Obligations and Contracts
Obligations with Penal Clause | Art.
Ligutan v CA
G.R. No. 138677 February 12, 2002
TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA,
petitioners,
vs.
HON. COURT OF APPEALS & SECURITY BANK & TRUST
COMPANY, respondents.
DECISION
VITUG, J.:
Before the Court is a petition for review on certiorari under Rule
45 of the Rules of Court, assailing the decision and resolutions of
the Court of Appeals in CA-G.R. CV No. 34594, entitled "Security
Bank and Trust Co. vs. Tolomeo Ligutan, et al."
Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained
on 11 May 1981 a loan in the amount of P120,000.00 from
respondent Security Bank and Trust Company. Petitioners
executed a promissory note binding themselves, jointly and
severally, to pay the sum borrowed with an interest of 15.189%
per annum upon maturity and to pay a penalty of 5% every
month on the outstanding principal and interest in case of
default. In addition, petitioners agreed to pay 10% of the total
amount due by way of attorney’s fees if the matter were indorsed
to a lawyer for collection or if a suit were instituted to enforce
payment. The obligation matured on 8 September 1981; the
bank, however, granted an extension but only up until 29
December 1981.
Despite several demands from the bank, petitioners failed to
settle the debt which, as of 20 May 1982, amounted to
P114,416.10. On 30 September 1982, the bank sent a final
demand letter to petitioners informing them that they had five
days within which to make full payment. Since petitioners still
defaulted on their obligation, the bank filed on 3 November 1982,
with the Regional Trial Court of Makati, Branch 143, a complaint
for recovery of the due amount.
After petitioners had filed a joint answer to the complaint, the
bank presented its evidence and, on 27 March 1985, rested its
case. Petitioners, instead of introducing their own evidence, had
the hearing of the case reset on two consecutive occasions. In
view of the absence of petitioners and their counsel on 28
August 1985, the third hearing date, the bank moved, and the
trial court resolved, to consider the case submitted for decision.
Two years later, or on 23 October 1987, petitioners filed a motion
for reconsideration of the order of the trial court declaring them
as having waived their right to present evidence and prayed that
they be allowed to prove their case. The court a quo denied the
motion in an order, dated 5 September 1988, and on 20 October
1989, it rendered its decision,1 the dispositive portion of which
read:
"WHEREFORE, judgment is hereby rendered in favor of the
plaintiff and against the defendants, ordering the latter to pay,
jointly and severally, to the plaintiff, as follows:
"1. The sum of P114,416.00 with interest thereon at the rate of
15.189% per annum, 2% service charge and 5% per month
penalty charge, commencing on 20 May 1982 until fully paid;
"2. To pay the further sum equivalent to 10% of the total amount
of indebtedness for and as attorney’s fees; and
"3. To pay the costs of the suit."2
Petitioners interposed an appeal with the Court of Appeals,
questioning the rejection by the trial court of their motion to
present evidence and assailing the imposition of the 2% service
charge, the 5% per month penalty charge and 10% attorney's
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1226-1229
fees. In its decision3 of 7 March 1996, the appellate court
affirmed the judgment of the trial court except on the matter of
the 2% service charge which was deleted pursuant to Central
Bank Circular No. 783. Not fully satisfied with the decision of the
appellate court, both parties filed their respective motions for
reconsideration.4 Petitioners prayed for the reduction of the 5%
stipulated penalty for being unconscionable. The bank, on the
other hand, asked that the payment of interest and penalty be
commenced not from the date of filing of complaint but from the
time of default as so stipulated in the contract of the parties.
On 28 October 1998, the Court of Appeals resolved the two
motions thusly:
"We find merit in plaintiff-appellee’s claim that the principal sum
of P114,416.00 with interest thereon must commence not on the
date of filing of the complaint as we have previously held in our
decision but on the date when the obligation became due.
"Default generally begins from the moment the creditor demands
the performance of the obligation. However, demand is not
necessary to render the obligor in default when the obligation or
the law so provides.
"In the case at bar, defendants-appellants executed a promissory
note where they undertook to pay the obligation on its maturity
date 'without necessity of demand.' They also agreed to pay the
interest in case of non-payment from the date of default.
"x x x xxx xxx
"While we maintain that defendants-appellants must be bound by
the contract which they acknowledged and signed, we take
cognizance of their plea for the application of the provisions of
Article 1229 x x x.
"Considering that defendants-appellants partially complied with
their obligation under the promissory note by the reduction of the
original amount of P120,000.00 to P114,416.00 and in order that
they will finally settle their obligation, it is our view and we so
hold that in the interest of justice and public policy, a penalty of
3% per month or 36% per annum would suffice.
"x x x xxx xxx
"WHEREFORE, the decision sought to be reconsidered is
hereby MODIFIED. The defendants-appellants Tolomeo Ligutan
and Leonidas dela Llana are hereby ordered to pay the plaintiff-
appellee Security Bank and Trust Company the following:
"1. The sum of P114,416.00 with interest thereon at the rate of
15.189% per annum and 3% per month penalty charge
commencing May 20, 1982 until fully paid;
"2. The sum equivalent to 10% of the total amount of the
indebtedness as and for attorney’s fees."5
On 16 November 1998, petitioners filed an omnibus motion for
reconsideration and to admit newly discovered evidence,6
alleging that while the case was pending before the trial court,
petitioner Tolomeo Ligutan and his wife Bienvenida Ligutan
executed a real estate mortgage on 18 January 1984 to secure
the existing indebtedness of petitioners Ligutan and dela Llana
with the bank. Petitioners contended that the execution of the
real estate mortgage had the effect of novating the contract
between them and the bank. Petitioners further averred that the
mortgage was extrajudicially foreclosed on 26 August 1986, that
they were not informed about it, and the bank did not credit them
with the proceeds of the sale. The appellate court denied the
omnibus motion for reconsideration and to admit newly
discovered evidence, ratiocinating that such a second motion for
reconsideration cannot be entertained under Section 2, Rule 52,
of the 1997 Rules of Civil Procedure. Furthermore, the appellate
court said, the newly-discovered evidence being invoked by
petitioners had actually been known to them when the case was

brought on appeal and when the first motion for reconsideration
was filed.7
Aggrieved by the decision and resolutions of the Court of
Appeals, petitioners elevated their case to this Court on 9 July
1999 via a petition for review on certiorari under Rule 45 of the
Rules of Court, submitting thusly -
"I. The respondent Court of Appeals seriously erred in not
holding that the 15.189% interest and the penalty of three (3%)
percent per month or thirty-six (36%) percent per annum
imposed by private respondent bank on petitioners’ loan
obligation are still manifestly exorbitant, iniquitous and
unconscionable.
"II. The respondent Court of Appeals gravely erred in not
reducing to a reasonable level the ten (10%) percent award of
attorney’s fees which is highly and grossly excessive,
unreasonable and unconscionable.
"III. The respondent Court of Appeals gravely erred in not
admitting petitioners’ newly discovered evidence which could not
have been timely produced during the trial of this case.
"IV. The respondent Court of Appeals seriously erred in not
holding that there was a novation of the cause of action of
private respondent’s complaint in the instant case due to the
subsequent execution of the real estate mortgage during the
pendency of this case and the subsequent foreclosure of the
mortgage."8
Respondent bank, which did not take an appeal, would,
however, have it that the penalty sought to be deleted by
petitioners was even insufficient to fully cover and compensate
for the cost of money brought about by the radical devaluation
and decrease in the purchasing power of the peso, particularly
vis-a-vis the U.S. dollar, taking into account the time frame of its
occurrence. The Bank would stress that only the amount of
P5,584.00 had been remitted out of the entire loan of
P120,000.00.9
A penalty clause, expressly recognized by law,10 is an
accessory undertaking to assume greater liability on the part of
an obligor in case of breach of an obligation. It functions to
strengthen the coercive force of the obligation11 and to provide,
in effect, for what could be the liquidated damages resulting from
such a breach. The obligor would then be bound to pay the
stipulated indemnity without the necessity of proof on the
existence and on the measure of damages caused by the
breach.12 Although a court may not at liberty ignore the freedom
of the parties to agree on such terms and conditions as they see
fit that contravene neither law nor morals, good customs, public
order or public policy, a stipulated penalty, nevertheless, may be
equitably reduced by the courts if it is iniquitous or
unconscionable or if the principal obligation has been partly or
irregularly complied with.13
The question of whether a penalty is reasonable or iniquitous
can be partly subjective and partly objective. Its resolution would
depend on such factors as, but not necessarily confined to, the
type, extent and purpose of the penalty, the nature of the
obligation, the mode of breach and its consequences, the
supervening realities, the standing and relationship of the
parties, and the like, the application of which, by and large, is
addressed to the sound discretion of the court. In Rizal
Commercial Banking Corp. vs. Court of Appeals,14 just an
example, the Court has tempered the penalty charges after
taking into account the debtor’s pitiful situation and its offer to
settle the entire obligation with the creditor bank. The stipulated
penalty might likewise be reduced when a partial or irregular
performance is made by the debtor.15 The stipulated penalty
might even be deleted such as when there has been substantial
performance in good faith by the obligor,16 when the penalty
clause itself suffers from fatal infirmity, or when exceptional
circumstances so exist as to warrant it.17
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Obligations with Penal Clause | Art.
1226-1229
The Court of Appeals, exercising its good judgment in the instant
case, has reduced the penalty interest from 5% a month to 3% a
month which petitioner still disputes. Given the circumstances,
not to mention the repeated acts of breach by petitioners of their
contractual obligation, the Court sees no cogent ground to
modify the ruling of the appellate court..
