[G.R.

No. 148163. December 6, 2004] BANCO FILIPINO SAVINGS AND MORTGAGE BANK, petitioner, vs. JUANITA B. YBAEZ, CHARLES B. YBAEZ, JOSEPH B. YBAEZ and JEROME B. YBAEZ, respondents. D E C I S I O N QUISUMBING, J.: In this petition for review, Banco Filipino Savings and Mortgage Bank seeks the reversal of the Decision[1] dated April 17, 2001 of the Court of Appeals in CA-G.R. CV No. 57927 affirming the Decision[2] dated July 16, 1997 of the Regional Trial Court, Branch 13 of Cebu City in Civil Case No. CEB-16548. The facts of this case are as follows: On March 7, 1978, respondents obtained a loan secured by a Deed of Real Estate Mortgage over Transfer Certificate of Title (TCT) No. 69836 from petitioner bank. The loan was used for the construction of a commercial building in Cebu City. On October 25, 1978, respondents obtained an additional loan from the petitioner thus increasing their obligation to one million pesos. A corresponding Amendment of Real Estate Mortgage was thereafter executed. On December 24, 1982, the loan was again re-structured, increasing the loan obligation to P1,225,000 and the Real Estate Mortgage was again amended. Respondents executed a Promissory Note for the sum of P1,225,000 payable in fifteen years, with a stipulated interest of 21% per annum, and stipulating monthly payments of P22,426. The first payment was payable on January 24, 1983, and the succeeding payments were due every 24th of each month thereafter.[3] The note also stipulated that in case of default in the payment of any of the monthly amortization and interest, respondents shall pay a penalty equivalent to 3% of the amount due each month.[4] Respondents total payment from 1983 to 1988 amounted[5] to P1,455,385.07, broken down as follows: 1983 247,631.54 1984 81,797.24 1985 173,875.77 1986 284,364.82 1987 380,000.00 1988 287,715.70[6] From 1989 onwards, respondents did not pay a single centavo. They aver that Banco Filipino had ceased operations and/or was not allowed to continue business, having been placed under liquidation by the Central Bank.

On January 15, 1990, respondents lawyer wrote Special Acting Liquidator, Renan Santos, and requested that plaintiff return the mortgaged property of the respondents since it had sufficiently profited from the loan and that the interest and penalty charges were excessive. Petitioner bank denied the request.[7] Banco Filipino was closed on January 1, 1985 and re-opened for business on July 1, 1994. From its closure to its re-opening, petitioner bank did not transact any business with its customers.[8] On August 24, 1994, respondents were served a Notice of Extra Judicial Sale of their property covered by TCT No. 69836 to satisfy their indebtedness allegedly of P6,174,337.46 which includes the principal, interest, surcharges and 10% attorneys fees. The public auction was scheduled on September 22, 1994 at 2:00 in the afternoon. On September 19, 1994, respondents filed a suit for Injunction, Accounting and Damages, alleging that there was no legal and factual basis for the foreclosure proceedings since the loan had already been fully paid. A restraining order was issued the following day by the lower court enjoining petitioner to cease and desist from selling the property at a public auction.[9] On July 16, 1997, the lower court rendered a Decision, disposing as follows: WHEREFORE, judgment is hereby rendered directing defendant Banco Filipino Savings and Mortgage Bank to render a correct accounting of the obligations of plaintiffs with it after eliminating interest from January 1, 1985 to July 1, 1994 when it was closed, and reducing interest from 21% to 17% per annum, at the time it was in operation, and totally eliminating [the] surcharge of 1% per month, within a period of fifteen (15) days from the time the judgment shall have become final and executory. Plaintiffs are directed to pay the bank within a period of thirty (30) days from the time they will receive defendant banks true and correct accounting, otherwise the order of injunction will be lifted/dissolved. Defendants are enjoined from foreclosing the real estate mortgage on the property of plaintiffs, unless the latter fail to pay in accordance with the [preceding] paragraph. Without special pronouncement as to costs. SO ORDERED.[10] Not satisfied with the decision, both parties appealed the case to the Court of Appeals. Petitioner filed its Notice of Appeal on August 19, 1997, while respondents filed theirs on August 22, 1997. On April 17, 2001, the Court of Appeals rendered a Decision affirming the decision of the trial court stating:

WHEREFORE, for lack of merit, both appeals are DISMISSED and the Decision appealed from is AFFIRMED. SO ORDERED.[11] Petitioner now alleges the following errors: I. THE COURT OF APPEALS ERRED IN CONCURRING WITH THE TRIAL COURTS DECISION ORDERING THE DEFENDANT BANK (HEREIN PETITIONER) TO RENDER A CORRECT ACCOUNTING OF PLAINTIFFS LOAN BECAUSE THE STATEMENT OF ACCOUNT (EXH. 5 and 6 Defendant) SUBMITTED BY DEFENDANT BANK DOES NOT REFLECT THE TRUE AND CORRECT AMOUNT AS IT IMPOSES A 21% PER ANNUM INTEREST WHICH THE COURT OF APPEALS CONSIDERED AS EXCESSIVE AND THAT IT HAS NO PROBATIVE VALUE AS ITS SIGNATORIES WERE NOT PRESENTED AS WITNESSES. II. THE COURT OF APPEALS ERRED IN ORDERING THE DELETION OF THE 3% PER MONTH SURCHARGE SIMPLY BECAUSE THE PLAINTIFF-BORROWER HAD MADE SUBSTANTIAL PAYMENTS FROM 1983 TO 1988. III. THE COURT OF APPEALS COMMITTED AN ERROR IN RULING THAT THE PLAINTIFFS- BORROWERS (HEREIN RESPONDENTS) CANNOT BE CONSIDERED TO HAVE DEFAULTED IN THEIR PAYMENT SINCE DEFENDANT BANK CEASED OPERATION FROM 1985 TO 1991.[12] To resolve the controversy we shall address the following pertinent questions: (1) What is the effect of the temporary closure of Banco Filipino from January 1, 1985 to July 1, 1994 on the loan? (2) Is the rate of interest set at 21% per annum legal? and (3) Is the 3% monthly surcharge valid? In Banco Filipino Savings and Mortgage Bank v. Monetary Board,[13] the validity of the closure and receivership of Banco Filipino was put in issue. But the pendency of the case did not diminish the authority of the designated liquidator to administer and continue the banks transactions. The Court allowed the banks liquidator to continue receiving collectibles and receivables or paying off creditors claims and other transactions pertaining to normal operations of a bank. Among these transactions were the prosecution of suits against debtors for collection and for foreclosure of mortgages. The bank was allowed to collect interests on its loans while under liquidation, provided that the interests were legal. Petitioner contends that the 21% annual interest was freely and voluntarily agreed upon by the parties, and that it was neither excessive nor violative of the Usury Law.[14] On the other hand, respondents state that the rate of 21% was usurious because the loan was incurred on December 24, 1982, before the de facto repeal of the Usury Law on January 1, 1983.[15] Respondents add that the normal rate by which petitioner charges its borrowers at that time was only 17%, or 4% lower than the rate it gave to respondents.

