclusively attributed to petitioner, the same should be charged
against it. This unilateral mistake cannot be taken against respondent who merely affixed
her signature on the pro forma loan agreements. As between two parties to a written
agreement, the party who gave rise to the mistake or error in the provisions of the same is
estopped from asserting a contrary intention to that contained therein. The checks issued
by respondent do not clearly and convincingly prove that the real intent of the parties is to
apply the interest rates on a monthly basis. Absent any proof of vice of consent, the
promissory notes and disclosure statements remain the best evidence to ascertain the real
intent of the parties.
ATESCc

The same promissory note provides that ". . . any and all remaining amount due on the
principal upon maturity hereof shall earn interest at the rate of _____ from date of
maturity until fully paid." The CA thus properly imposed the legal interest of 12% per
annum from the time the loans matured until the same has been fully paid on February 2,
1999. As decreed in Eastern Shipping Lines, Inc. v. Court of Appeals, 12 "in the absence
of stipulation, the rate of interest shall be 12% per annum to be computed from default."
As regards the penalty charges, we agree with the CA in ruling that the 1% penalty per
day of delay is highly unconscionable. Applying Article 1229 of the Civil Code, courts
shall equitably reduce the penalty when the principal obligation has been partly or
irregularly complied with, or if it is iniquitous or unconscionable.
With regard to the attorney's fees, the CA correctly deleted the award in favor of
petitioner since the trial court's decision does not reveal any explicit basis for such an
award. Attorney's fees are not automatically awarded to every winning litigant. It must be
shown that any of the instances enumerated under Art. 2208 13 of the Civil Code exists
to justify the award thereof. 14 Not one of such instances exists here. Besides, by filing
the complaint, respondent was merely asserting her rights which, after due deliberations,
proved to be lawful, proper and valid.
WHEREFORE, in view of the foregoing, the October 16, 2003 decision of the Court of
Appeals in CA-G.R. CV No. 75183 is AFFIRMED with the MODIFICATION that the
interest rates on the July 22, 1997 and September 7, 1997 loan obligations of respondent
Gloria D. Padillo from petitioner First Fil-Sin Lending Corporation be imposed and
computed on a per annum basis, and upon their respective maturities, the interest rate of

12% per annum shall be imposed until full payment. In addition, the penalty at the rate of
12% per annum shall be imposed on the outstanding obligations from date of default until
full payment.
IHaCDE

SO ORDERED.
Davide, Jr., C.J., Quisumbing, Carpio and Azcuna, JJ., concur.
(First Fil-Sin Lending Corp. v. Padillo, G.R. No. 160533, [January 12, 2005], 489 PHIL
64-72)
|||

SECOND DIVISION
[G.R. No. 138980. September 20, 2005.]
FILINVEST LAND, INC., petitioner, vs. HON. COURT OF
APPEALS, PHILIPPINE AMERICAN GENERAL INSURANCE
COMPANY, and PACIFIC EQUIPMENT CORPORATION,
respondents.
Buag Kapunan Migallos & Perez for petitioner.
Arturo D. Vallar and Antonio C. Pesigan for Pacific Equipment Corp.
Reloj Law Office for Phil. American Gen. Ins. Co.
SYLLABUS
1. REMEDIAL LAW; CIVIL PROCEDURE; APPEALS; PETITION FOR REVIEW ON
CERTIORARI UNDER RULE 45 OF THE RULES OF COURT; LIMITED TO
REVIEW OF QUESTIONS OF LAW; CASE AT BAR. Section 1, Rule 45 of the
1997 Rules of Court states in no uncertain terms that this Court's jurisdiction in petitions
for review on certiorari is limited to "questions of law which must be distinctly set forth."
By assigning only one legal issue, Filinvest has effectively cordoned off any discussion
into the factual issue raised before the Court of Appeals. 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. 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.
2. CIVIL LAW; OBLIGATIONS AND CONTRACTS; OBLIGATIONS WITH A
PENAL CLAUSE; PENAL CLAUSE; FUNCTIONS. A penal clause is an accessory
undertaking to assume greater liability in case of breach. It is attached to an obligation in
order to insure performance and has a double function: (1) to provide for liquidated
damages, and (2) to strengthen the coercive force of the obligation by the threat of greater
responsibility in the event of breach. 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 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."
3. ID.; ID.; ID.; PENALTY, WHEN MAY BE EQUITABLY REDUCED BY COURTS.
As a general rule, courts are not at liberty to ignore the freedom of the parties to agree
on such terms and conditions as they see fit as long as they are not contrary to law,
morals, good customs, public order or public policy. Nevertheless, courts may equitably
reduce a stipulated penalty in the contract in two instances: (1) if the principal obligation
has been partly or irregularly complied; and (2) even if there has been no compliance if
the penalty is iniquitous or unconscionable in accordance with Article 1229 of the Civil
Code 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."
4. ID.; ID.; ID.; A DISTINCTION BETWEEN A PENALTY CLAUSE IMPOSED AS
PENALTY IN CASE OF BREACH AND A PENALTY CLAUSES IMPOSED AS
INDEMNITY FOR DAMAGES SHOULD BE MADE IN CASES WHERE THERE
HAVE BEEN NEITHER PARTIAL NOR IRREGULAR COMPLIANCE WITH THE
TERMS OF THE CONTRACT. 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. . . . 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."
5. ID.; ID.; ID.; FACTORS IN DETERMINING WHETHER A PENALTY IS
REASONABLE OR INIQUITOUS. In Ligutan v. Court of Appeals, 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."

