MIAA vs. Olongapo Maintenance, G.R. 146184-85
50087 and
The antecedent facts are as follows:
OMSI and TCSI were among the five contractors of MIAA
which had janitorial and maintenance service contracts
covering various areas in the Ninoy Aquino International
Airport. Before their service contracts expired on October
31, 1998, the MIAA Board of Directors, through Antonio P.
Gana, then General Manager (GM) of MIAA, wrote OMSI
and TCSI informing them that their contracts would no
longer be renewed after October 31, 1998.13
On September 28, 1998, TCSI, in a letter to Gana,
expressed its concern over the award of its concession
area to a new service contractor through a negotiated
contract. It said that to award TCSI’s contract by mere
negotiation would violate its right to equal protection of
the law. TCSI thus suggested that a public bidding be
conducted and that the effectivity of its service contract
be meanwhile extended until a winning bid is declared.
A similar letter from OMSI to MIAA followed.14
In reply, MIAA wrote TCSI and OMSI reiterating its
disinclination to renew the latter’s contracts, adding that
it was to the government’s advantage to instead just
negotiate with other contractors. The MIAA said that
awarding a contract through negotiation was in
accordance with Section 9 of Executive Order No. (EO)
903; Sec. 82 of Republic Act No. (RA) 8522, otherwise
known as the General Appropriations Act for 1998; and
Sec. 417 of the Government Accounting and Auditing
Manual (GAAM).15
Consequently, OMSI and TCSI instituted civil cases against
MIAA to forestall the termination of their contracts and
prevent MIAA from negotiating with other service
contractors.
Civil Case Nos. 98-1875 and 98-1885
On October 26, 1998, OMSI filed with the Pasay City RTC a
Complaint for Injunction and Damages with Prayer for
Issuance of a Temporary Restraining Order and/or Writ of
Preliminary Injunction16 against MIAA (OMSI case).
Docketed as Civil Case No. 98-1875, the case was raffled
to Branch 119 of the court.
Two days after, TCSI filed Civil Case No. 98-1885 (first TCSI
case) for Prohibition, Mandamus and Damages with
Prayer for Temporary Restraining Order (TRO) and
Injunction17 against Gana and Goodline Staffers & Allied
Services, Inc. (Goodline), a service contractor that was
awarded the contract heretofore pertaining to TCSI. This
was raffled to the RTC, Branch 113, Pasay City. The OMSI
and TCSI cases are now the consolidated cases G.R. Nos.
146184-85.
Both Branches 113 and 119 granted TROs to OMSI and
TCSI.18 Subsequently, on November 18, 1998, Branch 119
granted a preliminary injunctive writ 19 in favor of OMSI. A
day after, Branch 113 also granted a similar writ20 in favor
of TCSI.
Without filing any motion for reconsideration, MIAA
assailed as void the issuance of the injunctive writs before
the CA through petitions for certiorari under Rule 65 of the
Rules of Court, docketed as CA-G.R. SP Nos.
50131.21
Meanwhile, even as the cases were pending before the
CA, Branch 113 continued to hear the first TCSI case. On
February 1, 2001, the trial court rendered a Decision
declaring as null and void the negotiated contract award
to Goodline and the Resolution of the MIAA Board dated
October 2, 1998, which authorized Gana to negotiate the
award of the service contract, and ordered the holding of
a public bidding on the janitorial service contract. Branch
113 also ordered the writ of preliminary injunction in the
case enforced until after a qualified bidder is
determined.22
In its Decision, the trial court said MIAA and Gana violated
TCSI’s right to equal protection and that the authority to
negotiate the MIAA Board granted to Gana was tainted
with grave abuse of discretion as Gana’s exercise of the
management’s prerogative to choose the awardee of a
service contract was done arbitrarily. Gana, the RTC
added, should have conducted a public bidding, noting
that Gana erred in relying on the law and executive
issuances he cited because those do not do away with the
required public bidding, as held in National Food Authority
v. Court of Appeals.23
Following the denial of Gana’s motion for reconsideration,
MIAA and Gana appealed before the CA
Ruling: It is undisputed that the service contracts of OMSI
and TCSI expired on October 31, 1998 and were not
extended by MIAA. Hence, all the rights and obligations
arising from said contracts were extinguished on the last
day of the term. As a result, OMSI and TCSI had already
lost their rights to render janitorial and maintenance
services for MIAA starting November 1, 1998.
Such being the case, the Court rules that the TROs and
writs of preliminary injunction issued in favor of OMSI and
TCSI are irregular and without legal basis for the following
reasons, to wit:
(1) The November 18, 1998 injunctive writ in favor of
OMSI in the OMSI case and the November 19, 1998
injunctive writ in favor of TCSI in the first TCSI case were
in the nature of writs of mandatory preliminary injunction.
In Bautista v. Barcelona,46 we made clear that a
mandatory injunction is an extreme remedy and will be
granted only on a showing that (a) the invasion of the right
is material and substantial; (b) the right of the
complainant is clear and unmistakable; and (c) there is an
urgent and paramount necessity for the writ to prevent
serious damage.47 It is apparent that OMSI and TCSI have
no more legal rights under the service contracts and,
therefore, they have not met the vital procedural
requirement that they must have material and substantial
rights that have to be protected by courts.
(2) The service contracts of OMSI and TCSI may not be
extended through the instrumentality of an injunctive
writ. It is a doctrine firmly settled in this jurisdiction that
courts have no power to make a contract for the parties
nor can they construe contracts in such a manner as to
change the terms of the contracts not contemplated by
the parties.48Verily, under Art. 1308 of the Civil Code, the
contract between the parties is the law between them;
mutuality being an essential characteristic of contracts
giving rise to reciprocal obligations.49 And under Art. 1306
of the Code, the parties may establish stipulations
mutually acceptable to them for as long as such are not
contrary to law, morals, good customs, public order, or
public policy. And where a determinate period for a
contract’s effectivity and expiration has been mutually
agreed upon and duly stipulated, the lapse of such period
ends the contract’s effectivity and the parties cease to be
bound by the contract.
It is undisputed that the service contracts were to
terminate on October 31, 1998. Thus, by the lapse of such
date, where no contract extension had been mutually
agreed upon by the parties, the trial court cannot force the
parties nor substitute their mutual consent to a contract
extension through an injunction.
Indeed, MIAA’s decision not to extend the service
contracts of OMSI and TCSI is a valid exercise of
management prerogative. Certainly, there is no law that
prohibits management discretion, even if it be a
governmental agency or instrumentality or a government-
owned or controlled corporation, from extending or not
extending a service contract. Certainly, MIAA’s
management can determine, in the exercise of its sound
discretion and the options available, given the factual and
economic milieu prevailing, whether or not it is to its
interest to extend a service contract for janitorial and
maintenance services.
From the foregoing premises, the RTCs in Civil Case Nos.
98-1875 and 98-1885 have erred in issuing the assailed
writs of mandatory injunction. Hence, these writs must be
nullified.
DBP vs. Sta. Ines, G.R. 193068
Facts: National Galleon Shipping Corporation (Galleon),
"formerly known as Galleon Shipping Corporation, was
organized to operate a liner service between the
Philippines and its ... trading partners."8 Galleon's major
stockholders were respondents Sta. Ines Melale Forest
Products Corporation (Sta. Ines), Cuenca Investment
Corporation (Cuenca Investment), Universal Holdings
Corporation (Universal Holdings), Galleon's President
Rodolfo M. Cuenca (Cuenca), Manuel I. Tinio (Tinio), and
the Philippine National Construction Corporation (PNCC).9
Galleon experienced financial difficulties and had to take
out several loans from different sources such as foreign
financial institutions, its shareholders (Sta. Ines, Cuenca
Investment, Universal Holdings, Cuenca, and Tinio), and
other entities "with whom it had ongoing commercial
relationships."10
DBP guaranteed Galleon's foreign loans. 11 In return,
Galleon and its stockholders Sta. Ines, Cuenca Investment,
Universal Holdings, Cuenca, and Tinio, executed a Deed of
Undertaking12 on October 10, 1979 and obligated
themselves to guarantee DBP's potential liabilities.13
To secure DBP's guarantee, Galleon undertook to secure a
first mortgage on its five new vessels and two second-
hand vessels.14 However, despite the loans extended to it,
"[Galleon's] financial condition did not improve."15
Cuenca, as Galleon's president, wrote to the members of
the Cabinet Standing Committee "for the consideration of
a policy decision to support a liner service." 16 Cuenca also
wrote then President Ferdinand Marcos and asked for
assistance.17
On July 21, 1981, President Marcos issued Letter of
Instructions No. 115518 addressed to the NDC, DBP, and
the Maritime Industry Authority.
On August 10, 1981,20 pursuant to Letter of Instructions
No. 1155, Galleon's stockholders, represented by Cuenca,
and NDC, through its then Chairman of the Board of
Directors, Roberto V. Ongpin (Ongpin) entered into a
Memorandum of Agreement,21 where NDC and Galleon
undertook to prepare and sign a share purchase
agreement covering 100% of Galleon's equity for
₱46,740,755.00.22 The purchase price was to be paid after
five years from the execution of the share purchase
agreement.23 The share purchase agreement also
provided for the release of Sta. Ines, Cuenca, Tinio and
Construction Development Corporation of the Philippines
from the personal counter-guarantees they issued in
DBP's favor under the Deed of Undertaking.
Acting as Galleon's guarantor, DBP paid off Galleon's debts
to its foreign bank creditor and, on January 25, 1982,
pursuant to the Deed of Undertaking, Galleon executed a
mortgage contract26 over seven of its vessels in favor of
DBP.
NDC took over Galleon's operations "even prior to the
signing of a share purchase agreement."27 However,
despite NDC's takeover, the share purchase agreement
was never formally executed.28
Issue: WON the failure to execute the share purchase
agreement was brought about by NDC's delay in reviewing
the financial accounts submitted by Galleon's
stockholders.
Rulings: YES
When the "terms of a contract are clear and leave no
doubt upon the intention of the contracting parties, the
literal meaning of its stipulations shall control.
It is not disputed that NDC and respondents Sta. Ines,
Cuenca, Tinio, Cuenca Investment, and Universal Holdings
executed a Memorandum of Agreement pursuant to the
directives of Letter of Instructions No. 1155.