Anent the stipulated interest of 15.189% per annum, petitioners,
for the first time, question its reasonableness and prays that the
Court reduce the amount. This contention is a fresh issue that
has not been raised and ventilated before the courts below. In
any event, the interest stipulation, on its face, does not appear
as being that excessive. The essence or rationale for the
payment of interest, quite often referred to as cost of money, is
not exactly the same as that of a surcharge or a penalty. A
penalty stipulation is not necessarily preclusive of interest, if
there is an agreement to that effect, the two being distinct
concepts which may separately be demanded.18 What may
justify a court in not allowing the creditor to impose full
surcharges and penalties, despite an express stipulation therefor
in a valid agreement, may not equally justify the non-payment or
reduction of interest. Indeed, the interest prescribed in loan
financing arrangements is a fundamental part of the banking
business and the core of a bank's existence.19
Petitioners next assail the award of 10% of the total amount of
indebtedness by way of attorney's fees for being grossly
excessive, exorbitant and unconscionable vis-a-vis the time
spent and the extent of services rendered by counsel for the
bank and the nature of the case. Bearing in mind that the rate of
attorney’s fees has been agreed to by the parties and intended
to answer not only for litigation expenses but also for collection
efforts as well, the Court, like the appellate court, deems the
award of 10% attorney’s fees to be reasonable.
Neither can the appellate court be held to have erred in rejecting
petitioners' call for a new trial or to admit newly discovered
evidence. As the appellate court so held in its resolution of 14
May 1999 -
"Under Section 2, Rule 52 of the 1997 Rules of Civil Procedure,
no second motion for reconsideration of a judgment or final
resolution by the same party shall be entertained. Considering
that the instant motion is already a second motion for
reconsideration, the same must therefore be denied.
"Furthermore, it would appear from the records available to this
court that the newly-discovered evidence being invoked by
defendants-appellants have actually been existent when the
case was brought on appeal to this court as well as when the
first motion for reconsideration was filed.1âwphi1 Hence, it is
quite surprising why defendants-appellants raised the alleged
newly-discovered evidence only at this stage when they could
have done so in the earlier pleadings filed before this court.
"The propriety or acceptability of such a second motion for
reconsideration is not contingent upon the averment of 'new'
grounds to assail the judgment, i.e., grounds other than those
theretofore presented and rejected. Otherwise, attainment of
finality of a judgment might be stayed off indefinitely, depending
on the party’s ingenuousness or cleverness in conceiving and
formulating 'additional flaws' or 'newly discovered errors' therein,
or thinking up some injury or prejudice to the rights of the movant
for reconsideration."20
At any rate, the subsequent execution of the real estate
mortgage as security for the existing loan would not have
resulted in the extinguishment of the original contract of loan
because of novation. Petitioners acknowledge that the real
estate mortgage contract does not contain any express
stipulation by the parties intending it to supersede the existing
loan agreement between the petitioners and the bank.21
Respondent bank has correctly postulated that the mortgage is

but an accessory contract to secure the loan in the promissory
note.
Extinctive novation requires, first, a previous valid obligation;
second, the agreement of all the parties to the new contract;
third, the extinguishment of the obligation; and fourth, the validity
of the new one.22 In order that an obligation may be
extinguished by another which substitutes the same, it is
imperative that it be so declared in unequivocal terms, or that the
old and the new obligation be on every point incompatible with
each other.23 An obligation to pay a sum of money is not
extinctively novated by a new instrument which merely changes
the terms of payment or adding compatible covenants or where
the old contract is merely supplemented by the new one.24
When not expressed, incompatibility is required so as to ensure
that the parties have indeed intended such novation despite their
failure to express it in categorical terms. The incompatibility, to
be sure, should take place in any of the essential elements of the
obligation, i.e., (1) the juridical relation or tie, such as from a
mere commodatum to lease of things, or from negotiorum gestio
to agency, or from a mortgage to antichresis,25 or from a sale to
one of loan;26 (2) the object or principal conditions, such as a
change of the nature of the prestation; or (3) the subjects, such
as the substitution of a debtor27 or the subrogation of the
creditor. Extinctive novation does not necessarily imply that the
new agreement should be complete by itself; certain terms and
conditions may be carried, expressly or by implication, over to
the new obligation.
WHEREFORE, the petition is DENIED.
SO ORDERED.
FOOTNOTES
Art. 1226. In obligations with a penal clause, the penalty shall
substitute the indemnity for damages and the payment of
interests in case of noncompliance, if there is no stipulation to
the contrary. Nevertheless, damages shall be paid if the obligor
refuses to pay the penalty or is guilty of fraud in the fulfillment of
the obligation.
The penalty may be enforced only when it is demandable in
accordance with the provisions of this Code. (1152a)
Article 2227. Liquidated damages, whether intended as an
indemnity or a penalty, shall be equitably reduced if they are
iniquitous or unconscionable.
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.
Insular Bank of Asia and America vs. Spouses Salazar (159
SCRA 111), for instance, the Court reduced the penalty charge
of 2% a month to 1% a month, considering that, on a loan of
P42,050.00, the debtor spouses paid a total of P68,676.75 which
was applied by the creditor to satisfy the penalty and interest
charges.
Art. 1234. If the obligation has been substantially performed in
good faith, the obligor may recover as though there had been a
strict and complete fulfillment, less damages suffered by the
obligee.
Pryce Corp v PAGCOR
G.R. No. 157480 May 6, 2005
PRYCE CORPORATION (formerly PRYCE PROPERTIES
CORPORATION), petitioners,
Page 3 of 14
Obligations and Contracts
Obligations with Penal Clause | Art.
1226-1229
vs.
PHILIPPINE AMUSEMENT AND GAMING CORPORATION,
respondent.
DECISION
PANGANIBAN, J.:
In legal contemplation, the termination of a contract is not
equivalent to its rescission. When an agreement is terminated, it
is deemed valid at inception. Prior to termination, the contract
binds the parties, who are thus obliged to observe its provisions.
However, when it is rescinded, it is deemed inexistent, and the
parties are returned to their status quo ante. Hence, there is
mutual restitution of benefits received. The consequences of
termination may be anticipated and provided for by the contract.
As long as the terms of the contract are not contrary to law,
morals, good customs, public order or public policy, they shall be
respected by courts. The judiciary is not authorized to make or
modify contracts; neither may it rescue parties from
disadvantageous stipulations. Courts, however, are empowered
to reduce iniquitous or unconscionable liquidated damages,
indemnities and penalties agreed upon by the parties.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of
Court, assailing the May 22, 2002 Decision2 of the Court of
Appeals (CA) in CA-GR CV No. 51629 and its March 4, 2003
Resolution3 denying petitioner’s Motion for Reconsideration. The
assailed Decision disposed thus:
"WHEREFORE, in view of the foregoing, judgment is hereby
rendered as follows: (1) In Civil Case No. 93-68266, the
appealed decision[,] is AFFIRMED with MODIFICATION[,]
ordering [Respondent] Philippine Amusement and Gaming
Corporation to pay [Petitioner] Pryce Properties Corporation the
total amount of P687,289.50 as actual damages representing the
accrued rentals for the quarter September to November 1993
with interest and penalty at the rate of two percent (2%) per
month from date of filing of the complaint until the amount shall
have been fully paid, and the sum of P50,000.00 as attorney’s
fees; (2) In Civil Case No. 93-68337, the appealed decision is
REVERSED and SET ASIDE and a new judgment is rendered
ordering [Petitioner] Pryce Properties Corporation to reimburse
[Respondent] Philippine Amusement and Gaming Corporation
the amount of P687,289.50 representing the advanced rental
deposits, which amount may be compensated by [Petitioner]
Pryce Properties Corporation with its award in Civil Case No. 93-
68266 in the equal amount of P687,289.50."4
The Facts
According to the CA, the facts are as follows:
"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. [A] series of negotiations
followed. PAGCOR representatives went to Cagayan de Oro City
to determine the pulse of the people whether the presence of a
casino would be welcomed by the residents. Some local
government officials showed keen interest in the casino
operation and expressed the view that possible problems were
surmountable. Their negotiations culminated with PPC’s counter-
letter proposal dated October 14, 1992.
"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.
"Way back 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.
"In the afternoon of December 18, 1992 and just hours before
the actual formal opening of casino operations, a public rally in
front of the hotel was staged by some local officials, residents
and religious leaders. Barricades were placed [which] prevented
some casino personnel and hotel guests from entering and
exiting from the Hotel. PAGCOR was constrained to suspend
casino operations because of the rally. An agreement between
PPC and PAGCOR, on one hand, and representatives of the
rallyists, on the other, eventually ended the rally on the 20th of
December, 1992.
"On January 4, 1993, Ordinance No. 3375-93 x x x was passed
by the Sangguniang Panlungsod of Cagayan de Oro City,
prohibiting the operation of casinos and providing for penalty for
violation thereof. On January 7, 1993, PPC filed a Petition for
Prohibition with Preliminary Injunction x x x against then public
respondent Cagayan de Oro City and/or Mayor Pablo P.
Magtajas x x x before the Court of Appeals, docketed as CA
G.R. SP No. 29851 praying inter alia, for the declaration of
unconstitutionality of Ordinance No. 3353. PAGCOR intervened
in said petition and further assailed Ordinance No. 4475-93 as
being violative of the non-impairment of contracts and equal
protection clauses. On March 31, 1993, the Court of Appeals
promulgated its decision x x x, the dispositive portion of which
reads:
‘IN VIEW OF ALL THE FOREGOING, Ordinance No. 3353 and
Ordinance No. 3375-93 are hereby DECLARED
UNCONSTITUTIONAL and VOID and the respondents and all
other persons acting under their authority and in their behalf are
PERMANENTLY ENJOINED from enforcing those ordinances.
‘SO ORDERED.’
"Aggrieved by the decision, then public respondents Cagayan de
Oro City, et al. elevated the case to the Supreme Court in G.R.
No. 111097, where, in an En Banc Decision dated July 20, 1994
x x x, the Supreme Court denied the petition and affirmed the
decision of the Court of Appeals.
"In the meantime, PAGCOR resumed casino operations on July
15, 1993, against which, however, another public rally was held.
Casino operations continued for some time, but were later on
indefinitely suspended due to the incessant demonstrations. 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.