DECISION

CHICO-NAZARIO, J :
p

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).
TADIHE

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 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 former's 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
Philamgen's) 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 (12,470,00011,788,282.42).
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.
On 01 April 1985, plaintiff filed its objections to the Commissioner's 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 plaintiff's 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 Commissioner's
Resolution was filed by defendant Pacific.
On 11 October 1990, plaintiff filed its opposition thereto which was but a
rehash of objections to the commissioner's report earlier filed by said plaintiff. 3

On the basis of the commissioner's report, the trial court dismissed Filinvest's complaint
as well as Pecorp's 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 commissioner's findings with
respect to
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 plaintiff's 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 plaintiff's claim of P758,080.37
and defendant's allegation of P306,567.67. The amount due to defendant per the
commissioner's 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.
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 Court's 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 Pecorp's 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 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 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 plaintiff's 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 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, plaintiff's right to

indemnity due to defendant's 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 plaintiff's claim of P758,080.37 and
defendant's 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, plaintiff's estimates were brushed aside by the commissioner
on the reasoned observation that "plaintiff's 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.
cCHETI

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 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.
ISHCcT

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 Filinvest's 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 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 Pecorp's 94.53% completion rate.
TaCDcE

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 Pecorp's delay in the performance of
5.47% of the contract was due to it having 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 Pecorp's 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.
Puno, Austria-Martinez, Callejo, Sr. and Tinga, JJ., concur.

(Filinvest Land Inc. v. Court of Appeals, G.R. No. 138980, [September 20, 2005], 507
PHIL 259-273)
|||

THIRD DIVISION
[G.R. No. 180458. July 30, 2009.]
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs.
FAMILY FOODS MANUFACTURING CO. LTD., and SPOUSES
JULIANCO and CATALINA CENTENO, respondent.

DECISION

NACHURA, J :
p

At bar is a petition for review on certiorari under Rule 45 of the Rules of Court
filed by petitioner Development Bank of the Philippines (DBP), challenging the May
11, 2007 Decision 1 and the October 24, 2007 Resolution 2 of the Court of Appeals
(CA) in CA-G.R. CV No. 81360.
On September 15, 1982, respondent Family Foods Manufacturing Co. Ltd.
(FAMILY FOODS), a partnership owned and operated by Spouses Julianco and
Catalina Centeno (spouses Centeno) obtained an industrial loan of P500,000.00 from
DBP. The loan was evidenced by a promissory note dated September 15, 1982 and
payable in seven (7) years, with quarterly amortizations of P31,760.40. The loan carried
an interest rate of 18% per annum, and penalty charge of 8% per annum. As security,
spouses Centeno executed a real estate mortgage on the parcels of land in Los Baos,
Laguna, covered by Transfer Certificate of Title (TCT) Nos. T-651217, T-96878 and
T-96689; and a chattel mortgage over the buildings, equipment and machineries therein,
in favor of DBP.
On October 14, 1984, FAMILY FOODS was granted an additional loan of
P440,000.00, payable on or before November 8, 1989, with interest at 22% per annum
and penalty charge of 8%. The loan was, likewise, secured by the same real estate and
chattel mortgages.
FAMILY FOODS failed to pay the loans when they became due. Demand to pay
was made, but it was not heeded. Accordingly, DBP filed a petition for extrajudicial
foreclosure of mortgage with the Office of the Clerk of Court of the Regional Trial
Court (RTC) of Laguna. A notice of sale, setting the auction sale on August 20, 1990,
was issued and was published in The Barangay on July 19, August 5 and August 12,
1990. As scheduled, the sale proceeded, and the properties were awarded to DBP as the
highest bidder. A certificate of sale was issued and was registered with the Register of
Deeds.

On January 10, 1991, before the redemption period expired, FAMILY FOODS
entered into a contract of lease over the foreclosed properties with DBP for agreed
monthly rentals of P12,000.00. Spouses Centeno paid P24,000.00 as advanced rentals,
but refused to pay the succeeding rentals. They, likewise, failed to redeem the
foreclosed properties; hence, DBP consolidated its title over the same.
DCaEAS

