Solidary

Alipio vs CA

On June 19, 1987, Respondent Romeo Jaring subleased a portion of his leased fishpond to the
spouses Alipio (petitioner) and spouses Manuel charging the 4 sublessees P485,600.00 for rent. Rent
was payable in two installments: P300,000 and P185,600, where the second installment is due
on June 30, 1989. The sublessees were able to pay the first installment, but only satisfied a portion
of the second installment, leaving with an unpaid balance of P50,600. Despite due demand, the
sublessees were unable to comply with their obligation, which prompted respondent to file a
judicial demand against petitioner and Manuel spouses for the collection of the P50,600. In the
alternative, he prayed for the recission of the sublease contract if the sublessees fail to pay the
balance. Petitioner moved to dismiss the case on the ground that her husband, Placido Alipio,
passed way on December 1, 1988. This was denied since she can still be impleaded in the suit and
her husband’s death only excludes him from the case. CA also dismissed petitioner’s appeal on the
ground that the sublessees cannot avoid their obligation due to the death of one party to the
contract

ISSUES:

W/N the remaining balance of P50,600 is to be paid by petitioner and Spouses Manuel jointly or
solidarily.

RULING:

Jointly. Art. 1207, NCC states that “There is solidary liability only when the obligation expressly so
states, or when the law or the nature of the obligation requires solidarity “Hence, if the obligation or
the law does not state solidary liability, it is presumed to be a joint obligation, where the debt is
equally divided among all debtors. The contract does not state that the lease must be paid solidarily.
Clearly, the liability of the sublessees is merely joint. The unpaid balance of P50,600 must be divided
into two so that each couple is liable to pay the amount of P25,300.

Effect of Penal Clause

Makati Development vs Empire Insurance

On March 31, 1959, the Makati Development Corporation sold to Rodolfo P. Andal a lot, with an
area of 1,589 square meters, in the Urdaneta Village, Makati, Rizal, for P55,615.1äwphï1.ñët

A so-called "special condition" contained in the deed of sale provides that "[T]he VENDEE/S shall
commence the construction and complete at least 50% of his/her/their/its residence on the
property within two (2) years from March 31, 1959 to the satisfaction of the VENDOR and, in the
event of his/her/their/its failure to do so, the bond which the VENDEE/S has delivered to the
VENDOR in the sum of P11,123.00 and evidenced by a cash bond receipt dated April 10, 1959 will be
forfeited in favor of the VENDOR by the mere fact of failure of the VENDEE/S to comply with this
special condition." To insure faithful compliance with this "condition," Andal gave a surety bond on
April 10, 1959 wherein he, as principal, and the Empire Insurance Company, as surety, jointly and
severally, undertook to pay the Makati Development Corporation the sum of P12,000 in case Andal
failed to comply with his obligation under the deed of sale.
Andal did not build his house; instead he sold the lot to Juan Carlos on January 18, 1960. As neither
Andal nor Juan Carlos built a house on the lot within the stipulated period, the Makati Development
Corporation, on April 3, 1961, that is, three days after the lapse of the two-year period, sent a notice
of claim to the Empire Insurance Co. advising it of Andal's failure to comply with his undertaking.
Demand for the payment of P12,000 was refused, whereupon the Makati Development Corporation
filed a complaint in the Court of First Instance of Rizal on May 22, 1961 against the Empire Insurance
Co. to recover on the bond in the full amount, plus attorney's fees. In due time, the Empire
Insurance Co. filed its answer with a third-party complaint against Andal. It asked that the complaint
be dismissed or, in the event of a judgment in favor of the Makati Development Corporation, that
judgment be rendered ordering Andal to pay the Empire Insurance Co. whatever amount it maybe
ordered to pay the Makati Development Corporation, plus interest at 12%, from the date of the filing
of the complaint until said amount was fully reimbursed, and attorney's fees.

In his answer, Andal admitted the execution of the bond but alleged that the "special condition" in
the deed of sale was contrary to law, morals and public policy. He averred that, at any rate, Juan
Carlos had started construction of a house on the lot.

Hearing was held and, on March 28, 1963, the lower court rendered judgment, sentencing the
Empire Insurance Co. to pay the Makati Development Corporation the amount of P1,500, with
interest at the rate of 12% from the time of the filing of the complaint until the amount was fully
paid, and to pay attorney's fees in the amount of P500, and the proportionate part of the costs. The
court directed that in case the amount of the judgment was paid by the Empire Insurance Co., Andal
should in turn pay the former the sum of P1,500 with interest at 12% from the time of the filing of
the complaint to the time of payment and to pay attorney's fees in the sum of P500 and
proportionate part of the costs. The Makati Development Corporation appealed directly to this
Court.