It is an elementary rule of contracts that the contracting parties are free to stipulate the terms of their contract for as long as the terms are not contrary to law, morals, good customs, public policy, public order, and national interests.[16] Laws in force at the time the contract was made generally govern its interpretation and application. The loan agreement between petitioner and respondents specifies the obligation of the debtor to pay interest. In principle said stipulation is binding between the parties.[17] We note that at the time the parties entered into the said loan agreement, the pertinent law, Act No. 2655, already provided that the rate of interest for the forbearance of money when secured by a mortgage upon real estate should not be more than 12% per annum or the maximum rate prescribed by the Monetary Board and in force at the time the loan was granted. On December 1, 1979, the Monetary Board of the Central Bank of the Philippines[18] had issued CBP Circular No. 705-79.[19] On loan transactions with maturities of more than 730 days, it fixed the effective rate of interest at 21% per annum for both secured and unsecured loans. Since the loan in question has fixed 15 years for its maturity, it fell within the coverage of said CBP Circular. Thus, we agree that the 21% interest is not violative of the Usury Law as it stood at the time of the loan transaction. As to the monthly surcharge, petitioner relies on CBP Circular No. 905-82.[20] The ceiling on interest rates prescribed by the Usury Law, according to petitioner, were expressly removed. Petitioner argues that the said circular had retroactive effect since it is merely procedural in nature. Hence according to petitioner, the imposition of 3% monthly surcharge by the bank against the borrower is legal. On this matter, we disagree with petitioner. CBP Circular No. 905-82, which was effective January 1, 1983, did not repeal nor in any way amend the Usury Law. The Circular simply suspended the effectivity of the Usury Law. A Central Bank Circular cannot repeal a law. Only a law can repeal another law. Thus, the retroactive application of a CBP Circular cannot, and should not, be presumed.[21] The loan was entered into on December 24, 1982, but CBP Circular No. 905-82 was given force and effect only on January 1, 1983. Thus, CBP Circular No. 905-82 could not be made applicable to the loan agreement in this case, and petitioner could not rely on this Circular for its imposition of 3% monthly surcharge. Petitioner also argues that the 3% monthly surcharge partakes of the nature of a penalty clause.[22] A penal clause is an accessory undertaking to assume greater liability in case of breach and is attached to an obligation in order to secure its performance.[23] The penalty shall substitute the indemnity for damages and the payment of interests in case of non- compliance.[24] But if such stipulation is found contrary to law for being usurious, it can be nullified by the courts without affecting the principal obligation.[25] In the loan agreement between the parties in this case, the total interest and other charges exceed the prescribed 21% ceiling. Hence, the imposition of the 3% monthly surcharge, as the penal clause to the obligation, violated the limit imposed by the Usury Law. Said surcharge of 3% monthly must be declared null and void.

To recapitulate: the respondents principal obligation to pay the monthly amortization of P22,426, validly subsists. Only the 3% monthly surcharge is void. The monthly amortization of P22,426, for 15 years, would amount to P4,036,680. To date, respondents already paid the amount of P1,455,385.07. Thus, only the outstanding balance of P2,581,294.93 remains due. Respondents were given by the RTC 30 days from receipt of decision, within which to pay their outstanding obligation. We now reiterate that period of 30 days, from receipt of this Decision, for respondents to pay the amount of P2,581,294.93 to the bank as full payment of the outstanding balance on their loan obligation. Otherwise, the order of injunction restraining petitioner from foreclosing the property shall be lifted. WHEREFORE, the Decision of the Regional Trial Court, which was sustained by the Court of Appeals, is hereby MODIFIED as follows: (1) the interest rate at 21% per annum is hereby declared VALID; (2) the 3% monthly surcharge is NULLIFIED for being violative of the Usury Law at the time; and (3) respondents are ORDERED to pay petitioner the amount of P2,581,294.93 within 30 days from receipt of this Decision. No pronouncement as to costs. SO ORDERED. Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna, JJ., concur. Navarro v. Mallari Facts: This action was instituted in the Court of First Instance of Pampanga by Santiago Navarro, Sabas Magtoto, and Victorino Calara, as trustees (mandatarios) of the inhabitants of the barrio of San Vicente, in the municipality of Macabebe, to compel the defendants, Felix Mallari, as principal, and Leon Tolentino and Ignacio Tolentino, as sureties, to comply withthe contract for the construction of a chapel to the patron saint of the barrio, or in thealternative to require the same defendants to return the sum of P12,000 paid to them, uponsaid contract, together with the sum of P4,000 as stipulated damages for failure to constructthe chapel according to the specifications. Issue: Whether or not Felix Mallari is liable for damages. Held: Concurrently with the execution of said contract Leon Tolentino and Ignacio Tolentino,also residents of municipality of Macabebe, obligated themselves in collateral contract of guaranty to respond solidarily for the faithful and true performance of the contract on the partof Felix Mallari. Felix Mallari, it may be stated, is not a contractor or builder by professionand knows nothing about constructing houses. His son Jose, although he supposed himself tohave some knowledge of the art, was but little better versed in such matters than his father;and he appears to have had but little skill even in the art of drafting.As might have been expected from the lack of technical knowledge on the part of the"contractor," a botch was made of the job. The chapel was indeed constructed somewhat in theexternal shape indicated in the design, but the work was done with complete want of knowledge of the art of construction and of the material employed. These words we take fromthe report of a competent engineer, Seor Emilio Maria de Moreta, of Manila, who made aspecial