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"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 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 Hotel’s parking lot. In a letter dated November 5, 1993 x x x,
PAGCOR formally demanded from PPC the payment of its claim
for reimbursement.
"On November 15, 1993 x x x, PPC filed a case for sum of
money in the Regional Trial Court of Manila docketed as Civil
Case No. 93-68266. On November 19, 1993, PAGCOR also filed
a case for sum of money in the Regional Trial Court of Manila
docketed as Civil Case No. 93-68337.
"In a letter dated November 25, 1993, PPC informed PAGCOR
that it was terminating the contract of lease due to PAGCOR’s
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.
"On February 2, 1994, PPC filed a supplemental complaint x x x
in Civil Case No. 93-68266, which the trial court admitted in an
Order dated February 11, 1994. In an Order dated April 27,
1994, Civil Case No. 93-68377 was ordered consolidated with
Civil Case No. 93-68266. These cases were jointly tried by the
court a quo. On August 17, 1995, the court a quo promulgated its
decision. Both parties appealed."5
In its appeal, PPC faulted the trial court for the following reasons:
1) failure of the court to award actual and moral damages; 2) the
50 percent reduction of the amount PPC was claiming; and 3)
the court’s ruling that the 2 percent penalty was to be imposed
from the date of the promulgation of the Decision, not from the
date stipulated in the Contract.
On the other hand, PAGCOR criticized the trial court for the
latter’s failure to rule that the Contract of Lease had already been
terminated as early as September 21, 1993, or at the latest, on
October 14, 1993, when PPC received PAGCOR’s letter dated
October 12, 1993. The gaming corporation added that the trial
court erred in 1) failing to consider that PPC was entitled to avail
itself of the provisions of Article XX only when PPC was the party
terminating the Contract; 2) not finding that there were valid,
justifiable and good reasons for terminating the Contract; and 3)
dismissing the Complaint of PAGCOR in Civil Case No. 93-
68337 for lack of merit, and not finding PPC liable for the
reimbursement of PAGCOR’S cash deposits and of the value of
improvements.
Ruling of the Court of Appeals
First, on the appeal of PAGCOR, the CA ruled that the
PAGCOR’S pretermination of the Contract of Lease was
unjustified. The appellate court explained that public
demonstrations and rallies could not be considered as fortuitous
events that would exempt the gaming corporation from
complying with the latter’s contractual obligations. Therefore, the
Contract continued to be effective until PPC elected to terminate
it on November 25, 1993.
Regarding the contentions of PPC, the CA held that under Article
1659 of the Civil Code, PPC had the right to ask for (1)
rescission of the Contract and indemnification for damages; or
(2) only indemnification plus the continuation of the Contract.
These two remedies were alternative, not cumulative, ruled the
CA.
As PAGCOR had admitted its failure to pay the rentals for
September to November 1993, PPC correctly exercised the

option to terminate the lease agreement. Previously, the
Contract remained effective, and PPC could collect the accrued
rentals. However, from the time it terminated the Contract on
November 25, 1993, PPC could no longer demand payment of
the remaining rentals as part of actual damages, the CA added.
Denying the claim for moral damages, the CA pointed out the
failure of PPC to show that PAGCOR had acted in gross or
evident bad faith in failing to pay the rentals from September to
November 1993. Such failure was shown especially by the fact
that PPC still had in hand three (3) months advance rental
deposits of PAGCOR. The former could have simply applied this
deposit to the unpaid rentals, as provided in the Contract.
Neither did PPC adequately show that its reputation had been
besmirched or the hotel’s goodwill eroded by the establishment
of the casino and the public protests.
Finally, as to the claimed reimbursement for parking lot
improvement, the CA held that PAGCOR had not presented
official receipts to prove the latter’s alleged expenses. The
appellate court, however, upheld the trial court’s award to PPC of
P50,000 attorney’s fees.
Hence this Petition.6
Issues
In their Memorandum, petitioner raised the following issues:
"MAIN ISSUE:
"Did the Honorable Court of Appeals commit x x x grave and
reversible error by 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?
"Sub-Issues:
"1. Were the provisions of Sections 20(a) and 20(c) of the
Contract of Lease relative to the right of PRYCE to terminate the
Contract for cause and to moreover collect rentals from
PAGCOR corresponding to the remaining term of the lease valid
and binding?
"2. Did not Article 1659 of the Civil Code supersede Sections
20(a) and 20(c) of the Contract, PRYCE having ‘rescinded’ the
Contract of Lease?
"3. Do the case of Rios, et al. vs. Jacinto Palma Enterprises, et
al. and the other cases cited by PAGCOR support its position
that PRYCE was not entitled to future rentals?
"4. Would the collection by PRYCE of future rentals not give rise
to unjust enrichment?
"5. Could we not have ‘harmonized’ Article 1659 of the Civil
Code and Article 20 of the Contract of Lease?
"6. Is it not a basic rule that the law, i.e. Article 1659, is deemed
written in contracts, particularly in the PRYCE-PAGCOR
Contract of Lease?"7
The Court’s Ruling
The Petition is partly meritorious.
Main Issue:
Collection of Remaining Rentals
PPC anchors its right to collect future rentals upon the provisions
of the Contract. Likewise, it argues that termination, as defined
under the Contract, is different from the remedy of rescission
prescribed under Article 1659 of the Civil Code. On the other
hand, PAGCOR contends, as the CA ruled, that Article 1659 of
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the Civil Code governs; hence, PPC is allegedly no longer
entitled to future rentals, because it chose to rescind the
Contract.
Contract Provisions
Clear and Binding
Article 1159 of the Civil Code provides that "obligations arising
from contracts have the force of law between the contracting
parties and should be complied with in good faith."8 In deference
to the rights of the parties, the law9 allows them to enter into
stipulations, clauses, terms and conditions they may deem
convenient; that is, as long as these are not contrary to law,
morals, good customs, public order or public policy. Likewise, it
is settled that if the terms of the contract clearly express the
intention of the contracting parties, the literal meaning of the
stipulations would be controlling.10
In this case, Article XX of the parties’ Contract of Lease provides
in part as follows:
"XX. BREACH OR DEFAULT
"a) The LESSEE agrees that all the terms, conditions and/or
covenants herein contained shall be deemed essential
conditions of this contract, and in the event of default or breach
of any of such terms, conditions and/or covenants, or should the
LESSEE become bankrupt, or insolvent, or compounds with his
creditors, the LESSOR shall have the right to terminate and
cancel this contract by giving them fifteen (15 days) prior notice
delivered at the leased premises or posted on the main door
thereof. Upon such termination or cancellation, the LESSOR
may forthwith lock the premises and exclude the LESSEE
therefrom, forcefully or otherwise, without incurring any civil or
criminal liability. During the fifteen (15) days notice, the LESSEE
may prevent the termination of lease by curing the events or
causes of termination or cancellation of the lease.
"b) x x x x x x x x x
"c) Moreover, the LESSEE shall be fully liable to the LESSOR for
the rentals corresponding to the remaining term of the lease as
well as for any and all damages, actual or consequential
resulting from such default and termination of this contract.
"d) x x x x x x x x x." (Italics supplied)
The above provisions leave no doubt that the parties have
covenanted 1) to give PPC the right to terminate and cancel the
Contract in the event of a default or breach by the lessee; and 2)
to make PAGCOR fully liable for rentals for the remaining term of
the lease, despite the exercise of such right to terminate. Plainly,
the parties have voluntarily bound themselves to require strict
compliance with the provisions of the Contract by stipulating that
a default or breach, among others, shall give the lessee the
termination option, coupled with the lessor’s liability for rentals
for the remaining term of the lease.
For sure, these stipulations are valid and are not contrary to law,
morals, good customs, public order or public policy. Neither is
there anything objectionable about the inclusion in the Contract
of mandatory provisions concerning the rights and obligations of
the parties.11 Being the primary law between the parties, it
governs the adjudication of their rights and obligations. A court
has no alternative but to enforce the contractual stipulations in
the manner they have been agreed upon and written.12 It is well
to recall that courts, be they trial or appellate, have no power to
make or modify contracts.13 Neither can they save parties from
disadvantageous provisions.
Termination or Rescission?
Well-taken is petitioner’s insistence that it had the right to ask for
"termination plus the full payment of future rentals" under the
provisions of the Contract, rather than just rescission under

Article 1659 of the Civil Code. This Court is not unmindful of the
fact that termination and rescission are terms that have been
used loosely and interchangeably in the past. But distinctions
ought to be made, especially in this controversy, in which the
terms mean differently and lead to equally different
consequences.
The term "rescission" is found in 1) Article 119114 of the Civil
Code, the general provision on rescission of reciprocal
obligations; 2) Article 1659,15 which authorizes rescission as an
alternative remedy, insofar as the rights and obligations of the
lessor and the lessee in contracts of lease are concerned; and 3)
Article 138016 with regard to the rescission of contracts.
In his Concurring Opinion in Universal Food Corporation v.
CA,17 Justice J. B. L. Reyes differentiated rescission under
Article 1191 from that under Article 1381 et seq. as follows:
"x x x. The rescission on account of breach of stipulations is not
predicated on injury to economic interests of the party plaintiff
but on the breach of faith by the defendant, that violates the
reciprocity between the parties. It is not a subsidiary action, and
Article 1191 may be scanned without disclosing anywhere that
the action for rescission thereunder is subordinated to anything
other than the culpable breach of his obligations to the
defendant. This rescission is a principal action retaliatory in
character, it being unjust that a party be held bound to fulfill his
promises when the other violates his. As expressed in the old
Latin aphorism: ‘Non servanti fidem, non est fides servanda.’
Hence, the reparation of damages for the breach is purely
secondary.