In reducing Andal's liability for breach of his undertaking from P12,000, as stipulated in the bond to
P1,500, the court noted that

While no building has actually been constructed before the target date which is March 31, 1961, it is
also a fact that even before that date the entire area was already fenced with a stone wall and
building materials were also stocked in the premises which are clear indicia of the owner's desire to
construct his house with the least possible delay. As a matter of fact the incontrovertible testimony
of Juan Carlos is to the effect that by the end of April 1961, he had finished very much more than the
required 50% stipulated in the contract of sale. In short there was only really a little delay.

But the appellant argues that Andal became liable for the full amount of his bond upon his failure to
build a house within the two-year period which expired on March 31, 1961 and that the trial court
was without authority to reduce Andal's liability on the basis of Carlos' construction of a house a
month after the stipulated period because there was no privity of contract between Carlos and the
Makati Development Corporation.

To begin with, the so-called "special condition" in the deed of sale is in reality an obligation1 — to
build a house at least 50 per cent of which must be finished within two years. It was to secure the
performance of this obligation that a penal clause was inserted.

While it is true that in obligations with a penal sanction the penalty takes the place of "damages and
the payment of interest in case of non-compliance"2 and that the obligee is entitled to recover upon
the breach of the obligation without the need of proving damages,3 it is nonetheless true that in
certain instances a mitigation of the obligor's liability is allowed. Thus article 1229 of the Civil Code
states:

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.

Here the trial court found that Juan Carlos had finished more than 50 per cent of his house by April,
1961, or barely a month after the expiration on March 31, 1961 of the stipulated period. There was
therefore a partial performance of the obligation within the meaning and intendment of article
1229.4 The case of General Ins. & Surety Corp. vs. Republic, G.R. L-13873, Jan. 31, 19635 cannot be
invoked as authority for the forfeiture of the full amount of the bond because unlike this case there
was in that case no performance at all of any part of the obligation to secure the payment of salaries
to teachers. Indeed, it has been held that where there has been 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 contract that the amount or character of
the indemnity is fixed without regard to the probable damages which might be anticipated as a
result of a breach of the terms of the contract, or, in other words, where the indemnity provided for
is essentially a mere penalty having for its object the enforcement of compliance with the contract.6
The penal clause in this case was inserted not to indemnify the Makati Development Corporation for
any damage it might suffer as a result of a breach of the contract but rather to compel performance
of the so-called "special condition" and thus encourage home building among lot owners in the
Urdaneta Village.

Considering that a house had been built shortly after the period stipulated, the substantial, if tardy,
performance of the obligation, having in view the purpose of the penal clause, fully justified the trial
court in reducing the penalty.

Still it is insisted that Carlos' construction of a house on the lot sold cannot be considered a partial
performance of Andal's obligation because Carlos bears no contractual relation to the Makati
Development Corporation. This case is in many respects analogous to Insular Gov't. vs. Amechazurra,
10 Phil. 637 (1908) where a similar claim was made by a party and rejected by this Court. There the
defendant gave a bond for $800 to guarantee the return to the plaintiff of four firearms issued to
him "on demand" of the Government. Three of the firearms were stolen from the defendant so that
on demand of the Government he was able to produce only one. Subsequently the constabulary
recovered two of the missing guns and the question was whether defendant was entitled to a
mitigation of liability even if recovery of the firearms was made possible through the efforts of third
parties (the Constabulary) This Court gave an affirmative answer.

Indeed the stipulation in this case to commence the construction and complete at least 50 per cent
of the vendee's house within two years cannot be construed as imposing a strictly personal
obligation on Andal. To adopt such a construction would be to limit Andal's right to dispose of the
lot. There is nothing in the deed of sale restricting Andal's right to sell the lot at least within the two-
year period and we think it plain that a reading of such a limitation on one of the rights of ownership
must rest on more explicit language in the contract. It cannot be left to mere inference.

Accordingly, the decision appealed from is affirmed, at appellant's cost.