Under the Memorandum of Agreement, NDC, as the
Buyer, undertook to:
a) implement Letter of Instructions No. 1155 and acquire
100% of Galleon's shareholdings;
b) assume actual control over Galleon's management and
operations prior to the execution of a formal share
purchase agreement and prior to the transfer to NDC of
Galleon's shareholdings;
c) designate five persons to sit in Galleon's Board of
Directors;
d) pay Galleon's stockholders the share purchase price
after five years from the date of the share purchase
agreement;
e) issue each Galleon stockholder a negotiable promissory
note with maturity on the date of the fifth annual
anniversary of the share purchase agreement;
f) verify Galleon's special warranty on its liabilities and
obligations by conducting an audit; and
g) consider for priority in the repayment of accounts,
Galleon's valid and duly authorized liabilities which are the
subject of meritorious lawsuit or which have been
arranged and guaranteed by Cuenca. While respondents,
Galleon's stockholders, as the Sellers, undertook to:
a) implement Letter of Instructions No. 1155 by allowing
NDC to purchase 100% of their shareholdings;
b) consent for NDC to assume actual control over
Galleon's management and operations prior to the
execution of a formal share purchase agreement and prior
to the transfer to NDC of Galleon's shareholdings;
c) elect NDC's designated five persons to Galleon's Board
of Directors;
d) warrant that ₱46,740,755.00 had been actually paid to
Galleon, representing payment of 46,740,755 common
shares to Galleon;
e) deliver to NDC, upon signing of the share purchase
agreement, 10,000,000 common shares of Galleon, duly
and validly endorsed for transfer, free from any and all
liens and encumbrances whatsoever; and
f) make special warranties under clause 8.
As parties to the Memorandum of Agreement, NDC and
respondents jointly undertook to:
a) immediately implement Letter of Instructions No. 1155;
b) endeavor to prepare and sign a share purchase
agreement covering 100% of Galleon's shareholdings not
more than 60 days after the signing of the Memorandum
of Agreement; and
c) incorporate the conditions listed down in clause 7 in the
share purchase agreement.
The law is categorical that "various stipulations of a
contract shall be interpreted together, attributing to the
doubtful ones that sense which may result from all of
them taken jointly."74 Fernandez v. Court of
Appeals75further emphasizes that " [t]he important task in
contract interpretation is always the ascertainment of the
intention of the contracting parties and that task is of
course to be discharged by looking to the words they used
to project that intention in their contract, all the words
not just a particular word or two, and words in context not
words standing alone."76
The Court of Appeals found that the Memorandum of
Agreement between NDC and Galleon was a perfected
contract for NDC to purchase 100% of Galleon's
shareholdings. However, a careful reading of the
Memorandum of Agreement shows that what the parties
agreed to was the execution of a share purchase
agreement to effect the transfer of 100% of Galleon's
shareholdings to NDC, as seen in clause 3.
The second paragraph of clause 4 likewise makes the
execution of a share purchase agreement a condition
before the purchase price can be paid to respondents,
since the payment of the purchase price becomes due
only after five years from the date of execution of the
share purchase agreement.
NDC asserts that the Memorandum of Agreement was
only a preliminary agreement between Galleon,
represented by Cuenca, and NDC, represented by Ongpin,
for the intended purchase of Galleon's equity pursuant to
Letter of Instructions No. 1155.
NDC's assertion that the Memorandum of Agreement was
merely a preliminary agreement that was separate and
distinct from the share purchase agreement, finds support
in clause 7 of the Memorandum of Agreement.
Under clause 7 of the Memorandum of Agreement, NDC
and respondents agreed to include in the still-to-be-
executed share purchase agreement, provisions on: (a)
standard warranties, including warranties on the accuracy
of Galleon's financials, disclosure of liabilities, etc; (b) the
retention of Galleon's representatives in Galleon's board
of directors prior to the payment of the share purchase
price; (c) the release of respondents from the counter-
guarantees they made in favor of DBP and other financial
institutions in connection with Galleon's various credit
accommodations; and (d) arbitration as a means of
settling disputes and differences of opinion regarding the
stock purchase agreement.
Taking the provisions of the Memorandum of Agreement
as a whole, it is clear that while there was an intention to
follow the directives of Letter of Instructions No. 1155, the
transfer of shares from respondents to NDC was to be
effected only with the execution of the share purchase
agreement, the terms and conditions of which were laid
out in the Memorandum of Agreement.
NDC and the respondents undertook to prepare and sign
a share purchase agreement over 100% of respondents'
shares in Galleon not more than sixty days after the
signing of the Memorandum of Agreement
The execution of a share purchase agreement was a
condition precedent to the transfer of Galleon's shares to
NDC. However, the Court of Appeals found that the NDC
prevented its execution by deliberately delaying its review
of Galleon's financial accounts.
The Regional Trial Court likewise found that respondent
Cuenca, as Galleon's representative, initiated moves for
the preparation and execution of the share purchase
agreement and NDC's takeover of Galleon.80 Nonetheless,
despite Cuenca's efforts, the share purchase agreement
was never formally executed.
NDC denies that it caused the delay in the execution of the
share purchase agreement and argues that it was Cuenca
who caused the delay for insisting on the payment first of
the advances made in Galleon's favor before executing the
share purchase agreement and relinquishing control over
Galleon.82
NDC's bare denials cannot succeed in light of the
preponderance of evidence submitted by respondents.
On April 26, 1982, Antonio L. Carpio, NDC's General
Manager,85 sent Ongpin a Memorandum,86 where Carpio
acknowledged reviewing Galleon's outstanding accounts
submitted by Cuenca.87 This supports Cuenca's statement
that they submitted a statement of Galleon's outstanding
accounts for NDC's review, as per Ongpin's request, a fact
not denied by NDC.
Upon receiving Galleon's outstanding accounts, NDC and
Sta. Ines, Cuenca, Tinio, Cuenca Investment and Universal
Holdings should have initiated the execution of the share
purchase agreement. However, the share purchase
agreement was never executed, through no fault of
Galleon's stockholders.
In clause 4 of the Memorandum of Agreement, NDC as the
buyer was to verify the warranty of the Galleon
shareholders that ₱46,740,755.00 was paid for Ga1leon's
46,740,755 common shares with par value of ₱1.00 per
share. The results of the verification would have
determined the final purchase price to be paid to the
Galleon shareholders. Nonetheless, despite the
verification still to be done, both parties agreed to execute
the share purchase agreement as soon as possible but not
more than sixty days from the signing of the
Memorandum of Agreement.
We uphold the Court of Appeals' finding that the failure to
execute the share purchase agreement was brought about
by NDC's delay in reviewing the financial accounts
submitted by Galleon's stockholders. The Memorandum
of Agreement was executed on August 10, 1981, giving the
parties no more than sixty days or up to October 9, 1981,
to prepare and sign the share purchase agreement.
However, it was only on April 26, 1982, or more than eight
months after the Memorandum of Agreement was signed,
did NDC's General Director submit his recommendation
on Galleon's outstanding account. Even then, there was
no clear intention to execute a share purchase agreement
as compliance with the Memorandum of Agreement.
Article 1186 of the Civil Code is categorical that a
"condition shall be deemed fulfilled when the obligor
voluntarily prevents its fulfilment." Considering NDC's
delay, the execution of the share purchase agreement
should be considered fulfilled with NDC as the new owner
of 100% of Galleon's shares of stocks.
The due execution of the share purchase agreement is
further bolstered by Article 1198(4) of the Civil Code,
which states that the debtor loses the right to make use of
the period when a condition is violated, making the
obligation immediately demandable:
Article 1198. The debtor shall lose every right to make use
of the period:
(1) When after the obligation has been contracted, he
becomes insolvent, unless he gives a guaranty or security
for the debt;
(2) When he does not furnish to the creditor the
guaranties or securities which he has promised;
(3) When by his own acts he has impaired said guaranties
or securities after their establishment, and when through
a fortuitous event they disappear, unless he immediately
gives new ones equally satisfactory;
(4) When the debtor violates any undertaking, in
consideration of which the creditor agreed to the period;
(5) When the debtor attempts to abscond.
Ruks Consult vs. Adworld Sign
The Facts
Adworld alleged that it is the owner of a 75 ft. x 60 ft.
billboard structure, which was misaligned and its
foundation impaired when, on August 11, 2003, the
adjacent billboard structure owned by Transworld and
used by Comark collapsed and crashed against it.
Resultantly, Adworld sent Transworld and Comark a letter
demanding payment for the repairs of its billboard as well
asloss of rental income. On August 29, 2003, Transworld
sent its reply, admitting the damage caused by its
billboard structure on Adworld’s billboard, but
nevertheless, refused and failed to pay the amounts
demanded by Adworld. As Adworld’s final demand letter
also went unheeded, it was constrained to file the instant
complaint. In its Answer with Counterclaim, Transworld
averred that the collapse of its billboard structure was due
to extraordinarily strong winds that occurred instantly and
unexpectedly, and maintained that the damage caused to
Adworld’s billboard structure was hardly noticeable.
Transworld likewise filed a Third-Party Complaint against
Ruks, the company which built the collapsed billboard
structure in the former’s favor.1âwphi1 It was alleged
therein that the structure constructed by Ruks had a weak
and poor foundation not suited for billboards, thus, prone
to collapse, and as such, Ruks should ultimately be held
liable for the damages caused to Adworld’s billboard
structure.7
For its part, Comark denied liability for the damages
caused to Adworld’s billboard structure, maintaining that
it does not have any interest on Transworld’s collapsed
billboard structure as it only contracted the use of the
same. In this relation, Comark prayed for exemplary
damages from Transworld for unreasonably includingit as
a party-defendant in the complaint.8
Lastly, Ruks admitted that it entered into a contract with
Transworld for the construction of the latter’s billboard
structure, but denied liability for the damages caused by
its collapse. It contended that when Transworld hired its
services, there was already an existing foundation for the
billboard and that it merely finished the structure
according to the terms and conditions of its contract with
the latter.9
Issue: Whether or not the CA correctly affirmed the ruling
of the RTC declaring Ruks jointly and severally liable with
Transworld for damages sustained by Adworld.
Ruling: Both Transworld and Ruks committed acts
resulting in the collapse of the former’s billboard, which in
turn, caused damage to the adjacent billboard of Adworld.