On March 3, 1994, spouses Centeno filed a suit for Annulment of Sale with
Prayer for Issuance of a Writ of Injunction and/or Restraining Order. 3 They admitted
obtaining loans in the amount of P940,000.00 from DBP, but claimed that they made
substantial payments amounting to P773,466.59. DBP, however, imposed interest and
other charges in excess of those provided in the promissory note and in the real estate
and chattel mortgages, thus, unnecessarily increasing their outstanding obligation.
Spouses Centeno further claimed that the foreclosure was void, because the notice of
public action was not published in a newspaper of general circulation, as required by
law. The Barangay, the newspaper where the notice of auction sale was published, they
asserted, was not a newspaper of general circulation in Laguna. The certificate of
posting issued by the Sheriff was, likewise, defective, as it was not in affidavit form or
under oath, as required by Act No. 3135. Finally, spouses Centeno prayed for the
issuance of a restraining order to enjoin DBP from taking possession of the property
pending adjudication of the case.
DBP filed its answer 4 asserting lack of cause of action, as a defense. It averred
that the foreclosure proceeding was valid and in accordance with law, arguing that it
was not flawed by lack of notice or publication. FAMILY FOODS and spouses Centeno
were duly notified of the scheduled auction sale. The notices of foreclosure sale were
posted and published, as required by law. DBP further averred that respondents were
estopped from questioning the foreclosure proceeding, because respondents already
entered into a contract of lease with DBP. In so doing, respondents acknowledged
DBP's ownership of the subject properties, thereby admitting the validity of the
foreclosure proceeding. It added that respondents, as tenants, could not deny the DPB's
title over the property, citing Sec. 4 (b), Rule 31 of the Rules of Court.
In due course and after hearing, the RTC rendered a decision 5 on January 30,
2003, dismissing the complaint. It rejected respondents' assertion that the notice of
auction sale was not published and posted, as required by law. It also sustained DBP's
argument that respondents are estopped from assailing the auction sale after the
execution of the contract of lease. Respondents' claim of payment was, likewise,
rejected for lack of factual and legal basis. Respondents filed a motion for
reconsideration, but the RTC denied the same. 6
Forthwith, respondents appealed to the Court of Appeals (CA). In its May 11,
2007 Decision, the appellate court modified the RTC decision. While upholding the
validity of the auction sale, the CA reduced the interest rates and penalty charges
stipulated in the two (2) promissory notes for being iniquitous and unconscionable. The
dispositive portion of the CA decision reads:

WHEREFORE, premises considered, the assailed January 30, 2003 Decision of

the Regional Trial Court of Calamba, Laguna, Branch 92, in Civil Case No. 208294-C, is hereby MODIFIED with respect to the penalty which is hereby
REDUCED to three percent (3%) per annum and with respect to the interest rates
charged in the two promissory notes, these iniquitous interest rates are hereby
REDUCED to twelve percent (12%) per annum each of the two promissory notes.
All other aspects of the decision are hereby AFFIRMED.
SO ORDERED. 7

Respondents filed a motion for reconsideration, while DBP moved for partial
reconsideration of the decision, but these were both denied by the CA on October 24,
2007.
Respondents and DBP then came to us with their respective petitions for review
assailing the CA ruling. Respondents' petition was docketed as G.R No. 180318, while
that of DBP was docketed as G.R. No. 180458. The petitions, however, were not
consolidated.
On February 2, 2008, this Court dismissed G.R. No. 180318 and affirmed the
CA ruling. Thus, what remains to be resolved is DBP's petition, raising the following
issues:
I. WHETHER THE REASONABLENESS OF THE STIPULATED PENALTY
CHARGE AND INTEREST RATES ARE WITHIN THE ISSUES OF THE
INSTANT CASE;
II. WHETHER THE JUSTIFICATION PROVIDED FOR THE REDUCTION
OF THE STIPULATED PENALTY CHARGE AND INTEREST RATES IS
SUPPORTED BY THE EVIDENCE ON RECORD;
ISHaTA

III. WHETHER THE STIPULATED PENALTY CHARGE OF 8% PER

ANNUM AND INTEREST RATES OF 18% AND 22% PER ANNUM ARE
UNREASONABLE, INIQUITOUS AND UNCONSCIONABLE UNDER THE
APPLICABLE DECISIONS OF THE SUPREME COURT. 8

We will first address the procedural issue raised by the respondents in their
comment.
Respondents moved for the outright dismissal of the petition on the ground that
DBP did not attach material portions of the record, i.e., promissory notes, real estate
and chattel mortgages, and other documents, which are necessary for a complete
determination of the merits of the petition. They assert that DBP violated Sec. 4, Rule
45 9 of the Rules of Civil Procedure, thus, justifying the outright dismissal of the
petition.
We disagree.

As a general rule, a petition lacking copies of essential pleadings and portions of

the case record may be dismissed. 10 This rule, however, is not petrified. As the exact
nature of the pleadings and parts of the case record that must accompany a petition is
not specified, much discretion is left to the court to determine the necessity for copies
of pleadings and other documents. 11
A careful perusal of the records of the case shows that the petitioners
substantially complied with the procedural requirements of Section 4, Rule 45 of the
Rules of Court. Attached to the petition for review as annexes are legible certified
duplicate originals of the assailed CA decision and resolution. DBP also attached the
pleadings filed before the RTC and the latter's decision. The attachment of the pleadings
and of the decisions of the RTC and CA provides sufficient basis to resolve the instant
controversy.
As held by this Court in Air Philippines Corporation v. Zamora: 12
[E]ven if a document is relevant and pertinent to the petition, it need not be
appended if it is shown that the contents thereof can also found in another
document already attached to the petition. Thus, if the material allegations in a
position paper are summarized in a questioned judgment, it will suffice that only
a certified true copy of the judgment is attached.
Third, a petition lacking an essential pleading or part of the case record may still
be given due course or reinstated (if earlier dismissed) upon showing that
petitioner later submitted the documents required, or that it will serve the higher
interest of justice that the case be decided on the merits.