examination and careful report upon the condition of the structure. In concluding hisreport Seor Moreta says that the plans were drawn by a person completely ignorant not onlyof all knowledge of the resisting power of materials and of descriptive geometry, as well as of technical knowledge in general, but that he did not even possess sufficient instruction in thedrawing of plans. Seor Moreta concludes his report with the observation that the buildingthreatens ruin for want of proper foundation and that upon the slightest tremor of the earth itmight come down. The photographs in evidence as prepare one for the conclusion stated inSeor Moreta's report.We do not encumber the opinion with the details stated of said report but will merely say that by that report and the testimony adduced at the trial, the case stated in the complaint is in our opinion completely demonstrated; and the plaintiffs are without doubt entitled to recover thestipulated damages for failure of the contracting parties to construct a chapel in conformitywith the fundamental principles of the art of building and in accordance with the specificationsof the contract.But the chapel, such as it is, appears to be in use for the purpose for which it was intended,and we are of the opinion that the plaintiffs are not entitled to confiscate the sum of P4,000 which is as yet unpaid upon the purchase price and at the same time to claim the stipulateddamages. The result is that the damages to which the plaintiffs are entitled under the lastclause of the contract (Exhibit A) must be set off against the portion of the contract pricewhich has been retained in the hands of the plaintiffs, with the result that neither party canrecover anything of the other. Lambert vs. Fox 26 phil 588 (kf) This is an action brought to recover a penalty prescribed on a contract as punishment for the breach thereof. Early in 1911 the firm known as John R. Edgar & Co., engaged in the retail book and stationery business, found itself in such condition financially that its creditors, including the plaintiff and the defendant, together with many others, agreed to take over the business, incorporate it and accept stock therein in payment of their respective credits. A few days after the incorporation was completed plaintiff and defendant entered into the following agreement: xxx the undersigned mutually and reciprocally agree not to sell, transfer, or otherwise dispose of any part of their present holdings of stock in said John R. Edgar & Co. Inc., till after one year from the date hereof. Either party violating this agreement shall pay to the other the sum of one thousand (P1,000) pesos as liquidated damages, unless previous consent in writing to such sale, transfer, or other disposition be obtained. Notwithstanding this contract the defendant Fox sold his stock in the said corporation to E. C. McCullough of the firm of E. C. McCullough & Co. of Manila, a strong competitor of the said John R. Edgar & Co., Inc. The learned trial court decided the case in favor of the defendant upon the ground that the intention of the parties as it appeared from the contract in question was to the effect that the agreement should be good and continue only until the corporation reached a sound financial basis, and that that event having occurred some time before the expiration of the year mentioned in the contract, the purpose for which the contract was made and had been fulfilled and the defendant accordingly discharged of his obligation thereunder. The complaint was dismissed upon the merits.

ISSUE: Did the court erred in the construction of the contract? HELD: "As for us, we do not construe or interpret this law. It does not need it. We apply it. By applying the law, we conserve both provisions for the benefit of litigants. The first and fundamental duty of courts, in our judgment, is to apply the law. Construction and interpretation come only after it has been demonstrated that application is impossible or inadequate without them. They are the very last functions which a court should exercise. The majority of the law need no interpretation or construction. They require only application, and if there were more application and less construction, there would be more stability in the law, and more people would know what the law is." In the case at bar the parties expressly stipulated that the contract should last one year. No reason is shown for saying that it shall last only nine months. Whatever the object was in specifying the year, it was their agreement that the contract should last a year and it was their judgment and conviction that their purposes would not be subversed in any less time. What reason can give for refusing to follow the plain words of the men who made the contract? We see none. In this jurisdiction penalties provided in contracts of this character are enforced . It is the rule that parties who are competent to contract may make such agreements within the limitations of the law and public policy as they desire, and that the courts will enforce them according to their terms. (Civil Code, articles 1152, 1153, 1154, and 1155; Fornow vs. Hoffmeister, 6 Phil. Rep., 33; Palacios vs. Municipality of Cavite, 12 Phil. Rep., 140; Gsell vs. Koch, 16 Phil. Rep., 1.) The only case recognized by the Civil Code in which the court is authorized to intervene for the purpose of reducing a penalty stipulated in the contract is when the principal obligation has been partly or irregularly fulfilled and the court can see that the person demanding the penalty has received the benefit of such or irregular performance. In such case the court is authorized to reduce the penalty to the extent of the benefits received by the party enforcing the penalty. In this jurisdiction, there is no difference between a penalty and liquidated damages, so far as legal results are concerned. In either case the party to whom payment is to be made is entitled to recover the sum stipulated without the necessity of proving damages. Indeed one of the primary purposes in fixing a penalty or in liquidating damages, is to avoid such necessity. The suspension of the power to sell has a beneficial purpose, results in the protection of the corporation as well as of the individual parties to the contract, and is reasonable as to the length of time of the suspension. We do not here undertake to discuss the limitations to the power to suspend the right of alienation of stock, limiting ourselves to the statement that the suspension in this particular case is legal and valid. The judgment is reversed, the case remanded with instructions to enter a judgment in favor of the plaintiff and against the defendant for P1,000, with interest; without costs in this instance.

