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G.R. No.

L-28497 November 6, 1928

THE BACHRACH MOTOR CO., INC., plaintiff-appellee,


vs.
FAUSTINO ESPIRITU, defendant-appellant.

------------------------------

G.R. No. L-28498 November 6, 1928

THE BACHRACH MOTOR CO., INC., plaintiff-appellee,


vs.
FAUSTINO ESPIRITU, defendant-appellant, and
ROSARIO ESPIRITU, intervenor-appellant.

Ernesto Zaragoza and Simeon Ramos for defendant-appellant.


Benito Soliven and Jose Varela Calderon for intervenor-appellant.
B. Francisco for appellee.

AVANCEA, C. J.:

These two cases, Nos. 28497 and 28948, were tried together.

It appears, in connection with case 28497; that on July 28, 1925 the defendant Faustino Espiritu
purchased of the plaintiff corporation a two-ton White truck for P11,983.50, paying P1,000 down to
apply on account of this price, and obligating himself to pay the remaining P10,983.50 within the
periods agreed upon. To secure the payment of this sum, the defendants mortgaged the said truck
purchased and, besides, three others, two of which are numbered 77197 and 92744 respectively, and
all of the White make (Exhibit A). These two trucks had been purchased from the same plaintiff and
were fully paid for by the defendant and his brother Rosario Espiritu. The defendant failed to pay
P10,477.82 of the price secured by this mortgage.

In connection with case 28498, it appears that on February 18, 1925 the defendant bought a one-
ton White truck of the plaintiff corporation for the sum of P7,136.50, and after having deducted the
P500 cash payment and the 12 per cent annual interest on the unpaid principal, obligated himself to
make payment of this sum within the periods agreed upon. To secure this payment the defendant
mortgaged to the plaintiff corporation the said truck purchased and two others, numbered 77197
and 92744, respectively, the same that were mortgaged in the purchase of the other truck referred to
in the other case. The defendant failed to pay P4,208.28 of this sum.

In both sales it was agreed that 12 per cent interest would be paid upon the unpaid portion of the
price at the executon of the contracts, and in case of non-payment of the total debt upon its maturity,
25 per cent thereon, as penalty.

In addition to the mortagage deeds referred to, which the defendant executed in favor of the plaintiff,
the defendant at the same time also signed a promissory note solidarily with his brother Rosario
Espiritu for the several sums secured by the two mortgages (Exhibits B and D).
Rosario Espiritu appeared in these two cases as intervenor, alleging to be the exclusive owner of the
two White trucks Nos. 77197 and 92744, which appear to have been mortgaged by the defendants to
the plaintiff. lawphi1.net

While these two cases were pending in the lower court the mortgaged trucks were sold by virtue of
the mortgage, all of them together bringing in, after deducting the sheriff's fees and transportation
charges to Manila, the net sum of P3,269.58.

The judgment appealed from ordered the defendants and the intervenor to pay plaintiff in case
28497 the sum of P7,732.09 with interest at the rate of 12 per cent per annum from May 1, 1926
until fully paid, and 25 per cent thereof in addition as penalty. In case 28498, the trial court ordered
the defendant and the intervenor to pay plaintiff the sum of P4,208.28 with interest at 12 per cent
per annum from December 1, 1925 until fully paid, and 25 per cent thereon as penalty.

The appellants contend that trucks 77197 and 92744 were not mortgaged, because, when the
defendant signed the mortgage deeds these trucks were not included in those documents, and were
only put in later, without defendant's knowledge. But there is positive proof that they were included
at the time the defendant signed these documents. Besides, there were presented two of defendant's
letters to Hidalgo, an employee of the plaintiff's written a few days before the transaction,
acquiescing in the inclusion of all his White trucks already paid for, in the mortgage (Exhibit H-I).

Appellants also alleged that on February 4, 1925, the defendant sold his rights in said trucks Nos.
77197 and 92744 to the intervenor, and that as the latter did not sign the mortgage deeds, such
trucks cannot be considered as mortgaged. But the evidence shows that while the intervenor Rosario
Espiritu did not sign the two mortgage deeds (Exhibits A and C), yet, together with the defendants
Faustino Espiritu, he signed the two promissory notes (Exhibits B and D) secured by these two
mortgages. All these instruments were executed at the same time, and when the trucks 77197 and
92744 were included in the mortgages, the intervenor Rosario Espiritu was aware of it and
consented to such inclusion. These facts are supported by the testimony of Bachrach, manager of the
plaintiff corporation, of Agustin Ramirez, who witnessed the execution of all these documents, and of
Angel Hidalgo, who witnessed the execution of Exhibits B and D.

We do not find the statement of the intervenor Rosario Espiritu that he did not sign promissory notes
Exhibits B and C to be sufficient to overthrow this evidence. A comparison of his genuine signature
on Exhibit AA with those appearing on promissory notes B and C, convinces us that the latter are his
signatures. And such is our conclusion, notwithstanding the evidence presented to establish that on
the date when Exhibits B appears to have been signed, that is July 25, 1925, the intervenor was in
Batac, Ilocos Norte, many miles away from Manila. And the fact that on the 24th of said month of July,
the plaintiff sent some truck accessory parts by rail to Ilocos for the intervenor does not necessarily
prove that the latter could not have been in Manila on the 25th of that month.

In view of his conclusion that the intervenor signed the promissory notes secured by trucks 77197
and 92744 and consented to the mortgage of the same, it is immaterial whether he was or was not
the exclusive owner thereof.

It is finally contended that the 25 per cent penalty upon the debt, in addition to the interest of 12 per
cent per annum, makes the contract usurious. Such a contention is not well founded. Article 1152 of
the Civil Code permits the agreement upon a penalty apart from the interest. Should there be such an
agreemnet, the penalty, as was held in the case of Lopez vs. Hernaez (32 Phil., 631), does not include
the interest, and which may be demamded separetely. According to this, the penalty is not to be
added to the interest for the determination of whether the interest exceeds the rate fixed by the law,
since said rate was fixed only for the interest. But considering that the obligation was partly
performed, and making use of the power given to the court by article 1154 of the Civil Code, this
penalty is reduced to 10 per cent of the unpaid debt.

With the sole modification that instead of 25 per cent upon the sum owed, the defendants need pay
only 10 per cent thereon as penalty, the judgment appealed from is affired in all other respects
without special pronouncement as to costs. So ordered.
G.R. No. L-41093 October 30, 1978

ROBES-FRANCISCO REALTY & DEVELOPMENT CORPORATION, petitioner,


vs.
COURT OF FIRST INSTANCE OF RIZAL (BRANCH XXXIV), and LOLITA MILLAN, respondents.

Purugganan & Bersamin for petitioner.

Salvador N. Beltran for respondent.

MUOZ PALMA, J.:

This is a direct appeal on questions of law from a decision of the Court of First Instance of Rizal,
Branch XXXIV, presided by the Honorable Bernardo P. Pardo, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered commanding the defendant to register the deed of
absolute sale it had executed in favor of plaintiff with the Register of Deeds of Caloocan City and
secure the corresponding title in the name of plaintiff within ten (10) days after finality of this
decision; if, for any reason, this not possible, defendant is hereby sentenced to pay plaintiff the sum
of P5,193.63 with interest at 4% per annum from June 22, 1972 until fully paid.

In either case, defendant is sentenced to pay plaintiff nominal damages in the amount of P20,000.00
plus attorney's fee in the amount of P5,000.00 and costs.

SO ORDERED.

Caloocan City, February 11, 1975. (rollo, p. 21)

Petitioner corporation questions the award for nominal damages of P20,000.00 and attorney's fee of
P5,000.00 which are allegedly excessive and unjustified.