Jurisprudence defines negligence as the omission to do
something which a reasonable man, guided by those
considerations which ordinarily regulate the conduct of
human affairs, would do, or the doing of something which
a prudent and reasonable man would not do.27 It is the
failure to observe for the protection of the interest of
another person that degree of care, precaution, and
vigilance which the circumstances justly demand,
whereby such other person suffers injury.28
In this case, the CA correctly affirmed the RTC’s finding
that Transworld’s initial construction of its billboard’s
lower structure without the proper foundation, and that
of Ruks’s finishing its upper structure and just merely
assuming that Transworld would reinforce the weak
foundation are the two (2) successive acts which were the
direct and proximate cause of the damages sustained by
Adworld. Worse, both Transworld and Ruks were fully
aware that the foundation for the former’s billboard was
weak; yet, neither of them took any positive step to
reinforce the same. They merely relied on each other’s
word that repairs would be done to such foundation, but
none was done at all. Clearly, the foregoing circumstances
show that both Transworld and Ruks are guilty of
negligence in the construction of the former’s billboard,
and perforce, should be held liable for its collapse and the
resulting damage to Adworld’s billboard structure. As joint
tortfeasors, therefore, they are solidarily liable to
Adworld. Verily, "[j]oint tortfeasors are those who
command, instigate, promote, encourage, advise,
countenance, cooperate in, aid or abet the commission of
a tort, or approve of it after it is done, if done for their
benefit. They are also referred to as those who act
together in committing wrong or whose acts, if
independent of each other, unite in causing a single injury.
Under Article 219429 of the Civil Code, joint tortfeasors are
solidarily liable for the resulting damage. In other words,
joint tortfeasors are each liable as principals, to the same
extent and in the same manner as if they had performed
the wrongful act themselves."30 The Court’s
pronouncement in People v. Velasco 31 is instructive on
this matter, to wit:32
Where several causes producing an injury are concurrent
and each is an efficient cause without which the injury
would not have happened, the injury may be attributed to
all or any of the causes and recovery may be had against
any or all of the responsible persons although under the
circumstances of the case, it may appear that one of them
was more culpable, and that the duty owed by them to the
injured person was not same. No actor's negligence ceases
to be a proximate cause merely because it does not
exceed the negligence of other actors. Each wrongdoer is
responsible for the entire result and is liable as though his
acts were the sole cause of the injury.
There is no contribution between joint [tortfeasors]
whose liability is solidary since both of them are liable for
the total damage.1âwphi1 Where the concurrent or
successive negligent acts or omissions of two or more
persons, although acting independently, are in
combination the direct and proximate cause of a single
injury to a third person, it is impossible to determine in
what proportion each contributed to the injury and either
of them is responsible for the whole injury.
AFPRSBS vs. Sanvictores, G.R. 207586, 2016
Facts
Sometime in 1994, PEPI, formerly Antipolo Properties,
Inc., offered to Eduardo Sanvictores for sale on
installment basis a parcel of land in Village East Executive
Homes designated as Lot 5, Block 64, Phase II, situated in
Tayuman, Pantok, Binangonan, Rizal. Sanvictores paid
the required downpayment. A Contract to Sell was
executed by and between PEPI and AFP Retirement and
Separation Benefits System (AFPRSBS), as the seller, and
Sanvictores, as the buyer. In 1999, Sanvictores paid the
full purchase price. Despite full payment, PEPI and
AFPRSBS failed to execute the corresponding deed of
absolute sale on the subject property and deliver the
corresponding title thereto. In 2000, Sanvictores
demanded from PEPI the execution of the deed of sale
and the delivery of the transfer certificate of title. PEPI
claimed that the title was still with the Philippine
National Bank (PNB) and could not be released due to
economic crisis. Sanvictores followed up with PEPI but
the latter did not communicate with Sanvictores for a
period of 4 years. Sanvictores then filed a complaint for
rescission of the contract to sell, refund of payment,
damages, and attorney’s fees against PEPI and AFPRSBS
before the HLURB. AFPRSBS countered that it was not
the owner and developer of Village East Executive Homes
but PEPI, that PEPI alone was the seller, and that the
signatory to the contract, Norma Espina, was neither the
treasurer nor the authorized representative of AFPRSBS
but the Treasurer of PEPI. The HLURB Arbiter rendered a
decision in favor of Sanvictores and ordered PEPI and
AFPRSBS to pay jointly and severally the complainant. On
appeal of PEPI and AFPRSBS, the HLURB Board affirmed
the decision of the Arbiter. The OP upheld the decision of
the HLURB Board, holding that PEPI and AFPRSBS should
indeed be jointly and severally liable because PEPI and
AFPRSBS were referred to singly as the seller in the
contract and there were no delineations whatsoever as
to their rights and obligations. AFPRSBS filed a petition
for review before the CA. The appellate court merely
affirmed the decision of the OP and echoed the view that
the two liable entities ought to be jointly and severally
liable as they came to the contracting table with the
intention to be bound jointly and severally. The CA
concluded that the nature of the obligation of PEPI and
AFPRSBS under the subject contract was solidary
pursuant to Article 1207 of the Civil Code.
Issue: Whether or not petitioner AFPRSBS is jointly and
severally liable with PEPI to Sanvictore
Ruling:
Yes. In Spouses Berot v. Siapno, the Court defined solidary
obligation as one in which each of the debtors is liable for
the entire obligation, and each of the creditors is entitled
to demand the satisfaction of the whole obligation from
any or all of the debtors. On the other hand, a joint
obligation is one in which each debtor is liable only for a
proportionate part of the debt, and the creditor is entitled
to demand only a proportionate part of the credit from
each debtor.
The well-entrenched rule is that solidary obligations
cannot be inferred lightly. They must be positively and
clearly expressed. Article 1207 of the Civil Code does not
presume solidary liability unless the obligation expressly
so states or the law or the nature of the obligation
requires solidarity.
In the case at bar, there is no doubt that the nature of the
obligation of PEPI and AFPRSBS under the subject contract
to sell was solidary. In the said contract, PEPI and AFPRSBS
were expressly referred to as the seller while Sanvictores
was referred to as the buyer. The contract to sell did not
state sellers but seller. This could only mean that PEPI and
AFPRSBS were considered as one seller in the contract.
There was no delineation as to their rights and obligations.
Also, the signatories were Espina, representing PEPI, and
Mena, representing AFPRSBS. The signatures of Espina
and Mena were affixed again in the last portion of the
Deed of Restrictions under the word owner. AFPRSBS
repeatedly argues that the contract was not signed by any
of its authorized representative. Conveniently, however, it
remained silent as to Mena.
It never denied that Mena was its representative. AFPRSBS
is estopped from denying Mena’s authority to represent
it. It is quite obvious that AFPRSBS clothed Mena with
apparent authority to act on its behalf in the execution of
the contract to sell.
There is estoppel when the principal has clothed the agent
with indicia of authority as to lead a reasonably prudent
person to believe that the agent actually has such
authority. A corporation may be held in estoppel from
denying as against innocent third persons the authority of
its officers or agents who have been clothed by it with
ostensible or apparent authority.
R Transport vs. YU, G.R. 174161
Facts: Loreta, after having alighted from a passenger bus,
was hit and run over by a bus driven by Gimena, who was
then employed by petitioner R Transport Corporation.
Loreta was immediately rushed to the hospital where she
was pronounced dead on arrival. As testified by the police
officer on duty at the time of the incident and indicated in
the Autopsy Report, the deceased’s clothes were ripped
off from her body, her brain even spewed out from her
skull and spilled over the road. The bus driven by Gimena
bumped the deceased in a loading and unloading area of
a commercial center.
The husband of the deceased, respondent Luisito, filed a
Complaint for damages before the RTC against petitioner
R Transport, Gimena, and Metro Manila Transport
Corporation (MMTC) for the death of his wife.
MMTC denied its liability reasoning that it is merely the
registered owner of the bus involved in the incident, the
actual owner, being petitioner R Transport. Since it was
not actually operating the bus which killed respondent’s
wife, nor was it the employer of the driver thereof, MMTC
alleged that the complaint against it should be dismissed.
For its part, petitioner R Transport alleged that
respondent had no cause of action against it for it had
exercised due diligence in the selection and supervision of
its employees and drivers and that its buses are in good
condition. Meanwhile, the driver Gimena was declared in
default for his failure to file an answer to the complaint.
After trial on the merits, the trial court rendered judgment
in favor of respondent Luisito ruling that petitioner R
Transport failed to prove that it exercised the diligence
required of a good father of a family in the selection and
supervision of its driver. The RTC ordered defendants R
Transport and Metro Manila Transport Corporation
(MMTC) to be primarily and solidarily liable and defendant
Gimena subsidiarily liable to plaintiff Luisito. The CA
affirmed the Decision of the RTC with modification that
defendant Antonio Gimena is made solidarily liable for the
damages caused to respondent.
ISSUE: Is the petitioner liable for the damages caused by
its employee?
RULING: The petitioner is liable for the
damages caused by its employee. Negligence has
been defined as "the failure to observe for the protection
of the interests of another person that degree of care,
precaution, and vigilance which the circumstances justly
demand, whereby such other person suffers injury."
Verily, foreseeability is the fundamental test of
negligence. It is the omission to do something which a
reasonable man, guided by those considerations which
ordinarily regulate the conduct of human affairs, would
do, or the doing of something which a prudent and
reasonable man would not do.
Under Article 2180 of the New Civil Code, employers are
liable for the damages caused by their employees acting
within the scope of their assigned tasks. Once negligence
on the part of the employee is established, a presumption
instantly arises that the employer was remiss in the
selection and/or supervision of the negligent employee.
To avoid liability for the quasi-delict committed by its
employee, it is incumbent upon the employer to rebut this
presumption by presenting adequate and convincing
proof that it exercised the care and diligence of a good
father of a family in the selection and supervision of its
employees.
Unfortunately, however, the records of this case are
bereft of any proof showing the exercise by petitioner of
the required diligence. As aptly observed by the CA, no
evidence of whatever nature was ever presented
depicting petitioner’s due diligence in the selection and
supervision of its driver, Gimena, despite several
opportunities to do so. In fact, in its petition, apart from
denying the negligence of its employee and imputing the
same to the bus from which the victim alighted, petitioner
merely reiterates its argument that since it is not the
registered owner of the bus which bumped the victim, it
cannot be held liable for the damage caused by the same.
Nowhere was it even remotely alleged that petitioner had
exercised the required diligence in the selection and
supervision of its employee. Because of this failure,
petitioner cannot now avoid liability for the quasi-delict
committed by its negligent employee.
Sps. Ibanez vs. James, G.R. 194272
Facts: Sometime in October 1996, spouses Amado and
Esther Ibañez (spouses Ibañez) borrowed from Francisco
E. Muñoz, Sr. (Francisco), Consuelo Estrada (Consuelo) and
Ma. Consuelo E. Muñoz (Ma. Consuelo) the amount of
₱1,300,000, payable in three months, with interest at the
rate of 3% a month.