Antonio Tan vs CA

On May 14, 1978 and July 6, 1978, petitioner Antonio Tan obtained two (2) loans each in the
principal amount of Two Million Pesos (P2,000,000.00), or in the total principal amount of Four
Million Pesos (P4,000,000.00) from respondent Cultural Center of the Philippines (CCP, for brevity)
evidenced by two (2) promissory notes with maturity dates on May 14, 1979 and July 6, 1979,
respectively. Petitioner defaulted but after a few partial payments he had the loans restructured by
respondent CCP, and petitioner accordingly executed a promissory note (Exhibit "A") on August 31,
1979 in the amount of Three Million Four Hundred Eleven Thousand Four Hundred Twenty-One
Pesos and Thirty-Two Centavos (P3,411,421.32) payable in five (5) installments. Petitioner Tan failed
to pay any installment on the said restructured loan of Three Million Four Hundred Eleven Thousand
Four Hundred Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32), the last installment
falling due on December 31, 1980. In a letter dated January 26, 1982, petitioner requested and
proposed to respondent CCP a mode of paying the restructured loan, i.e., (a) twenty percent (20%)
of the principal amount of the loan upon the respondent giving its conformity to his proposal; and
(b) the balance on the principal obligation payable in thirty-six (36) equal monthly installments until
fully paid. On October 20, 1983, petitioner again sent a letter to respondent CCP requesting for a
moratorium on his loan obligation until the following year allegedly due to a substantial deduction in
the volume of his business and on account of the peso devaluation. No favorable response was
made to said letters. Instead, respondent CCP, through counsel, wrote a letter dated May 30, 1984
to the petitioner demanding full payment, within ten (10) days from receipt of said letter, of the
petitioner’s restructured loan which as of April 30, 1984 amounted to Six Million Eighty-Eight
Thousand Seven Hundred Thirty-Five Pesos and Three Centavos (P6,088,735.03).
On August 29, 1984, respondent CCP filed in the RTC of Manila a complaint for collection of a sum of
money, docketed as Civil Case No. 84-26363, against the petitioner after the latter failed to settle his
said restructured loan obligation. The petitioner interposed the defense that he merely
accommodated a friend, Wilson Lucmen, who allegedly asked for his help to obtain a loan from
respondent CCP. Petitioner claimed that he has not been able to locate Wilson Lucmen. While the
case was pending in the trial court, the petitioner filed a Manifestation wherein he proposed to
settle his indebtedness to respondent CCP by proposing to make a down payment of One Hundred
Forty Thousand Pesos (P140,000.00) and to issue twelve (12) checks every beginning of the year to
cover installment payments for one year, and every year thereafter until the balance is fully paid.
However, respondent CCP did not agree to the petitioner’s proposals and so the trial of the case
ensued.

On May 8, 1991, the trial court rendered a decision, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendant, ordering
defendant to pay plaintiff, the amount of P7,996,314.67, representing defendant’s outstanding
account as of August 28, 1986, with the corresponding stipulated interest and charges thereof, until
fully paid, plus attorney’s fees in an amount equivalent to 25% of said outstanding account, plus
P50,000.00, as exemplary damages, plus costs.

Defendant’s counterclaims are ordered dismissed, for lack of merit.

SO ORDERED.4

The trial court gave five (5) reasons in ruling in favor of respondent CCP. First, it gave little weight to
the petitioner’s contention that the loan was merely for the accommodation of Wilson Lucmen for
the reason that the defense propounded was not credible in itself. Second, assuming, arguendo, that
the petitioner did not personally benefit from the said loan, he should have filed a third party
complaint against Wilson Lucmen, the alleged accommodated party but he did not. Third, for three
(3) times the petitioner offered to settle his loan obligation with respondent CCP. Fourth, petitioner
may not avoid his liability to pay his obligation under the promissory note (Exh. "A") which he must
comply with in good faith pursuant to Article 1159 of the New Civil Code. Fifth, petitioner is
estopped from denying his liability or loan obligation to the private respondent.

The petitioner appealed the decision of the trial court to the Court of Appeals insofar as it charged
interest, surcharges, attorney’s fees and exemplary damages against the petitioner. In his appeal,
the petitioner asked for the reduction of the penalties and charges on his loan obligation. He
abandoned his alleged defense in the trial court that he merely accommodated his friend, Wilson
Lucmen, in obtaining the loan, and instead admitted the validity of the same. On August 31, 1993,
the appellate court rendered a decision, the dispositive portion of which reads:
WHEREFORE, with the foregoing modification, the judgment appealed from is hereby AFFIRMED.

SO ORDERED.5

In affirming the decision of the trial court imposing surcharges and interest, the appellate court held
that:

We are unable to accept appellant’s (petitioner’s) claim for modification on the basis of alleged
partial or irregular performance, there being none. Appellant’s offer or tender of payment cannot be
deemed as a partial or irregular performance of the contract, not a single centavo appears to have
been paid by the defendant.

However, the appellate court modified the decision of the trial court by deleting the award for
exemplary damages and reducing the amount of awarded attorney’s fees to five percent (5%), by
ratiocinating as follows:

Given the circumstances of the case, plus the fact that plaintiff was represented by a government
lawyer, We believe the award of 25% as attorney’s fees and P500,000.00 as exemplary damages is
out of proportion to the actual damage caused by the non-performance of the contract and is
excessive, unconscionable and iniquitous.

In a Resolution dated July 13, 1994, the appellate court denied the petitioner’s motion for
reconsideration of the said decision.

Hence, this petition anchored on the following assigned errors:

THE HONORABLE COURT OF APPEALS COMMITTED A MISTAKE IN GIVING ITS IMPRIMATUR TO THE
DECISION OF THE TRIAL COURT WHICH COMPOUNDED INTEREST ON SURCHARGES.