"On the contrary, in rescission by reason of lesion or economic
prejudice, the cause of action is subordinated to the existence of
that prejudice, because it is the raison d’etre as well as the
measure of the right to rescind. x x x."18
Relevantly, it has been pointed out that resolution was originally
used in Article 1124 of the old Civil Code, and that the term
became the basis for rescission under Article 1191 (and,
conformably, also Article 1659).19
Now, as to the distinction between termination (or cancellation)
and rescission (more properly, resolution), Huibonhoa v. CA20
held that, where the action prayed for the payment of rental
arrearages, the aggrieved party actually sought the partial
enforcement of a lease contract. Thus, the remedy was not
rescission, but termination or cancellation, of the contract. The
Court explained:
"x x x. By the allegations of the complaint, the Gojoccos’ aim was
to cancel or terminate the contract because they sought its
partial enforcement in praying for rental arrearages. There is a
distinction in law between cancellation of a contract and its
rescission. To rescind is to declare a contract void in its inception
and to put an end to it as though it never were. It is not merely to
terminate it and release parties from further obligations to each
other but to abrogate it from the beginning and restore the
parties to relative positions which they would have occupied had
no contract ever been made.
"x x x. The termination or cancellation of a contract would
necessarily entail enforcement of its terms prior to the
declaration of its cancellation in the same way that before a
lessee is ejected under a lease contract, he has to fulfill his
obligations thereunder that had accrued prior to his ejectment.
However, termination of a contract need not undergo judicial
intervention. x x x."21 (Italics supplied)
Rescission has likewise been defined as the "unmaking of a
contract, or its undoing from the beginning, and not merely its
termination." Rescission may be effected by both parties by
mutual agreement; or unilaterally by one of them declaring a
rescission of contract without the consent of the other, if a legally
sufficient ground exists or if a decree of rescission is applied for
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before the courts.22 On the other hand, termination refers to an
"end in time or existence; a close, cessation or conclusion." With
respect to a lease or contract, it means an ending, usually before
the end of the anticipated term of such lease or contract, that
may be effected by mutual agreement or by one party exercising
one of its remedies as a consequence of the default of the
other.23
Thus, mutual restitution is required in a rescission (or resolution),
in order to bring back the parties to their original situation prior to
the inception of the contract.24 Applying this principle to this
case, it means that PPC would re-acquire possession of the
leased premises, and PAGCOR would get back the rentals it
paid the former for the use of the hotel space.
In contrast, the parties in a case of termination are not restored
to their original situation; neither is the contract treated as if it
never existed. Prior to its termination, the parties are obliged to
comply with their contractual obligations. Only after the contract
has been cancelled will they be released from their obligations.
In this case, the actions and pleadings of petitioner show that it
never intended to rescind the Lease Contract from the beginning.
This fact was evident when it first sought to collect the accrued
rentals from September to November 1993 because, as
previously stated, it actually demanded the enforcement of the
Lease Contract prior to termination. Any intent to rescind was not
shown, even when it abrogated the Contract on November 25,
1993, because such abrogation was not the rescission provided
for under Article 1659.
Future Rentals
As to the remaining sub-issue of future rentals, Rios v. Jacinto25
is inapplicable, because the remedy resorted to by the lessors in
that case was rescission, not termination. The rights and
obligations of the parties in Rios were governed by Article 1659
of the Civil Code; hence, the Court held that the damages to
which the lessor was entitled could not have extended to the
lessee’s liability for future rentals.
Upon the other hand, future rentals cannot be claimed as
compensation for the use or enjoyment of another’s property
after the termination of a contract. We stress that by abrogating
the Contract in the present case, PPC released PAGCOR from
the latter’s future obligations, which included the payment of
rentals. To grant that right to the former is to unjustly enrich it at
the latter’s expense.
However, 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."26
Quite common in lease contracts, this clause functions to
strengthen the coercive force of the obligation and to provide, in
effect, for what could be the liquidated damages resulting from a
breach.27 There is nothing immoral or illegal in such
indemnity/penalty clause, absent any showing that it was forced
upon or fraudulently foisted on the obligor.28
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. 31
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.
Reduction of Penalty
In certain cases, a stipulated penalty may nevertheless be
equitably reduced by the courts.32 This power is explicitly
sanctioned by Articles 1229 and 2227 of the Civil Code, which
we quote:
"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."
"Art. 2227. Liquidated damages, whether intended as an
indemnity or a penalty, shall be equitably reduced if they are
iniquitous or unconscionable."
The question of whether a penalty is reasonable or iniquitous is
addressed to the sound discretion of the courts. To be
considered in fixing the amount of penalty are factors such as --
but not limited to -- the type, extent and purpose of the penalty;
the nature of the obligation; the mode of the breach and its
consequences; the supervening realities; the standing and
relationship of the parties; and the like.33
In this case, PAGCOR’s breach was occasioned by events that,
although not fortuitous in law, were in fact real and pressing.
From the CA’s factual findings, which are not contested by either
party, we find that PAGCOR conducted a series of negotiations
and consultations before entering into the Contract. It did so not
only with the PPC, but also with local government officials, who
assured it that the problems were surmountable. Likewise,
PAGCOR took pains to contest the ordinances34 before the
courts, which consequently declared them unconstitutional. On
top of these developments, the gaming corporation was advised
by the Office of the President to stop the games in Cagayan de
Oro City, prompting the former to cease operations prior to
September 1993.
Also worth mentioning is the CA’s finding that PAGCOR’s casino
operations had to be suspended for days on end since their start
in December 1992; and indefinitely from July 15, 1993, upon the
advice of the Office of President, until the formal cessation of
operations in September 1993. Needless to say, these
interruptions and stoppages meant that PAGCOR suffered a
tremendous loss of expected revenues, not to mention the fact
that it had fully operated under the Contract only for a limited
time.
While petitioner’s right to a stipulated penalty is affirmed, we
consider the claim for future rentals to the tune of P7,037,835.40
to be highly iniquitous. The amount should be equitably reduced.
Under the circumstances, the advanced rental deposits in the
sum of P687,289.50 should be sufficient penalty for respondent’s
breach.
WHEREFORE, the Petition is GRANTED in part. The assailed
Decision and Resolution are hereby MODIFIED to include the
payment of penalty. Accordingly, respondent is ordered to pay
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petitioner the additional amount of P687,289.50 as penalty,
which may be set off or applied against the former’s advanced
rental deposits. Meanwhile, the CA’s award to petitioner of actual
damages representing the accrued rentals for September to
November 1993 -- with interest and penalty at the rate of two
percent (2%) per month, from the date of filing of the Complaint
until the amount shall have been fully paid -- as well as the
P50,000 award for attorney’s fees, is AFFIRMED. No costs.
SO ORDERED.
Sandoval-Gutierrez, Corona, Carpio-Morales, and Garcia, JJ.,
concur.
FOOTNOTES
Art. 1191 of the Civil Code states:
"Art. 1191. The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not comply
with what is incumbent upon him.
"The injured party may choose between the fulfillment and the
rescission of the obligation, with the payment of damages in
either case. He may also seek rescission, even after he has
chosen fulfillment, if the latter should become impossible.
"The court shall decree the rescission claimed, unless there be
just cause authorizing the fixing of a period."
Article 1659 of the Civil Code provides as follows:
"Art. 1659. If the lessor or the lessee should not comply with the
obligations set forth in articles 1654 and 1657, the aggrieved
party may ask for the rescission of the contract and
indemnification for damages, or only the latter, allowing the
contract to remain in force."
Art. 1380 of the Civil Code reads thus:
"Art. 1380. Contracts validly agreed upon may be rescinded in
the cases established by law."
Florentino v Supervalue
G.R. No. 172384 September 12, 2007
ERMINDA F. FLORENTINO, Petitioner,
vs.
SUPERVALUE, INC., Respondent.
DECISION
CHICO-NAZARIO, J.:
Before this Court is a Petition for Review on Certiorari under
Rule 45 of the Revised Rules of Court, filed by petitioner
Erminda F. Florentino, seeking to reverse and set aside the
Decision,1 dated 10 October 2003 and the Resolution,2 dated 19
April 2006 of the Court of Appeals in CA-G.R. CV No. 73853.
The appellate court, in its assailed Decision and Resolution,
modified the Decision dated 30 April 2001 of the Regional Trial
Court (RTC) of Makati, Branch 57, in Civil Case No. 00-1015,
finding the respondent Supervalue, Inc., liable for the sum of
₱192,000.00, representing the security deposits made by the
petitioner upon the commencement of their Contract of Lease.