On October 14, 1996, the spouses Ibanez issued a
Promissory Note binding themselves jointly and severally.
As security, on October 1 7, 1996, the spouses Ibañez
executed a Deed of Real Estate Mortgage. The mortgage
contained the same terms as the promissory note. It
further stipulated that Ma. Consuelo and Consuelo shall
have the right to immediately foreclose the mortgage
upon the happening of the following events: (1) filing by
the mortgagor of any petition for insolvency or suspension
of payment; and/or (2) failure of the mortgagor to
perform or comply with any covenant, agreement, term or
condition of the mortgage.
On September 23, 1997, alleging that the conditions of the
mortgage have been violated since November 17, 1996
and that all check payments were dishonored by the
drawee, Ma. Consuelo and Consuelo applied for
foreclosure of the real estate mortgage. Spouses Ibañez
filed in the RTC of Manila a Complaint for injunction and
damages with prayers for writ of preliminary injunction
and temporary restraining order.
On June 11, 2002, the parties filed a Joint Motion for
Approval of Amended Compromise Agreement which was
granted and adopted as “hatol”. However, the defendants
failed to comply with the agreement and during the period
to do so Francisco died. His heirs then substituted him.
Aggrieved by the Regional Trial Court order, the heirs of
Francisco, identified as Maria C. Muñoz, Angelina M.
Crocker and Maria Elena M. Webster and represented by
James Harper, filed before the CA a Petition for
Certiorari under Rule 65 of the Revised Rules of Court.
They assailed the Orders dated August 11, 2006 and
February 20, 2007 of the trial court and clarified that
contrary to the findings of the trial court, they are pushing
for the execution of the Amended Compromise
Agreement. The heirs are of the view that since the
spouses Ibañez have not complied with any of the
foregoing stipulations, the December 16, 1997 status quo
order of the trial court should already be lifted. They
likewise argue that the trial court gravely and seriously
erred when it disregarded Francisco an
The CA ruled that the Amended Complaint and the Hatol
identified Francisco, Ma. Consuelo and Consuelo as the
creditors and the parties who were supposed to receive
the proceeds of the Amended Compromise Agreement.
Since the Deed of Assignment was executed only in favor
of Ma. Consuelo and Consuelo, the loan obligation of the
spouses Ibañez to Francisco remained unsettled. The heirs
of Francisco thus retain the right to invoke paragraph 2.5
of the Compromise Agreement which provides for the
lifting of the trial court’s status quo order. The CA
disagreed that there was no valid substitution of parties
and noted from the records that the RTC was notified of
Francisco’s death on June 29, 2006.
Issues: Whether or not the obligation created in the
amended compromise agreement and hatol is solidary
thus payment made to Ma. Consuelo and Consuelo
discharged the obligation with respect to Francisco.
Rulings: No. The Supreme Court ruled in the negative. A
compromise agreement is a contract whereby the parties,
make reciprocal concessions to avoid a litigation or put an
end to one already commenced. In a compromise, the
parties adjust their difficulties in the manner they have
agreed upon, disregarding the possible gain in litigation
and keeping in mind that such gain is balanced by the
danger of losing. It encompasses the objects stated,
although it may include other objects by necessary
implication. It is binding on the contractual parties, being
expressly acknowledged as a juridical agreement between
them, and has the effect and authority of res judicata.
Here, the spouses Ibañez agreed to pay Francisco, Ma.
Consuelo and Consuelo the total amount of ₱3,000,000,
with the initial payment of ₱2,000,000 to be sourced from
the proceeds of a GSIS loan and secured by the spouses
Ibanez while the remaining balance of ₱l,000,000 to be
paid one year from the date of the Amended Compromise
Agreement.
As correctly identified by the CA, the Amended
Compromise Agreement clearly refers to the spouses
Ibañez as plaintiffs and Francisco, Consuelo and Ma.
Consuelo as the defendants they covenanted to pay.
There is nothing in the Hatol, and the Amended
Compromise Agreement it is based on, which shows a
declaration that the obligation created was solidary.
In any case, solidary obligations cannot be inferred lightly.
They must be positively and clearly expressed. Articles
1207 and 1208 of the Civil Code provide:
Art. 1207. The concurrence of two or more creditors or of
two or more debtors in one and the same obligation does
not imply that each one of the former has a right to
demand, or that each one of the latter is bound to render,
entire compliance with the prestations. There is a solidary
liability only when the obligation expressly so states, or
when the law or the nature of the obligation requires
solidarity.
Art. 1208. If from the law, or the nature or the wording of
the obligations to which the preceding article refers the
contrary does not appear, the credit or debt shall be
presumed to be divided into as many equal shares as there
are creditors or debtors, the credits or debts being
considered distinct from one another, subject to the Rules
of Court governing the multiplicity of suits.
In this case, given that solidarity could not be inferred
from the agreement, the presumption under the law
applies-the obligation is joint.
As defined in Article 1208, a joint obligation is one where
there is a concurrence of several creditors, or of several
debtors, or of several debtors, or of several creditors and
debtors, by virtue of which each of the creditors has a right
to demand, and each of the debtors is bound to render
compliance with his proportionate part of the prestation
which constitutes the object of the obligation. Each debtor
answers only for a part of the whole liability and to each
obligee belongs only a part of the correlative rights as it is
only in solidary obligations that payment made to any one
of the solidary creditors extinguishes the entire obligation.
This means that Francisco, Ma. Consuelo and Consuelo are
each entitled to equal shares in the ₱3,000,000 agreed
upon in the Amended Compromise Agreement and that
payment to Consuelo and Ma. Consuelo will not have the
effect of discharging the obligation with respect to
Francisco.
Government vs. CFI G.R. L-32162
Facts: In 1964, respondent-appellee V.D. Isip, Sons &
Associates represented by Vicente David Isip entered into
a contract with the City of Pasay represented by then
Mayor Pablo Cuneta for the construction of a new Pasay
City Hall for the contract price of P4.9 million. Isip
proceeded with the construction and accomplished the
amount of work equivalent to P1.7 million. Pasay paid only
the total amount of P1.1 million, leaving a balance of
P613,000. Pasay failed to remit the amount, so Isip filed a
case for specific performance with damages before CFI
Manila. The parties arrived at a draft amicable agreement
wherein it was stated that Pasay will remit P613,000 to
Isip and that Isip will start the construction work
corresponding to the next stage. The Municipal Board
enacted an ordinance which approved the Compromise
Agreement. CFI approved the compromise agreement and
subsequently issued a writ of execution. An application for
and notice of garnishment were made and effected upon
Pasay's funds with the PNB. Pasay filed a motion to quash
the writ of execution, alleging that the Sheriff has no
power to levy or garnish on execution the general funds,
specially the trust funds, of Pasay City. CFI denied the
motion and ordered the enforcement of garnishment.
Hence, Pasay filed a petition for review before the SC.
Issue: WON Respondent can ask for rescission and enforce
the compromise agreement.
Ruling: The two purposes of a compromise agreement are
enunciated in Article 2028 of the New Civil Code, to wit:
A. 2028. A compromise is a contract where by the
parties,by making reciprocal concessions, avoid a litigation
or put an end to one already commenced.
The first purpose — "to avoid a litigation" — occurs when
there is a threat of an impending litigation. At this point,
no case has yet reached the courts. The moment a case
has been filed in court then the second purpose — "to put
an end to one already commenced" — applies.
In the herein case, We are concerned with the second
purpose. The latter purpose is given effect in Article 2037
of the New Civil Code which reads:
Article 2037. A compromise has upon the parties the
effect and authority of res judicata; but there shall be no
execution except in compliance with a judicial
compromise.
A compromise agreement not contrary to law, public
order, public policy, morals or good customs is a valid
contract which is the law between the parties themselves
(Municipal Board of Cabanatuan City vs. Samahang
Magsasaka, Inc., 62 SCRA 435). A judgment on a
compromise is a final and executory (Samonte vs.
Samonte, 64 SCRA 524). It is immediately executory
(Pamintuan vs. Muños et al., L-26331, 22 SCRA 1109
[March 15, 1968]) in the absence of a motion to set the
same aside on the ground of fraud, mistake or duress
(Cadano vs. Cadano L-34998, 49 SCRA 33 [January 11,
1973]).
In fact in the herein case before Us, execution has already
been issued. Considering this in the light of Article 2041 of
the New Civil Code, to wit:
Art. 2041. If one of the parties fails or refuses to abide by
the compromise, the other party may either enforce the
compromise or regard it as rescinded and insist upon his
original demand.,
it is obvious that the respondent-appellee did not only
succeed in enforcing the compromise but said plaintiff-
appellee likewise wants to rescind the said compromise. It
is clear from the language of the law, specifically Article
2041 of the New Civil Code that one of the parties to a
compromise has two options: 1) to enforce the
compromise; or 2) to rescind the same and insist upon his
original demand. The respondent-appellee in the case
herein before Us wants to avail of both of these options.
This can not be done. The respondent-appellee cannot ask
for rescission of the compromise agreement after it has
already enjoyed the first option of enforcing the
compromise by asking for a writ of execution resulting
thereby in the garnishment of the Pasay City funds
deposited with the Philippine National Bank which
eventually was delivered to the respondent-appellee.
RS Tomas Inc, vs. Rizal Cement, G.R. 173155
Facts: On December 28, 1990, respondent and petitioner
entered into a Contract[5] for the supply of labor,
materials, and technical supervision of the following
projects:
1. J.O. #P-90-212 Wiring and installation of primary and
secondary lines system.
2. J.O. #P-90-213 Supply and installation of primary
protection and disconnecting switch.
3. J.O. #P-90-214 Rewinding and conversion of one (1)
unit 3125 KVA, 34.5 KV/2.4 KV, 3 Transformer to 4000
KVA, 34.5 KV/480V, 3 Delta Primary, Wye with neutral
secondary.[6]
Petitioner agreed to perform the above-mentioned job
orders. Specifically, it undertook to supply the labor,
equipment, supervision, and materials as specified in the
detailed scope of work.[7] For its part, respondent agreed
to pay the total sum of P2,944,000.00 in consideration of
the performance of the job orders. Petitioner undertook
to complete the projects within one hundred twenty (120)
days from the effectivity of the contract.[8] It was agreed
upon that petitioner would be liable to respondent for
liquidated damages in the amount of P29,440.00 per day
of delay in the completion of the projects which shall be
limited to 10% of the project cost.[9] To secure the full and
faithful performance of all its obligations and
responsibilities under the contract, petitioner obtained
from Times Surety & Insurance Co. Inc. (Times Insurance)
a performance bond[10]in an amount equivalent to fifty
percent (50%) of the contract price or P1,458,618.18.
