G.R. No.
138980 September 20, 2005 but Philamgen refused to acknowledge its liability for the simple reason that
FILINVEST LAND, INC., Petitioners,
vs.
HON. COURT OF APPEALS, PHILIPPINE AMERICAN GENERAL
INSURANCE COMPANY, and PACIFIC EQUIPMENT
CORPORATION, Respondent.
DECISION
CHICO-NAZARIO, J.:
This is a petition for review on certiorari of the Decision1 of the Court of
Appeals dated 27 May 1999 affirming the dismissal by the Regional Trial
Court of Makati, Branch 65,2 of the complaint for damages filed by Filinvest
Land, Inc. (Filinvest) against herein private respondents Pacific Equipment
Corporation (Pecorp) and Philippine American General Insurance Company.
The essential facts of the case, as recounted by the trial court, are as follows:
On 26 April 1978, Filinvest Land, Inc. ("FILINVEST", for brevity), a
corporation engaged in the development and sale of residential subdivisions,
awarded to defendant Pacific Equipment Corporation ("PACIFIC", for
brevity) the development of its residential subdivisions consisting of two (2)
parcels of land located at Payatas, Quezon City, the terms and conditions of
which are contained in an "Agreement". (Annex A, Complaint). To guarantee
its faithful compliance and pursuant to the agreement, defendant Pacific
posted two (2) Surety Bonds in favor of plaintiff which were issued by
defendant Philippine American General Insurance ("PHILAMGEN", for
brevity). (Annexes B and C, Complaint).
Notwithstanding three extensions granted by plaintiff to defendant Pacific,
the latter failed to finish the contracted works. (Annexes G, I and K,
Complaint). On 16 October 1979, plaintiff wrote defendant Pacific advising
the latter of its intention to takeover the project and to hold said defendant
liable for all damages which it had incurred and will incur to finish the
project. (Annex "L", Complaint).
On 26 October 1979, plaintiff submitted its claim against defendant
Philamgen under its performance and guarantee bond (Annex M, Complaint)
its principal, defendant Pacific, refused to acknowledge liability therefore.
Hence, this action.
In defense, defendant Pacific claims that its failure to finish the contracted
work was due to inclement weather and the fact that several items of finished
work and change order which plaintiff refused to accept and pay for caused
the disruption of work. Since the contractual relation between plaintiff and
defendant Pacific created a reciprocal obligation, the failure of the plaintiff to
pay its progressing bills estops it from demanding fulfillment of what is
incumbent upon defendant Pacific. The acquiescence by plaintiff in granting
three extensions to defendant Pacific is likewise a waiver of the former’s
right to claim any damages for the delay. Further, the unilateral and voluntary
action of plaintiff in preventing defendant Pacific from completing the work
has relieved the latter from the obligation of completing the same.
On the other hand, Philamgen contends that the various amendments made
on the principal contract and the deviations in the implementation thereof
which were resorted to by plaintiff and co-defendant Pacific without its
(defendant Philamgen’s) written consent thereto, have automatically released
the latter from any or all liability within the purview and contemplation of
the coverage of the surety bonds it has issued. Upon agreement of the parties
to appoint a commissioner to assist the court in resolving the issues
confronting the parties, on 7 July 1981, an order was issued by then Presiding
Judge Segundo M. Zosa naming Architect Antonio Dimalanta as Court
Commissioner from among the nominees submitted by the parties to conduct
an ocular inspection and to determine the amount of work accomplished by
the defendant Pacific and the amount of work done by plaintiff to complete
the project.
On 28 November 1984, the Court received the findings made by the Court
Commissioner. In arriving at his findings, the Commissioner used the
construction documents pertaining to the project as basis. According to him,
no better basis in the work done or undone could be made other than the
contract billings and payments made by both parties as there was no proper
procedure followed in terminating the contract, lack of inventory of work
accomplished, absence of appropriate record of work progress (logbook) and
inadequate documentation and system of construction management.
Based on the billings of defendant Pacific and the payments made by
plaintiff, the work accomplished by the former amounted to ₱11,788,282.40
1
with the exception of the last billing (which was not acted upon or processed
by plaintiff) in the amount of ₱844,396.42. The total amount of work left to
be accomplished by plaintiff was based on the original contract amount less
value of work accomplished by defendant Pacific in the amount of
₱681,717.58 (12,470,000-11,788,282.42).