The dispositive portion of the assailed appellate court’s Decision
thus reads:
WHEREFORE, premises considered, the appeal is PARTLY
GRANTED. The April 30, 2001 Decision of the Regional Trial
Court of Makati, Branch 57 is therefore MODIFIED to wit: (a) the
portion ordering the [herein respondent] to pay the amount of

₱192,000.00 representing the security deposits and ₱50,000.00
as attorney’s fees in favor of the [herein petitioner] as well as
giving [respondent] the option to reimburse [petitioner] ½ of the
value of the improvements introduced by the [petitioner] on the
leased [premises] should [respondent] choose to appropriate
itself or require the [petitioner] to remove the improvements, is
hereby REVERSED and SET ASIDE; and (b) the portion
ordering the return to [petitioner] the properties seized by
[respondent] after the former settled her obligation with the latter
is however MAINTAINED.3
The factual and procedural antecedents of the instant petition
are as follows:
Petitioner is doing business under the business name
"Empanada Royale," a sole proprietorship engaged in the retail
of empanada with outlets in different malls and business
establishments within Metro Manila.4
Respondent, on the other hand, is a domestic corporation
engaged in the business of leasing stalls and commercial store
spaces located inside SM Malls found all throughout the
country.5
On 8 March 1999, petitioner and respondent executed three
Contracts of Lease containing similar terms and conditions over
the cart-type stalls at SM North Edsa and SM Southmall and a
store space at SM Megamall. The term of each contract is for a
period of four months and may be renewed upon agreement of
the parties.6
Upon the expiration of the original Contracts of Lease, the
parties agreed to renew the same by extending their terms until
31 March 2000.7
Before the expiration of said Contracts of Lease, or on 4
February 2000, petitioner received two letters from the
respondent, both dated 14 January 2000, transmitted through
facsimile transmissions.8
In the first letter, petitioner was charged with violating Section 8
of the Contracts of Lease by not opening on 16 December 1999
and 26 December 1999.9
Respondent also charged petitioner with selling a new variety of
empanada called "mini-embutido" and of increasing the price of
her merchandise from ₱20.00 to ₱22.00, without the prior
approval of the respondent.10
Respondent observed that petitioner was frequently closing
earlier than the usual mall hours, either because of non-delivery
or delay in the delivery of stocks to her outlets, again in violation
of the terms of the contract. A stern warning was thus given to
petitioner to refrain from committing similar infractions in the
future in order to avoid the termination of the lease contract.11
In the second letter, respondent informed the petitioner that it will
no longer renew the Contracts of Lease for the three outlets,
upon their expiration on 31 March 2000.12
In a letter-reply dated 11 February 2000, petitioner explained that
the "mini-embutido" is not a new variety of empanada but had
similar fillings, taste and ingredients as those of pork empanada;
only, its size was reduced in order to make it more affordable to
the buyers.13
Such explanation notwithstanding, respondent still refused to
renew its Contracts of Lease with the petitioner. To the contrary,
respondent took possession of the store space in SM Megamall
and confiscated the equipment and personal belongings of the
petitioner found therein after the expiration of the lease
contract.14
In a letter dated 8 May 2000, petitioner demanded that the
respondent release the equipment and personal belongings it
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seized from the SM Megamall store space and return the
security deposits, in the sum of ₱192,000.00, turned over by the
petitioner upon signing of the Contracts of Lease. On 15 June
2000, petitioner sent respondent another letter reiterating her
previous demands, but the latter failed or refused to comply
therewith. 15
On 17 August 2000, an action for Specific Performance, Sum of
Money and Damages was filed by the petitioner against the
respondent before the RTC of Makati, Branch 57.16
In her Complaint docketed as Civil Case No. 00-1015, petitioner
alleged that the respondent made verbal representations that the
Contracts of Lease will be renewed from time to time and,
through the said representations, the petitioner was induced to
introduce improvements upon the store space at SM Megamall
in the sum of ₱200,000.00, only to find out a year later that the
respondent will no longer renew her lease contracts for all three
outlets.17
In addition, petitioner alleged that the respondent, without
justifiable cause and without previous demand, refused to return
the security deposits in the amount of ₱192,000.00.18
Further, petitioner claimed that the respondent seized her
equipment and personal belongings found inside the store space
in SM Megamall after the lease contract for the said outlet
expired and despite repeated written demands from the
petitioner, respondent continuously refused to return the seized
items.19
Petitioner thus prayed for the award of actual damages in the
sum of ₱472,000.00, representing the sum of security deposits,
cost of improvements and the value of the personal properties
seized. Petitioner also asked for the award of ₱300,000.00 as
moral damages; ₱50,000.00 as exemplary damages; and
₱80,000.00 as attorney’s fees and expenses of litigation.20
For its part, respondent countered that petitioner committed
several violations of the terms of their Contracts of Lease by not
opening from 16 December 1999 to 26 December 1999, and by
introducing a new variety of empanada without the prior consent
of the respondent, as mandated by the provision of Section 2 of
the Contract of Lease. Respondent also alleged that petitioner
infringed the lease contract by frequently closing earlier than the
agreed closing hours. Respondent finally averred that petitioner
is liable for the amount ₱106,474.09, representing the penalty for
selling a new variety of empanada, electricity and water bills, and
rental adjustment, among other charges incidental to the lease
agreements. Respondent claimed that the seizure of petitioner’s
personal belongings and equipment was in the exercise of its
retaining lien, considering that the petitioner failed to settle the
said obligations up to the time the complaint was filed.21
Considering that petitioner already committed several breaches
of contract, the respondent thus opted not to renew its Contracts
of Lease with her anymore. The security deposits were made in
order to ensure faithful compliance with the terms of their lease
agreements; and since petitioner committed several infractions
thereof, respondent was justified in forfeiting the security
deposits in the latter’s favor.
On 30 April 2001, the RTC rendered a Judgment22 in favor of
the petitioner and found that the physical takeover by the
respondent of the leased premises and the seizure of petitioner’s
equipment and personal belongings without prior notice were
illegal. The decretal part of the RTC Judgment reads:
WHEREFORE, premises duly considered, judgment is hereby
rendered ordering the [herein respondent] to pay [herein
petitioner] the amount of ₱192,000.00 representing the security
deposits made by the [petitioner] and ₱50,000.00 as and for
attorney’s fees.

The [respondent] is likewise ordered to return to the [petitioner]
the various properties seized by the former after settling her
account with the [respondent].
Lastly, the [respondent] may choose either to reimburse the
[petitioner] one half (1/2) of the value of the improvements
introduced by the plaintiff at SM Megamall should [respondent]
choose to appropriate the improvements to itself or require the
[petitioner] to remove the improvements, even though the
principal thing may suffer damage thereby. [Petitioner] shall not,
however, cause anymore impairment upon the said leased
premises than is necessary.
The other damages claimed by the plaintiff are denied for lack of
merit.
Aggrieved, the respondent appealed the adverse RTC Judgment
to the Court of Appeals.
In a Decision23 dated 10 October 2003, 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 attorney’s fees.
In modifying the findings of the lower court, the appellate court
declared that in view of the breaches of contract committed by
the petitioner, the respondent is justified in forfeiting the security
deposits. Moreover, since the petitioner did not obtain the
consent of the respondent before she introduced improvements
on the SM Megamall store space, the respondent has therefore
no obligation to reimburse the petitioner for the amount
expended in connection with the said improvements.24 The
Court of Appeals, however, maintained the order of the trial court
for respondent to return to petitioner her properties after she has
settled her obligations to the respondent. The appellate court
denied petitioner’s Motion for Reconsideration in a Resolution25
dated 19 April 2006.
Hence, this instant Petition for Review on Certiorari26 filed by
the petitioner assailing the Court of Appeals Decision. For the
resolution of this Court are the following issues:
I. Whether or not the respondent is liable to return the security
deposits to the petitions.
II. Whether or not the respondent is liable to reimburse the
petitioner for the sum of the improvements she introduced in the
leased premises.
III. Whether or not the respondent is liable for attorney’s fees.27
The appellate court, in finding that the respondent is authorized
to forfeit the security deposits, relied on the provisions of
Sections 5 and 18 of the Contract of Lease, to wit:
Section 5. DEPOSIT. The LESSEE shall make a cash deposit in
the sum of SIXTY THOUSAND PESOS (P60,000.00) equivalent
to three (3) months rent as security for the full and faithful
performance to each and every term, provision, covenant and
condition of this lease and not as a pre-payment of rent. If at any
time during the term of this lease the rent is increased[,] the
LESSEE on demand shall make an additional deposit equal to
the increase in rent. The LESSOR shall not be required to keep
the deposit separate from its general funds and the deposit shall
not be entitled to interest. The deposit shall remain intact during
the entire term and shall not be applied as payment for any
monetary obligations of the LESSEE under this contract. If the
LESSEE shall faithfully perform every provision of this lease[,]
the deposit shall be refunded to the LESSEE upon the expiration
of this Lease and upon satisfaction of all monetary obligation to
the LESSOR.
xxxx
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Section 18. TERMINATION. Any breach, non-performance or
non-observance of the terms and conditions herein provided
shall constitute default which shall be sufficient ground to
terminate this lease, its extension or renewal. In which event, the
LESSOR shall demand that LESSEE immediately vacate the
premises, and LESSOR shall forfeit in its favor the deposit
tendered without prejudice to any such other appropriate action
as may be legally authorized.28
Since it was already established by the trial court that the
petitioner was guilty of committing several breaches of contract,
the Court of Appeals decreed that she cannot therefore rightfully
demand the return of the security deposits for the same are
deemed forfeited by reason of evident contractual violations.
It is undisputed that the above-quoted provision found in all
Contracts of Lease is in the nature of a penal clause to ensure
petitioner’s faithful compliance with the terms and conditions of
the said contracts.
A penal clause is an accessory undertaking to assume greater
liability in case of breach. It is attached to an obligation in order
to insure performance and has a double function: (1) to provide
for liquidated damages, and (2) to strengthen the coercive force
of the obligation by the threat of greater responsibility in the
event of breach.29 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.30
Article 1226 of the Civil Code states:
Art. 1226. In obligations with a penal clause, the penalty shall
substitute the indemnity for damages and the payment of
interests in case of noncompliance, if there is no stipulation to
the contrary. Nevertheless, damages shall be paid if the obligor
refuses to pay the penalty or is guilty of fraud in the fulfillment of
the obligation.
The penalty may be enforced only when it is demandable in
accordance with the provisions of this Code.
As a general rule, courts are not at liberty to ignore the freedoms
of the parties to agree on such terms and conditions as they see
fit as long as they are not contrary to law, morals, good customs,
public order or public policy. Nevertheless, 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; and (2) even if there has been no compliance if the penalty
is iniquitous or unconscionable in accordance with Article 1229
of the Civil Code which clearly provides:
Art. 1229. The judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with
by the debtor. Even if there has been no performance, the
penalty may also be reduced by the courts if it is iniquitous or
unconscionable.31
In ascertaining whether the penalty is unconscionable or not, this
court set out the following standard in Ligutan v. Court of
Appeals,32 to wit:
The question of whether a penalty is reasonable or iniquitous
can be partly subjective and partly objective. Its resolution would
depend on such factor as, but not necessarily confined to, the
type, extent and purpose of the penalty, the nature of the
obligation, the mode of breach and its consequences, the
supervening realities, the standing and relationship of the
parties, and the like, the application of which, by and large, is
addressed to the sound discretion of the court. xxx.
In the instant case, the forfeiture of the entire amount of the
security deposits in the sum of ₱192,000.00 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.