Pursuant to the terms of the contract, respondent made
an initial payment of P1,458,618.18 on January 8, 1991.[11]
In a letter[12] dated March 9, 1991, petitioner requested
for an extension of seventy-five (75) days within which to
complete the projects because of the need to import some
of the materials needed. In the same letter, it also asked
for a price adjustment of P255,000.00 to cover the higher
cost of materials.[13] In another letter[14] dated March 27,
1991, petitioner requested for another 75 days extension
for the completion of the transformer portion of the
projects for failure of its supplier to deliver the materials.
On June 14, 1991,[15] petitioner manifested its desire to
complete the project as soon as possible to prevent
further losses and maintain goodwill between the
companies. Petitioner requested for respondents
assistance by facilitating the acquisition of materials and
supplies needed to complete J.O. #P-90-212 and J.O. #P-
90-213 by directly paying the suppliers. It further sought
that it be allowed to back out from J.O. #P-90-214 covering
the rewinding and conversion of the damaged
transformer.
In response[16] to petitioners requests, respondent,
through counsel, manifested its observation that
petitioners financial status showed that it could no longer
complete the projects as agreed upon. Respondent also
informed petitioner that it was already in default having
failed to complete the projects within 120 days from the
effectivity of the contract. Respondent further notified
petitioner that the former was terminating the contract. It
also demanded for the refund of the amount already paid
to petitioner, otherwise, the necessary action would be
instituted. Respondent sent another demand letter[17] to
Times Insurance for the payment of P1,472,000.00
pursuant to the performance bond it issued.
On November 14, 1991,[18] respondent entered into two
contracts with Geostar Philippines, Inc. (Geostar) for the
completion of the projects commenced but not
completed by petitioner for a total consideration
of P3,435,000.00.
On December 14, 1991, petitioner reiterated its desire to
complete J.O. #P-90-212 and J.O. #P-90-213 and to
exclude J.O. #P-90-214,[19] but the same was denied by
respondent in a letter[20] dated January 14, 1992. In the
same letter, respondent pointed out that amicable
settlement is impossible. Hence, the Complaint for Sum of
Money[21]filed by respondent against petitioner and Times
Surety & Insurance Co., Inc. praying for the payment of the
following: P493,695.00 representing the amount which
they owed respondent from the downpayment and
advances made by the latter vis--vis the work
accomplishment; P2,550,945.87 representing the amount
incurred in excess of the cost of the projects as agreed
upon; P294,000.00 as liquidated damages; plus interest
and attorneys fees.[22]
Times Insurance did not file any pleading nor appeared in
court. For its part, petitioner denied[23] liability and
claimed instead that it failed to complete the projects due
to respondents fault. It explained that it relied in good
faith on respondents representation that the transformer
subject of the contract could still be rewound and
converted but upon dismantling the core-coil assembly, it
discovered that the coils were already badly damaged and
the primary bushing broken. This discovery allegedly
entailed price adjustment. Petitioner thus requested
respondent for additional time within which to complete
the project and additional amount to finance the same.
Petitioner also insisted that the proximate cause of the
delay is the misrepresentation of the respondent on the
extent of the defect of the transformer.
Issue: whether or not the evidence presented by
petitioner adequately established the true nature and
condition of the subject transformer.
Ruling: petitioner justified its inability to complete the
projects within the stipulated period on the alleged
unavailability of the materials to be used to perform the
projects as stated in the job orders. Nowhere in said
letters did petitioner claim that it could not finish the
projects, particularly the conversion of the transformer
unit because the defects were worse than the
representation of respondent. In other words, there was
no allegation of fraud, bad faith, concealment or
misrepresentation on the part of respondent as to the
true condition of the subject transformer. Even in its
letter[49] dated May 25, 1991, petitioner only requested
respondent that payment to the first progress billing be
released as soon as possible and without deduction. It
further proposed that respondent make a direct payment
to petitioners suppliers.
It was only in its June 14, 1991 letter[50] when petitioner
raised its observations that the subject transformer
needed more repairs than what it knew during the
bidding.[51] In the same letter, however, petitioner
repeated its request that direct payment be made by
respondent to petitioners suppliers.[52] More importantly,
petitioner admitted that it made a judgment error when it
quoted for only P440,770.00 for the contract relating to
J.O. #P-90-214 based on limited information.
It can be inferred from the foregoing facts that there was
not only a delay but a failure to complete the projects as
stated in the contract; that petitioner could not complete
the projects because it did not have the materials needed;
and that it is in need of financial assistance.
Assuming for the sake of argument that the subject
transformer was indeed in a damaged condition even
before the bidding which makes it impossible for
petitioner to perform its obligations under the contract,
we also agree with the CA that petitioner failed to prove
that respondent was guilty of bad faith, fraud, deceit or
misrepresentation.
Bad faith does not simply connote bad judgment or
negligence; it imports a dishonest purpose or some moral
obliquity and conscious doing of a wrong, a breach of a
known duty through some motive or interest or ill will that
partakes of the nature of fraud.[59] Fraud has been defined
to include an inducement through insidious machination.
Insidious machination refers to a deceitful scheme or plot
with an evil or devious purpose. Deceit exists where the
party, with intent to deceive, conceals or omits to state
material facts and, by reason of such omission or
concealment, the other party was induced to give consent
that would not otherwise have been given.[60] These are
allegations of fact that demand clear and convincing
proof. They are serious accusations that can be so
conveniently and casually invoked, and that is why they
are never presumed.[61] In this case, the evidence
presented is insufficient to prove that respondent acted in
bad faith or fraudulently in dealing with petitioner.
Petitioner in fact admitted that its representatives were
given the opportunity to inspect the subject transformer
before it offered its bid. If indeed the transformer was
completely sealed, it should have demanded that the
same be opened if it found it necessary before it offered
its bid. As contractor, petitioner had been remiss in its
obligation to obtain as much information as possible on
the actual condition of the subject transformer or at least
it should have provided a qualification in its bid so as to
make clear its right to claim contract price and time
adjustment.[62] As aptly held by the CA, considering that
petitioner is a company engaged in the electrical business
and the contract it had entered into involved a sizable
amount of money, its failure to conduct an inspection of
the subject transformer is inexcusable.[63]
In sum, the evidence presented by the parties lead to the
following conclusions: (1) that the projects were not
completed by petitioner; (2) that petitioner was given the
opportunity to inspect the subject transformer; (3) that
petitioner failed to thoroughly study the entirety of the
projects before it offered its bid; (4) that petitioner failed
to complete the projects because of the unavailability of
the required materials and that petitioner needed
financial assistance; (5) that the evidence presented by
petitioner were inadequate to prove that the subject
transformer could no longer be repaired; and (6) that
there was no evidence to show that respondent was in
bad faith, acted fraudulently, or guilty of deceit and
misrepresentation in dealing with petitioner.
In view of the foregoing disquisitions, we find that there
was not only delay but non-completion of the projects
undertaken by petitioner without justifiable ground.
Undoubtedly, petitioner is guilty of breach of
contract. Breach of contract is defined as the failure
without legal reason to comply with the terms of a
contract. It is also defined as the failure, without legal
excuse, to perform any promise which forms the whole or
part of the contract.[64] In the present case, petitioner did
not complete the projects. This gives respondent the right
to terminate the contract by serving petitioner a written
notice.
Spouses Jaime and Matilde Poon vs. Prime Savings Bank
represent by the Philippine Deposit Insurance
Corporation as Statutory Liquidator G.R. No. 183794 June
13, 2016
Facts: Petitioners owned a commercial building in Naga
City. On November 3, 2006, Matilde Poon and Respondent
executed a 10-year Contract of Lease over the building for
the latter’s use as its branch office in Naga City. They
agreed to a fixed monthly rental of 60,000 pesos, with
advanced payment of rentals for the first 100 months, in
the amount of 6,000,000, to be applied immediately.
Paragraph 24 of the Contract provides that should the
leased premises be closed, deserted, or vacated by lessee,
the lessor shall have the right to terminate the lease
without necessity of serving a court order and to
immediately repossess the leased premises. The lessor
shall thereupon have the right to enter into a new contract
with another party and all advanced rentals shall be
forfeited in favor of the lessor.
Three years later, BSP placed respondent under the
receivership of Philippine Deposit Insurance Corporation.
The BSP eventually ordered respondent’s liquidation.
Respondent vacated the leased premises on May 12,
2000. PDIC then issued petitioners a demand later asking
for the return of the unused advance rentals amounting to
3,480,000 pesos on the ground that the lease agreement
had become inoperative because of respondent’s closure,
which constitutes force majeure. The petitioners refused
the PDIC’s demand and maintained that they were
entitled to retain the reminder of the advance rentals
following Paragraph 24 of their Contract.
Issues: 1. Whether respondent may be released from its
contractual obligations on grounds of fortuitous event
under Article 1174 of the Civil Code and unforeseen event
under Article 1267 of the Civil Code?
Held: 1. The closure of respondent’s business was neither
a fortuitous nor an unforeseen event that rendered the
leased agreement functus officio.
Respondent cites the case of Provident Savings Bank
wherein the closure of its business upon BSP’s order
constituted a fortuitous event. However, the context of
that case is different form the case at bar.
The Court ruled in that case that the Monetary Board had
acted arbitrarily and in in bad faith in ordering the closure
of Provident Savings Bank. In this case, there is no
indication or allegation that the BSP’s action was tainted
with arbitrariness or bad faith. It was made pursuant to
R.A. No. 7653. Respondent was also partly accountable for
the closure of its business. The legal effect is analogous to
that created by contributory negligence in quasi-delict
actions.
Therefore, the period during which the bank cannot do
business due to insolvency is not a fortuitous event.
Respondent lessee invokes the doctrine of unforeseen
event under Article 1267 of the Civil Code as an alternative
justification for its premature termination of the contract.
Article 1267 provides that when the service has become
so difficult as to be manifestly beyond the contemplation
of the parties, the obligor may also be released therefrom,
in whole or in part. However, Article 1267 cannot be
applied in all cases; otherwise, it would endanger the
security of contractual relations. Parties to a contract are
presumed to have assumed the risk of unfavorable
developments.
It is only in exceptional changes of circumstance that
equity demands assistance for the debtor. The difficulty of
the performance should be such that the party seeking to
be released from the contractual obligation would be
placed at a disadvantage by the unforeseen event.
