4_Heirs of Uy Ek Liong v. Castillo (Mina) time, unless this right has been clearly granted to him.

However, if after
June 5, 2013 | Perez, J. | Penal Clause in a valid contract with suspensive the creditor has decided to require the fulfilment of the obligation, the
condition performance thereof should become impossible without his fault, the
penalty may be enforced.
PETITIONER: HEIRS OF MANUEL UY EK LIONG, represented by
BELEN LIM VDA. DE UY
RESPONDENTS: NANCY UMALI, VICTORIA H. CASTILLO,
BERTILLA C. RADA, MARIETTA C. CAVANEZ, LEOVINA C.
JALBUENA and PHILIP M. CASTILLO,
SUMMARY: Respondents Castillo entered into an agreement in exchange
for the legal services of Uy Ek Liong and Atty. Zepeda. If the civil case
propers and have a favorable decision, Zepeda and Uy Ek Liong would be
entitled to 40% of the parcel of land. An additional KASUNDUAN was
executed, stipulating that the 60% of land will be sold to Uy Ek Liong for
P180,000 and that in case of breach, the aggrieved party shall have a
penalty fixed of P50,000 together with attorney’s fees and litigation
expenses. The civil case prospered and Uy Ek Liong demanded for the
land but Castillo refused. RTC held that the contract became valid when
the civil case was won (suspensive condition) and is still valid. CA
reversed the decision. SC reinstated RTC decision, held that the contract is
valid as well as the penal clause therein

DOCTRINE: Articles 1226 and 1227 of the Civil Code state:

Art. 1226. In obligations with a penal clause, the penalty shall
substitute the indemnity for damages and the payment of interests in case
of noncompliance, if there is no stipulation to the contrary. Nevertheless,
damages shall be paid if the obligor refuses to pay the penalty or is guilty FACTS:
of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance 1. Spouses Felipe/Mauricia Castillo was the owner of 4 parcels of land with
with the provisions of this Code.
aggregate area of 53,307sqm in Lucena City registered under their name.
Art. 1227. The debtor cannot exempt himself from the performance
2. Felipe Castillo died and a deed of extrajudicial partition over his estate was
of the obligation by paying the penalty, save in the case where this right
executed by his heirs (respondents) and Buenaflor
has been expressly reserved for him. Neither can the creditor demand the
3. Castillo’s nephew used as security for payment of a tractor from
fulfilment of the obligation and the satisfaction of the penalty at the same
Bormaheco, Inc., it appears that the subject properties were sold at a
 public auction where Insurance Coporation of the Philippines (ICP)
tendered the highest bid. ICP then sold the parcels in favour of Philippine
Machinery Parts Manufacturing Co. Inc (PMPMCI)
3. The heirs of Castillo and Buenaflor and instituted a civil case in CFI
Quezon to seek the annulment of the transactions involving the parcels
and the TCT procured by PMPMCI
4. Encountering financial problems, heirs and Buenaflor entered into an
agreement whereby whereby they procured the legal services of Atty.
Edmundo Zepeda and the assistance of Manuel Uy Ek Liong who, as
financier, agreed to underwrite the litigation expenses entailed by the
case
5. In exchange, it was stipulated in the notarized Agreement that, in the event
of a favorable decision in the civil case, Atty. Zepeda and Uy Ek Liong
would be entitled to "a share of forty (40%) percent of all the realties
and/or monetary benefits, gratuities or damages" which may be
adjudicated in favor of respondents
6. Respondents and Buenaflor also agreed to another notarised agreement
called KASUNDUAN, whereby they agree to sell the remaining 60%
share in the subject parcels for P180,000 to Uy Ek Liong. (P1,000 dp).
They agreed that in case of breach, the aggrieved party shall have a
penalty fixed of P50,000 together with attorney’s fees and litigation
expenses.
7. Uy Ek Liong and the Castillos agreed that any party violating the
Kasunduan would pay the aggrieved party a penalty fixed in the sum of
P50,000.00, together with the attorney's fees and litigation expenses
incurred should a case be subsequently filed in court. The parties
likewise agreed to further enter into such other stipulations as would be
necessary to ensure that the sale would push through and/or in the event
of illegality or impossibility of any part of the Kasunduan
8. Uy Ek Liong died and the negotiations are represented by De Uy
9. Civil case (above) was rendered in favour of Castillo and Buenaflor and the
subject parcels were subdivided in accordance with the agreement. De
Uy sent a letter requesting them to execute within 15 days the portion
specified in KASUNDUAN, saying that De Uy was ready to pay the
remaining P179,000.
10. Castillo denied and expressed their refusal of the offer
11. De Uy filed an instant suit for unjustified refusal to comply with the
obligation under KASUNDUAN. Castillo’s counterclaim that
KASUNDUAN was illegal for being unconscionable and contrary to
public policy.
12. RTC declare KASUNDUAN valid and binding. Contract became binding
when the civil case was won (suspensive condition)
13. CA reversed the decision: (a) the Agreement and Kasunduan are
byproducts of the partnership between Atty. Zepeda and Manuel who, as
a non-lawyer, was not authorized to practice law; (b) the Agreement is
void under Article 1491 (5) of the Civil Code of the Philippines which
prohibits lawyers from acquiring properties which are the objects of the
litigation in which they have taken part; (c) jointly designed to
completely deprive respondents of the subject parcels, the Agreement
and the Kasunduan are invalid and unconscionable; and (d) without
prejudice to his liability for violation of the Canons of Professional
Responsibility, Atty. Zepeda can file an action to collect attorney's fees
based on quantum meruit.
ISSUES:
1. WoN CA erred in deciding KASUNDUAN to be invalid – YES
2. WoN RTC was correct in awarding attorney’s fees in the sum of
P50,000 -- YES
RATIO:
1. Defined as a meeting of the minds between two persons whereby one binds
himself, with respect to the other to give something or to render some
service, a contract requires the concurrence of the following requisites:
(a) consent of the contracting parties; (b) object certain which is the
subject matter of the contract; and, (c) cause of the obligation which is
established. Executed in exchange for the legal services of Atty. Zepeda
 and the financial assistance to be extended by Manuel, the Agreement obligation.
concerned respondents' transfer of 40% of the avails of the suit, in the The penalty may be enforced only when it is demandable in accordance with the
event of a favorable judgment in Civil Case No. 8085. While concededly provisions of this Code.
Art. 1227. The debtor cannot exempt himself from the performance of the
subject to the same suspensive condition, the Kasunduan was, in contrast,
obligation by paying the penalty, save in the case where this right has been
concluded by respondents with Manuel alone, for the purpose of selling expressly reserved for him. Neither can the creditor demand the fulfilment of the
in favor of the latter 60% of their share in the subject parcels for the obligation and the satisfaction of the penalty at the same time, unless this right has
agreed price of P180,000.00. Given these clear distinctions, petitioners been clearly granted to him. However, if after the creditor has decided to require
correctly argue that the CA reversibly erred in not determining the the fulfilment of the obligation, the performance thereof should become
validity of the Kasunduan independent from that of the Agreement. impossible without his fault, the penalty may be enforced.
2. It was already partially executed with respondents' receipt of P1,000.00
6. The RTC's award of attorney's fees in the sum of P50,000.00 is proper.
from Manuel upon the execution thereof, the Kasunduan simply
Aside from the fact that the penal clause included a liability for said award in the
concerned the sale of the former's 60% share in the subject parcel, less
event of litigation over a breach of the Kasunduan, petitioners were able to prove
the 1,750-square meter portion to be retained, for the agreed
that they incurred said sum in engaging the services of their lawyer to pursue their
consideration of P180,000.00. As a notarized document that carries the
rights and protect their interests.
evidentiary weight conferred upon it with respect to its due execution,
the Kasunduan was shown to have been signed by respondents with full
knowledge of its contents and is therefore valid
3. Our perusal of the Kasunduan also shows that it contains a penal clause
which provides that a party who violates any of its provisions shall be
liable to pay the aggrieved party a penalty fixed at P50,000.00, together
with the attorney's fees and litigation expenses incurred by the latter
should judicial resolution of the matter becomes necessary.
4. An accessory undertaking to assume greater liability on the part of the
obligor in case of breach of an obligation, the foregoing stipulation is a
penal clause which serves to strengthen the coercive force of the
obligation and provides for liquidated damages for such breach. "The
obligor would then be bound to pay the stipulated indemnity without the
necessity of proof of the existence and the measure of damages caused by
the breach."
5. Articles 1226 and 1227 of the Civil Code state:
Art. 1226. In obligations with a penal clause, the penalty shall substitute
the indemnity for damages and the payment of interests in case of noncompliance,
if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the
obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the