It is in the exercise of its sound discretion that this court
tempered the penalty for the breaches committed by the
petitioner to 50% of the amount of the security deposits. The
forfeiture of the entire sum of ₱192,000.00 is clearly a usurious
and iniquitous penalty for the transgressions committed by the
petitioner. The respondent is therefore under the obligation to
return the 50% of ₱192,000.00 to the petitioner.
Turning now to the liability of the respondent to reimburse the
petitioner for one-half of the expenses incurred for the
improvements on the leased store space at SM Megamall, the
following provision in the Contracts of Lease will enlighten us in
resolving this issue:
Section 11. ALTERATIONS, ADDITIONS, IMPROVEMENTS,
ETC. The LESSEE shall not make any alterations, additions, or
improvements without the prior written consent of LESSOR; and
all alterations, additions or improvements made on the leased
premises, except movable or fixtures put in at LESSEE’s
expense and which are removable, without defacing the
buildings or damaging its floorings, shall become LESSOR’s
property without compensation/reimbursement but the LESSOR
reserves the right to require the removal of the said alterations,
additions or improvements upon expiration of the lease.
The foregoing provision in the Contract of Lease mandates that
before the petitioner can introduce any improvement on the
leased premises, she should first obtain respondent’s consent. In
the case at bar, it was not shown that petitioner previously
secured the consent of the respondent before she made the
improvements on the leased space in SM Megamall. It was not
even alleged by the petitioner that she obtained such consent or
she at least attempted to secure the same. On the other hand,
the petitioner asserted that respondent allegedly misrepresented
to her that it would renew the terms of the contracts from time to
time after their expirations, and that the petitioner was so
induced thereby that she expended the sum of ₱200,000.00 for
the improvement of the store space leased.
This argument was squarely addressed by this court in
Fernandez v. Court of Appeals,33 thus:
The Court ruled that the stipulation of the parties in their lease
contract "to be renewable" at the option of both parties stresses
that the faculty to renew was given not to the lessee alone nor to
the lessor by himself but to the two simultaneously; hence, both
must agree to renew if a new contract is to come about.
Petitioner’s contention that respondents had verbally agreed to
extend the lease indefinitely is inadmissible to qualify the terms
of the written contract under the parole evidence rule, and
unenforceable under the statute of frauds.34
Moreover, it is consonant with human experience that lessees,
before occupying the leased premises, especially store spaces
located inside malls and big commercial establishments, would
renovate the place and introduce improvements thereon
according to the needs and nature of their business and in
harmony with their trademark designs as part of their marketing
ploy to attract customers. Certainly, no inducement or
misrepresentation from the lessor is necessary for this purpose,
for it is not only a matter of necessity that a lessee should re-
design its place of business but a business strategy as well.
In ruling that the respondent is liable to reimburse petitioner one
half of the amount of improvements made on the leased store
space should it choose to appropriate the same, the RTC relied
on the provision of Article 1678 of the Civil Code which provides:
Art. 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
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leased, the lessor upon the termination of the lease shall pay the
lessee one-half of the value of the improvements at that time.
Should the lessor refuse to reimburse said amount, the lessee
may remove the improvements, even though the principal thing
may suffer damage thereby. He shall not, however, cause any
more impairment upon the property leased than is necessary.
While it is true that under the above-quoted provision of the Civil
Code, the lessor is under the obligation to pay the lessee one-
half of the value of the improvements made should the lessor
choose to appropriate the improvements, Article 1678 however
should be read together with Article 448 and Article 546 of the
same statute, which provide:
Art. 448. The owner of the land on which anything has been built,
sown or planted in good faith, shall have the right to appropriate
as his own the works, sowing or planting, after payment of the
indemnity provided for in articles 546 and 548, or to oblige the
one who built or planted to pay the price of the land, and the one
who sowed, the proper rent. However, the builder or planter
cannot be obliged to buy the land if its value is considerably
more than that of the building or trees. In such case, he shall pay
reasonable rent, if the owner of the land does not choose to
appropriate the building or trees after proper indemnity. The
parties shall agree upon the terms of the lease and in case of
disagreement, the court shall fix the terms thereof.
xxxx
Art. 546. Necessary expenses shall be refunded to every
possessor; but only possessor in good faith may retain the thing
until he has been reimbursed therefor.
Useful expenses shall be refunded only to the possessor in good
faith with the same right of retention, the person who has
defeated him in the possession having the option of refunding
the amount of the expenses or of paying the increase in value
which the thing may have acquired by reason thereof.
Thus, to be entitled to reimbursement for improvements
introduced on the property, the petitioner must be considered a
builder in good faith. Further, Articles 448 and 546 of the Civil
Code, which allow full reimbursement of useful improvements
and retention of the premises until reimbursement is made, apply
only to a possessor in good faith, i.e., one who builds on land
with the belief that he is the owner thereof. A builder in good faith
is one who is unaware of any flaw in his title to the land at the
time he builds on it.35 In this case, the petitioner cannot claim
that she was not aware of any flaw in her title or was under the
belief that she is the owner of the subject premises for it is a
settled fact that she is merely a lessee thereof.1âwphi1
In Geminiano v. Court of Appeals,36 this Court was emphatic in
declaring that lessees are not possessors or builders in good
faith, thus:
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.
In a plethora of cases, this Court has held that Article 448 of the
Civil Code, in relation to Article 546 of the same Code, which
allows full reimbursement of useful improvements and retention
of the premises until reimbursement is made, applies only to a
possessor in good faith, i.e., one who builds on land with the
belief that he is the owner thereof. It does not apply where one's
only interest is that of a lessee under a rental contract;
otherwise, it would always be in the power of the tenant to
"improve" his landlord out of his property.
Since petitioner’s interest in the store space is merely that of the
lessee under the lease contract, she cannot therefore be
considered a builder in good faith. Consequently, respondent
may appropriate the improvements introduced on the leased

premises without any obligation to reimburse the petitioner for
the sum expended.
Anent the claim for attorney’s fees, we resolve to likewise deny
the award of the same. Attorney’s fees may be awarded when a
party is compelled to litigate or to incur expenses to protect its
interest by reason of unjustified act of the other.37
In the instant petition, it was not shown that the respondent
unjustifiably refused to grant the demands of the petitioner so as
to compel the latter to initiate legal action to enforce her right. As
we have found herein, there is basis for respondent’s refusal to
return to petitioner the security deposits and to reimburse the
costs of the improvements in the leased premises. The award of
attorney’s fees is therefore not proper in the instant case.
WHEREFORE, premises considered, the instant Petition is
PARTLY GRANTED. The Court of Appeals Decision dated 10
October 2003 in CA-G.R. CV No. 73853 is hereby AFFIRMED
with the MODIFICATION that the respondent may forfeit only
50% of the total amount of the security deposits in the sum of
₱192,000.00, and must return the remaining 50% to the
petitioner. No costs.
SO ORDERED.
Diamond Builders v Country Bankers
G.R. No. 171820 December 13, 2007
DIAMOND BUILDERS CONGLOMERATION, ROGELIO S.
ACIDRE, TERESITA P. ACIDRE, GRACE C. OSIAS, VIOLETA
S. FAIYAZ and EMMA S. CUTILLAR, Petitioners,
vs.
COUNTRY BANKERS INSURANCE CORPORATION,
Respondent.
DECISION
NACHURA, J.:
Before us is a petition for review on certiorari to annul the
Decision1 of the Court of Appeals (CA) in CA-G.R. C.V. No.
48603, which reversed the Decision2 of the Regional Trial Court,
Branch 7, Manila (RTC Manila) in Civil Case No. 92-62029 and
granted respondent Country Bankers Insurance Corporation’s
(Country Bankers’) prayer for a sum of money against the
petitioners.
The controversy originated from a civil case3 pending before the
Regional Trial Court, Branch 125, Caloocan City (RTC
Caloocan) filed by Marceliano Borja (Borja) against Rogelio S.
Acidre (Rogelio) for the latter’s breach of his obligation to
construct a residential and commercial building. Rogelio is the
sole proprietor of petitioner Diamond Builders Conglomeration
(DBC).
To put an end to the foregoing litigation, the parties entered into
a Compromise Agreement4 which provided, in part:
COMPROMISE AGREEMENT
1. x x x
a. In lieu of rescission, the parties have mutually agreed, subject
to the provisions hereunder, to fully implement the building
contract dated October 1, 1990 and supplemented on October 2,
1990 with an additional scope of work marked as Annex "A" of
the complaint and the Letter-Agreement dated November 16,
1991 signed by the [petitioner Rogelio] and plaintiff’s son(,)
Ferdinand A. Borja, marked as Annex "B" of the complaint, which
required full compliance of the structural design of Engr. Ramos
and explicit reminders in the constructing of the
residential/commercial building and the additional works therein
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specified for the added consideration of ₱100,000.00 as alleged
in paragraphs 2 and 3 of the complaint, Annex "C" hereof.
b. [Petitioner Rogelio] admits full payment of plaintiff to him the
amount of ₱1,530,000.00 leaving the balance of ₱570,000.00 of
the contractual price of ₱2,100,000.00 for the construction of the
buildings aforementioned.
c. [Petitioner Rogelio] agrees to fully complete the construction of
the residential/commercial building mentioned in paragraph 1
hereof provided plaintiff would pay to him, subject to hereunder
terms, the aforesaid amount of ₱570,000.00.
d. The plaintiff agrees to pay [petitioner Rogelio] the amount of
₱570,000.00 subject to the terms hereunder set forth and subject
strictly to the condition that [petitioner Rogelio] will finish the
building above-described pursuant to the agreements [Annex(es)
"A" and "B"] set forth in paragraph 1 hereof.
e. Plaintiff shall pay [petitioner Rogelio] the amount of
₱570,000.00 as follows:
i. ₱370,000.00 – the 5th day from approval of this compromise
agreement by this Honorable Court and to coincide (with) the
start of the 75 days for [petitioner Rogelio] to complete the
construction of the building.
ii. ₱200,000.00 – When the aforedescribed building is fully
constructed pursuant to agreements stated in paragraph 1
hereof.
iii. Said building must be fully finished pursuant to the agreement
stated in paragraph 1 hereof within 75 days (excluding Sundays
and Holidays) counted from receipt of payment of ₱370,000.00.