Mere inconvenience, unexpected impediments, increased
expenses, or even pecuniary inability to fulfil an
engagement, will not relieve the obligor from an
undertaking that it has knowingly and freely contracted.
The closure of respondent’s business was not an
unforeseen event. As the lease was long-term, it was not
lost on the parties that such an eventuality might occur.
HEIRS OF Liong vs. Castillo, G.R. 176425
FACTS:
Respondents in this case were petitioners in a civil case to
annul the title of PMPCI over respondents’ land.
Respondents entered into an AGREEMENT whereby in
exchange for the legal services of Atty. Zepeda and the
financial assistance of MANUEL UY EK LIONG, in the event
of a favorable decision in the civil case, Atty Zepeda and
Manuel would be entitled to 40% of the realties and/or
monetary benefits which may be adjudicated in favor of
the respondents.
Respondents, on the same day entered into a Kasunduan,
agreeing to sell the remaining 60% share in the land in
favor of Manuel for the sum of 180k. Manuel would pay a
1K down payment upon execution of the Kasunduan. They
agreed that any party violating the Kasunduan would pay
the aggrieved party a penalty fixed in the sum of P50K,
together with the attorney’s fees and litigation expenses
incurred should a case be subsequently filed in court.
The respondents won in the CIVIL CASE. The land was
divided in accordance with the Agreement but the
respondents refused to comply with the KASUNDUAN,
despite Manuel’s offer to pay the remaining 179K balance,
claiming that the same was void ab initio for being
violative violative of Art 1491 of the NCC and the Canons
of Professional Responsibility. Article 1491 prohibits
lawyers from acquiring by purchase or assignment the
property /rights involved in the litigation in which they
intervene by virtue of their profession. Manuel instituted
an action for Specific Performance and Damages against
respondents.
ISSUE: w/n the Kasunduan should be given effect
HELD: The Kasunduan is valid. The prohibition applies only
during the pendency of the suit and generally does not
cover contracts for contingent fees where the transfer
takes effect only after the finality of a favorable judgment.
The Agreement and the Kasunduan are not independent
contracts, with parties, objects and causes different from
that of the other. Obligations arising from contracts have
the force of law between the contracting parties. When
the terms of the contract are clear and leave no doubt as
to the intention of the parties, the literal meaning of its
stipulation should govern.
The Kasunduan contained a penal clause which provides
that a party who violates any of its provisions shall be
liable to pay the aggrieved party a penalty fixed at P50K,
together with the attorney’s fees and litigation expenses
incurred by the latter should judicial resolution of the
matter becomes necessary. 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. The penalty clause
generally substitutes the indemnity for damages and the
payment of interests in case of noncompliance. The rule
is settled that a penal clause is not limited to actual and
compensatory damages.
The RTC’s award of attorney’s fees in the sum of
P50,000.00 is, however, proper. 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.
Lo vs. CA, 411 SCRA 523, 2003
At the core of the present controversy are two parcels of
land measuring a total of 2,147 square meters, with an
office building constructed thereon, located at Bo.
Potrero, Malabon, Metro Manila and covered by TCT Nos.
M-13166 and M-13167.
Petitioner acquired the subject parcels of land in an
auction sale on November 9, 1995 for P20,170,000 from
the Land Bank of the Philippines (Land Bank).
Private respondent National Onion Growers Cooperative
Marketing Association, Inc., an agricultural cooperative,
was the occupant of the disputed parcels of land under a
subsisting contract of lease with Land Bank. The lease was
valid until December 31, 1995.
Upon the expiration of the lease contract, petitioner
demanded that private respondent vacate the leased
premises and surrender its possession to him. Private
respondent refused on the ground that it was, at the time,
contesting petitioners acquisition of the parcels of land in
question in an action for annulment of sale, redemption
and damages.
On February 23, 1996, petitioner filed an action for
ejectment before the Metropolitan Trial Court of
Malabon, Branch 55. He asked, inter alia, for the
imposition of the contractually stipulated penalty
of P5,000 per day of delay in surrendering the possession
of the property to him. On September 3, 1996, the trial
court decided the case in favor of petitioner:
WHEREFORE, premises considered, the Court considers
the allegations of the complaint to be true and duly
substantiated except as to the amount of damages and
attorneys fees, which are reduced accordingly, a decision
is hereby rendered in favor of the plaintiffs and against the
defendant, ordering the latter and all persons claiming
rights under it:
1) To vacate the leased premises immediately and turn
over the same peacefully to the plaintiffs;
2) To pay plaintiff Antonio Lo the sum of P5,000.00 for
every day of delay from the time defendant is supposed to
have vacated the premises;
3) To pay the sum of P36,000.00 a month from January
1996 until it finally vacates the premises as payment for
reasonable compensation for the use and occupancy
thereof;
4) To pay the sum of P20,000.00 by way of reasonable
attorneys fees; and
5) To pay the costs of suit.[3]
On appeal to the Regional Trial Court of Malabon, Branch
74, the MTC decision was affirmed in toto on August 29,
1997.[4] Private respondents subsequent motion for
reconsideration of the RTC decision was denied on
November 26, 1997.
From the adverse decision of the trial court, private
respondent elevated the case to the Court of Appeals via a
petition for review.
On May 26, 1999, the Court of Appeals rendered its
assailed decision affirming the decision of the trial court,
with the modification that the penalty imposed upon
private respondent for the delay in turning over the leased
property to petitioner was reduced from P 5,000
to P 1000 per day.
Unsatisfied with the decision of the Court of Appeals,
petitioner filed the instant petition for review, raising the
sole issue of the alleged lack of authority of the Court of
Appeals to reduce the penalty awarded by the trial court,
the same having been stipulated by the parties in their
Contract of Lease.
The petition has no merit.
Generally, courts are not at liberty to ignore the freedom
of the parties to agree on such terms and conditions as
they see fit as long as they are not contrary to law, morals,
good customs, public order or public policy. Nevertheless,
courts may equitably reduce a stipulated penalty in the
contract if it is iniquitous or unconscionable, or if the
principal obligation has been partly or irregularly complied
with.[5]
This power of the courts is explicitly sanctioned by Article
1229 of the Civil Code which provides:
Article 1229. The judge shall equitably reduce the penalty
when the principal obligation has been partly or irregularly
complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the
courts if it is iniquitous or unconscionable.
The question of whether a penalty is reasonable or
iniquitous is addressed to the sound discretion of the
court and depends on several factors, including, but not
limited to, the following: the type, extent and purpose of
the penalty, the nature of the obligation, the mode of
breach and its consequences, the supervening realities,
the standing and relationship of the parties.[6]
In this case, the stipulated penalty was reduced by the
appellate court for being unconscionable and
iniquitous. As provided in the Contract of Lease, private
respondent was obligated to pay a monthly rent
of P30,000. On the other hand, the stipulated penalty was
pegged at P5,000 for each day of delay or P150,000 per
month, an amount five times the monthly rent. This
penalty was not only exorbitant but also unconscionable,
taking into account that private respondents delay in
surrendering the leased premises was because of a well-
founded belief that its right of preemption to purchase the
subject premises had been violated. Considering further
that private respondent was an agricultural cooperative,
collectively owned by farmers with limited resources,
ordering it to pay a penalty of P150,000 per month on top
of the monthly rent of P30,000 would seriously deplete its
income and drive it to bankruptcy. In Rizal Commercial
Banking Corp. vs. Court of Appeals,[7] the Court tempered
the penalty charges after taking into account the debtors
pitiful financial condition.
Accordingly, we rule that the Court of Appeals did not
commit any reversible error in the exercise of its
discretion when it reduced the award of penalty damages
from P5,000 to P1,000 for each day of delay.
WHEREFORE, petition is hereby DENIED.
State Investment House vs. CA, G.R. 112590
Facts: On March 9, 1978, Lomuyon Timber Industries, Inc.
(hereafter, Lomuyon) agreed to sell to plaintiff its
receivables at a discount on a with recourse basis (Exh.
A). It was agreed in that sale that should areceivable
remain unpaid, plaintiff, at its discretion, may impose a
penalty fee of 3% per month. To secure the payment of
the receivables, the Malonjaos also executed in favor of
plaintiff, a real estate mortgage over their real property.
Pursuant to their agreement, on March 9, 10 and 15, 1978
and July 19, 1978, Lomuyon sold to plaintiff for a total
consideration of P2,558,073.75 (Exhs. C, D, E and F),
various receivables consisting of checks.
TCBTC (The Consolidated Bank and Trust Corporation)
checks were all drawn by Amanda Malonjao to the order
of payee Lomuyon which in turn, indorsed the checks to
plaintiff. The MBTC (Metropolitan Bank and Trust
Company) check was drawn by one Antonietta Malonjao-
Roque to the order of payee Amanda Malonjao who in
turn, indorsed said check to plaintiff.
When plaintiff presented the checks for payment to the
drawee banks, the same were dishonored for having been
drawn against insufficient funds (Exhs. H to H-7) except for
TCBTC 618821.
Plaintiff made repeated written demands on defendants
to make good the checks they indorsed and to pay the
penalty charges it has imposed thereon, (Exhs. I, J, K, L, L-
1, M and N).
Defendants failed to pay the value of the checks. Plaintiff
thus decided to undertake foreclosure of the real estate
mortgage.
Ruling: There is no dispute that the payment of penalty is
sanctioned by the law, although the penalty may be
reduced by the courts if it is iniquitous or
unconscionable.[5] Petitioner argues that while it
recognizes the authority of the court to reduce the penalty
if it is iniquitous or unconscionable, the
court, however, does not have the authority to delete the
payment of the penalty charges altogether for this isin
clear contravention of Article 1229 and the law of
contracts between the parties.
This contention is not well-taken.
The Court does not find any reversible error committed by
the respondent court in ruling that the petitioner was no
longer entitled to recover any deficiency amount after the
foreclosure sale on February 14, 1983. Per Statement of
Account dated September 21, 1981, the obligation of the
private respondent was computed to be P4,809,187.12
inclusive of interest and penalty charges. Since the private
respondent failed to fulfill its obligation, petitioner then
decided to foreclose the real estate mortgage on two
properties of the private respondent. At the time of the
auction sale on February 14, 1983, the properties were
sold in the amount of P4,223,874.00 with the petitioner as
the highest bidder. Deducting this amount from the
outstanding obligation of P4,809,187.12 as stipulated in
the Statement of Account, there would therefore be a
balance of only about P575,313.12.
