Republic SUPREME Manila SECOND DIVISION

of

the

Philippines COURT

G.R. No. 126490 March 31, 1998 ESTRELLA PALMARES, petitioner, vs. COURT OF APPEALS and M.B. LENDING CORPORATION, respondents. REGALADO, J.: Where a party signs a promissory note as a co-maker and binds herself to be jointly and severally liable with the principal debtor in case the latter defaults in the payment of the loan, is such undertaking of the former deemed to be that of a surety as an insurer of the debt, or of a guarantor who warrants the solvency of the debtor? Pursuant to a promissory note dated March 13, 1990, private respondent M.B. Lending Corporation extended a loan to the spouses Osmea and Merlyn Azarraga, together with petitioner Estrella Palmares, in the amount of P30,000.00 payable on or before May 12, 1990, with compounded interest at the rate of 6% per annum to be computed every 30 days from the date thereof. 1 On four occasions after the execution of the promissory note and even after the loan matured, petitioner and the Azarraga spouses were able to pay a total of P16,300.00, thereby leaving a balance of P13,700.00. No payments were made after the last payment on September 26, 1991. 2 Consequently, on the basis of petitioner's solidary liability under the promissory note, respondent corporation filed a complaint 3 against petitioner Palmares as the lone partydefendant, to the exclusion of the principal debtors, allegedly by reason of the insolvency of the latter. In her Amended Answer with Counterclaim, 4 petitioner alleged that sometime in August 1990, immediately after the loan matured, she offered to settle the obligation with respondent corporation but the latter informed her that they would try to collect from the spouses Azarraga and that she need not worry about it; that there has already been a partial payment in the amount of P17,010.00; that the interest of 6% per month compounded at the same rate per month, as well as the penalty charges of 3% per month, are usurious and unconscionable; and that while she agrees to be liable on the note but only upon default of the principal debtor, respondent corporation acted in bad faith in suing her alone without including the Azarragas when they were the only ones who benefited from the proceeds of the loan. During the pre-trial conference, the parties submitted the following issues for the resolution of the trial court: (1) what the rate of interest, penalty and damages should be; (2) whether the liability of the defendant (herein petitioner) is primary or subsidiary; and (3) whether the defendant Estrella Palmares is only a guarantor with a subsidiary liability and not a co-maker with primary liability. 5 Thereafter, the parties agreed to submit the case for decision based on the pleadings filed and the memoranda to be submitted by them. On November 26, 1992, the Regional Trial Court of

Iloilo City, Branch 23, rendered judgment dismissing the complaint without prejudice to the filing of a separate action for a sum of money against the spouses Osmea and Merlyn Azarraga who are primarily liable on the instrument. 6 This was based on the findings of the court a quo that the filing of the complaint against herein petitioner Estrella Palmares, to the exclusion of the Azarraga spouses, amounted to a discharge of a prior party; that the offer made by petitioner to pay the obligation is considered a valid tender of payment sufficient to discharge a person's secondary liability on the instrument; as co-maker, is only secondarily liable on the instrument; and that the promissory note is a contract of adhesion. Respondent Court of Appeals, however, reversed the decision of the trial court, and rendered judgment declaring herein petitioner Palmares liable to pay respondent corporation: 1. The sum of P13,700.00 representing the outstanding balance still due and owing with interest at six percent (6%) per month computed from the date the loan was contracted until fully paid; 2. The sum equivalent to the stipulated penalty of three percent (3%) per month, of the outstanding balance; 3. Attorney's fees at 25% of the total amount due per stipulations; 4. Plus costs of suit. 7 Contrary to the findings of the trial court, respondent appellate court declared that petitioner Palmares is a surety since she bound herself to be jointly and severally or solidarily liable with the principal debtors, the Azarraga spouses, when she signed as a co-maker. As such, petitioner is primarily liable on the note and hence may be sued by the creditor corporation for the entire obligation. It also adverted to the fact that petitioner admitted her liability in her Answer although she claims that the Azarraga spouses should have been impleaded. Respondent court ordered the imposition of the stipulated 6% interest and 3% penalty charges on the ground that the Usury Law is no longer enforceable pursuant to Central Bank Circular No. 905. Finally, it rationalized that even if the promissory note were to be considered as a contract of adhesion, the same is not entirely prohibited because the one who adheres to the contract is free to reject it entirely; if he adheres, he gives his consent. Hence this petition for review on certiorari wherein it is asserted that: A. The Court of Appeals erred in ruling that Palmares acted as surety and is therefore solidarily liable to pay the promissory note. 1. The terms of the promissory note are vague. Its conflicting provisions do not establish Palmares' solidary liability. 2. The promissory note contains provisions which establish the co-maker's liability as that of a guarantor. 3. There is no sufficient basis for concluding that Palmares' liability is solidary. 4. The promissory note is a contract of adhesion and should be construed against M. B. Lending Corporation. 5. Palmares cannot be compelled to pay the loan at this point. B. Assuming that Palmares' liability is solidary, the Court of Appeals erred in strictly imposing the interests and penalty charges on the outstanding balance of the promissory note. The foregoing contentions of petitioner are denied and contradicted in their material points by respondent corporation. They are further refuted by accepted doctrines in the American