As regards the alleged repairs made by plaintiff on the construction
deficiencies, the Court Commissioner found no sufficient basis to justify the
same. On the other hand, he found the additional work done by defendant
Pacific in the amount of ₱477,000.00 to be in order.
On 01 April 1985, plaintiff filed its objections to the Commissioner’s
Resolution on the following grounds:
a) Failure of the commissioner to conduct a joint survey which according to
the latter is indispensable to arrive at an equitable and fair resolution of the
issues between the parties;
b) The cost estimates of the commissioner were based on pure conjectures
and contrary to the evidence; and,
c) The commissioner made conclusions of law which were beyond his
assignment or capabilities.
In its comment, defendant Pacific alleged that the failure to conduct joint
survey was due to plaintiff’s refusal to cooperate. In fact, it was defendant
Pacific who initiated the idea of conducting a joint survey and inventory
dating back 27 November 1983. And even assuming that a joint survey were
conducted, it would have been an exercise in futility because all physical
traces of the actual conditions then obtaining at the time relevant to the case
had already been obliterated by plaintiff.
On 15 August 1990, a Motion for Judgment Based on the Commissioner’s
Resolution was filed by defendant Pacific.
On 11 October 1990, plaintiff filed its opposition thereto which was but a
rehash of objections to the commissioner’s report earlier filed by said
plaintiff.3
On the basis of the commissioner’s report, the trial court dismissed
Filinvest’s complaint as well as Pecorp’s counterclaim. It held:
In resolving this case, the court observes that the appointment of a
Commissioner was a joint undertaking among the parties. The findings of
facts of the Commissioner should therefore not only be conclusive but final
among the parties. The court therefore agrees with the commissioner’s
findings with respect to
1. Cost to repair deficiency or defect – ₱532,324.02
2. Unpaid balance of work done by defendant - ₱1,939,191.67
3. Additional work/change order (due to defendant) – ₱475,000.00
The unpaid balance due defendant therefore is ₱1,939,191.67. To this amount
should be added additional work performed by defendant at plaintiff’s
instance in the sum of ₱475,000.00. And from this total of ₱2,414,191.67
should be deducted the sum of ₱532,324.01 which is the cost to repair the
deficiency or defect in the work done by defendant. The commissioner
arrived at the figure of ₱532,324.01 by getting the average between
plaintiff’s claim of ₱758,080.37 and defendant’s allegation of ₱306,567.67.
The amount due to defendant per the commissioner’s report is therefore
₱1,881,867.66.
Although the said amount of ₱1,881,867.66 would be owing to defendant
Pacific, the fact remains that said defendant was in delay since April 25,
1979. The third extension agreement of September 15, 1979 is very clear in
this regard. The pertinent paragraphs read:
a) You will complete all the unfinished works not later than Oct. 15, 1979. It
is agreed and understood that this date shall DEFINITELY be the LAST and
FINAL extension & there will be no further extension for any cause
whatsoever.
b) We are willing to waive all penalties for delay which have accrued since
April 25, 1979 provided that you are able to finish all the items of the
contracted works as per revised CPM; otherwise you shall continue to be
liable to pay the penalty up to the time that all the contracted works shall
2
have been actually finished, in addition to other damages which we may
suffer by reason of the delays incurred.
Defendant Pacific therefore became liable for delay when it did not finish the
project on the date agreed on October 15, 1979. The court however, finds the
claim of ₱3,990,000.00 in the form of penalty by reason of delay
(₱15,000.00/day from April 25, 1979 to Jan. 15, 1980) to be excessive. A
forfeiture of the amount due defendant from plaintiff appears to be a
reasonable penalty for the delay in finishing the project considering the
amount of work already performed and the fact that plaintiff consented to
three prior extensions.
The foregoing considered, this case is dismissed. The counterclaim is
likewise dismissed.
No Costs.4
The Court of Appeals, finding no reversible error in the appealed decision,
affirmed the same.