Whether or not the alleged deficiency from the
foreclosure sale was P575,313.12 or P2,601,147.62 as
claimed by petitioner was of no moment. The respondent
court disallowed the payment of the deficiency
altogether because it found that the principal obligation
of the private respondent would not have ballooned to
such a horrendous amount of P4.8M as of September 21,
1991 if not for the penalty charge of 3% per month or 36%
per annum.
Surcharges and penalties agreed to be paid by the debtor
in case of default partake of the nature of liquidated
damages, covered by Section 4, Chapter 3, Title XVIII of the
Civil Code. Article 2227 thereof provides:
ART. 2227. Liquidated damages, whether intended as an
indemnity or penalty, shall be equitably reduced if they
are iniquitous and unconscionable.
In exercising this vested power to determine what is
iniquitous and unconscionable, the Court must consider
the circumstances of each case. It should be stressed that
the Court will not make any sweeping ruling that
surcharges and penalties imposed by banks for non-
payment of the loans extended by them are generally
iniquitous and unconscionable. What may be iniquitous
and unconscionable in one case, may be totally just and
equitable in another. This provision of law will have to be
applied to the established facts of any given case. Given
the circumstances under which GOYU found itself after
the occurrence of the fire, the Court rules the surcharges
rates ranging anywhere from 9% to 27%, plus the penalty
charges of 36%, to be definitely iniquitous and
unconscionable. x x x
Likewise, in the case at bar, the two courts below found
the penalty charge of 3% a month or 36% per annum
iniquitous and unconscionable. Petitioner
computed the amount of P4,809,187.12 as the
outstanding obligation of the petitioner as of September
21, 1981 after imposing the 3% penalty charge when
petitioner defaulted in their payments. This amount was
no longer questioned and wasparticularly taken into
consideration when the mortgaged properties were
foreclosed and sold at the auction sale in 1983, obtaining
a sum of about P4,223,874.00. These foreclosed
properties located in Makati[8] are undoubtedly valuable
properties whose market value has greatly appreciated to
substantially satisfy the payment of the outstanding
obligation. Notwithstanding the balance of P575,313.12,
petitioner has clearly recouped its investment and earned
more than enough profit in two years (1978-1981) by way
of penalty charges. Although petitioner claims that the
penalty charge was well within the banking and business
practice, no proof was adduced thereof. To allow the
petitioner to recover the amount of P6,835,021.21 at the
time of the foreclosure sale in 1983, or P7,651,969.41 at
the time of the trial of the case in 1988 which amounts
are almost three times more than the original investment
of about P2,558,073.75 is rather unwarranted. We quote
with favor the respondent courts ratiocination:
The lower court did not err in its ruling under its statement
that since plaintiff had already recovered fully the
receivables from the defendants, the court, considering
that the plaintiff for the two properties foreclosed by it
bidded the amount of P4,233,874.00, far and above the
amount it had originally given to the defendants which
was only over P2,000,000.00, it is rather most shocking
and unconscionable for plaintiff to still collect from the
defendants the alleged collectibles of P2,601,147.62 with
3% penalty charges. The plaintiff should have stopped
imposing the 3% penalty charges and other burdens when
it had consolidated finally the two titles of the properties
it had foreclosed (Decision, p. 8). After due consideration
and reflection on all the factual circumstances obtaining in
the case at bar, it is Our opinion that the lower court
properly exercised its discretion under Article 1229 of the
Civil Code to reduce the penalty charges for being highly
and grossly unconscionable. x x x[9]
While the Court recognizes the right of the parties to enter
into contracts and are expected ro comply with the terms
and obligations, this rule is not absolute. The Court
allowed to temper interest rates when necessary. Article
1229 of the New Civil Code clearly 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.
Likewise, Article 2227 provides:
ART. 2227. Liquidated damages, whether intended as an
indemnity or penalty, shall be equitably reduced if they
are iniquitous and unconscionable.
DBP vs. CA, G.R. 137557
Facts: Development Bank of the Philippines is the owner
of a parcel of land in Bulacan. On August 8, 1983, it sold
the land to respondent spouses Nilo and Esperanza De La
Peña under a Deed of Conditional Sale for
₱207,000.00.4 The Deed of Conditional Sale stipulated:
That the down payment shall be ₱41,400.00 and the
balance of P165,600.00 to be paid in six (6) years on the
semi-annual amortization plan at 18% interest per annum.
The first amortization of ₱23,126.14 shall be due and
payable six (6) months from the date of execution of the
Deed of Conditional Sale and all subsequent amortizations
shall be due and payable every six (6) months thereafter;
After the execution of the contract, the spouses De La
Peña constructed a house on the said lot and began living
there. They also introduced other improvements therein
by planting fruit trees and building a small garage
After making the above payments, Esperanza De La Peña
went to petitioner DBP and asked for the execution of a
Deed of Absolute Sale and for the issuance of the title to
the property.7 On January 5, 1989, however, respondent
spouses De La Peña were informed by DBP through a letter
that there was still a balance of ₱221,86.85.
DBP demanded from respondent spouses the payment of
this amount, which had increased to ₱225,855.86 as of
June 30, 1989, otherwise, it would rescind the
sale.9 Respondent spouses proposed a settlement of the
amount through semi-annual payments over a period of
five years.10
As the parties failed to reach an agreement, respondent
spouses filed a complaint against petitioner on January 30,
1990 for specific performance and damages with
injunction before the Regional Trial Court
Issue: Whether or not the penalty is iniquitous or
unconscionable.
Ruling: YES
We find the interests to be excessive. It is noteworthy that
the interests paid by private respondents, which
amounted to P233,361.50,30 including therein the regular
interest, additional interest, penalty charges, and interest
on advances, is more than the principal obligation in the
amount of P207,000.00, which private respondents owed.
Moreover, the additional interest of 18% alone amounted
to P106,853.45,31 which is almost half of what was already
paid by private respondents.
Article 1229 of the Civil Code states that "Even if there has
been no performance, the penalty may also be reduced by
the courts if it is iniquitous or unconscionable." In Barons
Marketing Corp. v. Court of Appeals,32 the Court reduced
the 25% penalty charge to cover the attorney’s fees and
collection fees, which was in addition to the 12% annual
interest, to 10% for being manifestly exorbitant. Likewise,
in Palmares v. Court of Appeals,33 the Court eliminated
altogether the payment of the penalty charge of 3% per
month for being excessive and unwarranted under the
circumstances.
Private respondents made regular payments to petitioner
DBP in compliance with their principal obligation. They
failed only to pay on the dates stipulated in the contract.
This indicates the absence of bad faith on the part of
private respondents and their willingness to comply with
the terms of the contract. Moreover, of their principal
obligation in the amount of ₱207,000.00, private
respondents have already paid ₱289,600.00 in favor of
petitioner. These circumstances convince us of the
necessity to equitably reduce the interest due to
petitioner and we do so by reducing to 10% the additional
interest of 18% per annum computed on total
amortizations past due. The penalty charge of 8% per
annum is sufficient to cover whatever else damages
petitioner may have incurred due to private respondents’
delay in paying the amortizations, such as attorney’s fees
and litigation expenses.
DANILO SOLANGON AND URSULA SOLANGON vs JOSE
AVELINO SALAZAR
G.R.No. 125994, 29 June 2001
Facts:
On 1986, 1987, and 1990 the Solangons’ executed 3 real
estate mortgages in which they mortgaged a parcel of land
situated in Sta. Maria, Bulacan, in favor of the Salazar to
secure payment of a loan of P60, 000.00 payable within a
period of four (4) months, with interest thereon at the rate
of 6% per month, to secure payment of a loan of P136,
512.00, payable within a period of one (1) year, with
interest thereon at the legal rate, and to secure payment
of a loan in the amount of P230, 000.00 payable within a
period of four (4) months, with interest thereon at the
legal rate.
This action was initiated by the Solangons to prevent the
foreclosure of the mortgaged property. They alleged that
they obtained only one loan form the defendant-appellee,
and that was for the amount of P60, 000.00, the payment
of which was secured by the first of the above-mentioned
mortgages. The subsequent mortgages were merely
continuations of the first one, which is null and void
because it provided for unconscionable rate of interest.
They have already paid the defendant-appellee P78,
000.00 and tendered P47, 000.00 more, but the latter has
initiated foreclosure proceedings for their alleged failure
to pay the loan P230, 000.00 plus interest.
Issue: WON a loan obligation that is secured by a real
estate mortgage with an interest of 72% p.a. or 6% a
month unconscionable.
Ruling: YES
While the Usury Law ceiling on interest rates was lifted by
C.B. Circular No. 905, nothing in the said circular grants
lenders carte blanche authority to raise interest rates to
levels which will either enslave their borrowers or lead to
a hemorrhaging of their assets.5 In Medel v. Court of
Appeals,6 this court had the occasion to rule on this
question - whether or not the stipulated rate of interest
at 5.5% per month on a loan amounting to P500,000.00 is
usurious. While decreeing that the aforementioned
interest was not usurious, this Court held that the same
must be equitably reduced for
being iniquitous, unconscionable and exorbitant and
hence, contrary to morals (‘contra bonos mores’), if not
against the law. The stipulation is void. The courts shall
reduce equitably liquidated damages, whether intended
as an indemnity or a penalty if they are iniquitous or
unconscionable.
In the case at bench, petitioners stand on a worse
situation. They are required to pay the stipulated interest
rate of 6% per month or 72% per annum which is
definitely outrageous and inordinate. Surely, it is more
consonant with justice that the said interest rate be
reduced equitably. An interest of 12% per annum is
deemed fair and reasonable.
Ligutan vs. CA, G.R. 138667
Facts:
Petitioners Tolomeo Ligutan and Leonidas dela Llana obt
ained on 11 May 1981 a loan in the amount of
P120,000.00 from respondent Security Bank and Trust
Company. Petitioners executed a promissory note binding
themselves, jointly and severally, to pay the sum
borrowed with an interest of 15.189% per annum upon
maturity and to pay a penalty of 5% every month on the
outstanding principal and interest in case of default. In
addition, petitioners agreed to pay 10% of the total
amount due by way of attorneys fees if the matter were
indorsed to a lawyer for collection or if a suit were
instituted to enforce payment. The obligation matured
on 8 September 1981; the bank, however, granted an
extension but only up until 29 December 1981.
Despite several demands from the bank, petitioners failed
to settle the debt which, as of 20 May 1982, amounted to
P114,416.10. On 30 September 1982, the bank sent a final
demand letter to petitioners informing them that they had
five days within which to make full payment. Since
petitioners still defaulted on their obligation, the bank
filed on 3 November 1982, with the Regional Trial Court
of Makati, Branch 143, a complaint for recovery of the due
amount.