The date of receipt to be issued by [petitioner Rogelio] will
control. The 75th day will be 12:00 noon of the 75th day.
iv. From receipt of the aforesaid amount of ₱370,000.00,
[petitioner Rogelio] shall submit in favor of plaintiff a performance
or surety bond in the equivalent amount of ₱370,000.00 – to
answer or indemnify plaintiff in the event the building is not
finished on the 75th day.
v. In the event the building is finished within 75 days as
heretofore stated and pursuant to the agreements set forth in
paragraph 1 hereof, in addition to the amount of ₱200,000.00,
the plaintiff shall also pay [petitioner Rogelio] the amount of
₱90,000.00 by way of [bonus]. However, in the event [petitioner
Rogelio] shall fail to fully complete the construction of the
building pursuant to the agreements set forth in paragraph 1
hereof within 75 days as heretofore stated, [petitioner Rogelio]
shall not be entitled to any further payments and the
performance or surety bond above-mentioned shall be fully
implemented by way of penalizing [petitioner Rogelio] and/or as
award for damages in favor of plaintiff.
xxxx
f. x x x
g. That the construction herein contemplated shall not extend
beyond 75 days. Said period shall commence five days from the
date of the final approval hereof by this Honorable Court.
i. That any violation and/or avoidance of the terms and
conditions of this Compromise Agreement by either of the parties
herein shall forthwith entitle the aggrieved party to an immediate
execution hereof and to the necessary and corresponding reliefs
and remedies therefore. (Emphasis supplied.)
The RTC Caloocan approved the Compromise Agreement and
rendered a Decision5 in accordance with the terms and
conditions contained therein.

In compliance with the Compromise Agreement, Rogelio
obtained a Surety Bond6 from Country Bankers in favor of the
spouses Borja.7 In this regard, Rogelio and his spouse,
petitioner Teresita P. Acidre, together with DBC employees
Grace C. Osias, Violeta S. Faiyaz and Emma S. Cutillar (the
other petitioners herein), signed an Indemnity Agreement8
consenting to their joint and several liability to Country Bankers
should the surety bond be executed upon.
On April 23, 1992, Country Bankers received a Motion for
Execution9 of the surety bond filed by Borja with the RTC
Caloocan for Rogelio’s alleged violation of the Compromise
Agreement. Consequently, Country Bankers, in a letter10 dated
May 13, 1992, advised petitioners that in the event it is
constrained to pay under the surety bond to Borja, it shall
proceed against petitioners for reimbursement.
In turn, petitioners wrote Country Bankers informing the latter of
the filing of an Opposition to Borja’s Motion for Execution.11 In
spite of the opposition, however, the RTC Caloocan issued a
Writ of Execution12 on May 25, 1992. Petitioners then filed a
motion for reconsideration.
On May 29, 1992, Sheriff Perceverando Pangan of RTC
Caloocan served Country Bankers a copy of the writ. Posthaste,
Country Bankers, in writing, requested Sheriff Pangan for a 10-
day grace period within which to settle the claim.13
Subsequently, Rogelio filed an Urgent Omnibus Motion14 to
suspend the Writ of Execution and to resolve the Motion for
Reconsideration dated June 3, 1992. Upon receipt of the
Omnibus Motion, Country Bankers forthwith wrote Sheriff
Pangan and requested that the implementation of the Writ of
Execution be held in abeyance so as not to render moot and
academic the RTC Caloocan’s resolution on the Omnibus
Motion.15
Nonetheless, on June 9, 1992, Country Bankers was served a
Notice of Levy/Sheriff’s Sale16 with a list of its personal
properties to be sold at the scheduled public auction on June 15,
1992.
The next day, or on June 10, 1992, Country Bankers verified with
the RTC Caloocan the status of petitioners’ Omnibus Motion. It
was informed that the motion had yet to be acted upon. On the
same date, Sheriff Pangan arrived at Country Bankers’ office,
and the latter was thus constrained to pay the amount of the
surety bond.17
Significantly, on June 22, 1992, twelve (12) days after the
satisfaction of judgment in Civil Case No. C-14745, Rogelio filed
a Petition for Certiorari and Prohibition with Preliminary
Injunction and Restraining Order18 with the CA, docketed as
CA-G.R. SP No. 28205. Although the appellate court issued a
Temporary Restraining Order (TRO), the petition was eventually
denied due course and dismissed outright for being fait accompli,
as what it sought to enjoin or prohibit had already been fully
satisfied and executed.19
In the meantime, after Country Bankers was compelled to pay
the amount of the surety bond, it demanded reimbursement from
the petitioners under the Indemnity Agreement.20 However,
petitioners refused to reimburse Country Bankers.
In addition, upon the dismissal of their petition in CA-G.R. SP
No. 28205, petitioners wrote Country Bankers and informed the
latter that the voluntary payment of the bond effectively
prevented them from contesting the validity of the issuance of
the Writ of Execution.21
As a result, Country Bankers filed a complaint for sum of money
against the petitioners which, as previously stated, the RTC
Manila dismissed. It disposed of the case, thus:
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WHEREFORE, and considering the foregoing, judgment is
hereby rendered:
1. Dismissing the complaint for lack of merit;
2. On the counterclaim, ordering [Country Bankers] to pay
[petitioners] attorney’s fees of ₱50,000.00, plus the costs of suit.
SO ORDERED.
On appeal, the CA reversed and set aside the decision of the
RTC Manila, to wit:
WHEREFORE, premises considered, the Appeal is GRANTED
and the Decision dated November 2, 1992 of Branch 7 of the
Regional Trial Court of Manila is hereby REVERSED and a new
one entered, ordering [petitioners] to pay [Country Bankers] the
sum of THREE HUNDRED SEVENTY THOUSAND PESOS
(₱370,000.00), as reimbursement or actual damages, plus
interest thereon at the rate of 12% per annum computed from the
date of judicial demand, or from July 24, 1992, the date of filing
of the complaint until the said amount has been fully paid.
SO ORDERED.
In reversing the trial court, the CA ruled that Country Bankers, as
surety of Rogelio’s loan obligation, did not effect voluntary
payment on the bond. The appellate court found that what
Country Bankers paid was an obligation legally due and
demandable. It declared that Country Bankers acted upon
compulsion of a writ of execution, which appears to have been
regularly, and validly issued, and, by its very nature, is
immediately enforceable.
Hence, this appeal positing a sole issue for our resolution, to wit:
Whether petitioners should indemnify Country Bankers for the
payment of the surety bond.
In fine, petitioners contend that Country Bankers is not entitled to
reimbursement when it voluntarily paid the surety bond
considering it knew full well the remedies availed of by
petitioners to stay the execution of the compromise judgment.
Thus, Country Bankers must bear the loss or damage arising
from its voluntary act.
We deny the appeal and affirm the appellate court’s ruling.
Country Bankers should be reimbursed for the ₱370,000.00 it
paid to Borja under the surety bond.
In impugning the CA’s decision, petitioners invoke their pending
Omnibus Motion to stay the execution of the compromise
judgment. Petitioners’ theory is that, although the RTC Caloocan
had already issued a writ of execution and Country Bankers had
been served a Notice of Levy/Sheriff’s Sale of its properties at
the impending public auction, the payment made by Country
Bankers to Borja is a voluntary act. Petitioners push their theory
even further, and deign to suggest that Country Bankers should
have itself intervened in the proceedings before the RTC
Caloocan to stay the writ of execution.
We reject this preposterous suggestion. Petitioners ought to be
reminded of the nature of a judgment on a compromise and a
writ of execution issued in connection therewith.
A compromise judgment is a decision rendered by a court
sanctioning the agreement between the parties concerning the
determination of the controversy at hand. Essentially, it is a
contract, stamped with judicial imprimatur, between two or more
persons, who, for preventing or putting an end to a lawsuit,
adjust their difficulties by mutual consent in the manner which
they agree on, and which each of them prefers in the hope of
gaining, balanced by the danger of losing.22 Upon court
approval of a compromise agreement, it transcends its identity
as a mere contract binding only upon the parties thereto, as it

becomes a judgment that is subject to execution in accordance
with Rule 39 of the Rules of Court.23
Ordinarily, a judgment based on compromise is not appealable.
It should not be disturbed except upon a showing of vitiated
consent or forgery. The reason for the rule is that when both
parties enter into an agreement to end a pending litigation and
request that a decision be rendered approving said agreement, it
is only natural to presume that such action constitutes an implicit,
as undeniable as an express, waiver of the right to appeal
against said decision.24 Thus, a decision on a compromise
agreement is final and executory, and is conclusive between the
parties.25
It is beyond cavil that if a party fails or refuses to abide by a
compromise agreement, the other party may either enforce the
compromise or regard it as rescinded and insist upon his original
demand.26 Following this mandatory rule, the RTC Caloocan
granted Borja’s motion, and subsequently issued an order to the
sheriff to execute the compromise judgment. Notwithstanding the
foregoing, petitioners still maintain that since they had taken
steps to stay the execution of the compromise judgment, Country
Bankers, with full knowledge of their active opposition to the
execution thereof, should not have readily complied with the
RTC Caloocan Order.
Petitioners’ argument contemplates a brazen defiance of a
validly issued court order, which had not been restrained by the
appellate court or this Court. The argument is unacceptable.
The Compromise Agreement between Borja and Rogelio
explicitly provided that the latter’s failure to complete
construction of the building within the stipulated period27 shall
cause the full implementation of the surety bond as a penalty for
the default, and as an award of damages to Borja. Furthermore,
the Compromise Agreement contained a default executory
clause in case of a violation or avoidance of the terms and
conditions thereof. Therefore, the payment made by Country
Bankers to Borja was proper, as failure to pay would have
amounted to contumacious disobedience of a valid court order.
