1207 JOINT/SOLIDARY OBLIGATION

the loss of earning capacity despite the fact that the

victim there was enrolled in a pilot school.

PERENA VS ZARATE
ISSUE:
FACTS:
In June 1996, Nicolas and Teresita Zarate contracted
Teodoro and Nanette Perea to transport their (Zarates)
son, Aaron Zarate, to and from school. The Pereas
were owners of a van being used for private school
transport.
At about 6:45am of August 22, 1996, the driver of the
said private van, Clemente Alfaro, while the children
were on board including Aaron, decided to take a short
cut in order to avoid traffic. The usual short cut was a
railroad crossing of the Philippine National Railway
(PNR).
Alfaro saw that the barandilla (the pole used to block
vehicles crossing the railway) was up which means it
was okay to cross. He then tried to overtake a bus.
However, there was in fact an oncoming train but Alfaro
no longer saw the train as his view was already blocked
by the bus he was trying to overtake. The bus was able
to cross unscathed but the vans rear end was hit.
During the collision, Aaron, was thrown off the van. His
body hit the railroad tracks and his head was severed.
He was only 15 years old.
It turns out that Alfaro was not able to hear the train
honking from 50 meters away before the collision
because the vans stereo was playing loudly.
The Zarates sued PNR and the Pereas (Alfaro became
at-large). Their cause of action against PNR was based
on quasi-delict. Their cause of action against the
Pereas was based on breach of contract of common
carriage.
In their defense, the Pereas invoked that as private
carriers they were not negligent in selecting Alfaro as
their driver as they made sure that he had a drivers
license and that he was not involved in any accident
prior to his being hired. In short, they observed the
diligence of a good father in selecting their employee.
PNR also disclaimed liability as they insist that the
railroad crossing they placed there was not meant for
railroad crossing.
The RTC ruled in favor of the Zarates. The Court of
Appeals affirmed the RTC. In the decision of the RTC
and the CA, they awarded damages in favor of the
Zarates for the loss of earning capacity of their dead
son.
The Pereas appealed. They argued that the award was
improper as Aaron was merely a high school student,
hence, the award of such damages was merely
speculative. They cited the case of People vs Teehankee
where the Supreme Court did not award damages for

WON the Pereas and PNR jointly

and severally liable for damages
RULING:
YES.
At any rate, the lower courts correctly held both the
Pereas and the PNR "jointly and severally" liable for
damages arising from the death of Aaron. They had
been impleaded in the same complaint as defendants
against whom the Zarates had the right to relief, whether
jointly, severally, or in the alternative, in respect to or
arising out of the accident, and questions of fact and of
law were common as to the Zarates.36 Although the
basis of the right to relief of the Zarates (i.e., breach of
contract of carriage) against the Pereas was distinct
from the basis of the Zarates right to relief against the
PNR (i.e., quasi-delict under Article 2176, Civil Code),
they nonetheless could be held jointly and severally
liable by virtue of their respective negligence combining
to cause the death of Aaron.
As to the PNR, the RTC rightly found the PNR also guilty
of negligence despite the school van of the Pereas
traversing the railroad tracks at a point not dedicated by
the PNR as a railroad crossing for pedestrians and
motorists, because the PNR did not ensure the safety of
others through the placing of crossbars, signal lights,
warning signs, and other permanent safety barriers to
prevent vehicles or pedestrians from crossing there.
The RTC observed that the fact that a crossing guard
had been assigned to man that point from 7 a.m. to 5
p.m. was a good indicium that the PNR was aware of the
risks to others as well as the need to control the
vehicular and other traffic there. Verily, the Pereas and
the PNR were joint tortfeasors.