Nevertheless, even if the pleadings and other supporting documents were not
attached to the petition, the dismissal is unwarranted because the CA records containing
the promissory notes and the real estate and chattel mortgages were elevated to this
Court. Without a doubt, we have sufficient basis to actually and completely dispose of
the case.
We must stress that cases should be determined on the merits, after all parties
have been given full opportunity to ventilate their causes and defenses, rather than on
technicalities or procedural imperfections. In that way, the ends of justice would be
served better. Rules of procedure are mere tools designed to expedite the decision or
resolution of cases and other matters pending in court. A strict and rigid application of
rules, resulting in technicalities that tend to frustrate rather than promote substantial
justice, must be avoided. In fact, Section 6 of Rule 1 states that the Rules shall be
liberally construed in order to promote their objective of ensuring the just, speedy and
inexpensive disposition of every action and proceeding. 13
Now we resolve the merit of the petition.
DBP faults the CA for ruling on the reasonableness of the stipulated interest and,
accordingly, modifying the RTC decision. It points out that respondents never

questioned the interest and charges stipulated in the promissory notes and in the real
estate and chattel mortgages throughout the proceedings in the court a quo. What
respondents questioned were the interest and charges allegedly imposed or collected in
excess of those provided in the real estate and chattel mortgages. Thus, it contends that
the CA committed reversible error in ruling on the issue, which was neither raised in
the complaint nor ventilated during the trial. In any case, there was nothing illegal in
the stipulated rate of interest. DBP, therefore, prays for the reversal of the assailed
decision and resolution.
SECcIH

We grant the petition.

The records show that respondents in their complaint never raised as a ground
or basis for the annulment of the auction sale the nullity of the stipulated interest; 14
that during the pre-trial conference, 15 and in the course of trial, the validity of the
stipulated interest was never put as an issue. What respondents questioned were the
interest and charges that were allegedly imposed or collected in excess of those
provided in the real estate and chattel mortgages. It was only in the appellants' brief that
respondents raised the validity of the stipulated interest rate and invoked this Court's
ruling in Medel v. Court of Appeals. 16 Clearly, respondents raised the issue for the
first time on appeal.
It is well settled that issues raised for the first time on appeal are barred by
estoppel. Arguments not raised in the original proceedings cannot be considered on
review; otherwise, it would violate basic principles of fair play. 17 The CA, therefore,
had no basis for, and erred in, reducing the stipulated interest rates.
Moreover, respondents' own evidence shows that they agreed on the stipulated
interest rates of 18% and 22%, and on the penalty charge of 8%, in each promissory
note. It is a basic principle in civil law that parties are bound by the stipulations in the
contracts voluntarily entered into by them. Parties are free to stipulate terms and
conditions that they deem convenient, provided these are not contrary to law, morals,
good customs, public order, or public policy. 18
There is nothing in the records, and in fact, there is no allegation, showing that
respondents were victims of fraud when they signed the promissory notes. Neither is
there a showing that in their contractual relations with DBP, respondents were at a
disadvantage on account of their moral dependence, mental weakness, tender age or
other handicap, which would entitle them to the vigilant protection of the courts as
mandated by Article 24 19 of the Civil Code.
As held by this Court in Vales v. Villa, 20 and Spouses Pascual v. Ramos: 21
All men are presumed to be sane and normal and subject to be moved by
substantially the same motives. When of age and sane, they must take care of
themselves. In their relations with others in the business of life, wits, sense,
intelligence, training, ability and judgment meet and clash and contest, sometimes
with gain and advantage to all, sometimes to a few only, with loss and injury to

others. In these contests men must depend upon themselves upon their own
abilities, talents, training, sense, acumen, judgment. The fact that one may be
worsted by another, of itself, furnishes no cause of complaint. One man cannot
complain because another is more able, or better trained, or has better sense or
judgment than he has; and when the two meet on a fair field the inferior cannot
murmur if the battle goes against him. The law furnishes no protection to the
inferior simply because he is inferior, any more than it protects the strong because
he is strong. The law furnishes protection to both alike to one no more or less
than to the other. It makes no distinction between the wise and the foolish, the
great and the small, the strong and the weak. The foolish may lose all they have
to the wise; but that does not mean that the law will give it back to them again.
Courts cannot follow one every step of his life and extricate him from bad
bargains, protect him from unwise investments, relieve him from one-sided
contracts, or annul the effects of foolish acts. Courts cannot constitute themselves
guardians of persons who are not legally incompetent. Courts operate not because
one person has been defeated or overcome by another, but because he has been
defeated or overcome illegally. Men may do foolish things, make ridiculous
contracts, use miserable judgment, and lose money by then indeed, all they
have in the world; but not for that alone can the law intervene and restore. There
must be, in addition, a violation of law, the commission of what the law knows
as an actionable wrong, before the courts are authorized to lay hold of the
situation and remedy it.