Hence, the instant petition grounded solely on the issue of whether or not the
liquidated damages agreed upon by the parties should be reduced considering
that: (a) time is of the essence of the contract; (b) the liquidated damages was
fixed by the parties to serve not only as penalty in case Pecorp fails to fulfill
its obligation on time, but also as indemnity for actual and anticipated
damages which Filinvest may suffer by reason of such failure; and (c) the
total liquidated damages sought is only 32% of the total contract price, and
the same was freely and voluntarily agreed upon by the parties.
At the outset, it should be stressed that as only the issue of liquidated
damages has been elevated to this Court, petitioner Filinvest is deemed to
have acquiesced to the other matters taken up by the courts below. Section 1,
Rule 45 of the 1997 Rules of Court states in no uncertain terms that this
Court’s jurisdiction in petitions for review on certiorari is limited to
"questions of law which must be distinctly set forth."5 By assigning only one
legal issue, Filinvest has effectively cordoned off any discussion into the
factual issue raised before the Court of Appeals.6 In effect, Filinvest has
yielded to the decision of the Court of Appeals, affirming that of the trial
court, in deferring to the factual findings of the commissioner assigned to the
parties’ case. Besides, as a general rule, factual matters cannot be raised in a
petition for review on certiorari. This Court at this stage is limited to
reviewing errors of law that may have been committed by the lower
courts.7 We do not perceive here any of the exceptions to this rule; hence, we
are restrained from conducting further scrutiny of the findings of fact made
by the trial court which have been affirmed by the Court of Appeals. Verily,
factual findings of the trial court, especially when affirmed by the Court of
Appeals, are binding and conclusive on the Supreme Court.8 Thus, it is
settled that:
(a) Based on Pecorp’s billings and the payments made by Filinvest, the
balance of work to be accomplished by Pecorp amounts to ₱681,717.58
representing 5.47% of the contract work. This means to say that Pecorp, at
the time of the termination of its contract, accomplished 94.53% of the
contract work;
(b) The unpaid balance of work done by Pecorp amounts to ₱1,939,191.67;
(c) The additional work/change order due Pecorp amounts to ₱475,000.00;
(d) The cost to repair deficiency or defect, which is for the account of Pecorp,
is ₱532,324.02; and
(e) The total amount due Pecorp is ₱1,881,867.66.
Coming now to the main matter, Filinvest argues that the penalty in its
entirety should be respected as it was a product of mutual agreement and it
represents only 32% of the ₱12,470,000.00 contract price, thus, not shocking
and unconscionable under the circumstances. Moreover, the penalty was
fixed to provide for actual or anticipated liquidated damages and not simply
to ensure compliance with the terms of the contract; hence, pursuant
to Laureano v. Kilayco,9 courts should be slow in exercising the authority
conferred by Art. 1229 of the Civil Code.
We are not swayed.
There is no question that the penalty of ₱15,000.00 per day of delay was
mutually agreed upon by the parties and that the same is sanctioned by law.
A penal clause is an accessory undertaking to assume greater liability in case
of breach.10 It is attached to an obligation in order to insure
performance11 and has a double function: (1) to provide for liquidated
3
damages, and (2) to strengthen the coercive force of the obligation by the
threat of greater responsibility in the event of breach.12 Article 1226 of the
Civil Code states:
Art. 1226. In obligations with a penal clause, the penalty shall substitute the
indemnity for damages and the payment of interests in case of
noncompliance, if there is no stipulation to the contrary. Nevertheless,
damages shall be paid if the obligor refuses to pay the penalty or is guilty of
fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with
the provisions of this Code.
As a general rule, courts are not at liberty to ignore the freedom of the parties
to agree on such terms and conditions as they see fit as long as they are not
contrary to law, morals, good customs, public order or public
policy.13Nevertheless, courts may equitably reduce a stipulated penalty in the
contract in two instances: (1) if the principal obligation has been partly or
irregularly complied; and (2) even if there has been no compliance if the
penalty is iniquitous or unconscionable in accordance with Article 1229 of
the Civil Code which provides:
Art. 1229. The judge shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor. Even if
there has been no performance, the penalty may also be reduced by the courts
if it is iniquitous or unconscionable.