1226 OBLIGATIONS WITH PENAL CLAUSE

LIGUTAN VS CA
FACTS:
Petitioners Tolomeo Ligutan and Leonidas dela Llana
obtained on 11 May 1981 a loan in the amount of
P120,000.00 from respondent Security Bank and Trust
Company.
Petitioners executed a promissory note binding
themselves, jointly and severally, to pay the sum
borrowed with an interest of 15.189% per annum upon
maturity and to pay a penalty of 5% every month on the
outstanding principal and interest in case of default.
In addition, petitioners agreed to pay 10% of the total
amount due by way of attorneys fees if the matter were
indorsed to a lawyer for collection or if a suit were
instituted to enforce payment. The obligation matured
on 8 September 1981; the bank, however, granted an
extension but only up until 29 December 1981
Despite several demands from the bank, petitioners
failed to settle the debt which, as of 20 May 1982,
amounted to P114,416.10. On 30 September 1982, the
bank sent a final demand letter to petitioners informing
them that they had five days within which to make full
payment. Since petitioners still defaulted on their
obligation, the bank filed on 3 November 1982, with the
Regional Trial Court of Makati, Branch 143, a complaint
for recovery of the due amount.
RTC ruling: 1. sum of 114k with interest of 15%, 2%
sservice charge, 5% penalty charge,commencing on
may 20 1982 until fully paid 2. pay further sum of 10%
attorneys fees.
CA RULING : Considering that defendants-appellants
partially complied with their obligation under the
promissory note by the reduction of the original amount
of P120,000.00 to P114,416.00 and in order that they will
finally settle their obligation, it is our view and we so hold
that in the interest of justice and public policy, a penalty
of 3% per month or 36% per annum would suffice.
ISSUE: WON CA erred in not holding that the 15.189%
interest and the penalty of three (3%) percent per month
or thirty-six (36%) percent per annum imposed by private
respondent bank on petitioners loan obligation are still
manifestly exorbitant, iniquitous and unconscionable
RULING: NO
A penalty clause, expressly recognized by law,[10] is an
accessory undertaking to assume greater liability on the
part of an obligor in case of breach of an obligation. It
functions to strengthen the coercive force of the
obligation[11] and to provide, in effect, for what could be
the liquidated damages resulting from such a breach.
The obligor would then be bound to pay the stipulated

indemnity without the necessity of proof on the existence

and on the measure of damages caused by the breach.
[12] Although a court may not at liberty ignore the
freedom of the parties to agree on such terms and
conditions as they see fit that contravene neither law nor
morals, good customs, public order or public policy, a
stipulated penalty, nevertheless, may be equitably
reduced by the courts if it is iniquitous or unconscionable
or if the principal obligation has been partly or irregularly
complied with
Anent the stipulated interest of 15.189% per annum,
petitioners, for the first time, question its reasonableness
and prays that the Court reduce the amount. This
contention is a fresh issue that has not been raised and
ventilated before the courts below. In any event, the
interest stipulation, on its face, does not appear as being
that excessive.
The essence or rationale for the payment of interest,
quite often referred to as cost of money, is not exactly
the same as that of a surcharge or a penalty. A penalty
stipulation is not necessarily preclusive of interest, if
there is an agreement to that effect, the two being
distinct concepts which may separately be demanded.
[18] What may justify a court in not allowing the creditor
to impose full surcharges and penalties, despite an
express stipulation therefor in a valid agreement, may
not equally justify the non-payment or reduction of
interest. Indeed, the interest prescribed in loan financing
arrangements is a fundamental part of the banking
business and the core of a bank's existence

PRYCE CORPORATION VS PAGCOR

FACTS:
Sometime in the first half of 1992, representatives from
Pryce Properties Corporation (PPC for brevity) made
representations with the Philippine Amusement and
Gaming Corporation (PAGCOR) on the possibility of
setting up a casino in Pryce Plaza Hotel in Cagayan de
Oro City.
On November 11, 1992, the parties executed a Contract
of Lease x x x involving the ballroom of the Hotel for a
period of three (3) years starting December 1, 1992 and
until November 30, 1995. On November 13, 1992, they
executed an addendum to the contract x x x which
included a lease of an additional 1000 square meters of
the hotel grounds as living quarters and playground of
the casino personnel. PAGCOR advertised the start of
their casino operations on December 18, 1992.