Clearly, even without the aforesaid default clause, the
compromise judgment remained executory as against Rogelio,
as the principal obligor (co-debtor), and Country Bankers as
surety of the obligation. Section 4, Rule 39 of the Rules of Court
provides:
SEC. 4. Judgments not stayed by appeal. – Judgments in
actions for injunction, receivership, accounting and support, and
such other judgments as are now or may hereafter be declared
to be immediately executory, shall be enforceable after their
rendition and shall not be stayed by an appeal taken therefrom,
unless otherwise ordered by the trial court. On appeal therefrom,
the appellate court in its discretion may make an order
suspending, modifying, restoring or granting the injunction,
receivership, accounting, or award of support.
The stay of execution shall be upon such terms as to bind or
otherwise as may be considered proper for the security or
protection of the rights of the adverse party.
Other judgments in actions declared to be immediately executory
and not stayed by the filing of an appeal are for: (1)
compromise,28 (2) forcible entry and unlawful detainer,29 (3)
direct contempt,30 and (4) expropriation.31
Likewise, Section 9, paragraph (a),32 of the same Rule outlines
the procedure for execution of judgments for money, thus:
SEC. 9 Execution of judgments for money, how enforced. –
(a) Immediate payment on demand. – The officer shall enforce
an execution of a judgment for money by demanding from the
judgment obligor the immediate payment of the full amount
stated in the writ of execution and all lawful fees. The judgment
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obligor shall pay in case, certified bank check payable to the
judgment oblige, or any other form of payment acceptable to the
latter, the amount of the judgment debt under proper receipt
directly to the judgment oblige or his authorized representative if
present at the time of payment. The lawful fees shall be handed
under proper receipt to the executing sheriff who shall turn over
the said amount within the same day to the clerk of court of the
court that issued the writ.
As Rogelio’s obligation under the compromise agreement, and
approved by the RTC Caloocan, had a penal clause33 which is
monetary in nature,34 the writ of execution availed of by Borja,
and paid by Country Bankers, strictly complied with the rules on
execution of money judgments.
It is true that the petitioners did not directly question the
compromise judgment. What was pending before the Caloocan
RTC was petitioners’ Omnibus Motion praying for a stay in the
implementation of the writ of execution. However, the bottom line
issue raised in the Omnibus Motion is, actually, a question on the
compromise judgment, since its resolution would require an
inquiry into the stipulations contained in the Compromise
Agreement, particularly the provision on immediate execution.
Thus, when the RTC Manila ruled that the payment on the bond
made by Country Bankers was voluntary, the lower court
effectively disregarded the rule on the non-appealable nature
and the immediately executory character of a judgment on a
compromise.
Moreover, it has not escaped our attention that petitioners
belatedly filed a Petition for Certiorari and Prohibition with prayer
for a TRO with the CA, ostensibly to stop the execution of the
compromise judgment. Not only was the filing thereof late, it was
done twelve (12) days after the satisfaction of the compromise
judgment. We are, therefore, perplexed why, despite the urgency
of the matter, petitioners merely banked on a pending motion for
reconsideration to stay the enforcement of an already issued writ
of execution. Petitioners’ total reliance thereon was certainly
misplaced.
Admittedly, the general rule is that certiorari will not lie unless a
motion for reconsideration is first filed before the respondent
tribunal to allow it an opportunity to correct the imputed errors.35
Nonetheless, the rule admits of exceptions, thus:
(a) where the order is a patent nullity, as where the court a quo
has no jurisdiction;
(b) where the questions raised in the certiorari proceedings have
been duly raised and passed upon by the lower court, or are the
same as those raised and passed upon in the lower court;
(c) where there is an urgent necessity for the resolution of the
question and any further delay would prejudice the interests of
the Government or of the petitioner or the subject matter of the
action is perishable;
(d) where, under the circumstances, a motion for reconsideration
would be useless;
(e) where petitioner was deprived of due process and there is
extreme urgency for relief;
(f) where, in a criminal case, relief from an order of arrest is
urgent and the granting of such relief by the trial court is
improbable;
(g) where the proceedings in the lower court are a nullity for lack
of due process;
(h) where the proceedings was ex-parte or in which the petitioner
had no opportunity to object; and

(i) where the issue raised is one purely of law or where public
interest is involved.36
Evidently, it would not have been premature for petitioners to
have filed a petition before the CA, upon the issuance by the
RTC Caloocan of a writ of execution, because the RTC
Caloocan already denied their Opposition to Borja’s Motion for
Execution on the surety bond. If, as petitioners insist, they had a
meritorious challenge to the satisfaction of the writ of execution,
they should have immediately filed a Petition for Certiorari with
the CA and therein alleged the exceptional circumstance
warranting the non-filing of a motion for reconsideration.
Petitioners should not have persisted on waiting for the
resolution of their Omnibus Motion.
We have consistently ruled that an order for the issuance of a
writ of execution is ordinarily not appealable. The reason for this
is that the merits of the case should not be delved into anew
after a determination has been made thereon with finality.37
Otherwise, there would be practically no end to litigation since
the losing party would always try to thwart execution by
appealing from every order granting the writ. In this case, this
aphorism should apply. Rogelio, after agreeing to an amicable
settlement with Borja to put an end to the case before the RTC
Caloocan, cannot flout compliance of the court order of
execution by refusing to reimburse Country Bankers, the surety
of his obligation in the compromise agreement.
Still, petitioners stubbornly refuse to pay Country Bankers,
contending that the CA itself, in CA-G.R. SP No. 28205, declared
that the payment effected was voluntary.
We are not persuaded.
Article 2047 of the Civil Code specifically calls for the application
of the provisions on solidary obligations to suretyship contracts.
In particular, Article 1217 of the Civil Code recognizes the right of
reimbursement from a co-debtor (the principal co-debtor, in case
of suretyship) in favor of the one who paid (i.e., the surety).38 In
contrast, Article 1218 of the Civil Code is definitive on when
reimbursement is unavailing, such that only those payments
made after the obligation has prescribed or became illegal shall
not entitle a solidary debtor to reimbursement. Nowhere in the
invoked CA Decision does it declare that a surety who pays, by
virtue of a writ of execution, is not entitled to reimbursement from
the principal co-debtor. The CA Decision was confined to the
mootness of the issue presented and petitioners’ preclusion from
the relief it prayed for, i.e., a stay of the writ of execution,
considering that the writ had already been satisfied.
More importantly, the Indemnity Agreement signed by Rogelio
and the other petitioners explicitly provided for an incontestability
clause on payments made by Country Bankers.1âwphi1 The
said clause reads:
INCONTESTABILITY OF PAYMENTS MADE BY THE
COMPANY: - Any payment or disbursement made by [Country
Bankers] on account of the above-mentioned Bond, its renewals,
extensions, alterations or substitutions either in the belief that
[Country Bankers] was obligated to make such payment or in the
belief that said payment was necessary or expedient in order to
avoid greater losses or obligations for which [Country Bankers]
might be liable by virtue of the terms of the above-mentioned
Bond, its renewals, extensions, alterations, or substitutions, shall
be final and shall not be disputed by the undersigned, who
hereby jointly and severally bind themselves to indemnify
[Country Bankers] of any and all such payments, as stated in the
preceding clauses.
In case [Country Bankers] shall have paid, settled or
compromised any liability, loss, costs, damages, attorney’s fees,
expenses, claims, demands, suits, or judgments as above-
stated, arising out of or in connection with said bond, an itemized
statement thereof, signed by an officer of [Country Bankers] and
other evidence to show said payment, settlement or
Page 14 of 14
Obligations and Contracts
Obligations with Penal Clause | Art.
1226-1229
compromise, shall be prima facie evidence of said payment,
settlement or compromise, as well as the liability of [petitioners]
in any and all suits and claims against [petitioners] arising out of
said bond or this bond application.
Ineluctably, petitioners are obligated to reimburse Country
Bankers the amount of ₱370,000.00.
Finally, petitioners desperately attempt to inveigle out of this
burden, which is of their own making, by imputing a lack of
initiative on Country Banker’s part to intervene in the execution
proceedings before the RTC.
This contention, as with the rest of petitioners’ arguments,
deserves scant consideration. Suffice it to state that Country
Bankers is a surety of the obligation with a penal clause,
constituted in the compromise judgment; it is not a joint and
solidary co-debtor of Rogelio.
In the recent case of Escaňo v. Ortigas,39 we elucidated on the
distinction between a surety as a co-debtor under a suretyship
agreement and a joint and solidary co-debtor, thus:
(A)s indicated by Article 2047, a suretyship requires a principal
debtor to whom the surety is solidarily bound by way of an
ancillary obligation of segregate identity from the obligation
between the principal debtor and the creditor. The suretyship
does not bind the surety to the creditor, inasmuch as the latter is
vested with the right to proceed against the former to collect the
credit in lieu of proceeding against the principal debtor for the
same obligation. At the same time, there is also a legal tie
created between the surety and the principal debtor to which the
creditor is not privy or party to. The moment the surety fully
answers to the creditor for the obligation created by the principal
debtor, such obligation is extinguished. At the same time, the
surety may seek reimbursement from the principal debtor for the
amount paid, for the surety does in fact "become subrogated to
all the rights and remedies of the creditor."
WHEREFORE, the Petition is DENIED. The Decision of the
Court of Appeals in CA-G.R. C.V. No. 48603 is hereby
AFFIRMED. Costs against the petitioner.
SO ORDERED.
FOOTNOTES
Escaňo v. Ortigas, G.R. No. 151953, June 29, 2007. See
Lapanday Agricultural v. Court of Appeals, 381 Phil. 41, 52
(2000). Art. 1217 reads in part:
Payment made by one of the solidary debtors extinguishes the
obligation. If two or more solidary debtors offer to pay, the
creditor may choose which offer to accept xxx.
He who made payment may claim from his co-debtors only on
the share which corresponds to each, with interest for the
payment already made. If the payment is made before the debt
is due, no interest for the intervening period may be demanded
xxx.