In herein case, the trial court ruled that the penalty charge for delay – pegged
at ₱15,000.00 per day of delay in the aggregate amount of ₱3,990,000.00 --
was excessive and accordingly reduced it to ₱1,881,867.66 "considering the
amount of work already performed and the fact that [Filinvest] consented to
three (3) prior extensions." The Court of Appeals affirmed the ruling but
added as well that the penalty was unconscionable "as the construction was
already not far from completion." Said the Court of Appeals:
Turning now to plaintiff’s appeal, We likewise agree with the trial court that
a penalty interest of ₱15,000.00 per day of delay as liquidated damages or
₱3,990,000.00 (representing 32% penalty of the ₱12,470,000.00 contract
price) is unconscionable considering that the construction was already not far
from completion. Penalty interests are in the nature of liquidated damages
and may be equitably reduced by the courts if they are iniquitous or
unconscionable (Garcia v. Court of Appeals, 167 SCRA 815, Lambert v.
Fox, 26 Phil. 588). The judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by the
debtor. Even if there has been no performance, the penalty may also be
reduced by the courts if it is iniquitous or unconscionable (Art. 1229, New
Civil Code). Moreover, plaintiff’s right to indemnity due to defendant’s delay
has been cancelled by its obligations to the latter consisting of unpaid works.
This Court finds no fault in the cost estimates of the court-appointed
commissioner as to the cost to repair deficiency or defect in the works which
was based on the average between plaintiff’s claim of ₱758,080.37 and
defendant’s ₱306,567.67 considering the following factors: that "plaintiff did
not follow the standard practice of joint survey upon take over to establish
work already accomplished, balance of work per contract still to be done, and
estimate and inventory of repair" (Exhibit "H"). As for the cost to finish the
remaining works, plaintiff’s estimates were brushed aside by the
commissioner on the reasoned observation that "plaintiff’s cost estimate for
work (to be) done by the plaintiff to complete the project is based on a
contract awarded to another contractor (JPT), the nature and magnitude of
which appears to be inconsistent with the basic contract between defendant
PECORP and plaintiff FILINVEST."14
We are hamstrung to reverse the Court of Appeals as it is rudimentary that
the application of Article 1229 is essentially addressed to the sound
discretion of the court.15 As it is settled that the project was already 94.53%
complete and that Filinvest did agree to extend the period for completion of
the project, which extensions Filinvest included in computing the amount of
the penalty, the reduction thereof is clearly warranted.
Filinvest, however, hammers on the case of Laureano v. Kilayco,16 decided in
1915, which cautions courts to distinguish between two kinds of penalty
clauses in order to better apply their authority in reducing the amount
recoverable. We held therein that:
. . . [I]n any case wherein there has been a partial or irregular compliance
with the provisions in a contract for special indemnification in the event of
failure to comply with its terms, courts will rigidly apply the doctrine of
strict construction against the enforcement in its entirety of the
indemnification, where it is clear from the terms of the contract that the
amount or character of the indemnity is fixed without regard to the probable
4
damages which might be anticipated as a result of a breach of the terms of
the contract; or, in other words, where the indemnity provided for is
essentially a mere penalty having for its principal object the enforcement of
compliance with the contract. But the courts will be slow in exercising the
jurisdiction conferred upon them in article 115417 so as to modify the
terms of an agreed upon indemnification where it appears that in fixing such
indemnification the parties had in mind a fair and reasonable compensation
for actual damages anticipated as a result of a breach of the contract, or, in
other words, where the principal purpose of the indemnification agreed upon
appears to have been to provide for the payment of actual anticipated and
liquidated damages rather than the penalization of a breach of the contract.
(Emphases supplied)
Filinvest contends that the subject penalty clause falls under the second
type, i.e., the principal purpose for its inclusion was to provide for payment
of actual anticipated and liquidated damages rather than the penalization of a
breach of the contract. Thus, Filinvest argues that had Pecorp completed the
project on time, it (Filinvest) could have sold the lots sooner and earned its
projected income that would have been used for its other projects.