After petitioners had filed a joint answer to the complaint,
the bank presented its evidence and, on 27 March 1985,
rested its case. Petitioners, instead of introducing their
own evidence, had the hearing of the case reset on two
consecutive occasions. In view of the absence of
petitioners and their counsel on 28 August 1985, the third
hearing date, the bank moved, and the trial court
resolved, to consider the case submitted for decision.
Two years later, or on 23 October 1987, petitioners filed a
motion for reconsideration of the order of the trial court
declaring them as having waived their right to present
evidence and prayed that they be allowed to prove their
case. The court a quo denied the motion in an order,
dated 5 September 1988, and on 20 October 1989, it
rendered its decision favouring respondent.
Issue: WON the 15.189% interest and the penalty of three
(3%) percent per month or thirty-six (36%) percent per
annum imposed by private respondent bank on
petitioners loan obligation are still manifestly exorbitant,
iniquitous and unconscionable.
Ruling: NO
A penalty clause, expressly recognized by law,[10] is an
accessory undertaking to assume greater liability on the
part of an obligor in case of breach of an obligation. It
functions to strengthen the coercive force of the
obligation[11] and to provide, in effect, for what could be
the liquidated damages resulting from such a breach. The
obligor would then be bound to pay the stipulated
indemnity without the necessity of proof on the existence
and on the measure of damages caused by the
breach.[12] Although a court may not at liberty ignore the
freedom of the parties to agree on such terms and
conditions as they see fit that contravene neither law nor
morals, good customs, public order or public policy, a
stipulated penalty, nevertheless, may be equitably
reduced by the courts if it is iniquitous or unconscionable
or if the principal obligation has been partly or irregularly
complied with.[13]
The question of whether a penalty is reasonable or
iniquitous can be partly subjective and partly objective. Its
resolution would depend on such factors as, but not
necessarily confined to, the type, extent and purpose of
the penalty, the nature of the obligation, the mode of
breach and its consequences, the supervening realities,
the standing and relationship of the parties, and the like,
the application of which, by and large, is addressed to the
sound discretion of the court. In Rizal Commercial
Banking Corp. vs. Court of Appeals,[14] just an example, the
Court has tempered the penalty charges after taking into
account the debtors pitiful situation and its offer to settle
the entire obligation with the creditor bank. The
stipulated penalty might likewise be reduced when a
partial or irregular performance is made by the
debtor.[15] The stipulated penalty might even be deleted
such as when there has been substantial performance in
good faith by the obligor,[16] when the penalty clause itself
suffers from fatal infirmity, or when exceptional
circumstances so exist as to warrant it.[17]
The Court of Appeals, exercising its good judgment in the
instant case, has reduced the penalty interest from 5% a
month to 3% a month which petitioner still
disputes. Given the circumstances, not to mention the
repeated acts of breach by petitioners of their contractual
obligation, the Court sees no cogent ground to modify the
ruling of the appellate court..
Anent the stipulated interest of 15.189% per annum,
petitioners, for the first time, question its reasonableness
and prays that the Court reduce the amount. This
contention is a fresh issue that has not been raised and
ventilated before the courts below. In any event, the
interest stipulation, on its face, does not appear as being
that excessive. The essence or rationale for the payment
of interest, quite often referred to as cost of money, is not
exactly the same as that of a surcharge or a penalty. A
penalty stipulation is not necessarily preclusive of interest,
if there is an agreement to that effect, the two being
distinct concepts which may separately be
demanded.[18] What may justify a court in not allowing the
creditor to impose full surcharges and penalties, despite
an express stipulation therefor in a valid agreement, may
not equally justify the non-payment or reduction of
interest. Indeed, the interest prescribed in loan financing
arrangements is a fundamental part of the banking
business and the core of a bank's existence.[19]
Petitioners next assail the award of 10% of the total
amount of indebtedness by way of attorney's fees for
being grossly excessive, exorbitant and
unconscionable vis-a-vis the time spent and the extent of
services rendered by counsel for the bank and the nature
of the case. Bearing in mind that the rate of attorneys fees
has been agreed to by the parties and intended to answer
not only for litigation expenses but also for collection
efforts as well, the Court, like the appellate court, deems
the award of 10% attorneys fees to be reasonable.
At any rate, the subsequent execution of the real estate
mortgage as security for the existing loan would not have
resulted in the extinguishment of the original contract of
loan because of novation. Petitioners acknowledge that
the real estate mortgage contract does not contain any
express stipulation by the parties intending it to supersede
the existing loan agreement between the petitioners and
the bank.[21] Respondent bank has correctly postulated
that the mortgage is but an accessory contract to secure
the loan in the promissory note.
Extinctive novation requires, first, a previous valid
obligation; second, the agreement of all the parties to the
new contract; third, the extinguishment of the obligation;
and fourth, the validity of the new one.[22] In order that an
obligation may be extinguished by another which
substitutes the same, it is imperative that it be so declared
in unequivocal terms, or that the old and the new
obligation be on every point incompatible with each
other.[23] An obligation to pay a sum of money is
not extinctively novated by a new instrument which
merely changes the terms of payment or adding
compatible covenants or where the old contract is merely
supplemented by the new one.[24] When not expressed,
incompatibility is required so as to ensure that the parties
have indeed intended such novation despite their failure
to express it in categorical terms. The incompatibility, to
be sure, should take place in any of the essential elements
of the obligation, i.e., (1) the juridical relation or tie, such
as from a mere commodatum to lease of things, or
from negotiorum gestio to agency, or from a mortgage
to antichresis,[25] or from a sale to one of loan;[26] (2) the
object or principal conditions, such as a change of the
nature of the prestation; or (3) the subjects, such as the
substitution of a debtor[27] or the subrogation of the
creditor. Extinctive novation does not necessarily imply
that the new agreement should be complete by itself;
certain terms and conditions may be carried, expressly or
by implication, over to the new obligation.
Lou vs. BPI. G.R. No. 225562, March 8, 2017
Facts
A complaint for collection of sum of money was filed by
BPI against spouses Louh because they were unable to pay
purchases made on their credit cards.
They owed BPI the total amount of
P533,836.27. Defendant William filed before the RTC a
Motion for Extension of Time to File an Answer or
Responsive Pleading. The RTC granted an extension of 15
days or up to March 4, 2012, but the Spouses Louh still
failed to comply within the prescribed period.
BPI filed a motion to declare Spouses Louh in default.
Before the RTC can rule on BPI’s motion, Spouses Louh
filed an Answer more than three months after the been no perfom1ance, the penalty may also be reduced
prescribed period. by the courts if it is iniquitous or unconscionable.

RTC rendered a Decision and ordered the Spouses Louh xxxx

to solidarily pay BPI (1) P533,836.27 plus 12% finance and
x x x [T]he stipulated penalty charge of 31% per month or
12% late payment annual charges starting from August 7,
36% per annum, in addition to regular interests, is indeed
2010 until full payment, and (2) 25% of the amount due as
iniquitous and unconscionable. Thus, in Macalinao, the
attorney’s fees, plus P1,000.00 per court hearing and
Court reduced both the interest and penalty charges to
P8,064.00 as filing or docket fees; and (3) costs of
12% each, and the attorney’s fees to P10,000.00.
suit. However, the RTC found the 3.5% finance and 6%
late payment monthly charges imposed by BPI as In MCMP Construction Corp. v. Monark Equipment Corp.,
iniquitous and unconscionable. Hence, both charges the creditor cumulatively charged the debtor 60%
were reduced to 1% monthly. Anent the award of annually as interest, penalty and collection fees, and 25%
attorney’s fees equivalent to 25% of the amount due, RTC of the total amount due as attorney’s fees. The Court
found the same to be within the terms of the parties’ similarly found the rates as exorbitant and
agreement. unconscionable; hence, directed the reduction of the
annual interest to 12%, penalty and collection charges to
On appeal, Spouses Louh reiterated that the RTC wrongly
6%, and attorney’s fees to 5%. The Court explained that
declared them in default since by reason of William’s
attorney’s fees are in the nature of liquidated damages,
sickness, they were entitled to a relaxation of the rules.
which under Article 2227 of the New Civil Code, “shall be
Moreover, BPI had failed to offer preponderant evidence
equitably reduced if they are iniquitous or
relative to the actual amount of the Spouses Louh’s
unconscionable.”41
indebtedness
CA affirmed the RTC Decision in toto. In the case at bench, BPI imposed a cumulative annual
interest of 114%, plus 25% of the amount due as
Issue: Whether or not the 5% finance and 6% late payment
attorney’s fees. Inevitably, the RTC and the CA aptly
monthly charges imposed by BPI are iniquitous and
reduced the charges imposed by BPI upon the Spouses
unconscionable.
Louh. Note that incorporated in the amount of
Ruling: Yes. P533,836.27 demanded by BPI as the Spouses Louh’s
obligation as of August 7, 2010 were the higher rates of
In Macalinao, where BPI charged the credit cardholder of
finance and late payment charges, which the courts a
3.25% interest and 6% penalty per month, and 25% of the
quo had properly directed to be reduced.
total amount due as attorney’s fees, the Court
unequivocally declared that: In the SOA dated October 14, 2009, the principal amount
indicated was P113,756.83. In accordance
[T]his is not the first time that this Court has considered
with Macalinao, the finance and late payment charges to
the interest rate of 36% per annum as excessive and
be imposed on the principal amount of P113,756.83 are
unconscionable. We held in Chua vs. Timan:
reduced to 12% each per annum, reckoned from October
The stipulated interest rates of 7% and 5% per month 14, 2009, the date when the Spouses Louh became initially
imposed on respondents’ loans must be equitably remiss in the payment of their obligation to BPI, until full
reduced to 1% per month or 12% per annum. We need payment.
not unsettle the principle we had affirmed in a plethora
Anent BPI’s litigation expenses, the Court retains the RTC
of cases that stipulated interest rates of 3% per month
and CA’s disquisition awarding P8,064.00 as filing or
and higher are excessive, iniquitous, unconscionable and
docket fees, and costs of suit. However, the Court reduces
exorbitant. Such stipulations are void for being contrary
the attorney’s fees to five percent (5%) of the total
to morals, if not against the law.
amount due from the Spouses Louh pursuant
While C.B. Circular No. 905-82, which took effect on to MCMP43and Article 2227 of the New Civil Code.
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. x x x

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.

The same is true with respect to the penalty charge. x x x

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