In the Court's resolution of October 20, 1975, We gave due course to the Petition only as regards the
portion of the decision awarding nominal damages. 1

The following incidents are not in dispute:

In May 1962 Robes-Francisco Realty & Development Corporation, now petitioner, agreed to sell to
private respondent Lolita Millan for and in consideration of the sum of P3,864.00, payable in
installments, a parcel of land containing an area of approximately 276 square meters, situated in
Barrio Camarin, Caloocan City, known as Lot No. 20, Block No. 11 of its Franville Subdivision. 2

Millan complied with her obligation under the contract and paid the installments stipulated therein,
the final payment having been made on December 22, 1971. The vendee made a total payment of
P5,193.63 including interests and expenses for registration of title. 3

Thereafter, Lolita Millan made repeated demands upon the corporation for the execution of the final
deed of sale and the issuance to her of the transfer certificate of title over the lot. On March 2, 1973,
the parties executed a deed of absolute sale of the aforementioned parcel of land. The deed of
absolute sale contained, among others, this particular provision:

That the VENDOR further warrants that the transfer certificate of title of the above-described parcel
of land shall be transferred in the name of the VENDEE within the period of six (6) months from the
date of full payment and in case the VENDOR fails to issue said transfer certificate of title, it shall
bear the obligation to refund to the VENDEE the total amount already paid for, plus an interest at the
rate of 4% per annum. (record on appeal, p. 9)

Notwithstanding the lapse of the above-mentioned stipulated period of six (6) months, the
corporation failed to cause the issuance of the corresponding transfer certificate of title over the lot
sold to Millan, hence, the latter filed on August 14, 1974 a complaint for specific performance and
damages against Robes-Francisco Realty & Development Corporation in the Court of First Instance of
Rizal, Branch XXXIV, Caloocan City, docketed therein as Civil Case No. C-3268. 4

The complaint prayed for judgment (1) ordering the reformation of the deed of absolute sale; (2)
ordering the defendant to deliver to plaintiff the certificate of title over the lot free from any lien or
encumbrance; or, should this be not possible, to pay plaintiff the value of the lot which should not be
less than P27,600.00 (allegedly the present estimated value of the lot); and (3) ordering the
defendant to pay plaintiff damages, corrective and actual in the sum of P15 000.00. 5

The corporation in its answer prayed that the complaint be dismissed alleging that the deed of
absolute sale was voluntarily executed between the parties and the interest of the plaintiff was amply
protected by the provision in said contract for payment of interest at 4% per annum of the total
amount paid, for the delay in the issuance of the title. 6

At the pretrial conference the parties agreed to submit the case for decision on the pleadings after
defendant further made certain admissions of facts not contained in its answer. 7

Finding that the realty corporation failed to cause the issuance of the corresponding transfer
certificate of title because the parcel of land conveyed to Millan was included among other properties
of the corporation mortgaged to the GSIS to secure an obligation of P10 million and that the owner's
duplicate certificate of title of the subdivision was in the possession of the Government Service
Insurance System (GSIS), the trial court, on February 11, 1975, rendered judgment the dispositive
portion of which is quoted in pages 1 and 2 of this Decision. We hold that the trial court did not err in
awarding nominal damages; however, the circumstances of the case warrant a reduction of the
amount of P20,000.00 granted to private respondent Millan.

There can be no dispute in this case under the pleadings and the admitted facts that petitioner
corporation was guilty of delay, amounting to nonperformance of its obligation, in issuing the
transfer certificate of title to vendee Millan who had fully paid up her installments on the lot bought
by her. Article 170 of the Civil Code expressly provides that those who in the performance of their
obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor
thereof, are liable for damages.

Petitioner contends that the deed of absolute sale executed between the parties stipulates that
should the vendor fail to issue the transfer certificate of title within six months from the date of full
payment, it shall refund to the vendee the total amount paid for with interest at the rate of 4% per
annum, hence, the vendee is bound by the terms of the provision and cannot recover more than what
is agreed upon. Presumably, petitioner in invoking Article 1226 of the Civil Code which provides that
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.
The foregoing argument of petitioner is totally devoid of merit. We would agree with petitioner if the
clause in question were to be considered as a penal clause. Nevertheless, for very obvious reasons,
said clause does not convey any penalty, for even without it, pursuant to Article 2209 of the Civil
Code, the vendee would be entitled to recover the amount paid by her with legal rate of interest
which is even more than the 4% provided for in the clause. 7-A

It is therefore inconceivable that the aforecited provision in the deed of sale is a penal clause which
will preclude an award of damages to the vendee Millan. In fact the clause is so worded as to work to
the advantage of petitioner corporation.

Unfortunately, the vendee, now private respondent, submitted her case below without presenting
evidence on the actual damages suffered by her as a result of the nonperformance of petitioner's
obligation under the deed of sale. Nonetheless, the facts show that the right of the vendee to acquire
title to the lot bought by her was violated by petitioner and this entitles her at the very least to
nominal damages.

The pertinent provisions of our Civil Code follow:

Art. 2221. Nominal damages are adjudicated in order that a right of the plaintiff, which has been
violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of
indemnifying the plaintiff for any loss suffered by him.

Art. 2222. The court may award nominal damages in every obligation arising from any source
enumerated in article 1157, or in every case where any property right has been invaded.

Under the foregoing provisions nominal damages are not intended for indemnification of loss
suffered but for the vindication or recognition of a right violated or invaded. They are recoverable
where some injury has been done the amount of which the evidence fails to show, the assessment of
damages being left to the discretion of the court according to the circumstances of the case. 8

It is true as petitioner claims that under American jurisprudence nominal damages by their very
nature are small sums fixed by the court without regard to the extent of the harm done to the injured
party.

It is generally held that a nominal damage is a substantial claim, if based upon the violation of a legal
right; in such case, the law presumes a damage, although actual or compensatory damages are not
proven; in truth nominal damages are damages in name only and not in fact, and are allowed, not as
an equivalent of a wrong inflicted, but simply in recogniton of the existence of a technical injury.
(Fouraker v. Kidd Springs Boating and Fishing Club, 65 S. W. 2d 796-797, citing 17 C.J. 720, and a
number of authorities). 9

In this jurisdiction, in Vda. de Medina, et al. v. Cresencia, et al. 1956, which was an action for damages
arising out of a vehicular accident, this Court had occasion to eliminate an award of P10,000.00
imposed by way of nominal damages, the Court stating inter alia that the amount cannot, in common
sense, be demeed "nominal". 10

In a subsequent case, viz: Northwest Airlines, Inc. v. Nicolas L. Cuenca, 1965, this Court, however,
through then Justice Roberto Concepcion who later became Chief Justice of this Court, sustained an
award of P20,000.00 as nominal damages in favor of respnodent Cuenca. The Court there found
special reasons for considering P20,000.00 as "nominal". Cuenca who was the holder of a first class
ticket from Manila to Tokyo was rudely compelled by an agent of petitioner Airlines to move to the
tourist class notwithstanding its knowledge that Cuenca as Commissioner of Public Highways of the
Republic of the Philippines was travelling in his official capacity as a delegate of the country to a
conference in Tokyo." 11

Actually, as explained in the Court's decision in Northwest Airlines, there is no conflict between that
case and Medina, for in the latter, the P10,000.00 award for nominal damages was eliminated
principally because the aggrieved party had already been awarded P6,000.00 as compensatory
damages, P30,000.00 as moral damages and P10,000.00 as exemplary damages, and "nominal
damages cannot coexist with compensatory damages," while in the case of Commissioner Cuenca, no
such compensatory, moral, or exemplary damages were granted to the latter. 12

At any rate, the circumstances of a particular case will determine whether or not the amount
assessed as nominal damages is within the scope or intent of the law, more particularly, Article 2221
of the Civil Code.

In the situation now before Us, We are of the view that the amount of P20,000.00 is excessive. The
admitted fact that petitioner corporation failed to convey a transfer certificate of title to respondent
Millan because the subdivision property was mortgaged to the GSIS does not in itself show that there
was bad faith or fraud. Bad faith is not to be presumed. Moreover, there was the expectation of the
vendor that arrangements were possible for the GSIS to make partial releases of the subdivision lots
from the overall real estate mortgage. It was simply unfortunate that petitioner did not succeed in
that regard.

For that reason We cannot agree with respondent Millan Chat the P20,000.00 award may be
considered in the nature of exemplary damages.

In case of breach of contract, exemplary damages may be awarded if the guilty party acted in wanton,
fraudulent, reckless, oppressive or malevolent manner. 13 Furthermore, exemplary or corrective
damages are to be imposed by way of example or correction for the public good, only if the injured
party has shown that he is entitled to recover moral, temperate or compensatory damages."

Here, respondent Millan did not submit below any evidence to prove that she suffered actual or
compensatory damages. 14

To conclude, We hold that the sum of Ten Thousand Pesos (P10,000.00) by way of nominal damages
is fair and just under the following circumstances, viz: respondent Millan bought the lot from
petitioner in May, 1962, and paid in full her installments on December 22, 1971, but it was only on
March 2, 1973, that a deed of absolute sale was executed in her favor, and notwithstanding the lapse
of almost three years since she made her last payment, petitioner still failed to convey the
corresponding transfer certificate of title to Millan who accordingly was compelled to file the instant
complaint in August of 1974.

PREMISES CONSIDERED, We modify the decision of the trial court and reduce the nominal damages
to Ten Thousand Pesos (P10,000.00). In all other respects the aforesaid decision stands.

Without pronouncement as to costs.

SO ORDERED.
G.R. No. L-26339 December 14, 1979

MARIANO C. PAMINTUAN, petitioner-appellant,


vs.
COURT OF APPEALS and YU PING KUN CO., INC., respondent-appellees.