G.R. No. L-10419 FELIX LAUREANO, plaintiff-appellant, vs. EUGENIO KILAYCO and CELSA LIZARES DE KILAYCO, defendants-appellees. Laguda, Ledesma, Jalbuena Lawrence, Ross and Block for appellees. CARSON, J.: On the 20th day of February, 1913, the defendants in this action executed a written agreement wherein, for and in consideration of certain money lent to them by the plaintiff, they obligated themselves to pay the sum of P10,200 in monthly installments of P500, payable on the 15th day of each month, the first installment to be paid on the 15th day of April, 1913. By way of security for the loan they executed a chattel mortgage upon certain property, including the fittings and stock of a certain drug store. They obligated themselves, also, in the vent of failure to pay any of the installments on the date upon which such installments fell due, to pay interest at the rate of 15 per cent on all such overdue and unpaid installments until the date of payment; and, further, in the event that the plaintiff should be compelled to have recourse to the courts for the recovery of the money lent, to pay to plaintiff, by way of indemnification, the sum of P2,000. At the time of the trial, which took place in the month of October, 1914, it appeared that there was still due and unpaid under the contract the sum of P3,433.75, including in the amount the last installment due on the 15th day of November, 1914, and interest at the rate of 15 per cent upon the installments due and unpaid prior to the date of the trial. The defendants there and then offered to pay the total amount of P3,433.75 which appeared to be due on account of unpaid installments under the contract, including interest at the rate of 15 per cent from the date when such installments fell due; and, their offer having been declined in open court, deposited that amount with the clerk of the court, for payment to the plaintiff in full settlement of their obligation under the contract. Counsel for plaintiff declined to accept the money thus tendered and contended that he was entitled to receive not only the amount of the unpaid installments due upon the debt, but also, by way of indemnification, the indemnity of P2,000 which defendants obligated themselves to pay to plaintiff in the event that he should find it necessary to institute proceedings in court to recover the debt; and, alleging that defendants had unlawfully sold, without plaintiffs knowledge or consent, the drug store on which the defendants had executed a chattel mortgage, counsel claimed also the sum of P10,000 under the provisions of section 12 of Act No. 1508 (Chattel Mortgage Law). The trial judge, being of opinion that the deposit by the defendants with the clerk of the court of the sum of P3,433.75 constituted a settlement in full of their indebtedness under the contract, dismissed the complaint at the cost of the plaintiff. From this judgment plaintiff appealed and assigns as error: and Villalobos for appellant.

1. The failure of the trial court to give judgment against the defendants for the sum of P2,000, the indemnification agreed upon in the event that plaintiff should be compelled to institute legal proceedings to recover the debt. 2. The costs of the action. 3. The sum of P10,000 to which he claims he is entitled under the provisions of section 12 of Act No. 1508, read together with section 10 of the same Act. We will examine the last assignment of error first. Sections 10 and 12 of Act No. 1508 are as follows: SEC. 10. A mortgagor of personal property shall not sell or pledge such property, or any part thereof, mortgaged by him without the consent of the mortgagee in writing on the back of the mortgage and on the margin of the record thereof in the office where such mortgage is recorded. SEC. 12. If a mortgagor violates either of the three last preceding sections he shall be fined a sum double the value of the property so wrongfully removed from the province, sold, pledged or mortgaged, one-half to the use of the party injured and the other half to the use of the Treasury of the Philippine Islands, or he may be imprisoned for a period not exceeding six months, or punished by both such fine and imprisonment, in the discretion of the court. Without stopping to consider the legal effect of a chattel mortgage purporting to subject to mortgage the stock of a store, where it manifestly appears that it is the intent of the parties that the owner of the store shall continue the business without interruption, it is a sufficient answer to the contentions of plaintiff in this regard to direct attention to the terms of section 12 of the Act, which clearly contemplate that the fine and imprisonment which may be imposed thereunder are to be imposed in the course of a criminal action, wherein the accused is entitled to the benefit of the safeguards which the law of criminal procedure throws about the accused in every case in which he is charged with the commission of an offense defined and penalized by law. It follows, of course, that plaintiffs claim of one-half of the fine which he alleges should be imposed upon the defendants because of the alleged sale of the mortgaged property cannot be enforced in this action. Plaintiffs claim to the agreed upon indemnity of P2,000 raises a question of greater difficulty. We are of opinion, however, that the clauses of the contract providing for the payment of interest at an increased rate in the event of failure to pay any of the installment at the date upon which they fell due and providing further for the payment, by way of indemnification, of the sum of P2,000 in the event that plaintiff should find it necessary to institute proceedings for the enforcement of the contract, must be construed as penalties in the sense in which that term is used in articles 1152, 1153, 1154 and 1155 of the Civil Code.

In its decision dated March 24, 1909, the supreme court of Spain held that el sealamiento de crecidos intereses para el caso de satisfacer el capital al vencer la obligacion, debe interpretarse como clausula penal. (The fixing of an increased rate of interest in the event of paying off the principal when the obligation becomes due should be construed as a penal clause.) It needs no citation of authority to sustain a holding that a stipulation for the payment of P2,000 by way of indemnification, in the event of the failure to pay all or any part of an indebtedness of P10,200 in the event that the creditor should find it necessary to have recourse to the courts in the enforcement of the debt, is a penalty which, under the provisions of article 1154 of the code, the courts are authorized to modify in the sound exercise of their discretion when the principal obligation has been complied with by the debtor either in part or irregularly (en parte o irregularmente). In its decision of November 20, 1907, the supreme court of Spain held that aun estipulado en la escritura que en su caso serian de cuenta y cargo del deudor las costas, daos y perjuicios, la aplicacion de esta penalidad queda sometida al prudente arbitrio de los Tribunales. (Even when it is stipulated in the instrument that, in a given case, the cost, losses and damages shall be chargeable to the debtor and be borne by him, the application of this penalty shall rest in the sound discretion of the courts.) Under all the circumstances of this case, wherein the principal indebtedness appears to have been amply secured by a chattel mortgage, and wherein the greater part of the indebtedness had been paid at the time when the action was brought, and wherein the debtor tendered payment in full pending the proceedings in the court below and deposited the amount of the indebtedness then unpaid, together with 15 per cent interest, in the hands of the clerk of the court for the benefit of the creditor, and wherein substantial payments upon the principal obligation, amounting to some P2,000, had been made by the debtor and accepted by the creditor not long prior to the institution of the action, we are of opinion that the trial judge properly exercised the discretion conferred upon him under article 1154 of the Civil Code by modifying the penalties prescribed under the contract so as to limit the right of the plaintiff thereunder to interest at the rate of 15 per cent upon the last installments which had become overdue under the terms of the contract. It is true that it was said in a former decision (Lambert vs. Fox, 26 Phil. Rep., 588) that in this jurisdiction there is no substantial difference between a penalty and liquidated damages so far as legal results are concerned; but this statement is to be construed in connection with the case with reference to which it was made and, on examination, it will be found that it is strictly applicable only to cases wherein there has been neither a partial or irregular compliance with the terms of the contract, so that the courts have no authority to proceed under the provisions of article 1154 of the Civil Code which is as follows: The judge shall equitably mitigate the penalty if the principal obligation should have been partly or irregularly fulfilled by the debtor.