II

THE HONORABLE COURT OF APPEALS ERRED IN NOT SUSPENDING IMPOSITION OF INTEREST FOR
THE PERIOD OF TIME THAT PRIVATE RESPONDENT HAS FAILED TO ASSIST PETITIONER IN APPLYING
FOR RELIEF OF LIABILITY THROUGH THE COMMISSION ON AUDIT AND THE OFFICE OF THE
PRESIDENT.

III

THE HONORABLE COURT OF APPEALS ERRED IN NOT DELETING AWARD OF ATTORNEY’S FEES AND IN
REDUCING PENALTIES.

Significantly, the petitioner does not question his liability for his restructured loan under the
promissory note marked Exhibit "A". The first question to be resolved in the case at bar is whether
there are contractual and legal bases for the imposition of the penalty, interest on the penalty and
attorney’s fees.

The petitioner imputes error on the part of the appellate court in not totally eliminating the award of
attorney’s fees and in not reducing the penalties considering that the petitioner, contrary to the
appellate court’s findings, has allegedly made partial payments on the loan. And if penalty is to be
awarded, the petitioner is asking for the non-imposition of interest on the surcharges inasmuch as
the compounding of interest on surcharges is not provided in the promissory note marked Exhibit
"A". The petitioner takes exception to the computation of the private respondent whereby the
interest, surcharge and the principal were added together and that on the total sum interest was
imposed. Petitioner also claims that there is no basis in law for the charging of interest on the
surcharges for the reason that the New Civil Code is devoid of any provision allowing the imposition
of interest on surcharges.

We find no merit in the petitioner’s contention. Article 1226 of the New Civil Code provides that:

In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the
payment of interests in case of non-compliance, if there is no stipulation to the contrary.
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.

In the case at bar, the promissory note (Exhibit "A") expressly provides for the imposition of both
interest and penalties in case of default on the part of the petitioner in the payment of the subject
restructured loan. The pertinent6 portion of the promissory note (Exhibit "A") imposing interest and
penalties provides that:
For value received, I/We jointly and severally promise to pay to the CULTURAL CENTER OF THE
PHILIPPINES at its office in Manila, the sum of THREE MILLION FOUR HUNDRED ELEVEN THOUSAND
FOUR HUNDRED + PESOS (P3,411,421.32) Philippine Currency, xxx.

xxx xxx xxx

With interest at the rate of FOURTEEN per cent (14%) per annum from the date hereof until paid.
PLUS THREE PERCENT (3%) SERVICE CHARGE.

In case of non-payment of this note at maturity/on demand or upon default of payment of any
portion of it when due, I/We jointly and severally agree to pay additional penalty charges at the rate
of TWO per cent (2%) per month on the total amount due until paid, payable and computed
monthly. Default of payment of this note or any portion thereof when due shall render all other
installments and all existing promissory notes made by us in favor of the CULTURAL CENTER OF THE
PHILIPPINES immediately due and demandable. (Underscoring supplied)

xxx xxx xxx

The stipulated fourteen percent (14%) per annum interest charge until full payment of the loan
constitutes the monetary interest on the note and is allowed under Article 1956 of the New Civil
Code.7 On the other hand, the stipulated two percent (2%) per month penalty is in the form of
penalty charge which is separate and distinct from the monetary interest on the principal of the
loan.

Penalty on delinquent loans may take different forms. In Government Service Insurance System v.
Court of Appeals,8 this Court has ruled that the New Civil Code permits an agreement upon a
penalty apart from the monetary interest. If the parties stipulate this kind of agreement, the penalty
does not include the monetary interest, and as such the two are different and distinct from each
other and may be demanded separately. Quoting Equitable Banking Corp. v. Liwanag,9 the GSIS case
went on to state that such a stipulation about payment of an additional interest rate partakes of the
nature of a penalty clause which is sanctioned by law, more particularly under Article 2209 of the
New Civil Code which provides that:

If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the contrary, shall be the payment of the
interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per
annum.
The penalty charge of two percent (2%) per month in the case at bar began to accrue from the time
of default by the petitioner. There is no doubt that the petitioner is liable for both the stipulated
monetary interest and the stipulated penalty charge. The penalty charge is also called penalty or
compensatory interest. Having clarified the same, the next issue to be resolved is whether interest
may accrue on the penalty or compensatory interest without violating the provisions of Article 1959
of the New Civil Code, which provides that:

Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn interest.
However, the contracting parties may by stipulation capitalize the interest due and unpaid, which as
added principal, shall earn new interest.