V. E. del Rosario & Associates for appellant.

Sangco & Sangalang for private respondent.

AQUINO, J.:

This case is about the recovery compensatory, damages for breach of a contract of sale in addition to
liquidated damages.

Mariano C. Pamintuan appealed from the judgment of the Court of Appeals wherein he was ordered
to deliver to Yu Ping Kun Co., Inc. certain plastic sheetings and, if he could not do so, to pay the latter
P100,559.28 as damages with six percent interest from the date of the filing of the complaint. The
facts and the findings of the Court of Appeals are as follows:

In 1960, Pamintuan was the holder of a barter license wherein he was authorized to export to Japan
one thousand metric tons of white flint corn valued at forty-seven thousand United States dollars in
exchange for a collateral importation of plastic sheetings of an equivalent value.

By virtue of that license, he entered into an agreement to ship his corn to Tokyo Menka Kaisha, Ltd. of
Osaka, Japan in exchange for plastic sheetings. He contracted to sell the plastic sheetings to Yu Ping
Kun Co., Inc. for two hundred sixty-five thousand five hundred fifty pesos. The company undertook to
open an irrevocable domestic letter of credit for that amount in favor of Pamintuan.

It was further agreed that Pamintuan would deliver the plastic sheetings to the company at its
bodegas in Manila or suburbs directly from the piers "within one month upon arrival of" the carrying
vessels. Any violation of the contract of sale would entitle the aggreived party to collect from the
offending party liquidated damages in the sum of ten thousand pesos (Exh. A).

On July 28, 1960, the company received a copy of the letter from the Manila branch of Toyo Menka
Kaisha, Ltd. confirming the acceptance by Japanese suppliers of firm offers for the consignment to
Pamintuan of plastic sheetings valued at forty-seven thousand dollars. Acting on that information,
the company lost no time in securing in favor of Pamintuan an irrevocable letter of credit for two
hundred sixty-five thousand five hundred fifty pesos.

Pamintuan was apprised by the bank on August 1, 1960 of that letter of credit which made reference
to the delivery to Yu Ping Kun Co., Inc. on or before October 31, 1960 of 336, 360 yards of plastic
sheetings (p. 21, Record on Appeal).

On September 27 and 30 and October 4, 1960, the Japanese suppliers shipped to Pamintuan, through
Toyo Menka Kaisha, Ltd., the plastic sheetings in four shipments to wit: (1) Firm Offer No. 327 for
50,000 yards valued at $9,000; (2) Firm Offer No. 328 for 70,000 yards valued at $8,050; (3) Firm
Offers Nos. 329 and 343 for 175,000 and 18,440 yards valued at $22,445 and $2,305, respectively,
and (4) Firm Offer No. 330 for 26,000 yards valued at $5,200, or a total of 339,440 yards with an
aggregate value of $47,000 (pp. 4-5 and 239-40, Record on Appeal).

The plastic sheetings arrived in Manila and were received by Pamintuan. Out of the shipments,
Pamintuan delivered to the company's warehouse only the following quantities of plastic sheetings:

November 11, 1960 140 cases, size 48 inches by 50 yards. November 14, 1960 258 cases out of
352 cases. November 15, 1960 11 cases out of 352 cases. November 15, 1960 10 cases out of
100 cases. November 15, 1960 30 cases out of 100 cases.

Pamintuan withheld delivery of (1) 50 cases of plastic sheetings containing 26,000 yards valued at
$5,200; (2) 37 cases containing 18,440 yards valued at $2,305; (3) 60 cases containing 30,000 yards
valued at $5,400 and (4) 83 cases containing 40,850 yards valued at $5,236.97. While the plastic
sheetings were arriving in Manila, Pamintuan informed the president of Yu Ping Kun Co., Inc. that he
was in dire need of cash with which to pay his obligations to the Philippine National Bank. Inasmuch
as the computation of the prices of each delivery would allegedly be a long process, Pamintuan
requested that he be paid immediately.

Consequently, Pamintuan and the president of the company, Benito Y.C. Espiritu, agreed to fix the
price of the plastic sheetings at P0.782 a yard, regardless of the kind, quality or actual invoice value
thereof. The parties arrived at that figure by dividing the total price of P265,550 by 339,440 yards,
the aggregate quantity of the shipments.

After Pamintuan had delivered 224,150 yards of sheetings of interior quality valued at P163,.047.87,
he refused to deliver the remainder of the shipments with a total value of P102,502.13 which were
covered by (i) Firm Offer No. 330, containing 26,000 yards valued at P29,380; (2) Firm Offer No. 343,
containing 18,440 yards valued at P13,023.25; (3) Firm Offer No. 217, containing 30,000 yards
valued at P30,510 and (4) Firm Offer No. 329 containing 40,850 yards valued at P29,588.88 (See pp.
243-2, Record on Appeal).

As justification for his refusal, Pamintuan said that the company failed to comply with the conditions
of the contract and that it was novated with respect to the price.

On December 2, 1960, the company filed its amended complaint for damages against Pamintuan.
After trial, the lower court rendered the judgment mentioned above but including moral damages.

The unrealized profits awarded as damages in the trial court's decision were computed as follows
(pp. 248-9, Record on Appeal):

(1) 26,000 yards with a contract price of Pl.13 per yard and a selling price at the time of delivery of
Pl.75 a yard........................................................... P16,120.00

(2) 18,000 yards with a contract price of P0.7062 per yard and selling price of Pl.20 per yard at the
time of delivery......................................... 9,105.67

(3) 30,000 yards with a contract price of Pl.017 per yard and a selling price of Pl.70 per yard.
20,490.00

(4) 40,850 yards with a contract price of P0.7247 per yard and a selling price of P1.25 a yard at the
time of delivery.............................................. 21,458.50 Total unrealized profits....................... P67,174.17
The overpayment of P12,282.26 made to Pamintuan by Yu Ping Kun Co., Inc. for the 224,150 yards,
which the trial court regarded as an item of damages suffered by the company, was computed as
follows (p. 71, Record on Appeal):

Liquidation value of 224,150 yards at P0.7822 a yard ..............................................................................


P175,330.13

Actual peso value of 224,150 yards as per firm offers or as per


contract............................................ 163,047.87

Overpayment................................................................ P 12,282.26

To these two items of damages (P67,174.17 as unrealized profits and P12,282.26 as overpayment),
the trial court added (a) P10,000 as stipulated liquidated damages, (b) P10,000 as moral damages,
(c) Pl,102.85 as premium paid by the company on the bond of P102,502.13 for the issuance of the
writ of preliminary attachment and (d) P10,000 as attorney's fees, or total damages of P110,559.28)
p. 250, Record on Appeal). The Court of Appeals affirmed that judgment with the modification that
the moral damages were disallowed (Resolution of June 29, 1966).

Pamintuan appealed. The Court of Appeals in its decision of March 18, 1966 found that the contract
of sale between Pamintuan and the company was partly consummated. The company fulfilled its
obligation to obtain the Japanese suppliers' confirmation of their acceptance of firm offers totalling
$47,000. Pamintuan reaped certain benefits from the contract. Hence, he is estopped to repudiate it;
otherwise, he would unjustly enrich himself at the expense of the company.

The Court of Appeals found that the writ of attachment was properly issued. It also found that
Pamintuan was guilty of fraud because (1) he was able to make the company agree to change the
manner of paying the price by falsely alleging that there was a delay in obtaining confirmation of the
suppliers' acceptance of the offer to buy; (2) he caused the plastic sheetings to be deposited in the
bonded warehouse of his brother and then required his brother to make him Pamintuan), his
attorney-in-fact so that he could control the disposal of the goods; (3) Pamintuan, as attorney-in-fact
of the warehouseman, endorsed to the customs broker the warehouse receipts covering the plastic
sheetings withheld by him and (4) he overpriced the plastic sheetings which he delivered to the
company.

The Court of Appeals described Pamintuan as a man "who, after having succeeded in getting another
to accommodate him by agreeing to liquidate his deliveries on the basis of P0.7822 per yard,
irrespective of invoice value, on the pretense that he would deliver what in the first place he ought to
deliver anyway, when he knew all the while that he had no such intention, and in the process
delivered only the poorer or cheaper kind or those which he had predetermined to deliver and did
not conceal in his brother's name and thus deceived the unwary party into overpaying him the sum
of P 1 2,282.26 for the said deliveries, and would thereafter refuse to make any further delivery in
flagrant violation of his plighted word, would now ask us to sanction his actuation" (pp. 61-62,
Rollo).