Likewise, the 18% and 22% stipulated rates of interest in the two (2) promissory
notes are not unconscionable or excessive, contrary to the CA ruling.
DIETHS

In Garcia v. Court of Appeals, 22 this Court sustained the interest rates of 18%
and 24% per annum on the loans obtained by Chemark from Security Bank. Also, in
Bautista v. Pilar Development Corporation, 23 the validity of the 21% interest rate was
upheld. Thus, the stipulated rates on respondents' promissory notes cannot be stricken
down for being contrary to public policy.
Similarly, we uphold the validity of the 8% penalty charge. In Development
Bank of the Philippines v. Go, 24 this Court had the occasion to state that the 8% penalty
charge is valid, viz.:
This Court has recognized a penalty clause 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 prestation (generally consisting in the
payment of a sum of money) in case the obligation is not fulfilled or is irregularly
or inadequately fulfilled. The enforcement of the penalty can be demanded by the
creditor only when the non-performance is due to the fault or fraud of the debtor.
The non-performance gives rise to the presumption of fault; in order to avoid the
payment of the penalty, the debtor has the burden of proving an excuse the
failure of the performance was due to either force majeure or the acts of the
creditor himself. 25

In this case, respondents failed to discharge the burden. Thus, they cannot avoid
the payment of the agreed penalty charge.
WHEREFORE, the petition is GRANTED. The assailed Decision and
Resolution of the Court of Appeals in CA-G.R. CV No. 81360 are REVERSED and
SET ASIDE. The January 30, 2003 Decision of the Regional Trial Court of Calamba,
Branch 92, dismissing Civil Case 2082-94-C, is REINSTATED.
SO ORDERED.
Ynares-Santiago, Chico-Nazario, Velasco, Jr. and Peralta, JJ., concur.

(Development Bank of the Phils. v. Family Foods Manufacturing Co. Ltd., G.R. No.
180458, [July 30, 2009], 611 PHIL 843-855)
|||

THIRD DIVISION
[G.R. No. 175490. September 17, 2009.]
ILEANA DR. MACALINAO, petitioner, vs. BANK OF THE
PHILIPPINE ISLANDS, respondent.

DECISION

VELASCO, JR., J :
p

The Case
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of
Court seeking to reverse and set aside the June 30, 2006 Decision 1 of the Court of
Appeals (CA) and its November 21, 2006 Resolution 2 denying petitioner's motion for
reconsideration.
The Facts
Petitioner Ileana Macalinao was an approved cardholder of BPI Mastercard, one
of the credit card facilities of respondent Bank of the Philippine Islands (BPI). 3
Petitioner Macalinao made some purchases through the use of the said credit card and
defaulted in paying for said purchases. She subsequently received a letter dated January
5, 2004 from respondent BPI, demanding payment of the amount of one hundred fortyone thousand five hundred eighteen pesos and thirty-four centavos (PhP141,518.34), as
follows:
Statement
Date

Previous
Balance

10/27/2002
11/27/2002
12/31/2002
1/27/2003
2/27/2003
3/27/2003
4/27/2003
5/27/2003
6/29/2003

94,843.70
98,465.41
86,351.02
119,752.28
124,234.58
129,263.13
115,177.90
119,565.44
113,540.10

7/27/2003
8/27/2003

118,833.49
123,375.65

Purchases
(Payments)

(15,000)
30,308.80

(18,000.00)
(10,000.00)
8,362.50
(7,000.00)

Penalty
Interest

Finance
Charges

Balance Due

559.72
0
259.05
618.23
990.93
298.72
644.26
402.95
323.57

3,061.99
2,885.61
2,806.41
3,891.07
4,037.62
3,616.05
3,743.28
3,571.71
3,607.32

98,456.41
86,351.02
119,752.28
124,234.58
129,263.13
115,177.90
119,565.44
113,540.10
118,833.49

608.07
1,050.20

3,862.09
4,009.71

123,375.65
128,435.56

9/28/2003
10/28/2003
11/28/2003
12/28/2003
1/27/2004

128,435.56

1,435.51

4,174.16

134,045.23

141,518.34

8,491.10

4,599.34

154,608.78

Under the Terms and Conditions Governing the Issuance and Use of the BPI
Credit and BPI Mastercard, the charges or balance thereof remaining unpaid after the
payment due date indicated on the monthly Statement of Accounts shall bear interest at
the rate of 3% per month and an additional penalty fee equivalent to another 3% per
month. Particularly:
HDCAaS

8. PAYMENT OF CHARGES BCC shall furnish the Cardholder a monthly

Statement of Account (SOA) and the Cardholder agrees that all charges made
through the use of the CARD shall be paid by the Cardholder as stated in the SOA
on or before the last day for payment, which is twenty (20) days from the date of
the said SOA, and such payment due date may be changed to an earlier date if the
Cardholder's account is considered overdue and/or with balances in excess of the
approved credit limit, or to such other date as may be deemed proper by the
CARD issuer with notice to the Cardholder on the same monthly SOA. If the last
day fall on a Saturday, Sunday or a holiday, the last day for the payment
automatically becomes the last working day prior to said payment date. However,
notwithstanding the absence or lack of proof of service of the SOA of the
Cardholder, the latter shall pay any and all charges made through the use of the
CARD within thirty (30) days from date or dates thereof. Failure of the
Cardholder to pay the charges made through the CARD within the payment
period as stated in the SOA or within thirty (30) days from actual date or dates of
purchase whichever occur earlier, shall render him in default without the
necessity of demand from BCC, which the Cardholder expressly waives. The
charges or balance thereof remaining unpaid after the payment due date
indicated on the monthly Statement of Accounts shall bear interest at the
rate of 3% per month for BPI Express Credit, BPI Gold Mastercard and an
additional penalty fee equivalent to another 3% of the amount due for every
month or a fraction of a month's delay. PROVIDED that if there occurs any
change on the prevailing market rates, BCC shall have the option to adjust the
rate of interest and/or penalty fee due on the outstanding obligation with prior
notice to the cardholder. The Cardholder hereby authorizes BCC to
correspondingly increase the rate of such interest [in] the event of changes in the
prevailing market rates, and to charge additional service fees as may be deemed
necessary in order to maintain its service to the Cardholder. A CARD with
outstanding balance unpaid after thirty (30) days from original billing statement
date shall automatically be suspended, and those with accounts unpaid after
ninety (90) days from said original billing/statement date shall automatically be
cancel (sic), without prejudice to BCC's right to suspend or cancel any card
anytime and for whatever reason. In case of default in his obligation as provided
herein, Cardholder shall surrender his/her card to BCC and in addition to the