Unfortunately for Filinvest, the above-quoted doctrine is inapplicable to
herein case. The Supreme Court in Laureano instructed that a distinction
between a penalty clause imposed essentially as penalty in case of breach and
a penalty clause imposed as indemnity for damages should be made in cases
where there has been neither partial nor irregular compliance with the terms
of the contract. In cases where there has been partial or irregular compliance,
as in this case, there will be no substantial difference between a penalty and
liquidated damages insofar as legal results are concerned.18 The distinction is
thus more apparent than real especially in the light of certain provisions of
the Civil Code of the Philippines which provides in Articles 2226 and Article
2227 thereof:
Art. 2226. Liquidated damages are those agreed upon by the parties to a
contract to be paid in case of breach thereof.
Art. 2227. Liquidated damages, whether intended as an indemnity or a
penalty, shall be equitably reduced if they are iniquitous or unconscionable.
Thus, we lamented in one case that "(t)here is no justification for the Civil
Code to make an apparent distinction between a penalty and liquidated
damages because the settled rule is that there is no difference between
penalty and liquidated damages insofar as legal results are concerned and that
either may be recovered without the necessity of proving actual damages and
both may be reduced when proper."19
Finally, Filinvest advances the argument that while it may be true that courts
may mitigate the amount of liquidated damages agreed upon by the parties on
the basis of the extent of the work done, this contemplates a situation where
the full amount of damages is payable in case of total breach of contract. In
the instant case, as the penalty clause was agreed upon to answer for delay in
the completion of the project considering that time is of the essence, "the
parties thus clearly contemplated the payment of accumulated liquidated
damages despite, and precisely because of, partial performance."20 In effect,
it is Filinvest’s position that the first part of Article 1229 on partial
performance should not apply precisely because, in all likelihood, the penalty
clause would kick in in situations where Pecorp had already begun work but
could not finish it on time, thus, it is being penalized for delay in its
completion.
The above argument, albeit sound,21 is insufficient to reverse the ruling of the
Court of Appeals. It must be remembered that the Court of Appeals not only
held that the penalty should be reduced because there was partial compliance
but categorically stated as well that the penalty was unconscionable.
Otherwise stated, the Court of Appeals affirmed the reduction of the penalty
not simply because there was partial compliance per se on the part of Pecorp
with what was incumbent upon it but, more fundamentally, because it
deemed the penalty unconscionable in the light of Pecorp’s 94.53%
completion rate.
In Ligutan v. Court of Appeals,22 we pointed out that the question of whether
a penalty is reasonable or iniquitous can be partly subjective and partly
objective as its "resolution would depend on such factors as, but not
necessarily confined to, the type, extent and purpose of the penalty, the
nature of the obligation, the mode of breach and its consequences, the
supervening realities, the standing and relationship of the parties, and the
like, the application of which, by and large, is addressed to the sound
discretion of the court."23
In herein case, there has been substantial compliance in good faith on the part
of Pecorp which renders unconscionable the application of the full force of
the penalty especially if we consider that in 1979 the amount of ₱15,000.00
as penalty for delay per day was quite steep indeed. Nothing in the records
5
suggests that Pecorp’s delay in the performance of 5.47% of the contract was
due to it having acted negligently or in bad faith. Finally, we factor in the fact
that Filinvest is not free of blame either as it likewise failed to do that which
was incumbent upon it, i.e., it failed to pay Pecorp for work actually
performed by the latter in the total amount of ₱1,881,867.66. Thus, all things
considered, we find no reversible error in the Court of Appeals’ exercise of
discretion in the instant case.

Before we write finis to this legal contest that had spanned across two and a
half decades, we take note of Pecorp’s own grievance. From its Comment
and Memorandum, Pecorp, likewise, seeks affirmative relief from this Court
by praying that not only should the instant case be dismissed for lack of
merit, but that Filinvest should likewise be made to pay "what the Court
Commissioner found was due defendant" in the "total amount of
₱2,976,663.65 plus 12% interest from 1979 until full payment thereof plus
attorneys fees."24 Pecorp, however, cannot recover that which it seeks as we
had already denied, in a Resolution dated 21 June 2000, its own petition for
review of the 27 May 1999 decision of the Court of Appeals. Thus, as far as
Pecorp is concerned, the ruling of the Court of Appeals has already attained
finality and can no longer be disturbed.