The main contention of appellant Pamintuan is that the buyer, Yu Ping Kun Co., Inc., is entitled to
recover only liquidated damages. That contention is based on the stipulation "that any violation of
the provisions of this contract (of sale) shall entitle the aggrieved party to collect from the offending
party liquidated damages in the sum of P10,000 ".

Pamintuan relies on the rule that a penalty and liquidated damages are the same (Lambert vs. Fox 26
Phil. 588); that "in obligations with a penal clause, the penalty shall substitute the indemnity for
damages and the payment of interests in case of non-compliance, if there is no stipulation to the
contrary " (1st sentence of Art. 1226, Civil Code) and, it is argued, there is no such stipulation to the
contrary in this case and that "liquidated damages are those agreed upon by the parties to a contract,
to be paid in case of breach thereof" (Art. 2226, Civil Code).

We hold that appellant's contention cannot be sustained because the second sentence of article 1226
itself provides that I nevertheless, damages shall be paid if the obligor ... is guilty of fraud in the
fulfillment of the obligation". "Responsibility arising from fraud is demandable in all obligations"
(Art. 1171, Civil Code). "In case of fraud, bad faith, malice or wanton attitude, the obligor shall be
responsible for an damages which may be reasonably attributed to the non-performance of the
obligation" (Ibid, art. 2201).

The trial court and the Court of Appeals found that Pamintuan was guilty of fraud because he did not
make a complete delivery of the plastic sheetings and he overpriced the same. That factual finding is
conclusive upon this Court.

There is no justification for the Civil Code to make an apparent distinction between 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 (Arts. 1229, 2216
and 2227, Civil Code. See observations of Justice J.B.L. Reyes, cited in 4 Tolentino's Civil Code, p. 251).

Castan Toben as notes that the penal clause in an obligation has three functions: "1. Una funcion
coercitiva o de garantia, consistente en estimular al deudor al complimiento de la obligacion
principal, ante la amenaza de tener que pagar la pena. 2. Una funcion liquidadora del dao, o sea la de
evaluar por anticipado los perjuicios que habria de ocasionar al acreedor el incumplimiento o
cumplimiento inadecuado de la obligacion. 3. Una funcion estrictamente penal, consistente en
sancionar o castigar dicho incumplimiento o cumplimiento inadecuado, atribuyendole consecuencias
mas onerosas para el deudor que las que normalmente lleva aparejadas la infraccion contractual. " (3
Derecho Civil Espanol, 9th Ed., p. 128).

The penalty clause is strictly penal or cumulative in character and does not partake of the nature of
liquidated damages (pena sustitutiva) when the parties agree "que el acreedor podra pedir, en el
supuesto incumplimiento o mero retardo de la obligacion principal, ademas de la pena, los danos y
perjuicios. Se habla en este caso de pena cumulativa, a differencia de aquellos otros ordinarios, en
que la pena es sustitutiva de la reparacion ordinaria." (Ibid, Castan Tobenas, p. 130).

After a conscientious consideration of the facts of the case, as found by Court of Appeals and the trial
court, and after reflecting on the/tenor of the stipulation for liquidated damages herein, the true
nature of which is not easy to categorize, we further hold that justice would be adequately done in
this case by allowing Yu Ping Kun Co., Inc. to recover only the actual damages proven and not to
award to it the stipulated liquidated damages of ten thousand pesos for any breach of the
contract. The proven damages supersede the stipulated liquidated damages.

This view finds support in the opinion of Manresa (whose comments were the bases of the new
matter found in article 1226, not found in article 1152 of the old Civil Code) that in case of fraud the
difference between the proven damages and the stipulated penalty may be recovered (Vol. 8, part. 1,
Codigo Civil, 5th Ed., 1950, p. 483).

Hence, the damages recoverable by the firm would amount to ninety thousand five hundred fifty-
nine pesos and twenty-eight centavos (P90,559.28), with six percent interest a year from the filing of
the complaint.
With that modification the judgment of the Court of Appeals is affirmed in all respects. No costs in
this instance.

SO ORDERED.

Barredo, Concepcion, Jr., and Santos, JJ., concur.

Abad Santos, J., concur in the result.

Separate Opinions

ANTONIO, J., concurring:

As a general rule, the penalty takes the place of the indemnity for damages and the payment of
interest. 1 This was also the rule under the Old Civil Code. Thus, Article 1152 of the Spanish Civil
Code provided that in "obligations with a penal clause the penalty shall substitute indemnity for
damages and the payment of interest in case of non-performance should there be no agreement to
the contrary. " As an exception to this rule, the penalty and the indemnity for damages and payment
of interest may be recovered when there is an express stipulation to that effect. Aside from
incorporating the provisions of Article 1152 of the Spanish Civil Code, Article 1226 of the New Civil
Code also added two other exceptions when indemnity for damages, in addition to and part from the
penalty for damages, in addition to and apart from the penalty stipulated, may be recovered: (1)
when the obligor having failed to comply with the principal obligation also refuses to pay the penalty,
in which case the creditor is entitled to interest in the amount of the penalty, in accordance with
Article 2209; or (2) when the obligor is guilty of fraud in the fulfillment of the obligation. 2 The
reason for the third exception is based on the principle that an action to enforce is based on the
principle that an action to enforce liability for future fraud cannot be renounced, as that would be
against public policy and would contravene the express provisions of Article 1171 of the Civil Code
which states that "any waiver of an action for future fraud is void. "

On this matter, Manresa commented, thus:

La pena y la indemnizacion por dolo. Es en nuestra opinion, otrocaso de excepcion a la regla


general de incompatibilidad y lo entendemos asi, no ya por el primer parrafo del articulo 1.102, que
declara exigible la responsibilidad del dolo procedente en toda clase de obligaciones, sino
principalmente por la segunda parte de dicho articulo, que se opone a la validez de toda renuncia
anticipada de la accion para exigir tal responsibilidad. En efecto, este supone que la ley no autoriza
en modo alguno la impunidad del dolo por cause de convenios anteriores, y por tanto, rechaza lo
mismo la impunidad completa que la parcial ,es decir referira a aquellos perjuicios que no quedan
satisfechos con el importe de la pena convenida. Limitada asi la cuestion, y no olividando que, a falta
de convenio especial, tiene la pena asignado el fin de reparar los perjuicios, concretamos asi nuestra
opinion: 1.0, que en caso de dolo de una obligacion con clausula penal, la prueba de de aquel para
reclamar mas indemnizacion corresponde al actor; 2. 0, que tambien, caso pedirla, le corresponde la
de existencia y cuantra los perjuicio; y 3.0, que probando ambos extremos, podra pedir la differencia
de dicha sobre el importe de la pena estipulada. 3

It is evident from tile foregoing that in case of fraud in the fulfillment of an obligation with a penal
clause, proof of such fraud is incumbent upon the creditor, and in case he demands indemnity in
addition to the penalty stipulated, proof of the existence and amount of the damages shall also
correspond to him. However, the creditor may demand only the difference of such amount over the
amount of the penalty stipulated as the creditor cannot recover both the proven damages and the
stipulated penalty. In the case at bar, he is only entitled to the stipulated
penalty plus the difference between the proven damages and the stipulated penalty.

# Separate Opinions

ANTONIO, J., concurring:

As a general rule, the penalty takes the place of the indemnity for damages and the payment of
interest. 1 This was also the rule under the Old Civil Code. Thus, Article 1152 of the Spanish Civil
Code provided that in "obligations with a penal clause the penalty shall substitute indemnity for
damages and the payment of interest in case of non-performance should there be no agreement to
the contrary. " As an exception to this rule, the penalty and the indemnity for damages and payment
of interest may be recovered when there is an express stipulation to that effect. Aside from
incorporating the provisions of Article 1152 of the Spanish Civil Code, Article 1226 of the New Civil
Code also added two other exceptions when indemnity for damages, in addition to and part from the
penalty for damages, in addition to and apart from the penalty stipulated, may be recovered: (1)
when the obligor having failed to comply with the principal obligation also refuses to pay the penalty,
in which case the creditor is entitled to interest in the amount of the penalty, in accordance with
Article 2209; or (2) when the obligor is guilty of fraud in the fulfillment of the obligation. 2 The
reason for the third exception is based on the principle that an action to enforce is based on the
principle that an action to enforce liability for future fraud cannot be renounced, as that would be
against public policy and would contravene the express provisions of Article 1171 of the Civil Code
which states that "any waiver of an action for future fraud is void. "

On this matter, Manresa commented, thus:

La pena y la indemnizacion por dolo. Es en nuestra opinion, otrocaso de excepcion a la regla


general de incompatibilidad y lo entendemos asi, no ya por el primer parrafo del articulo 1.102, que
declara exigible la responsibilidad del dolo procedente en toda clase de obligaciones, sino
principalmente por la segunda parte de dicho articulo, que se opone a la validez de toda renuncia
anticipada de la accion para exigir tal responsibilidad. En efecto, este supone que la ley no autoriza
en modo alguno la impunidad del dolo por cause de convenios anteriores, y por tanto, rechaza lo
mismo la impunidad completa que la parcial ,es decir referira a aquellos perjuicios que no quedan
satisfechos con el importe de la pena convenida. Limitada asi la cuestion, y no olividando que, a falta
de convenio especial, tiene la pena asignado el fin de reparar los perjuicios, concretamos asi nuestra
opinion: 1.0, que en caso de dolo de una obligacion con clausula penal, la prueba de de aquel para
reclamar mas indemnizacion corresponde al actor; 2. 0, que tambien, caso pedirla, le corresponde la
de existencia y cuantra los perjuicio; y 3.0, que probando ambos extremos, podra pedir la differencia
de dicha sobre el importe de la pena estipulada. 3

It is evident from tile foregoing that in case of fraud in the fulfillment of an obligation with a penal
clause, proof of such fraud is incumbent upon the creditor, and in case he demands indemnity in
addition to the penalty stipulated, proof of the existence and amount of the damages shall also
correspond to him. However, the creditor may demand only the difference of such amount over the
amount of the penalty stipulated as the creditor cannot recover both the proven damages and the
stipulated penalty. In the case at bar, he is only entitled to the stipulated
penalty plus the difference between the proven damages and the stipulated penalty.
G.R. No. 176425

HEIRS OF MANUEL UY EK LIONG, represented by BELEN LIM VDA. DE UY, Petitioners,


vs.
MAURICIA MEER CASTILLO, HEIRS OF BUENAFLOR C. UMALI, represented by NANCY UMALI,
VICTORIA H. CASTILLO, BERTILLA C. RADA, MARIETTA C. CAVANEZ, LEOVINA C. JALBUENA and
PHILIP M. CASTILLO, Respondents.

DECISION

PEREZ, J.:

Assailed in this Petition for Review on Certiorari filed pursuant to Rule 45 of the Rules of Court is the
Decision1dated 23 January 2007 rendered by the Fifteenth Division of the Court of Appeals in CA-G.R.
CV No. 84687,2 the dispositive portion of which states:

WHEREFORE, premises considered, the assailed January 27, 2005 Decision of the Regional Trial
Court of Lucena City, Branch 59, in Civil Case No. 93-176, is hereby REVERSED and SET ASIDE and a
new one entered declaring the AGREEMENT and the KASUNDUAN void ab initio for being contrary to
law and public policy, without prejudice to the attorneys filing a proper action for collection of
reasonable attorneys fees based on quantum meruit and without prejudice also to administrative
charges being filed against counsel for counsels openly entering into such an illegal AGREEMENT in
violation of the Canons of Professional Responsibility which action may be instituted with the
Supreme Court which has exclusive jurisdiction to impose such penalties on members of the bar.

No pronouncement as to costs.

SO ORDERED.3 (Italics and Underscore Ours)

The Facts

Alongside her husband, Felipe Castillo, respondent Mauricia Meer Castillo was the owner of four
parcels of land with an aggregate area of 53,307 square meters, situated in Silangan Mayao, Lucena
City and registered in their names under Transfer Certificate of Title (TCT) Nos. T-42104, T-32227, T-
31752 and T-42103. With the death of Felipe, a deed of extrajudicial partition over his estate was
executed by his heirs, namely, Mauricia, Buenaflor Umali and respondents Victoria Castillo, Bertilla
Rada, Marietta Cavanez, Leovina Jalbuena and Philip Castillo. Utilized as security for the payment of a
tractor purchased by Mauricias nephew, Santiago Rivera, from Bormaheco, Inc., it appears, however,
that the subject properties were subsequently sold at a public auction where Insurance Corporation
of the Philippines (ICP) tendered the highest bid. Having consolidated its title, ICP likewise sold said
parcels in favor of Philippine Machinery Parts Manufacturing Co., Inc. (PMPMCI) which, in turn,
caused the same to be titled in its name.4

On 29 September 1976, respondents and Buenaflor instituted Civil Case No. 8085 before the then
Court of First Instance (CFI) of Quezon, for the purpose of seeking the annulment of the transactions
and/or proceedings involving the subject parcels, as well as the TCTs procured by
PMPMCI.5 Encountering financial difficulties in the prosecution of Civil Case No. 8085, respondents
and Buenaflor entered into an Agreement dated 20 September 1978 whereby they procured the legal
services of Atty. Edmundo Zepeda and the assistance of Manuel Uy Ek Liong who, as financier, agreed
to underwrite the litigation expenses entailed by the case. In exchange, it was stipulated in the
notarized Agreement that, in the event of a favorable decision in Civil Case No. 8085, Atty. Zepeda
and Manuel would be entitled to "a share of forty (40%) percent of all the realties and/or monetary
benefits, gratuities or damages" which may be adjudicated in favor of respondents. 6

On the same date, respondents and Buenaflor entered into another notarized agreement
denominated as a Kasunduan whereby they agreed to sell their remaining sixty (60%) percent share
in the subject parcels in favor of Manuel for the sum of P180,000.00. The parties stipulated that
Manuel would pay a downpayment in the sum of P1,000.00 upon the execution of the Kasunduan
and that respondents and Buenaflor would retain and remain the owners of a 1,750-square meter
portion of said real properties. It was likewise agreed that any party violating the Kasunduan would
pay the aggrieved party a penalty fixed in the sum of P50,000.00, together with the attorneys fees
and litigation expenses incurred should a case be subsequently filed in court. The parties likewise
agreed to further enter into such other stipulations as would be necessary to ensure that the sale
would push through and/or in the event of illegality or impossibility of any part of the Kasunduan. 7

With his death on 19 August 1989, 8 Manuel was survived by petitioners, Heirs of Manuel Uy Ek
Liong, who were later represented in the negotiations regarding the subject parcels and in this suit
by petitioner BelenLim Vda. de Uy. The record also shows that the proceedings in Civil Case No. 8085
culminated in this Courts rendition of a 13 September 1990 Decision in G.R. No. 89561 9 in favor of
respondents and Buenaflor. 10 Subsequent to the finality of the Courts Decision, 11 it appears that the
subject parcels were subdivided in accordance with the Agreement, with sixty (60%) percent thereof
consisting of 31,983 square meters equally apportioned among and registered in the names of
respondents and Buenaflor under TCT Nos. T-72027, T-72028, T-72029, T-72030, T-72031, T-72032
and T-72033.12 Consisting of 21,324 square meters, the remaining forty (40%) percent was, in turn,
registered in the names of petitioners and Atty. Zepeda under TCT No. T-72026. 13

Supposedly acting on the advice of Atty. Zepeda, respondents wrote petitioners a letter dated 22
March 1993, essentially informing petitioners that respondents were willing to sell their sixty (60%)
percent share in the subject parcels for the consideration of P500.00 per square meter.14 Insisting on
the price agreed upon in the Kasunduan, however, petitioners sent a letter dated 19 May 1993,
requesting respondents to execute within 15 days from notice the necessary Deed of Absolute Sale
over their 60% share as aforesaid, excluding the 1,750-square meter portion specified in their
agreement with Manuel. Informed that petitioners were ready to pay the remaining P179,000.00
balance of the agreed price,15 respondents wrote a 28 May 1993 reply, reminding the former of their
purported refusal of earlier offers to sell the shares of Leovina and of Buenaflor who had, in the
meantime, died.16 In a letter dated 1 June 1993, respondents also called petitioners attention to the
fact, among others, that their right to ask for an additional consideration for the sale was recognized
under the Kasunduan.17

On 6 October 1993, petitioners commenced the instant suit with the filing of their complaint for
specific performance and damages against the respondents and respondent Heirs of Buenaflor, as
then represented by Menardo Umali. Faulting respondents with unjustified refusal to comply with
their obligation under the Kasunduan, petitioners prayed that the former be ordered to execute the
necessary Deed of Absolute Sale over their shares in the subject parcels, with indemnities for moral
and exemplary damages, as well as attorneys fees, litigation expenses and the costs of the
suit.18 Served with summons, respondents filed their Answer with Counterclaim and Motion to File
Third Party Complaint on 3 December 1993. Maintaining that the Agreement and the Kasunduan
were illegal for being unconscionable and contrary to public policy, respondents averred that Atty.
Zepeda was an indispensable party to the case. Together with the dismissal of the complaint and the
annulment of said contracts and TCT No. T-72026, respondents sought the grant of their
counterclaims for moral and exemplary damages, as well as attorneys fees and litigation expenses. 19