interest and penalty charges aforementioned, pay the following liquidated

damages and/or fees (a) a collection fee of 25% of the amount due if the account
is referred to a collection agency or attorney; (b) service fee for every dishonored
check issued by the cardholder in payment of his account without prejudice,
however, to BCC's right of considering Cardholder's account, and (c) a final fee
equivalent to 25% of the unpaid balance, exclusive of litigation expenses and
judicial cost, if the payment of the account is enforced though court action. Venue
of all civil suits to enforce this Agreement or any other suit directly or indirectly
arising from the relationship between the parties as established herein, whether
arising from crimes, negligence or breach thereof, shall be in the process of courts
of the City of Makati or in other courts at the option of BCC. 4 (Emphasis
supplied.)

For failure of petitioner Macalinao to settle her obligations, respondent BPI filed
with the Metropolitan Trial Court (MeTC) of Makati City a complaint for a sum of
money against her and her husband, Danilo SJ. Macalinao. This was raffled to Branch
66 of the MeTC and was docketed as Civil Case No. 84462 entitled Bank of the
Philippine Islands vs. Spouses Ileana Dr. Macalinao and Danilo SJ. Macalinao. 5
In said complaint, respondent BPI prayed for the payment of the amount of one
hundred fifty-four thousand six hundred eight pesos and seventy-eight centavos
(PhP154,608.78) plus 3.25% finance charges and late payment charges equivalent to
6% of the amount due from February 29, 2004 and an amount equivalent to 25% of the
total amount due as attorney's fees, and of the cost of suit. 6
After the summons and a copy of the complaint were served upon petitioner
Macalinao and her husband, they failed to file their Answer. 7 Thus, respondent BPI
moved that judgment be rendered in accordance with Section 6 of the Rule on Summary
Procedure. 8 This was granted in an Order dated June 16, 2004. 9 Thereafter, respondent
BPI submitted its documentary evidence. 10
In its Decision dated August 2, 2004, the MeTC ruled in favor of respondent BPI
and ordered petitioner Macalinao and her husband to pay the amount of PhP141,518.34
plus interest and penalty charges of 2% per month, to wit:
cSIHCA

WHEREFORE, finding merit in the allegations of the complaint supported by

documentary evidence, judgment is hereby rendered in favor of the plaintiff,
Bank of the Philippine Islands and against defendant-spouses Ileana DR
Macalinao and Danilo SJ Macalinao by ordering the latter to pay the former
jointly and severally the following:
1. The amount of PESOS: ONE HUNDRED FORTY ONE
THOUSAND FIVE HUNDRED EIGHTEEN AND 34/100
(P141,518.34) plus interest and penalty charges of 2% per month from
January 05, 2004 until fully paid;
2. P10,000.00 as and by way of attorney's fees; and

3. Cost of suit.
SO ORDERED. 11

Only petitioner Macalinao and her husband appealed to the Regional Trial Court
(RTC) of Makati City, their recourse docketed as Civil Case No. 04-1153. In its
Decision dated October 14, 2004, the RTC affirmed in toto the decision of the MeTC
and held:
In any event, the sum of P141,518.34 adjudged by the trial court appeared to be
the result of a recomputation at the reduced rate of 2% per month. Note that the
total amount sought by the plaintiff-appellee was P154,608.75 exclusive of
finance charge of 3.25% per month and late payment charge of 6% per month.
WHEREFORE, the appealed decision is hereby affirmed in toto.
No pronouncement as to costs.
SO ORDERED. 12

Unconvinced, petitioner Macalinao filed a petition for review with the CA,
which was docketed as CA-G.R. SP No. 92031. The CA affirmed with modification the
Decision of the RTC:
WHEREFORE, the appealed decision is AFFIRMED but MODIFIED with
respect to the total amount due and interest rate. Accordingly, petitioners are
jointly and severally ordered to pay respondent Bank of the Philippine Islands the
following:
1. The amount of One Hundred Twenty Six Thousand Seven Hundred
Six Pesos and Seventy Centavos plus interest and penalty
charges of 3% per month from January 5, 2004 until fully paid;

cHCIEA

2. P10,000.00 as and by way of attorney's fees; and

3. Cost of Suit.
SO ORDERED. 13

Although sued jointly with her husband, petitioner Macalinao was the only one
who filed the petition before the CA since her husband already passed away on October
18, 2005. 14
In its assailed decision, the CA held that the amount of PhP141,518.34 (the
amount sought to be satisfied in the demand letter of respondent BPI) is clearly not the
result of the re-computation at the reduced interest rate as previous higher interest rates