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

dated 27 May 1999 is AFFIRMED. No pronouncement as to costs.

SO ORDERED.

6
G.R. No. 138677 February 12, 2002
TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA, petitioners,
vs.
HON. COURT OF APPEALS & SECURITY BANK & TRUST
COMPANY, respondents.
DECISION
VITUG, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the
Rules of Court, assailing the decision and resolutions of the Court of Appeals
in CA-G.R. CV No. 34594, entitled "Security Bank and Trust Co. vs.
Tolomeo Ligutan, et al."
Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained 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 attorney’s
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,1 the
dispositive portion of which read:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and
against the defendants, ordering the latter to pay, jointly and severally, to the
plaintiff, as follows:
"1. The sum of P114,416.00 with interest thereon at the rate of
15.189% per annum, 2% service charge and 5% per month penalty
charge, commencing on 20 May 1982 until fully paid;
"2. To pay the further sum equivalent to 10% of the total amount of
indebtedness for and as attorney’s fees; and
"3. To pay the costs of the suit."2
Petitioners interposed an appeal with the Court of Appeals, questioning the
rejection by the trial court of their motion to present evidence and assailing
the imposition of the 2% service charge, the 5% per month penalty charge
and 10% attorney's fees. In its decision3 of 7 March 1996, the appellate court
affirmed the judgment of the trial court except on the matter of the 2%
service charge which was deleted pursuant to Central Bank Circular No. 783.
Not fully satisfied with the decision of the appellate court, both parties filed
their respective motions for reconsideration.4 Petitioners prayed for the
reduction of the 5% stipulated penalty for being unconscionable. The bank,
on the other hand, asked that the payment of interest and penalty be
commenced not from the date of filing of complaint but from the time of
default as so stipulated in the contract of the parties.
On 28 October 1998, the Court of Appeals resolved the two motions thusly:
"We find merit in plaintiff-appellee’s claim that the principal sum of
P114,416.00 with interest thereon must commence not on the date of filing of
7
the complaint as we have previously held in our decision but on the date
when the obligation became due.
"Default generally begins from the moment the creditor demands the
performance of the obligation. However, demand is not necessary to render
the obligor in default when the obligation or the law so provides.
"In the case at bar, defendants-appellants executed a promissory note where
they undertook to pay the obligation on its maturity date 'without necessity of
demand.' They also agreed to pay the interest in case of non-payment from
the date of default.
"x x x xxx xxx
"While we maintain that defendants-appellants must be bound by the contract
which they acknowledged and signed, we take cognizance of their plea for
the application of the provisions of Article 1229 x x x.
"Considering that defendants-appellants partially complied with their
obligation under the promissory note by the reduction of the original amount
of P120,000.00 to P114,416.00 and in order that they will finally settle their
obligation, it is our view and we so hold that in the interest of justice and
public policy, a penalty of 3% per month or 36% per annum would suffice.
"x x x xxx xxx
"WHEREFORE, the decision sought to be reconsidered is hereby
MODIFIED. The defendants-appellants Tolomeo Ligutan and Leonidas dela
Llana are hereby ordered to pay the plaintiff-appellee Security Bank and
Trust Company the following:
"1. The sum of P114,416.00 with interest thereon at the rate of
15.189% per annum and 3% per month penalty charge commencing
May 20, 1982 until fully paid;
"2. The sum equivalent to 10% of the total amount of the
indebtedness as and for attorney’s fees."5
On 16 November 1998, petitioners filed an omnibus motion for
reconsideration and to admit newly discovered evidence,6 alleging that while
the case was pending before the trial court, petitioner Tolomeo Ligutan and
his wife Bienvenida Ligutan executed a real estate mortgage on 18 January
1984 to secure the existing indebtedness of petitioners Ligutan and dela
Llana with the bank. Petitioners contended that the execution of the real
estate mortgage had the effect of novating the contract between them and the
bank. Petitioners further averred that the mortgage was extrajudicially
foreclosed on 26 August 1986, that they were not informed about it, and the
bank did not credit them with the proceeds of the sale. The appellate court
denied the omnibus motion for reconsideration and to admit newly
discovered evidence, ratiocinating that such a second motion for
reconsideration cannot be entertained under Section 2, Rule 52, of the 1997
Rules of Civil Procedure. Furthermore, the appellate court said, the newly-
discovered evidence being invoked by petitioners had actually been known to
them when the case was brought on appeal and when the first motion for
reconsideration was filed.7
Aggrieved by the decision and resolutions of the Court of Appeals,
petitioners elevated their case to this Court on 9 July 1999 via a petition for
review on certiorari under Rule 45 of the Rules of Court, submitting thusly -
"I. The respondent Court of Appeals seriously erred in not holding
that 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.