As was said by the supreme court of Spain in its sentence dated June 13, 1906, construing the provisions of book 4, title 1, chapter 3, section 6 of the Civil Code: The rules and prescriptions governing penal matters are fundamentally applicable to the penal sanctions of civil character. It follows that, in any case wherein there has been a partial or irregular compliance with the provisions in a contract for special indemnification in the event of failure to comply with its terms, courts will rigidly apply the doctrine of strict construction against the enforcement in its entirety of the indemnification, where it is clear from the terms of the contract that the amount or character of the indemnity is fixed without regard to the probable damages which might be anticipated as a result of a breach of the terms of the contract; or, in other words, where the indemnity provided for is essentially a mere penalty having for its principal object the enforcement of compliance with the contract. But the courts will be slow in exercising the jurisdiction conferred upon them in article 1154 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. It will readily be seen that the application of these principles to the particular factors in any case in which there has been a partial or irregular performance of the condition of a contract which provides a penalty or liquidated damages for noncompliance therewith will lead to results substantially identical with those arrived at in like cases in the United States under generally accepted doctrine touching the enforcement of such contracts. (Cf. Ency. of U.S. Supreme Court Reports, vol. 5, p. 176, Liquidated Damages, and cases there cited.) The application of these principles to the case at bar leaves no doubt in our mind as to the propriety of the action of the court below in restricting the right of the plaintiff to recover under the penal clauses set forth in his contract the interest at the rate of 15 per cent agreed upon by the parties in the event of failure to pay the various installments of his indebtedness on the day and date when they fell due. As to the third assignment of error, touching the judgment of the court against plaintiff for costs, we need only indicate that while it is true, as contended by plaintiff, that a tender of payment made after action has been instituted does not necessarily relieve a defendant, in an action for a sum of money, from the costs incurred prior to the date of the tender, it may and as a general rule should relieve him of all costs thereafter in the event that plaintiff declines to accept payment as tendered, and if it thereafter appears that the tender actually made was for the full amount due at the time when it was made. In the case at bar the total amount ultimately found due by the trial court was paid into court during the course of the trial, and we are of opinion that under all the circumstances of the case no errors was committed by the trial judge in the exercise of his discretion in imposing the costs of the trial upon plaintiff, who declined to accept tender of payment of the full amount due and thus

terminate the proceedings without further cost or expense to either party. (Section 487, Code of Civil Procedure.) We conclude that the judgment entered in the court below should be affirmed, with the costs of this instance against the appellant. So ordered. [G.R. No. 149004. April 14, 2004] RESTITUTA M. IMPERIAL, petitioner, vs. ALEX A. JAUCIAN, respondent. D E C I S I O N PANGANIBAN, J.: Iniquitous and unconscionable stipulations on interest rates, penalties and attorneys fees are contrary to morals. Consequently, courts are granted authority to reduce them equitably. If reasonably exercised, such authority shall not be disturbed by appellate courts. The Case Before us is a Petition for Review1[1] under Rule 45 of the Rules of Court, assailing the July 19, 2000 Decision2[2] and the June 14, 2001 Resolution3[3] of the Court of Appeals (CA) in CA-GR CV No. 43635. The decretal portion of the Decision is as follows: WHEREFORE, premises considered, the appealed Decision of the Regional Trial Court, 5th Judicial Region, Branch 21, Naga City, dated August 31, 1993, in Civil Case No. 89-1911 for Sum of Money, is hereby AFFIRMED in toto.4[4] The assailed Resolution denied petitioners Motion for Reconsideration. The dispositive portion of the August 31, 1993 Decision, promulgated by the Regional Trial Court (RTC) of Naga City (Branch 21) and affirmed by the CA, reads as follows: Wherefore, Judgment is hereby rendered declaring Section I, Central Bank Circular No. 905, series of 1982 to be of no force and legal effect, it having been promulgated by the Monetary Board of the Central Bank of the Philippines with grave abuse of discretion amounting to excess of jurisdiction; declaring that the rate of interest, penalty, and charges

for attorneys fees agreed upon between the parties are unconscionable, iniquitous, and in violation of Act No. 2655, otherwise known as the Usury Law, as amended; and ordering Defendant to pay Plaintiff the amount of FOUR HUNDRED SEVENTY-EIGHT THOUSAND, ONE HUNDRED NINETY-FOUR and 54/100 (P478,194.54) PESOS, Philippine currency, with regular and compensatory interests thereon at the rate of twenty-eight (28%) per centum per annum, computed from August 31, 1993 until full payment of the said amount, and in addition, an amount equivalent to ten (10%) per centum of the total amount due and payable, for attorneys fees, without pronouncement as to costs.5[5] The Facts The CA summarized the facts of the case in this wise: The present controversy arose from a case for collection of money, filed by Alex A. Jaucian against Restituta Imperial, on October 26, 1989. The complaint alleges, inter alia, that defendant obtained from plaintiff six (6) separate loans for which the former executed in favor of the latter six (6) separate promissory notes and issued several checks as guarantee for payment. When the said loans became overdue and unpaid, especially when the defendants checks were dishonored, plaintiff made repeated oral and written demands for payment. Specifically, the six (6) separate loans obtained by defendant from plaintiff on various dates are as follows: (a) November 13, 1987 (b) December 28, 1987 (c) January 6, 1988 (d) January 11, 1988 (e) January 12, 1988 (f) January 13, 1988 Total P 50,000.00 40,000.00 30,000.00 50,000.00 50,000.00 100,000.00 P320,000.00

The loans were covered by six (6) separate promissory notes executed by defendant. The face value of each promissory notes is bigger [than] the amount released to defendant because said face value already include[d] the interest from date of note to date of maturity. Said promissory notes, which indicate the interest of 16% per month, date of issue, due date, the corresponding guarantee checks issued by defendant, penalties and attorneys fees, are the following: 1. Exhibit D for loan of P40,000.00 on December 28, 1987, with face value of P65,000.00;

2.