were already incorporated in the said amount. Thus, the said amount should not be made
as basis in computing the total obligation of petitioner Macalinao. Further, the CA also
emphasized that respondent BPI should not compound the interest in the instant case
absent a stipulation to that effect. The CA also held, however, that the MeTC erred in
modifying the amount of interest rate from 3% monthly to only 2% considering that
petitioner Macalinao freely availed herself of the credit card facility offered by
respondent BPI to the general public. It explained that contracts of adhesion are not
invalid per se and are not entirely prohibited.
Petitioner Macalinao's motion for reconsideration was denied by the CA in its
Resolution dated November 21, 2006. Hence, petitioner Macalinao is now before this
Court with the following assigned errors:
I.
THE REDUCTION OF INTEREST RATE, FROM 9.25% TO 2%, SHOULD
BE UPHELD SINCE THE STIPULATED RATE OF INTEREST WAS
UNCONSCIONABLE AND INIQUITOUS, AND THUS ILLEGAL.
II.
THE COURT OF APPEALS ARBITRARILY MODIFIED THE REDUCED
RATE OF INTEREST FROM 2% TO 3%, CONTRARY TO THE TENOR OF
ITS OWN DECISION.
III.
THE COURT A QUO, INSTEAD OF PROCEEDING WITH A
RECOMPUTATION, SHOULD HAVE DISMISSED THE CASE FOR
FAILURE OF RESPONDENT BPI TO PROVE THE CORRECT AMOUNT OF
PETITIONER'S OBLIGATION, OR IN THE ALTERNATIVE, REMANDED
THE CASE TO THE LOWER COURT FOR RESPONDENT BPI TO
PRESENT PROOF OF THE CORRECT AMOUNT THEREOF.
DHITSc

Our Ruling
The petition is partly meritorious.
The Interest Rate and Penalty Charge of 3% Per Month or 36% Per
Annum Should Be Reduced to 2% Per Month or 24% Per Annum
In its Complaint, respondent BPI originally imposed the interest and penalty
charges at the rate of 9.25% per month or 111% per annum. This was declared as
unconscionable by the lower courts for being clearly excessive, and was thus reduced
to 2% per month or 24% per annum. On appeal, the CA modified the rate of interest
and penalty charge and increased them to 3% per month or 36% per annum based on

the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card,
which governs the transaction between petitioner Macalinao and respondent BPI.
In the instant petition, Macalinao claims that the interest rate and penalty charge
of 3% per month imposed by the CA is iniquitous as the same translates to 36% per
annum or thrice the legal rate of interest. 15 On the other hand, respondent BPI asserts
that said interest rate and penalty charge are reasonable as the same are based on the
Terms and Conditions Governing the Issuance and Use of the BPI Credit Card. 16
We find for petitioner. We are of the opinion that the interest rate and penalty
charge of 3% per month should be equitably reduced to 2% per month or 24% per
annum.
Indeed, in the Terms and Conditions Governing the Issuance and Use of the BPI
Credit Card, there was a stipulation on the 3% interest rate. Nevertheless, it should be
noted that this is not the first time that this Court has considered the interest rate of 36%
per annum as excessive and unconscionable. We held in Chua vs. Timan: 17
The stipulated interest rates of 7% and 5% per month imposed on respondents'
loans must be equitably reduced to 1% per month or 12% per annum. We need
not unsettle the principle we had affirmed in a plethora of cases that
stipulated interest rates of 3% per mouth and higher are excessive,
iniquitous, unconscionable and exorbitant. Such stipulations are void for
being contrary to morals, if not against the law. While C.B. Circular No. 90582, which took effect on January 1, 1983, effectively removed the ceiling on
interest rates for both secured and unsecured loans, regardless of maturity,
nothing in the said circular could possibly be read as granting carte blanche
authority to lenders to raise interest rates to levels which would either enslave
their borrowers or lead to a hemorrhaging of their assets. (Emphasis supplied.)
DTAcIa

Since the stipulation on the interest rate is void, it is as if there was no express
contract thereon. Hence, courts may reduce the interest rate as reason and equity
demand. 18
The same is true with respect to the penalty charge. Notably, under the Terms
and Conditions Governing the Issuance and Use of the BPI Credit Card, it was also
stated therein that respondent BPI shall impose an additional penalty charge of 3% per
month. Pertinently, Article 1229 of the Civil Code states:
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 exercising this power to determine what is iniquitous and unconscionable,

courts must consider the circumstances of each case since what may be iniquitous and
unconscionable in one may be totally just and equitable in another. 19
In the instant case, the records would reveal that petitioner Macalinao made
partial payments to respondent BPI, as indicated in her Billing Statements. 20 Further,
the stipulated penalty charge of 3% per month or 36% per annum, in addition to regular
interests, is indeed iniquitous and unconscionable.
Thus, under the circumstances, the Court finds it equitable to reduce the interest
rate pegged by the CA at 1.5% monthly to 1% monthly and penalty charge fixed by the
CA at 1.5% monthly to 1% monthly or a total of 2% per month or 24% per annum in
line with the prevailing jurisprudence and in accordance with Art. 1229 of the Civil
Code.
There Is No Basis for the Dismissal of the Case,
Much Less a Remand of the Same for Further Reception of Evidence
Petitioner Macalinao claims that the basis of the re-computation of the CA, that
is, the amount of PhP94,843.70 stated on the October 27, 2002 Statement of Account,
was not the amount of the principal obligation. Thus, this allegedly necessitates a reexamination of the evidence presented by the parties. For this reason, petitioner
Macalinao further contends that the dismissal of the case or its remand to the lower
court would be a more appropriate disposition of the case.
CaTSEA