According to the petitioner, there is no legal basis for the imposition of interest on the penalty
charge for the reason that the law only allows imposition of interest on monetary interest but not
the charging of interest on penalty. He claims that since there is no law that allows imposition of
interest on penalties, the penalties should not earn interest. But as we have already explained,
penalty clauses can be in the form of penalty or compensatory interest. Thus, the compounding of
the penalty or compensatory interest is sanctioned by and allowed pursuant to the above-quoted
provision of Article 1959 of the New Civil Code considering that:

First, there is an express stipulation in the promissory note (Exhibit "A") permitting the compounding
of interest. The fifth paragraph of the said promissory note provides that: "Any interest which may
be due if not paid shall be added to the total amount when due and shall become part thereof, the
whole amount to bear interest at the maximum rate allowed by law."10 Therefore, any penalty
interest not paid, when due, shall earn the legal interest of twelve percent (12%) per annum,11 in
the absence of express stipulation on the specific rate of interest, as in the case at bar.

Second, Article 2212 of the New Civil Code provides that "Interest due shall earn legal interest from
the time it is judicially demanded, although the obligation may be silent upon this point." In the
instant case, interest likewise began to run on the penalty interest upon the filing of the complaint in
court by respondent CCP on August 29, 1984. Hence, the courts a quo did not err in ruling that the
petitioner is bound to pay the interest on the total amount of the principal, the monetary interest
and the penalty interest.

The petitioner seeks the elimination of the compounded interest imposed on the total amount
based allegedly on the case of National Power Corporation v. National Merchandising
Corporation,12 wherein we ruled that the imposition of interest on the damages from the filing of
the complaint is unjust where the litigation was prolonged for twenty-five (25) years through no
fault of the defendant. However, the ruling in the said National Power Corporation (NPC) case is not
applicable to the case at bar inasmuch as our ruling on the issue of interest in that NPC case was
based on equitable considerations and on the fact that the said case lasted for twenty-five (25) years
"through no fault of the defendant." In the case at bar, however, equity cannot be considered
inasmuch as there is a contractual stipulation in the promissory note whereby the petitioner
expressly agreed to the compounding of interest in case of failure on his part to pay the loan at
maturity. Inasmuch as the said stipulation on the compounding of interest has the force of law
between the parties and does not appear to be inequitable or unjust, the said written stipulation
should be respected.

The private respondent’s Statement of Account (marked Exhibits "C" to "C-2")13 shows the following
breakdown of the petitioner’s indebtedness as of August 28, 1986:

Principal

P2,838,454.68

Interest

P 576,167.89

Surcharge

P4,581,692.10

P7,996,314.67

The said statement of account also shows that the above amounts stated therein are net of the
partial payments amounting to a total of Four Hundred Fifty-Two Thousand Five Hundred Sixty-One
Pesos and Forty-Three Centavos (P452,561.43) which were made during the period from May 13,
1983 to September 30, 1983.14 The petitioner now seeks the reduction of the penalty due to the
said partial payments. The principal amount of the promissory note (Exhibit "A") was Three Million
Four Hundred Eleven Thousand Four Hundred Twenty-One Pesos and Thirty-Two Centavos
(P3,411,421.32) when the loan was restructured on August 31, 1979. As of August 28, 1986, the
principal amount of the said restructured loan has been reduced to Two Million Eight Hundred
Thirty-Eight Thousand Four Hundred Fifty-Four Pesos and Sixty-Eight Centavos (P2,838,454.68).
Thus, petitioner contends that reduction of the penalty is justifiable pursuant to Article 1229 of the
New Civil Code which provides that: "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." Petitioner insists that the penalty should be reduced to ten percent (10%) of the
unpaid debt in accordance with Bachrach Motor Company v. Espiritu.15
There appears to be a justification for a reduction of the penalty charge but not necessarily to ten
percent (10%) of the unpaid balance of the loan as suggested by petitioner. Inasmuch as petitioner
has made partial payments which showed his good faith, a reduction of the penalty charge from two
percent (2%) per month on the total amount due, compounded monthly, until paid can indeed be
justified under the said provision of Article 1229 of the New Civil Code.

In other words, we find the continued monthly accrual of the two percent (2%) penalty charge on
the total amount due to be unconscionable inasmuch as the same appeared to have been
compounded monthly.

Considering petitioner’s several partial payments and the fact he is liable under the note for the two
percent (2%) penalty charge per month on the total amount due, compounded monthly, for twenty-
one (21) years since his default in 1980, we find it fair and equitable to reduce the penalty charge to
a straight twelve percent (12%) per annum on the total amount due starting August 28, 1986, the
date of the last Statement of Account (Exhibits "C" to "C-2"). We also took into consideration the
offers of the petitioner to enter into a compromise for the settlement of his debt by presenting
proposed payment schemes to respondent CCP. The said offers at compromise also showed his good
faith despite difficulty in complying with his loan obligation due to his financial problems. However,
we are not unmindful of the respondent’s long overdue deprivation of the use of its money
collectible from the petitioner.