The issues thereby joined, the Regional Trial Court (RTC), Branch 54, Lucena City, proveeded to
conduct the mandatory preliminary conference in the case. 20 After initially granting respondents
motion to file a third party complaint against Atty. Zepeda, 21 the RTC, upon petitioners motion for
reconsideration,22 went on to issue the 18 July 1997 Order disallowing the filing of said pleading on
the ground that the validity of the Agreement and the cause of action against Atty. Zepeda, whose
whereabouts were then unknown, would be better threshed out in a separate action. 23 The denial24 of
their motion for reconsideration of the foregoing order 25 prompted respondents to file a notice of
appeal26 which was, however, denied due course by the RTC on the ground that the orders sought to
be appealed were non-appealable.27 On 14 December 1997, Menardo died 28 and was substituted by
his daughter Nancy as representative of respondent Heirs of Buenaflor. 29

In the ensuing trial of the case on the merits, petitioners called to the witness stand Samuel Lim Uy
Ek Liong30whose testimony was refuted by Philip 31 and Leovina32 during the presentation of the
defense evidence. On 27 January 2005, the RTC rendered a decision finding the Kasunduan valid and
binding between respondents and petitioners who had the right to demand its fulfillment as
Manuels successors-in-interest. Brushing aside Philips testimony that respondents were forced to
sign the Kasunduan, the RTC ruled that said contract became effective upon the finality of this Courts
13 September 1990 Decision in G.R. No. 89561 which served as a suspensive condition therefor.
Having benefited from the legal services rendered by Atty. Zepeda and the financial assistance
extended by Manuel, respondents were also declared estopped from questioning the validity of the
Agreement, Kasunduan and TCT No. T-72026. With the Kasunduan upheld as the law between the
contracting parties and their privies,33 the RTC disposed of the case in the following wise:

WHEREFORE, premises considered, the Court finds for the petitioners and hereby:

1. Orders the respondents to execute and deliver a Deed of Conveyance in favor of the petitioners
covering the 60% of the properties formerly covered by Transfer Certificates of Title Nos. T-3175,
42104, T-42103, T-32227 and T-42104 which are now covered by Transfer Certificates of Title Nos. T-
72027, T-72028, T-72029, T-72030, T-72031, T-72032, T-72033 and T-72026, all of the Registry of
Deeds of Lucena City, for and in consideration of the amount of P180,000.00 in accordance with the
provisions of the KASUNDUAN, and

2. Orders the petitioners to pay and deliver to the respondents upon the latters execution of the
Deed of Conveyance mentioned in the preceding paragraph, the amount of P179,000.00 representing
the balance of the purchase price as provided in the KASUNDUAN, and

3. Orders the respondents to pay the petitioners the following amounts:

a). P50,000.00 as and for moral damages;

b). P50,000.00 as and for exemplary damages; and

c). P50,000.00 as and for attorneys fees.

and to pay the costs.

SO ORDERED.34

Dissatisfied with the RTCs decision, both petitioners 35 and respondents perfected their
appeals36 which were docketed before the CA as CA-G.R. CV No. 84687. While petitioners prayed for
the increase of the monetary awards adjudicated a quo, as well as the further grant of liquidated
damages in their favor,37 respondents sought the complete reversal of the appealed decision on the
ground that the Agreement and the Kasunduan were null and void. 38 On 23 January 2007, the CA
rendered the herein assailed decision, setting aside the RTCs decision, upon the following findings
and conclusions, to wit: (a) the Agreement and Kasunduan are byproducts of the partnership
between Atty. Zepeda and Manuel who, as a non-lawyer, was not authorized to practice law; (b) the
Agreement is void under Article 1491 (5) of the Civil Code of the Philippines which prohibits lawyers
from acquiring properties which are the objects of the litigation in which they have taken part; (c)
jointly designed to completely deprive respondents of the subject parcels, the Agreement and the
Kasunduan are invalid and unconscionable; and (d) without prejudice to his liability for violation of
the Canons of Professional Responsibility, Atty. Zepeda can file an action to collect attorneys fees
based on quantum meruit.39

The Issue

Petitioners seek the reversal of the CAs decision on the following issue:

WHETHER OR NOT THE HONORABLE COURT OF APPEALS, FIFTEENTH DIVISION,


COMITTED A REVERSIBLE ERROR WHEN IT REVERSED AND SET ASIDE THE
DECISION OF THE RTC BRANCH 59, LUCENA CITY, IN CIVIL CASE NO. 93-176
DECLARING THE AGREEMENT AND KASUNDUAN VOID AB INITIO FOR BEING
CONTRARY TO LAW AND PUBLIC POLICY FOR BEING VIOLATIVE OF ART. 1491 OF
THE NEW CIVIL CODE AND THE CANONS OF PROFESSIONAL RESPONSIBILITY. 40

The Courts Ruling

We find the petition impressed with partial merit.

At the outset, it bears pointing out that the complaint for specific performance filed before the RTC
sought only the enforcement of petitioners rights and respondents obligation under the Kasunduan.
Although the answer filed by respondents also assailed the validity of the Agreement and TCT No. T-
72026, the record shows that the RTC, in its order dated 18 July 1997, disallowed the filing of a third-
party complaint against Atty. Zepeda on the ground that the causes of action in respect to said
contract and title would be better threshed out in a separate action. As Atty. Zepedas whereabouts
were then unknown, the RTC also ruled that, far from contributing to the expeditious settlement of
the case, the grant of respondents motion to file a third-party complaint would only delay the
proceedings in the case.41 With the 1 October 1998 denial of their motion for reconsideration of the
foregoing order, respondents subsequently filed a notice of appeal which was, however, denied due
course on the ground that the orders denying their motion to file a third-party complaint and their
motion for reconsideration were interlocutory and non-appealable. 42

Absent a showing that the RTCs ruling on the foregoing issues was reversed and set aside, we find
that the CA reversibly erred in ruling on the validity of the Agreement which respondents executed
not only with petitioners predecessor-in-interest, Manuel, but also with Atty. Zepeda. Since it is
generally accepted that no man shall be affected by any proceeding to which he is a stranger, 43 the
rule is settled that a court must first acquire jurisdiction over a party either through valid service of
summons or voluntary appearance for the latter to be bound by a court decision. 44 The fact that
Atty. Zepeda was not properly impleaded in the suit and given a chance to present his side of the
controversy before the RTC should have dissuaded the CA from invalidating the Agreement and
holding that attorneys fees should, instead, be computed on a quantum meruit basis. Admittedly,
Article 1491 (5)45 of the Civil Code prohibits lawyers from acquiring by purchase or assignment the
property or rights involved which are the object of the litigation in which they intervene by virtue of
their profession. The CA lost sight of the fact, however, that the prohibition applies only during the
pendency of the suit46 and generally does not cover contracts for contingent fees where the transfer
takes effect only after the finality of a favorable judgment. 47

Although executed on the same day, it cannot likewise be gainsaid that the Agreement and the
Kasunduan are independent contracts, with parties, objects and causes different from that of the
other. Defined as a meeting of the minds between two persons whereby one binds himself, with
respect to the other to give something or to render some service, 48 a contract requires the
concurrence of the following requisites: (a) consent of the contracting parties; (b) object certain
which is the subject matter of the contract; and, (c) cause of the obligation which is
established.49 Executed in exchange for the legal services of Atty. Zepeda and the financial assistance
to be extended by Manuel, the Agreement concerned respondents transfer of 40% of the avails of the
suit, in the event of a favorable judgment in Civil Case No. 8085. While concededly subject to the
same suspensive condition, the Kasunduan was, in contrast, concluded by respondents with Manuel
alone, for the purpose of selling in favor of the latter 60% of their share in the subject parcels for the
agreed price of P180,000.00. Given these clear distinctions, petitioners correctly argue that the CA
reversibly erred in not determining the validity of the Kasunduan independent from that of the
Agreement.