"II. The respondent Court of Appeals gravely erred in not reducing to
a reasonable level the ten (10%) percent award of attorney’s fees
which is highly and grossly excessive, unreasonable and
unconscionable.
"III. The respondent Court of Appeals gravely erred in not admitting
petitioners’ newly discovered evidence which could not have been
timely produced during the trial of this case.
"IV. The respondent Court of Appeals seriously erred in not holding
that there was a novation of the cause of action of private
respondent’s complaint in the instant case due to the subsequent
execution of the real estate mortgage during the pendency of this
case and the subsequent foreclosure of the mortgage."8
8
Respondent bank, which did not take an appeal, would, however, have it that
the penalty sought to be deleted by petitioners was even insufficient to fully
cover and compensate for the cost of money brought about by the radical
devaluation and decrease in the purchasing power of the peso,
particularly vis-a-vis the U.S. dollar, taking into account the time frame of its
occurrence. The Bank would stress that only the amount of P5,584.00 had
been remitted out of the entire loan of P120,000.00.9
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 obligation11 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 debtor’s 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 attorney’s 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% attorney’s fees to
be reasonable.
Neither can the appellate court be held to have erred in rejecting petitioners'
call for a new trial or to admit newly discovered evidence. As the appellate
court so held in its resolution of 14 May 1999 -
"Under Section 2, Rule 52 of the 1997 Rules of Civil Procedure, no second
motion for reconsideration of a judgment or final resolution by the same
party shall be entertained. Considering that the instant motion is already a
second motion for reconsideration, the same must therefore be denied.
"Furthermore, it would appear from the records available to this court that the
newly-discovered evidence being invoked by defendants-appellants have
actually been existent when the case was brought on appeal to this court as
well as when the first motion for reconsideration was filed.1âwphi1 Hence, it
is quite surprising why defendants-appellants raised the alleged newly-
9
discovered evidence only at this stage when they could have done so in the complete by itself; certain terms and conditions may be carried, expressly or
earlier pleadings filed before this court. by implication, over to the new obligation.

"The propriety or acceptability of such a second motion for reconsideration is WHEREFORE, the petition is DENIED.
not contingent upon the averment of 'new' grounds to assail the judgment,
i.e., grounds other than those theretofore presented and rejected. Otherwise, SO ORDERED.
attainment of finality of a judgment might be stayed off indefinitely,
depending on the party’s ingenuousness or cleverness in conceiving and
formulating 'additional flaws' or 'newly discovered errors' therein, or thinking
up some injury or prejudice to the rights of the movant for
reconsideration."20

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 debtor27 or the subrogation of the creditor. Extinctive
novation does not necessarily imply that the new agreement should be

10
 FIRST DIVISION
[G.R. No. 8254. March 3, 1914. ]
MARIANO GONZAGA ET AL., Plaintiffs-Appellants, v. FELISA
GARCIA ET AL., Defendants-Appellees.
Perfecto Gabriel for Appellants.
Fernando Manikis for Appellees.
SYLLABUS
1. VENDOR AND PURCHASER; EXECUTION SALE OF RIGHT TO
REPURCHASE; SUBSEQUENT SALE BY EXECUTION PURCHASER.
— A judgment creditor purchased the right to repurchase under a pacto de
retro sale of land of his judgment debtor, at an execution sale. The period for
redemption of the interest thus sold under execution expired without the
judgment debtor’s having exercised his right of redemption. The latter did,
however, tender the repurchase price under the pacto de retro contract to the
vendee, who accepted it, at the same time canceling the annotation of the said
contract in the property registry. Petitioner’s claim of ownership of the land,
based on a subsequent purchase from the judgment creditor, was invalid, as
the latter did not acquire the fee by the repurchase of the land under the pacto
de retro contract by the judgment debtor. Article 1158 of the Civil Code is
not applicable to this case for the reason that the judgment creditor was not a
debtor of the pacto de retro vendee. Having acquired the right to repurchase,
the exercise of this right was optional with him.