Such contention is untenable. Based on the records, the summons and a copy of
the complaint were served upon petitioner Macalinao and her husband on May 4, 2004.
Nevertheless, they failed to file their Answer despite such service. Thus, respondent
BPI moved that judgment be rendered accordingly. 21 Consequently, a decision was
rendered by the MeTC on the basis of the evidence submitted by respondent BPI. This
is in consonance with Sec. 6 of the Revised Rule on Summary Procedure, which states:
Sec. 6. Effect of failure to answer. Should the defendant fail to answer the
complaint within the period above provided, the court, motu proprio, or on
motion of the plaintiff, shall render judgment as may be warranted by the
facts alleged in the complaint and limited to what is prayed for therein:
Provided, however, that the court may in its discretion reduce the amount of
damages and attorney's fees claimed for being excessive or otherwise
unconscionable. This is without prejudice to the applicability of Section 3(c),
Rule 10 of the Rules of Court, if there are two or more defendants. (As amended
by the 1997 Rules of Civil Procedure; emphasis supplied.)

Considering the foregoing rule, respondent BPI should not be made to suffer for
petitioner Macalinao's failure to file an answer and concomitantly, to allow the latter to
submit additional evidence by dismissing or remanding the case for further reception
of evidence. Significantly, petitioner Macalinao herself admitted the existence of her
obligation to respondent BPI, albeit with reservation as to the principal amount. Thus,

a dismissal of the case would cause great injustice to respondent BPI. Similarly, a
remand of the case for further reception of evidence would unduly prolong the
proceedings of the instant case and render inutile the proceedings conducted before the
lower courts.
Significantly, the CA correctly used the beginning balance of PhP94,843.70 as
basis for the re-computation of the interest considering that this was the first amount
which appeared on the Statement of Account of petitioner Macalinao. There is no other
amount on which the re-computation could be based, as can be gathered from the
evidence on record. Furthermore, barring a showing that the factual findings
complained of are totally devoid of support in the record or that they are so glaringly
erroneous as to constitute serious abuse of discretion, such findings must stand, for this
Court is not expected or required to examine or contrast the evidence submitted by the
parties. 22
In view of the ruling that only 1% monthly interest and 1% penalty charge can
be applied to the beginning balance of PhP94,843.70, this Court finds the following
computation more appropriate:
Statement
Date

Previous
Balance

10/27/2002
11/27/2002
12/31/2002
1/27/2003
2/27/2003
3/27/2003
4/27/2003
5/27/2003
6/29/2003

94,843.70
94,843.70
79,843.70
110,152.50
110,152.50
110,152.50
92,152.50
92,152.50
82,152.50

7/27/2003
8/27/2003
9/28/2003
10/28/2003
11/28/2003
12/28/2003
1/27/2004
TOTAL

83,515.00
83,515.00
83,515.00
83,515.00
83,515.00
83,515.00
83,515.00

Purchases
(Payments)

(15,000)
30,308.80

(18,000.00)
(10,000.00)
8,362.50
(7,000.00)

Balance

Interest
(1%)

Penalty
Charge
(1 %)

Total
Amount
Due for
the Month

94,843.70
79,843.70
110,152.50
110,152.50
110,152.50
92,152.50
92,152.50
82,152.50
83,515.00

948.44
798.44
1,101.53
1,101.53
1,101.53
921.53
921.53
821.53
835.15

948.44
798.44
1,101.53
1,101.53
1,101.53
921.53
921.53
821.53
835.15

96,740.58
81,440.58
112,355.56
112,355.56
112,355.56
93,995.56
93,995.56
83,795.56
85,185.30

83,515.00
83,515.00
83,515.00
83,515.00
83,515.00
83,515.00
83,515.00
83,515.00

835.15
835.15
835.15
835.15
835.15
835.15
835.15
14,397.26

835.15
835.15
835.15
835.15
835.15
835.15
835.15
14,397.26

85,185.30
85,185.30
85,185.30
85,185.30
85,185.30
85,185.30
85,185.30
112,309.52

WHEREFORE, the petition is PARTLY GRANTED. The CA Decision dated June 30,
2006 in CA-G.R. SP No. 92031 is hereby MODIFIED with respect to the total amount

due, interest rate, and penalty charge. Accordingly, petitioner Macalinao is ordered to pay
respondent BPI the following:
DSAEIT

(1) The amount of one hundred twelve thousand three hundred nine pesos and fiftytwo centavos (PhP112,309.52) plus interest and penalty charges of 2% per month from
January 5, 2004 until fully paid;
(2) PhP10,000 as and by way of attorney's fees; and
(3) Cost of suit.
SO ORDERED.
Ynares-Santiago, Chico-Nazario, Nachura and Peralta, JJ., concur.
(Macalinao v. Bank of the Philippine Islands, G.R. No. 175490, [September 17, 2009],
616 PHIL 60-73)
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