The petitioner also imputes error on the part of the appellate court for not declaring the suspension
of the running of the interest during that period when the respondent allegedly failed to assist the
petitioner in applying for relief from liability. In this connection, the petitioner referred to the private
respondent’s letter16 dated September 28, 1988 addressed to petitioner which partially reads:

Dear Mr. Tan:

xxx xxx xxx

With reference to your appeal for condonation of interest and surcharge, we wish to inform you that
the center will assist you in applying for relief of liability through the Commission on Audit and Office
of the President xxx.

While your application is being processed and awaiting approval, the center will be accepting your
proposed payment scheme with the downpayment of P160,000.00 and monthly remittances of
P60,000.00 xxx.
xxx xxx xxx

The petitioner alleges that his obligation to pay the interest and surcharge should have been
suspended because the obligation to pay such interest and surcharge has become conditional, that is
dependent on a future and uncertain event which consists of whether the petitioner’s request for
condonation of interest and surcharge would be recommended by the Commission on Audit and the
Office of the President to the House of Representatives for approval as required under Section 36 of
Presidential Decree No. 1445. Since the condition has not happened allegedly due to the private
respondent’s reneging on its promise, his liability to pay the interest and surcharge on the loan has
not arisen. This is the petitioner’s contention.

It is our view, however, that the running of the interest and surcharge was not suspended by the
private respondent’s promise to assist the petitioners in applying for relief therefrom through the
Commission on Audit and the Office of the President.

First, the letter dated September 28, 1988 alleged to have been sent by the respondent CCP to the
petitioner is not part of the formally offered documentary evidence of either party in the trial court.
That letter cannot be considered evidence pursuant to Rule 132, Section 34 of the Rules of Court
which provides that: "The court shall consider no evidence which has not been formally offered xxx."
Besides, the said letter does not contain any categorical agreement on the part of respondent CCP
that the payment of the interest and surcharge on the loan is deemed suspended while his appeal
for condonation of the interest and surcharge was being processed.

Second, the private respondent correctly asserted that it was the primary responsibility of petitioner
to inform the Commission on Audit and the Office of the President of his application for condonation
of interest and surcharge. It was incumbent upon the petitioner to bring his administrative appeal
for condonation of interest and penalty charges to the attention of the said government offices.

On the issue of attorney’s fees, the appellate court ruled correctly and justly in reducing the trial
court’s award of twenty-five percent (25%) attorney’s fees to five percent (5%) of the total amount
due.

WHEREFORE, the assailed Decision of the Court of Appeals is hereby AFFIRMED with MODIFICATION
in that the penalty charge of two percent (2%) per month on the total amount due, compounded
monthly, is hereby reduced to a straight twelve percent (12%) per annum starting from August 28,
1986. With costs against the petitioner.

SO ORDERED.
 When Penalty shall be equitably reduced

Macalinao vs BPI

Petitioner Ileana Macalinao was an approved cardholder of BPI Mastercard, one of the credit card
facilities of respondent Bank of the Philippine Islands (BPI).3 Petitioner Macalinao made some
purchases through the use of the said credit card and defaulted in paying for said purchases. She
subsequently received a letter dated January 5, 2004 from respondent BPI, demanding payment of
the amount of one hundred forty-one thousand five hundred eighteen pesos and thirty-four
centavos (PhP 141,518.34)

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

8. PAYMENT OF CHARGES – BCC shall furnish the Cardholder a monthly Statement of Account (SOA)
and the Cardholder agrees that all charges made through the use of the CARD shall be paid by the
Cardholder as stated in the SOA on or before the last day for payment, which is twenty (20) days
from the date of the said SOA, and such payment due date may be changed to an earlier date if the
Cardholder’s account is considered overdue and/or with balances in excess of the approved credit
limit, or to such other date as may be deemed proper by the CARD issuer with notice to the
Cardholder on the same monthly SOA. If the last day fall on a Saturday, Sunday or a holiday, the
last day for the payment automatically becomes the last working day prior to said payment date.
However, notwithstanding the absence or lack of proof of service of the SOA of the Cardholder,
the latter shall pay any and all charges made through the use of the CARD within thirty (30) days
from date or dates thereof. Failure of the Cardholder to pay the charges made through the CARD
within the payment period as stated in the SOA or within thirty (30) days from actual date or dates
of purchase whichever occur earlier, shall render him in default without the necessity of demand
from BCC, which the Cardholder expressly waives. The charges or balance thereof remaining
unpaid after the payment due date indicated on the monthly Statement of Accounts shall bear
interest at the rate of 3% per month for BPI Express Credit, BPI Gold Mastercard and an additional
penalty fee equivalent to another 3% of the amount due for every month or a fraction of a
month’s delay. PROVIDED that if there occurs any change on the prevailing market rates, BCC shall
have the option to adjust the rate of interest and/or penalty fee due on the outstanding obligation
with prior notice to the cardholder. The Cardholder hereby authorizes BCC to correspondingly
increase the rate of such interest [in] the event of changes in the prevailing market rates, and to
charge additional service fees as may be deemed necessary in order to maintain its service to the
Cardholder. A CARD with outstanding balance unpaid after thirty (30) days from original billing
statement date shall automatically be suspended, and those with accounts unpaid after ninety (90)
days from said original billing/statement date shall automatically be cancel (sic), without prejudice to
BCC’s right to suspend or cancel any card anytime and for whatever reason. In case of default in his
obligation as provided herein, Cardholder shall surrender his/her card to BCC and in addition to
the interest and penalty charges aforementioned , pay the following liquidated damages and/or
fees (a) a collection fee of 25% of the amount due if the account is referred to a collection agency
or attorney; (b) service fee for every dishonored check issued by the cardholder in payment of his
account without prejudice, however, to BCC’s right of considering Cardholder’s account, and (c) a
final fee equivalent to 25% of the unpaid balance, exclusive of litigation expenses and judicial cost,
if the payment of the account is enforced though court action. Venue of all civil suits to enforce this
Agreement or any other suit directly or indirectly arising from the relationship between the parties
as established herein, whether arising from crimes, negligence or breach thereof, shall be in the
process of courts of the City of Makati or in other courts at the option of BCC.