Exhibit E for loan of P50,000.00 on January 11, 1988, with face value of P82,000.00; Exhibit F for loan of P50,000.00 on January 12, 1988, with face value of P82,000.00; Exhibit G for loan of P100,000.00 on January 13, 1988, with face value of P164,000.00; Exhibit H This particular promissory note covers the second renewal of the original loan of P50,000.00 on November 13, 1987, which was renewed for the first time on March 16, 1988 after certain payments, and which was renewed finally for the second time on January 4, 1988 also after certain payments, with a face value of P56,240.00; Exhibit I This particular promissory note covers the second renewal of the original loan of P30,000.00 on January 6, 1988, which was renewed for the first time on June 4, 1988 after certain payments, and which was finally renewed for the second time on August 6, 1988, also after certain payments, with [a] face value of P12,760.00;

3.

4.

5.

6.

The particulars about the postdated checks, i.e., number, amount, date, etc., are indicated in each of the promissory notes. Thus, for Exhibit D, four (4) PB checks were issued; for Exhibit E four (4) checks; for Exhibit F four (4) checks; for Exhibit G four (4) checks; for Exhibit H one (1) check; for Exhibit I one (1) check; The arrangement between plaintiff and defendant regarding these guarantee checks was that each time a check matures the defendant would exchange it with cash. Although, admittedly, defendant made several payments, the same were not enough and she always defaulted whenever her loans mature[d]. As of August 16, 1991, the total unpaid amount, including accrued interest, penalties and attorneys fees, [was] P2,807,784.20. On the other hand, defendant claims that she was extended loans by the plaintiff on several occasions, i.e., from November 13, 1987 to January 13, 1988, in the total sum of P320,000.00 at the rate of sixteen percent (16%) per month. The notes mature[d] every four (4) months with unearned interest compounding every four (4) months if the loan [was] not fully paid. The loan releases [were] as follows: (a) November 13, 1987 (b) December 28, 1987 (c) January 6, 1988 (d) January 11, 1988 (e) January 12, 1988 (f) January 13, 1988 Total P 50,000.00 40,000.00 30,000.00 50,000.00 50,000.00 100,000.00 P320,000.00

The loan on November 13, 1987 and January 6, 1988 ha[d] been fully paid including the usurious interests of 16% per month, this is the reason why these were not included in the complaint. Defendant alleges that all the above amounts were released respectively by checks drawn by the plaintiff, and the latter must produce these checks as these were returned to him being the drawer if only to serve the truth. The above amount are the real amount released to the defendant but the plaintiff by masterful machinations made it appear that the total amount released was P462,600.00. Because in his computation he made it appear that the true amounts released was not the original amount, since it include[d] the unconscionable interest for four months. Further, defendant claims that as of January 25, 1989, the total payments made by defendants [were] as follows: Paid releases on November 13, 1987 of P50,000.00 and January 6, 1988 of P30,000.00 these two items were not included in the complaint affirming the fact that these were paid P 80,000.00 b. Exhibit 26 Receipt 231,000.00 c. Exhibit 8-25 Receipt 65,300.00 d. Exhibit 27 Receipt 65,000.00 Total P441,780.00 Less: 320,000.00 Excess Payment P121,780.00 a.

Defendant contends that from all perspectives the above excess payment of P121,780.00 is more than the interest that could be legally charged, and in fact as of January 25, 1989, the total releases have been fully paid. On 31 August 1993, the trial court rendered the assailed decision.6[6] Ruling of the Court of Appeals On appeal, the CA held that without judicial inquiry, it was improper for the RTC to rule on the constitutionality of Section 1, Central Bank Circular No. 905, Series of 1982. Nonetheless, the appellate court affirmed the judgment of the trial court, holding that the latters clear and detailed computation of petitioners outstanding obligation to respondent was convincing and satisfactory. Hence, this Petition.7[7]

The Issues Petitioner raises the following arguments for our consideration: 1. That the petitioner has fully paid her obligations even before filing of this case. That the charging of interest of twenty-eight (28%) per centum per annum without any writing is illegal. That charging of excessive attorneys fees is hemorrhagic. Charging of excessive penalties per month is in the guise of hidden interest. The non-inclusion of the husband of the petitioner at the time the case was filed should have dismissed this case.8[8]

2.

3. 4. 5.

The Courts Ruling The Petition has no merit. First Issue: Computation of Outstanding Obligation Arguing that she had already fully paid the loan before the filing of the case, petitioner alleges that the two lower courts misappreciated the facts when they ruled that she still had an outstanding balance of P208,430. This issue involves a question of fact. Such question exists when a doubt or difference arises as to the truth or the falsehood of alleged facts; and when there is need for a calibration of the evidence, considering mainly the credibility of witnesses and the existence and the relevancy of specific surrounding circumstances, their relation to each other and to the whole, and the probabilities of the situation.9[9] It is a well-entrenched rule that pure questions of fact may not be the subject of an appeal by certiorari under Rule 45 of the Rules of Court, as this remedy is generally confined to questions of law.10[10] The jurisdiction of this Court over cases brought to it is limited to the review and rectification of errors of law allegedly committed by the lower court. As a rule,

the latters factual findings, when adopted and affirmed by the CA, are final and conclusive and may not be reviewed on appeal.11[11] Generally, this Court is not required to analyze and weigh all over again the evidence already considered in the proceedings below.12[12] In the present case, we find no compelling reason to overturn the factual findings of the RTC -- that the total amount of the loans extended to petitioner was P320,000, and that she paid a total of only P116,540 on twenty- nine dates. These findings are supported by a preponderance of evidence. Moreover, the amount of the outstanding obligation has been meticulously computed by the trial court and affirmed by the CA. Petitioner has not given us sufficient reason why her cause falls under any of the exceptions to this rule on the finality of factual findings. Second Issue: Rate of Interest The trial court, as affirmed by the CA, reduced the interest rate from 16 percent to 1.167 percent per month or 14 percent per annum; and the stipulated penalty charge, from 5 percent to 1.167 percent per month or 14 percent per annum. Petitioner alleges that absent any written stipulation between the parties, the lower courts should have imposed the rate of 12 percent per annum only. The records show that there was a written agreement between the parties for the payment of interest on the subject loans at the rate of 16 percent per month. As decreed by the lower courts, this rate must be equitably reduced for being iniquitous, unconscionable and exorbitant. While the Usury Law ceiling on interest rates was lifted by C.B. Circular No. 905, nothing in the said circular grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.13[13] In Medel v. CA,14[14] the Court found the stipulated interest rate of 5.5 percent per month, or 66 percent per annum, unconscionable. In the present case, the rate is even more iniquitous and unconscionable, as it amounts to 192 percent per annum. When the agreed rate is iniquitous or unconscionable, it is considered contrary to morals, if not against the law. [Such] stipulation is void.15[15]