Viewed in the light of the autonomous nature of contracts enunciated under Article 1306 50 of the
Civil Code, on the other hand, we find that the Kasunduan was correctly found by the RTC to be a
valid and binding contract between the parties. Already partially executed with respondents receipt
of P1,000.00 from Manuel upon the execution thereof, the Kasunduan simply concerned the sale of
the formers 60% share in the subject parcel, less the 1,750-square meter portion to be retained, for
the agreed consideration of P180,000.00. As a notarized document that carries the evidentiary
weight conferred upon it with respect to its due execution, 51 the Kasunduan was shown to have been
signed by respondents with full knowledge of its contents, as may be gleaned from the testimonies
elicited from Philip52 and Leovina.53

Although Philip had repeatedly claimed that respondents had been forced to sign the Agreement and
the Kasunduan, his testimony does not show such vitiation of consent as would warrant the
avoidance of the contract. He simply meant that respondents felt constrained to accede to the
stipulations insisted upon by Atty. Zepeda and Manuel who were not otherwise willing to push
through with said contracts.54

At any rate, our perusal of the record shows that respondents main objection to the enforcement of
the Kasunduan was the perceived inadequacy of the P180,000.00 which the parties had fixed as
consideration for 60% of the subject parcels. Rather than claiming vitiation of their consent in the
answer they filed a quo, respondents, in fact, distinctly averred that the Kasunduan was tantamount
to unjust enrichment and "a clear source of speculative profit" at their expense since their remaining
share in said properties had "a current market value of P9,594,900.00, more or less."55 In their 22
March 1993 letter to petitioners, respondents also cited prices then prevailing for the sale of
properties in the area and offered to sell their 60% share for the price of P500.00 per square
meter56 or a total of P15,991,500.00. In response to petitioners insistence on the price originally
agreed upon by the parties,57 respondents even invoked the last paragraph 58 of the Kasunduan to the
effect that the parties agreed to enter into such other stipulations as would be necessary to ensure
the fruition of the sale.59

In the absence of any showing, however, that the parties were able to agree on new stipulations that
would modify their agreement, we find that petitioners and respondents are bound by the original
terms embodied in the Kasunduan. Obligations arising from contracts, after all, have the force of law
between the contracting parties60who are expected to abide in good faith with their contractual
commitments, not weasel out of them.61 Moreover, when the terms of the contract are clear and leave
no doubt as to the intention of the contracting parties, the rule is settled that the literal meaning of
its stipulations should govern. In such cases, courts have no authority to alter a contract by
construction or to make a new contract for the parties. Since their duty is confined to the
interpretation of the one which the parties have made for themselves without regard to its wisdom
or folly, it has been ruled that courts cannot supply material stipulations or read into the contract
words it does not contain.62Indeed, courts will not relieve a party from the adverse effects of an
unwise or unfavorable contract freely entered into.63
Our perusal of the Kasunduan also shows that it contains a penal clause 64 which provides that a party
who violates any of its provisions shall be liable to pay the aggrieved party a penalty fixed
at P50,000.00, together with the attorneys fees and litigation expenses incurred by the latter should
judicial resolution of the matter becomes necessary. 65 An accessory undertaking to assume greater
liability on the part of the obligor in case of breach of an obligation, the foregoing stipulation is a
penal clause which serves to strengthen the coercive force of the obligation and provides for
liquidated damages for such breach. 66 "The obligor would then be bound to pay the stipulated
indemnity without the necessity of proof of the existence and the measure of damages caused by the
breach."67 Articles 1226 and 1227 of the Civil Code state:

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.

Art. 1227. The debtor cannot exempt himself from the performance of the obligation by paying the
penalty, save in the case where this right has been expressly reserved for him. Neither can the
creditor demand the fulfillment of the obligation and the satisfaction of the penalty at the same time,
unless this right has been clearly granted to him. However, if after the creditor has decided to require
the fulfillment of the obligation, the performance thereof should become impossible without his
fault, the penalty may be enforced."

In the absence of a showing that they expressly reserved the right to pay the penalty in lieu of the
performance of their obligation under the Kasunduan, respondents were correctly ordered by the
RTC to execute and deliver a deed of conveyance over their 60% share in the subject parcels in favor
of petitiOners. Considering that the Kasunduan stipulated that respondents would retain a portion of
their share consisting of 1,750 square meters, said disposition should, however, be modified to give
full effect to the intention of the contracting parties. Since the parties also fixed liquidated damages
in the sum of P50,000.00 in case of breach, we find that said amount should suffice as petitioners'
indemnity, without further need of compensation for moral and exemplary damages. In obligations
with a penal clause, the penalty generally substitutes the indemnity for damages and the payment of
interests in case of non-compliance. 68 Usually incorporated to create an effective deterrent against
breach of the obligation by making the consequences of such breach as onerous as it may be possible,
the rule is settled that a penal clause is not limited to actual and compensatory damages 69

The RTC's award of attorney's fees in the sum of P50,000.00 is, however, proper.1a wphi1 Aside from
the fact that the penal clause included a liability for said award in the event of litigation over a breach
of the Kasunduan, petitioners were able to prove that they incurred said sum in engaging the
services of their lawyer to pursue their rights and protect their interests. 70

WHEREFORE, premises considered, the Court of Appeals' assailed 23 January 2007 Decision is
REVERSED and SET ASIDE. In lieu thereof, the RTC's 27 January 2005 Decision is REINSTATED
subject to the following MODIFICATIONS: (a) the exclusion of a 1,750-square meter portion from the
60% share in the subject parcel respondents were ordered to convey in favor of petitioners; and (b)
the deletion of the awards of moral and exemplary damages. The rights of the parties under the
Agreement may be determined in a separate litigation.

SO ORDERED.
[G.R. No. 128667. December 17, 1999]

RAFAEL A. LO, petitioner vs. COURT OF APPEALS and GREGORIO LUGUIBIS, respondents.

DECISION
MENDOZA, J.:

This is a petition for review by certiorari of the decision[1] of the Court of Appeals, dated January
31, 1996, affirming the resolution[2] of the Social Security Commission, dated May 3, 1994, the
dispositive portion of which reads:

WHEREFORE, PREMISES CONSIDERED, this Commission finds and so holds that petitioner Gregorio
Luguibis had been employed from September, 1957 to September, 1970 with respondent Jose Lo and
from January, 1981 to September, 1984 with respondent Rafael Lo Rice and Corn Mill.

Accordingly, respondent Jose Lo is hereby directed to report the petitioners name for SS coverage
effective September, 1957 and to pay to the SSS within thirty (30) days from receipt hereof the
amount of ONE THOUSAND THREE HUNDRED FORTY TWO PESOS (P1,342.00), representing the
unpaid SS contributions in favor of petitioner covering the period from September, 1957 to
September, 1970, plus the amount of THIRTEEN THOUSAND NINE HUNDRED SIXTY THREE PESOS
AND NINETY EIGHT CENTAVOS (P13,963.98), representing the penalty liability for late payment
computed as of December, 1993, and the damages amounting to TWELVE THOUSAND FIVE
HUNDRED EIGHTY FIVE PESOS AND THREE CENTAVOS (P12,585.03), for failure to report petitioner
for coverage prior to the contingency pursuant to Section 24(a) of the SS Law, as amended.

Likewise, respondent Rafael Lo as owner of Rafael Lo Rice and Corn Mill Factory is hereby directed to
report the petitioners name for SS coverage retroactive January, 1981; to pay to the SSS within thirty
(30) days from receipt hereof the amount of TWO THOUSAND ONE HUNDRED THIRTY SEVEN PESOS
AND TWENTY FIVE CENTAVOS (P2,137.25), representing the unpaid SS/Medicare/EC contributions
in favor of petitioner covering the period from January, 1981 to September, 1984, plus the amount of
NINE THOUSAND TWENTY FIVE PESOS AND TWENTY FOUR CENTAVOS (P9,025.24), representing
the penalty liability for late payment computed as of December, 1993, and the damages amounting to
SEVEN THOUSAND ONE HUNDRED EIGHTY SIX PESOS AND EIGHTY CENTAVOS (P7,186.80), for
misrepresenting petitioners true date of employment pursuant to Section 24(b) of the SS Law, as
amended.

Meanwhile, the SSS is hereby ordered to pay to petitioner his monthly retirement pension benefit
effective September, 1984, the date he was separated from employment, upon his filing of the proper
claim supported by pertinent documents.