opposition to their casino operations. In a letter dated

October 12, 1993 x x x, PAGCOR asked PPC to refund
the total of P1,437,582.25 representing the reimbursable
rental deposits and expenses for the permanent
improvement of the Hotels parking lot. In a letter dated
November 5, 1993 x x x, PAGCOR formally demanded
from PPC the payment of its claim for reimbursement.
In a letter dated November 25, 1993, PPC informed
PAGCOR that it was terminating the contract of lease
due to PAGCORs continuing breach of the contract and
further stated that it was exercising its rights under the
contract of lease pursuant to Article 20 (a) and (c)
thereof.
ISSUE: WON CA erred in holding that Pryce was not
entitled to future rentals or lease payments for the
unexpired period of the Contract of Lease between
Pryce and PAGCOR
RULING:

In 1990, the Sangguniang Panlungsod of Cagayan de

Oro City passed Resolution No. 2295 x x x dated
November 19, 1990 declaring as a matter of policy to
prohibit and/or not to allow the establishment of a
gambling casino in Cagayan de Oro City. Resolution
No. 2673 x x x dated October 19, 1992 (or a month
before the contract of lease was executed) was
subsequently passed reiterating with vigor and
vehemence the policy of the City under Resolution No.
2295, series of 1990, banning casinos in Cagayan de
Oro City.
On December 7, 1992, the Sangguniang Panlungsod of
Cagayan de Oro City enacted Ordinance No. 3353 x x x
prohibiting the issuance of business permits and
canceling existing business permits to any establishment
for using, or allowing to be used, its premises or any
portion thereof for the operation of a casino.
Per verbal advice x x x from the Office of the President
of the Philippines, PAGCOR decided to stop its casino
operations in Cagayan de Oro City.
PAGCOR stopped its casino operations in the hotel prior
to September, 1993. In two Statements of Account
dated September 1, 1993 x x x, PPC apprised PAGCOR
of its outstanding account for the quarter September 1 to
November 30, 1993. PPC sent PAGCOR another Letter
dated September 3, 1993 x x x as a follow-up to the
parties earlier conference. PPC sent PAGCOR another
Letter dated September 15, 1993 x x x stating its Board
of Directors decision to collect the full rentals in case of
pre-termination of the lease.
PAGCOR sent PPC a letter dated September 20, 1993 x
x x [stating] that it was not amenable to the payment of
the full rentals citing as reasons unforeseen legal and
other circumstances which prevented it from complying
with its obligations. PAGCOR further stated that it had
no other alternative but to pre-terminate the lease
agreement due to the relentless and vehement

it appears that Section XX (c) was intended to be a

penalty clause. That fact is manifest from a reading of
the mandatory provision under subparagraph (a) in
conjunction with subparagraph (c) of the Contract. A
penal clause is an accessory obligation which the
parties attach to a principal obligation for the purpose of
insuring the performance thereof by imposing on the
debtor a special prestation (generally consisting in the
payment of a sum of money) in case the obligation is not
fulfilled or is irregularly or inadequately fulfilled.
In obligations with a penal clause, the general rule is that
the penalty serves as a substitute for the indemnity for
damages and the payment of interests in case of
noncompliance; that is, if there is no stipulation to the
contrary,[29] in which case proof of actual damages is
not necessary for the penalty to be demanded.[30] There
are exceptions to the aforementioned rule, however, as
enumerated in paragraph 1 of Article 1226 of the Civil
Code: 1) when there is a stipulation to the contrary, 2)
when the obligor is sued for refusal to pay the agreed
penalty, and 3) when the obligor is guilty of fraud. In
these cases, the purpose of the penalty is obviously to
punish the obligor for the breach. Hence, the obligee
can recover from the former not only the penalty, but
also other damages resulting from the nonfulfillment of
the principal obligation.
In the present case, the first exception applies because
Article XX (c) provides that, aside from the payment of
the rentals corresponding to the remaining term of the
lease, the lessee shall also be liable for any and all
damages, actual or consequential, resulting from such
default and termination of this contract. Having entered
into the Contract voluntarily and with full knowledge of its
provisions, PAGCOR must be held bound to its
obligations. It cannot evade further liability for liquidated
damages.
FLORENTINO VS SUPERVALUE