Since the stipulation on the interest rate is void, it is as if there were no express contract thereon.16[16] Hence, courts may reduce the interest rate as reason and equity demand. We find no justification to reverse or modify the rate imposed by the two lower courts. Third and Fourth Issue: Penalties and Attorneys Fees Article 1229 of the Civil Code states thus: 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.17[17] What may be iniquitous and unconscionable in one may be totally just and equitable in another. In the present case, iniquitous and unconscionable was the parties stipulated penalty charge of 5 percent per month or 60 percent per annum, in addition to regular interests and attorneys fees. Also, there was partial performance by petitioner when she remitted P116,540 as partial payment of her principal obligation of P320,000. Under the circumstances, the trial court was justified in reducing the stipulated penalty charge to the more equitable rate of 14 percent per annum. The Promissory Note carried a stipulation for attorneys fees of 25 percent of the principal amount and accrued interests. Strictly speaking, this covenant on attorneys fees is different from that mentioned in and regulated by the Rules of Court.18[18] Rather, the attorneys fees here are in the nature of liquidated damages and the stipulation therefor is aptly called a penal clause.19[19] So long as the stipulation does not contravene the law, morals, public order or public policy, it is binding upon the obligor. It is the litigant, not the counsel, who is the judgment creditor entitled to enforce the judgment by execution. Nevertheless, it appears that petitioners failure to comply fully with her obligation was not motivated by ill will or malice. The twenty-nine partial payments she made were a manifestation of her good faith. Again, Article 1229 of the Civil Code specifically empowers the judge to reduce the civil penalty equitably, when the principal obligation has been partly or irregularly complied with. Upon this premise, we hold that the RTCs reduction of attorneys fees -- from 25 percent to 10 percent of the total amount due and payable -- is reasonable.

Fifth Issue: Non-Inclusion of Petitioners Husband Petitioner contends that the case against her should have been dismissed, because her husband was not included in the proceedings before the RTC. We are not persuaded. The husbands non-joinder does not warrant dismissal, as it is merely a formal requirement that may be cured by amendment.20[20] Since petitioner alleges that her husband has already passed away, such an amendment has thus become moot. WHEREFORE, the Petition is DENIED. Costs against petitioner. G.R. No. L-3527 September 23, 1907 TAN TIOCO, plaintiff-appellee, vs. MARCELINA LOPEZ, defendant-appellant. Luis Ledesma Rothrock and Foss for appellee. ARELLANO, C.J.: The subject-matter of the complaint is certain sums of money owing to the plaintiff, Tan Tioco, on account of some rice sold by him to Roque Lopez, and for money loaned to Marciano Jardenil, to the extent of 524.31 pesos. The plaintiff acknowledges having received payment of 179.37 pesos; leaving a balance of 344.94 pesos, the amount asked for in the complaint, with legal interest from January 29, 1901. The court below in its judgment ordered the defendant, Marcelina Lopez, to pay 312.51 pesos, with legal interest from February 1, 1901. The defendant appealed from this judgment, the corresponding bill of exceptions was presented to this court, and the appellant has the right to review of the evidence adduced during the trial. The allegation of the complaint are: 1. That on September 27, 1900, Roque Lopez received some rice from Tan Tioco, for which he issued a vale in the following terms" "Vale for fifty piculs of second class white rice, in favor of the Chinese Tiua on account of Marcelina Lopez. R. Lopez. Price $5 3/10 a picul $271.88." for appellant.

2. That on October 23, 1900, he issued another document reading as follows: "Vale for one picul of rice, second class white. R. Lopez. $5.31." 3. That on October 30, 1900, he signed another document which reads as follows: "Vale for forty piculs of second class white, in favor of the Chinese Tan Tioco. R. Lopez. @ $5 2/8 $210 % Marcelina Lopez." 4. That on November 5, 1900, he signed the following vale: "Vale for one picul rice No. 1 and three piculs Chinese Tabao, in favor of the Chinese Tan Tioco, on account of the undersigned. R. Lopez. $22.12." 5. That on November 21, 1900, Marciano Jardenil issued a document of the following tenor: "Vale for the sum of ten pesos fuertes in favor of the Chinese Tan Tioco on account and by order of Marcelina Lopez. Marciano Jardenil." All the allegations set up in the complaint having been denied, and all the vales above referred to having been produced at the trial as evidence in favor of the plaintiff, the court admitted as competent the evidence of allegations No. 1, 3, and 5, and rejected that referring to allegations No. 2 and 4. It appears from the record: 1. That, although at first the court below did not admit all the said vales issued and signed by Roque Lopez and Marciano Jardenil, respectively, as evidence against the defendant Marcelina Lopez, yet the same were admitted afterwards in view of further documental evidence, consisting of a letter, acknowledged by the defendant, which reads as follows: "Sir: To Chinese Tiua. Jaro, September 25, 1900. My dear Chinese Tiua. Kindly give some lumber in rafts (que entregera el balsas de madera). Yours truly. Marcelina Lopez. 50 piculs second class current rice." 2. That Marcelina Lopez declared that the Chinese did not know Roque Lopez, and the latter asked her for a recommendation; that she did not give Roque Lopez, any authority to sign vales in favor of the Chinese Tan Tioco on her account and by her order; that she had nothing to do with the letter and delivery of the lumber; that Roque Lopez had told her nothing about the rice received; that "it is stated in her letter that he (Roque Lopez) would pay the Chinese with logs, because the Chinese had an interest in some logs;" and that, when she wrote the letter, Roque Lopez and Marciano Jardenil, whom she believed to be partners, were already cutting timber; and that it is true that she wrote in said letter, under her signature, "that line;" "50 piculs second-class current rice." 3. That Roque Lopez testified that he took the rice on his own account, having asked his aunt, the defendant, for a letter of recommendation because the Chinese Tan Tioco did not know him, but he did not tell the latter that he was authorized by his aunt to obtain rice on her account; that he made out the vale saying: "On my own account; and that, on seeing it the Chinaman said: No, put it on account and by order of Marcelina," and "then [the witness said] I protested, saying that Marcelina had given me no authority to sign for her, but the