The facts are as follows:


On April 22, 1953, private respondent Gregorio Luguibis began working as a mechanic at the
Polangui Rice Mill, Inc., owned by Jose Lo. Private respondent was paid P4.00 daily. In 1959, in
addition to his work at the rice mill, he was asked to render services as a mechanic at the Polangui
Bijon Factory also owned by Jose Lo. His wage was later increased, and from 1964 to 1970, when he
resigned due to illness, he was receiving a daily wage of P10.00.
It appears that the management of the rice mill and noodle factory, originally owned by Jose Lo,
were transferred in 1978 to his son, petitioner Rafael Lo, and his sister, Leticia Lo. Petitioner took
over the rice mill, which then became known as the Rafael Lo Rice and Corn Mill, while Leticia Lo
became the operator and manager of the Polangui Bijon Factory. [3]
In 1981, private respondent was rehired by Jose Lo, as mechanic, with a daily wage of P34.00,
plus allowance. While repairing one of the defective machines at the noodle factory on August 11,
1984, private respondent met an accident and suffered injuries which forced him to retire soon
thereafter.
In 1985, private respondent filed his application for retirement benefits with the Social Security
System (SSS). His application, however, was denied since per SSS records he became a member only
in 1983, and contributions in his favor were remitted only from October 1983 to September 1984. As
private respondent knew that SSS contributions of P3.50 have been deducted from his monthly
salary since compulsory SSS coverage took effect in 1957, private respondent filed a petition with the
Social Security Commission against petitioner Rafael Lo and Jose Lo. On May 3, 1994, the
Commission upheld private respondents claim and ordered petitioner and Jose Lo to remit to the SSS
the unpaid contributions in favor of private respondent for the periods September 1957-September
1970, and January 1981-September 1984, including penalties and charges.
Instead of filing a notice of appeal, petitioner then filed a petition for review [4] with the Court of
Appeals. The appellate court, nonetheless, took cognizance of the petition as an appeal and decided it
on the merits.
On January 3, 1996, the Court of Appeals affirmed the decision of the Commission, except that it
ordered petitioner to pay to the SSS the amount representing the unpaid contributions for the period
January 1981 to September 1983, instead of the period January 1981 to September 1984.
When the appellate court denied his motion for reconsideration, [5] petitioner filed this petition
for review, where he assigns the following errors:[6]
I. THE FINDING THAT THE BULK OF THE CLAIMS HAS NOT PRESCRIBED IS NOT IN
ACCORD WITH AND/OR CONTRARY TO THE APPLICABLE LAW AND DECISIONS OF
THIS HONORABLE COURT.
II. THE FINDINGS OF FACT THAT IMPELLED THE HONORABLE COURT OF APPEALS TO
REJECT THE DEFENSE IS BASED ON A MISAPPREHENSION OF FACTS, IS
UNSUPPORTED BY THE EVIDENCE, AND THERE IS GRAVE ABUSE OF DISCRETION.
First. Petitioner argues that the right of private respondent to file an action to claim his SSS
benefits has already prescribed. He claims that the Court of Appeals should not have applied to this
case the ruling in People v. Monteiro,[7] where it was held that the period of prescription for failure to
register with the SSS commences on the day of the discovery of the violation. According to
petitioner, Monteirocan only be applied to penal offenses, whereas the present case involves civil
claims and should, therefore, be governed by the Civil Code provisions on prescription. Petitioner
argues:

Payment of SS premium, as stated in the Decision, is an obligation created by law hence, without
need of demand, it becomes due on the date when such payment should be made. Hence, under
Article 1150 [of the Civil Code], the right of action to recover unremitted SS premium accrues on the
date it is payable and maybe brought beginning such date. If the period of non-remittance covers a
certain period, say 10 years, such claim is divisible into as many parts as there are installments due,
although for purposes of convenience and avoidance of multiplicity of suits, such accumulated claims
may be brought in a single case. However, for purposes of prescription the accumulated claims
should be segregated to determine which have already prescribed. This is no different from a claim
for backwages, underpayment and the like under the Labor Code which fall due periodically mostly
on a weekly or even daily basis where all claims more than 3 years old reckoned from the date of the
filing of the claim are segregated and considered prescribed. Which is unlike a claim for separation
pay which is unitary or indivisible, the same being based on the length of service of an employee and
accrues only on the date he is separated from the service.[8]

The argument is untenable.


Section 22(b), par. 2, of Republic Act No. 1161, or the SSS Law, as amended, states:

The right to institute the necessary action against the employer may be commenced within twenty
(20) years from the time the delinquency is known or the assessment is made by the SSS, or from the
time the benefit accrues, as the case may be. (emphasis supplied)

The clear and explicit language of the statute leaves no room for doubt as to its application.
Indeed, in Benedicto v. Abad Santos,[10] we held that 22(b) of R.A. 1161 applies to administrative
[9]

and civil actions against an employer for his failure to remit SSS contributions. Criminal actions for
violations of the SSS law, on the other hand, prescribes in four years, as provided in Act No. 3326. [11]
Private respondent, in this case, discovered the delinquency of petitioner in remitting his SSS
contributions only after his separation from employment on September 13, 1984. Prior thereto,
private respondent could not have known that his SSS contributions were not being remitted by
petitioner since deductions were made on his salary monthly. Thus, even if petitioner is correct in
saying that the prescriptive period should be counted from the day on which the corresponding
action could have been instituted, the action in this case could only be instituted when the
delinquency was made known to the private respondent and not when the obligation to pay the
premiums accrued.
Thus, even if the case of People v. Monteiro were not applied to the present case, R.A. 1161,
22(b) expressly provides that the period of prescription to file the necessary action against the
employer should likewise commence on the day said violation was discovered.
Petitioner likewise contends that the 20-year prescriptive period does not apply to private
respondents claims prior to 1980 because Presidential Decree No. 1636, which amended R.A. 1161
to provide for such period, took effect on January 1, 1980. Hence, since R.A. 1161 did not originally
provide for a prescriptive period prior to its amendment, the Civil Code provisions on prescription
should govern.
The argument has no merit.
In amending R.A. 1161, P.D. 1636 provided for a 20-year prescriptive period and, in effect,
extended the 10-year period of prescription provided by the Civil Code. For cases, therefore, with
rights arising prior to P.D. 1636, the 20-year prescriptive period shall take effect as long as the
original prescriptive period has not expired. [12]
Even assuming that the prescriptive period has begun to run in this case prior to the discovery
of the violation in 1985, it could have started only at the time the benefit accrued, i.e., in September
1970 when private respondent left his job due to illness. On January 1, 1980, when P.D. 1636 took
effect, the 10-year prescriptive period has not expired and was, thus, deemed extended to 20 years.
In any case, as earlier stated, the provision of 22(b) of R.A. 1161 is clear that the period of
prescription commences to run only upon the discovery of the violation, which in this case took place
in 1985.When the complaint was filed on August 14, 1985, therefore, less than one year has passed
since the discovery of the delinquency. Nor do we find it necessary to discuss petitioners contention
that the Civil Code principles on divisible obligations and payments in installments should be
applied, considering the clear and unmistakable language of R.A. 1161.
Second. Petitioner questions the finding of the Commission that private respondent was a
regular employee of the rice mill and bijon factory when the compulsory SSS coverage took effect in
1957. He alleges that the Court of Appeals findings are unsupported by evidence, and committed
grave abuse of discretion in arriving at its decision.[13]
According to petitioner, the Court of Appeals itself found Leticia Los testimony not very credible,
since the reports she submitted did not contain all the names of the employees of the rice mill and
[14]

noodle factory[15] which she mentioned in her testimony.


The contention has no merit. The appellate court did not just rely on the testimony of Leticia Lo
but on the findings of the Social Security Commission, thus:

The Commission did not err in finding that Gregorio Luguibis was a regular employee of Jose Lo from
September 1957 to September 1970 and a regular employee of the Rafael Lo Rice and Corn Mill from
January, 1981 to September 1984. Such conclusion was reached after a thorough consideration of all
the evidence (sic) presented by the parties. Hearings were conducted where Gregorio Luguibis, Jesus
Balingasa, Rafael Lo, Leticia Lo, and Bernard Redillas testified. Documentary evidence (sic) were also
presented as correctly found by the Commission, the evidence (sic) of Luguibis were more
convincing.

The testimony of Gregorio Luguibis was explicit and clear. He named the exact dates of his actual
employment at the rice mill, the nature of his work, and the amount of wages he was paid. Balingasa
corroborated Lugubis testimony with respect to the fact that the latter was indeed employed as
mechanic at the rice mill.

On the other hand, the evidence of the opposing party with respect to the issue of when Luguibis
became an employee of the rice mill and bijon factory was inconsistent. Rafael Lo alleged in one
pleading that Luguibis became an employee at the rice mill on October 10, 1983 while he testified on
cross-examination that Luguibis was hired sometime in 1980. Rafaels sister Leticia testified upon
being cross-examined that prior to 10 October 1983, Luguibis was never hired as regular employee
at the rice mill.[16]

Time and again we have ruled that in reviewing administrative decisions . . . the findings of fact
made therein must be respected as long as they are supported by substantial evidence, even if not
overwhelming or preponderant; that it is not for the reviewing court to weigh the conflicting
evidence, determine the credibility of the witnesses, or otherwise substitute its own judgment for
that of the administrative agency on the sufficiency of the evidence; that the administrative decision
in matters, within the executive jurisdiction, can only be set aside on proof of grave abuse of
discretion, fraud, or error of law.[17]
Clearly, the Court of Appeals and the Commission had sufficient basis in concluding that private
respondent was an employee of petitioner in 1957, when compulsory SSS coverage took effect.
WHEREFORE, the petition is DISMISSED and the decision of the Court of Appeals is hereby
AFFIRMED.
SO ORDERED.

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