DECISION
TRENT, J. :
An appeal form a decision of the Court of Land Registration, denying the
registration, in the name of the appellants, of a parcel of land. The location
and identity of the land are undisputed.
The admitted facts are these: Rufino Francisco acquired the land in question
by inheritance from the registered owner. On August 20, 1909, he sold it with
the right to repurchase the same within one year and with the understanding
that the time could be extended one year more, to Vicente San Martin. This
sale was registered on August 26, 1909. On August 30, 1909, Francisco’s
right to repurchase was attached by one Del Rosario. This right of repurchase
was sold under execution on December 29, 1909, at a sheriff’s sale, Del
Rosario being the purchaser. The certificate of sale was registered January 6,
1910, and Francisco having failed to exercise his right of redemption within
one year, the sheriff issued his deed to Del Rosario for the interest of
Francisco in the land thus sold at the execution sale. This deed was registered
January 27, 1911. In November or December, 1911, Del Rosario sold the
land to Mariano Gonzaga. In the meantime Martin appeared before the Court
of Land Registration and asked that the inscription in the registry of the sale
to him under pacto de retro be canceled for the reason that Francisco had paid
him the redemption price. This was done on August 22, 1910. On November
9, 1908, Francisco sold the same land to Jose de Lavengco. The document
evidencing this sale was never registered. The opponents are the widow and
minor children of Jose de Lavengco. Neither Jose nor the opponents ever
entered into the possession of the property. The appellants knew nothing of
the sale by Rufino Francisco to Jose de Lanvengco. Did the appellants
acquire a registerable title?
Section 6, paragraph 5. of Act No. 1108, section 2283 (e), Compilation,
provides that: "Instruments known as pacto de retro, made under sections
fifteen hundred and seven and fifteen hundred and twenty of the Spanish
Civil Code in force in these Islands, may be registered under this title, and
application for registration thereof may be made by the owner who executed
the pacto de retro sale under the same conditions and in the same manner as
mortgagors are authorized to make application for registration."cralaw
virtua1aw library
The right to repurchase real estate sold under pacto de retro is subject to
execution and may be sold at public auction to satisfy a judgment against the
owner of such a right. By virtue of the sheriff’s sale of December 29, 1909,
Del Rosario acquired the right to repurchase the land in question from
Martin. In November or December, 1911, Del Rosario sold all of his interest
to the appellants. The only interest acquired by Del Rosario at the sheriff’s
sale was the right to repurchase from Martin because this was the only
interest that Francisco had at that time. Francisco repurchased the land
several months before Del Rosario sold his interest to the appellants. It is
therefore clear that the appellants acquired no interest whatever in the land
11
unless the repurchase made by Francisco vested the title in Del Rosario, the
then owner of the right to repurchase. We think that Francisco’s repurchase
did not have this effect. When Francisco’s right to repurchase was sold at
public auction the judgment against him was completely satisfied, and he was
therefore a stranger to the proceedings. But it is said that under the provisions
of article 1158 of the Civil Code the repurchase by Francisco was a payment
for Del Rosario and that the former may recover from the latter the price
paid.

This article reads: "Any person, whether he has an interested or not in the
fulfillment of the obligation, and whether the debtor knows and approves it
or is not aware thereof, can make the payment. The person paying for the
account of another may recover from the debtor what he may have paid,
unless he has done it against his express will. In such case he can only
recover from the debtor in so far as the payment has been useful to
him."cralaw virtua1aw library

Del Rosario was not a debtor. He was under no obligations to repurchase the
land from Martin. He had a right to do so but whether he exercised this right
or not depended upon his own volition. Article 1158 is not for these reasons
applicable.

The judgment appealed from is therefore affirmed, with costs against the
appellants.

Arellano, C.J., Carson, and Araullo, JJ., concur.

Moreland, J., concurs in the result.

12