Chinese replied: "Sign that, and I will give you the rice;" and, as the boat was getting ready to sail for Negros in order to take advantage of that opportunity, I changed the vale so as to read: "On account and by order of Marcelina Lopez;" but he denies having placed at the bottom of the vale (allegation No. 2) the note "on account of Marcelina Lopez." 4. That Tan Tioco declared that he sold the rice to Roque Lopez on account of the defendant, inasmuch as he has no account with the witness Roque Lopez; "that Roque Lopez told him, when he took the rice, that they would bring some rafts of lumber on the return of the boat in payment; that the price of the rice would be would be paid with the lumber which they would bring on the return of the boat," and that "he spoke to Marcelina, telling her that, if on the return of the boat they did not pay him, he would collect the amount from her;" that Roque Lopez told him that, on return of the lorcha, when the lumber was sold, they would pay with the proceeds of the sale. On being asked: "Did you tell Marcelina Lopez that, should Roque Lopez not deliver any lumber, you would collect that amount from her?" he replied: I think that it was two or three days after he took the rice that I told her that. Q. Only after he took the 50 piculs? A. Yes. And after he took the rice on another day I gave her a detailed statement of goods taken by him. Q. When you delivered that to Marcelino Lopez, what did she answer you? A. Wait, and you will be paid for this. Q. Did she say that she would pay for it, or that she would endeavor to have it paid you? A. That she would endeavor to have it paid;" and finally he said that the note placed on the bottom of the vale mentioned in the allegation No. 2 of the complaint was not made by Roque Lopez, but Marciano Jardenil, although the former was there at the time with the latter. The court below did not sentence the defendant to pay the amounts expressed in the two vales mentioned in allegations No. 2 and 4, for $5.31 and $22.12; it has considered, however, as obligations binding upon the defendant, and contracted by her, those contained in the vales (allegations Nos. 1, 3, and 5), that is, the price of the 50 piculs of second class current rice, and of the 40 piculs second class white taken by Roque Lopez, and the $10 loaned to Marciano Jardenil. Regarding this obligations, we consider that there is no reason to compel Marcelina Lopez to pay the price of the 40 cavanes of second class white rice, taken by Roque Lopez, nor the 10 pesos borrowed by Marciano Jardenil, inasmuch as the terms of the letter addressed by Marcelina Lopez to Tan Tioco, dated September 25, 1900, relating only to 50 cavanes second-class white rice which Roque Lopez might take, can not be made to include the two other persons mentioned. As to the 50 cavanes of rice to which this letter refers, there is some doubt, according to its terms, whether the sentence "who will deliver some lumber in rafts" (que entregara el balsa de maderas) indicates as the true person that must pay, that is, a third person on the part of the principal; in other words, whether the letter is a mere recommendation in favor of Roque Lopez, or is, on the contrary, an order, by virtue of which Marcelina Lopez would receive the rice and would herself pay the price thereof with the rafts of lumber which Roque Lopez would deliver, or is an order given for the profit of the agent and a third person.

We consider that the contract resulting in the one expressed in law 22, title 12, of the 5th Partida, which is the immediate legal precedent of the Civil Code in force, which contract is stated in the following terms: "Mandates of the fifth class are those wherein a man orders another to do or to give something in favor only of him who receives the order and of a third person. As for example, where one orders another to give his money to a third person on interest. In such a case, if the one who gave the money can not recover the same from the one who received it, the former can recover the money afterwards from the one who ordered him to give the money." The order Dele usted (give him) was given by Marcelina Lopez to Tan Tioco for the profit of the agent only, who was to receive the profit on the price of the rice, and for the profit of a third person, Roque Lopez, who wished to get some rice. The obligation to pay, therefore, rests principally, upon the third person, Roque Lopez, and subsidiarily, on default of payment on the part of the latter, upon the principal, Marcelina Lopez. The meaning of the phrase que entregara en el balsas de madera, is explained by the plaintiff himself in his declaration in which he says that Roque Lopez had informed him, on taking the rice, that they, Roque Lopez, and Marciano Jardenil, would bring some lumber rafts on the return of the lorcha, and "that they would pay him," and he said again that "Roque Lopez told him that, on the return of the lorcha, when the rafts were sold, they would pay him with the value of the lumber," adding that two or three days afterwards "he spoke to Marcelina and told her that, should they not pay him on the return of the lorcha, he would recover the amount from her." It is, therefore, evident that, on accepting the contract, the plaintiff did not consider Roque Lopez as a mere agent of the defendant, as if the latter were the only party obliged under the terms of the letter, but that he understood from the language of the letter that Roque Lopez was primarily responsible for the payment of the rice, and that Marcelina Lopez was responsible subsidiarily for Roque Lopez, on account of her having so said and given the order expressing the quantity of rice to be delivered to him, all in conformity with the above-mentioned Law of Partidas, which determines very distinctly the effects of a contract executed in such a way. Should the agent be unable to recover from the one who received the thing, he can require payment afterwards, "from the one who ordered him to give it." The action, therefore, has not been properly brought. By virtue thereof, and only upon the grounds expressed, we reverse the judgment appealed from, without costs. So ordered.

Legarda Hermanos vs. Saldana Facts: Petition for review of a decision of the Court of Appeals The action originated as a complaint for delivery of two parcels of land in Sampaloc, Manila and for the execution of the corresponding deed of conveyance after payment of the balance due on their purchase price. Saldana entered into a contract with Legarda Hermanos as subdivision owner, for the sale of two lots of 150 square meters each, amounting to PhP 1,500 per lot to be paid in 120 monthly installments of PhP 19.83 with 10% interest per annum. Saldana defaulted in his 96th installment, but has paid a total of PhP 1,682.28 in principal, worth more than the value of one lot. Saldana wrote the petitioners regarding his desire to fullfil his obligations, adding that his desire to build a house on the lot was prevented by Hermanos failure to introduce improvements to the subdivision. Issue: Whether Hermanos has the right to rescind the contract due to Saldanas default of payment Held: JM Tuason Ruling applies to the case in which Saldana must be granted lesser benefits, since no rescission of contract is permitted. Saldanas substantial compliance of the obligation entitles him to the transfer of ownership of one lot.