FACTS:
Florentino is a lessee of Supervalue which is a set of
stores operating in the country. Florentino is the owner of
Empanada royale a foodcart business entered into a
contract of lease with Supervalue.
The contract was good for 4 months and after the end of
the contract both the lessee and the lessor have the
option to either renew or terminate the contract.
Florentino and Supervalue was able to renew the
contract several times that it even lasted for a year.
However, Supervalue terminated the contract with
Florentino for the following violations: failure to open on
two separate occassions; closing earlier time;introducing
a new variety of empanada without the approval of
Supervalue. The store management then ordered the
foreclosure of the space and along with it were the
personal belongings of the petitioner.
Florentino demanded for the return of her personal
belongings and of the security bond that she have given
Supervalue.
the RTC rendered a Judgment22 in favor of the
petitioner.

Should the lessor refused to reimburse said amount the

lessee may remove the improvements, even though the
principal thing may suffer damages thereby. He shall not,
however, cause any more impairment upon the property
leased than is necessary."
As stated in Geminiano vs CA: "Being mere lessees, the
private respondents knew that their occupation of the
premises would continue only for the life of the lease.
Plainly, they cannot be considered as possessors nor
builders in good faith"
On the second issue raised in this case: Florentino is
entitled to half of the security deposits made with
Supervalue because it would unconscionable for
Florentino to be imposed such penalty.
Obligations with Penal clause: Article 1226: In
obligations with penal clause, the penalty shall substitute
the indemnity for damages and the payment of interests
in case of noncompliance, if there is no stipulation to the
contrary. Neveretheless, damages shall be paid if the
obligor refuses to pay the penalty or is guilty of fraud in
the fulfillment of the obligation.

RULING:

The penalty may be enfroced only when it is

demandable in accordance with the provisions of this
CODE. As a rule the courts are not in the liberty to
ignore the freedoms of the parties to agree on such
terms and conditions.The courts may equitably reduce a
stipulated penalty in the contracts in two instances: 1. if
the principal obligation has been partly or irregularly
complied with; 2. If there has been no compliance if the
penalty is iniquitous or unconscionable in accordance
with Article 1229: Article 1229: The judge shall equitably
reduce the penalty when the principal obligation has
been partly or irregularly complied with by the debtor.
Even if there has been no performance, the penalty may
also be reduced by the courts if it is iniquitous or
unconscionable.

Florentino is no longer entitled for reimbursment on the

improvements that she have done on her stall: Article
1678: If the lessee makes in good faith, useful
improvements which are suitable to the use for which the
lease is intended, without altering the form or substance
of the property leased,the lessor upon the termination of
the lease shall pay the lessee one-half of the of the
improvements at that time.

In the instant case, the forfeiture of the entire amount of

the security deposits in the sum of P192,000.00 was
excessive and unconscionable considering that the
gravity of the breaches committed by the petitioner is not
of such degree that the respondent was unduly
prejudiced thereby. It is but equitable therefore to reduce
the penalty of the petitioner to 50% of the total amount of
security deposits.

the Court of Appeals modified the RTC Judgment and

found that the respondent was justified in forfeiting the
security deposits and was not liable to reimburse the
petitioner for the value of the improvements introduced
in the leased premises and to pay for attorneys fees.
ISSUE:
whether or not florentino can claim for
reimbursement on the improvements that she have
made? whether or not Florentino is entitled to claim for
the security bond that she have posted?