For failure of petitioner Macalinao to settle her obligations, respondent BPI filed with the
Metropolitan Trial Court (MeTC) of Makati City a complaint for a sum of money against her and
her husband, Danilo SJ. Macalinao. This was raffled to Branch 66 of the MeTC and was docketed as
Civil Case No. 84462 entitled Bank of the Philippine Islands vs. Spouses Ileana Dr. Macalinao and
Danilo SJ. Macalinao.5

In said complaint, respondent BPI prayed for the payment of the amount of one hundred fifty-four
thousand six hundred eight pesos and seventy-eight centavos (PhP 154,608.78) plus 3.25% finance
charges and late payment charges equivalent to 6% of the amount due from February 29, 2004
and an amount equivalent to 25% of the total amount due as attorney’s fees, and of the cost of
suit.

After the summons and a copy of the complaint were served upon petitioner Macalinao and her
husband, they failed to file their Answer. Thus, respondent BPI moved that judgment be rendered in
accordance with Section 6 of the Rule on Summary Procedure. This was granted in an Order dated
June 16, 2004.9 Thereafter, respondent BPI submitted its documentary evidence.

ISSUE:

THE REDUCTION OF INTEREST RATE, FROM 9.25% TO 2%, SHOULD BE UPHELD SINCE THE
STIPULATED RATE OF INTEREST WAS UNCONSCIONABLE AND INIQUITOUS, AND THUS ILLEGAL.

THE COURT OF APPEALS ARBITRARILY MODIFIED THE REDUCED RATE OF INTEREST FROM 2% TO 3%,
CONTRARY TO THE TENOR OF ITS OWN DECISION.

RULING:

The petition is partly meritorious.

The Interest Rate and Penalty Charge of 3% Per Month or 36% Per Annum Should Be Reduced to
2% Per Month or 24% Per Annum

In its Complaint, respondent BPI originally imposed the interest and penalty charges at the rate of
9.25% per month or 111% per annum. This was declared as unconscionable by the lower courts for
being clearly excessive, and was thus reduced to 2% per month or 24% per annum. On appeal, the
CA modified the rate of interest and penalty charge and increased them to 3% per month or 36% per
annum based on the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card,
which governs the transaction between petitioner Macalinao and respondent BPI.

In the instant petition, Macalinao claims that the interest rate and penalty charge of 3% per month
imposed by the CA is iniquitous as the same translates to 36% per annum or thrice the legal rate of
interest. On the other hand, respondent BPI asserts that said interest rate and penalty charge are
reasonable as the same are based on the Terms and Conditions Governing the Issuance and Use of
the BPI Credit Card.

The Supreme Court finds for petitioner. We are of the opinion that the interest rate and penalty
charge of 3% per month should be equitably reduced to 2% per month or 24% per annum.
Indeed, in the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card, there
was a stipulation on the 3% interest rate. Nevertheless, it should be noted that this is not the first
time that this Court has considered the interest rate of 36% per annum as excessive and
unconscionable. We held in Chua vs. Timan:

The stipulated interest rates of 7% and 5% per month imposed on respondents’ loans must be
equitably reduced to 1% per month or 12% per annum. We need not unsettle the principle we had
affirmed in a plethora of cases that stipulated interest rates of 3% per month and higher are
excessive, iniquitous, unconscionable and exorbitant. Such stipulations are void for being contrary
to morals, if not against the law. While C.B. Circular No. 905-82, which took effect on January 1,
1983, effectively removed the ceiling on interest rates for both secured and unsecured loans,
regardless of maturity, nothing in the said circular could possibly be read as granting carte blanche
authority to lenders to raise interest rates to levels which would either enslave their borrowers or
lead to a hemorrhaging of their assets. (Emphasis supplied.)

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. Notably, under the Terms and Conditions
Governing the Issuance and Use of the BPI Credit Card, it was also stated therein that respondent
BPI shall impose an additional penalty charge of 3% per month. Pertinently, Article 1229 of the Civil
Code states:

Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been
partly or irregularly complied with by the debtor. Even if there has been no performance, the
penalty may also be reduced by the courts if it is iniquitous or unconscionable.

In exercising this power to determine what is iniquitous and unconscionable, courts must consider
the circumstances of each case since what may be iniquitous and unconscionable in one may be
totally just and equitable in another.

In the instant case, the records would reveal that petitioner Macalinao made partial payments to
respondent BPI, as indicated in her Billing Statements.20 Further, the stipulated penalty charge of
3% per month or 36% per annum, in addition to regular interests, is indeed iniquitous and
unconscionable.

Thus, under the circumstances, the Court finds it equitable to reduce the interest rate pegged by
the CA at 1.5% monthly to 1% monthly and penalty charge fixed by the CA at 1.5% monthly to 1%
monthly or a total of 2% per month or 24% per annum in line with the prevailing jurisprudence
and in accordance with Art. 1229 of the Civil Code.

There Is No Basis for the Dismissal of the Case,

Much Less a Remand of the Same for Further Reception of Evidence

Petitioner Macalinao claims that the basis of the re-computation of the CA, that is, the amount of
PhP 94,843.70 stated on the October 27, 2002 Statement of Account, was not the amount of the
principal obligation. Thus, this allegedly necessitates a re-examination of the evidence presented
by the parties. For this reason, petitioner Macalinao further contends that the dismissal of the
case or its remand to the lower court would be a more appropriate disposition of the case.

Such contention is untenable. Based on the records, the summons and a copy of the complaint were
served upon petitioner Macalinao and her husband on May 4, 2004. Nevertheless, they failed to file
their Answer despite such service. Thus, respondent BPI moved that judgment be rendered
accordingly. Consequently, a decision was rendered by the MeTC on the basis of the evidence
submitted by respondent BPI. This is in consonance with Sec. 6 of the Revised Rule on Summary
Procedure, which states:

Sec. 6. Effect of failure to answer. — Should the defendant fail to answer the complaint within the
period above provided, the court, motu proprio, or on motion of the plaintiff, shall render judgment
as may be warranted by the facts alleged in the complaint and limited to what is prayed for therein:
Provided, however, that the court may in its discretion reduce the amount of damages and
attorney’s fees claimed for being excessive or otherwise unconscionable. This is without prejudice to
the applicability of Section 3(c), Rule 10 of the Rules of Court, if there are two or more defendants.
(As amended by the 1997 Rules of Civil Procedure; emphasis supplied.)

Considering the foregoing rule, respondent BPI should not be made to suffer for petitioner
Macalinao’s failure to file an answer and concomitantly, to allow the latter to submit additional
evidence by dismissing or remanding the case for further reception of evidence. Significantly,
petitioner Macalinao herself admitted the existence of her obligation to respondent BPI, albeit with
reservation as to the principal amount. Thus, a dismissal of the case would cause great injustice to
respondent BPI. Similarly, a remand of the case for further reception of evidence would unduly
prolong the proceedings of the instant case and render inutile the proceedings conducted before the
lower courts.

Significantly, the CA correctly used the beginning balance of PhP 94,843.70 as basis for the re-
computation of the interest considering that this was the first amount which appeared on the
Statement of Account of petitioner Macalinao. There is no other amount on which the re-
computation could be based, as can be gathered from the evidence on record. Furthermore,
barring a showing that the factual findings complained of are totally devoid of support in the
record or that they are so glaringly erroneous as to constitute serious abuse of discretion, such
findings must stand, for this Court is not expected or required to examine or contrast the evidence
submitted by the parties.22

In view of the ruling that only 1% monthly interest and 1% penalty charge can be applied to the
beginning balance of PhP 94,843.70

WHEREFORE, the petition is PARTLY GRANTED. The CA Decision dated June 30, 2006 in CA-G.R. SP
No. 92031 is hereby MODIFIED with respect to the total amount due, interest rate, and penalty
charge. Accordingly, petitioner Macalinao is ordered to pay respondent BPI the following:

(1) The amount of one hundred twelve thousand three hundred nine pesos and fifty-two centavos
(PhP 112,309.52) plus interest and penalty charges of 2% per month from January 5, 2004 until fully
paid;

(2) PhP 10,000 as and by way of attorney’s fees; and

(3) Cost of suit.

SO ORDERED.