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jurisdiction after which we patterned our statutory law on surety and guaranty. This case then affords us the opportunity to make an extended exposition on the ramifications of these two specialized contracts, for such guidance as may be taken therefrom in similar local controversies in the future. The basis of petitioner Palmares' liability under the promissory note is expressed in this wise: ATTENTION TO CO-MAKERS: PLEASE READ WELL I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan, have fully understood the contents of this Promissory Note for Short-Term Loan: That as Co-maker, I am fully aware that I shall be jointly and severally or solidarily liable with the above principal maker of this note; That in fact, I hereby agree that M.B. LENDING CORPORATION may demand payment of the above loan from me in case the principal maker, Mrs. Merlyn Azarraga defaults in the payment of the note subject to the same conditions abovecontained. 8 Petitioner contends that the provisions of the second and third paragraph are conflicting in that while the second paragraph seems to define her liability as that of a surety which is joint and solidary with the principal maker, on the other hand, under the third paragraph her liability is actually that of a mere guarantor because she bound herself to fulfill the obligation only in case the principal debtor should fail to do so, which is the essence of a contract of guaranty. More simply stated, although the second paragraph says that she is liable as a surety, the third paragraph defines the nature of her liability as that of a guarantor. According to petitioner, these are two conflicting provisions in the promissory note and the rule is that clauses in the contract should be interpreted in relation to one another and not by parts. In other words, the second paragraph should not be taken in isolation, but should be read in relation to the third paragraph. In an attempt to reconcile the supposed conflict between the two provisions, petitioner avers that she could be held liable only as a guarantor for several reasons. First, the words "jointly and severally or solidarily liable" used in the second paragraph are technical and legal terms which are not fully appreciated by an ordinary layman like herein petitioner, a 65-year old housewife who is likely to enter into such transactions without fully realizing the nature and extent of her liability. On the contrary, the wordings used in the third paragraph are easier to comprehend. Second, the law looks upon the contract of suretyship with a jealous eye and the rule is that the obligation of the surety cannot be extended by implication beyond specified limits, taking into consideration the peculiar nature of a surety agreement which holds the surety liable despite the absence of any direct consideration received from either the principal obligor or the creditor. Third, the promissory note is a contract of adhesion since it was prepared by respondent M.B. Lending Corporation. The note was brought to petitioner partially filled up, the contents thereof were never explained to her, and her only participation was to sign thereon. Thus, any apparent ambiguity in the contract should be strictly construed against private respondent pursuant to Art. 1377 of the Civil Code. 9 Petitioner accordingly concludes that her liability should be deemed restricted by the clause in the third paragraph of the promissory note to be that of a guarantor. Moreover, petitioner submits that she cannot as yet be compelled to pay the loan because the principal debtors cannot be considered in default in the absence of a judicial or extrajudicial

demand. It is true that the complaint alleges the fact of demand, but the purported demand letters were never attached to the pleadings filed by private respondent before the trial court. And, while petitioner may have admitted in her Amended Answer that she received a demand letter from respondent corporation sometime in 1990, the same did not effectively put her or the principal debtors in default for the simple reason that the latter subsequently made a partial payment on the loan in September, 1991, a fact which was never controverted by herein private respondent. Finally, it is argued that the Court of Appeals gravely erred in awarding the amount of P2,745,483.39 in favor of private respondent when, in truth and in fact, the outstanding balance of the loan is only P13,700.00. Where the interest charged on the loan is exorbitant, iniquitous or unconscionable, and the obligation has been partially complied with, the court may equitably reduce the penalty 10 on grounds of substantial justice. More importantly, respondent corporation never refuted petitioner's allegation that immediately after the loan matured, she informed said respondent of her desire to settle the obligation. The court should, therefore, mitigate the damages to be paid since petitioner has shown a sincere desire for a compromise. 11 After a judicious evaluation of the arguments of the parties, we are constrained to dismiss the petition for lack of merit, but to except therefrom the issue anent the propriety of the monetary award adjudged to herein respondent corporation. At the outset, let it here be stressed that even assuming arguendo that the promissory note executed between the parties is a contract of adhesion, it has been the consistent holding of the Court that contracts of adhesion are not invalid per se and that on numerous occasions the binding effects thereof have been upheld. The peculiar nature of such contracts necessitate a close scrutiny of the factual milieu to which the provisions are intended to apply. Hence, just as consistently and unhesitatingly, but without categorically invalidating such contracts, the Court has construed obscurities and ambiguities in the restrictive provisions of contracts of adhesion strictly albeit not unreasonably against the drafter thereof when justified in light of the operative facts and surrounding circumstances. 12 The factual scenario obtaining in the case before us warrants a liberal application of the rule in favor of respondent corporation. The Civil Code pertinently provides: Art. 2047. By guaranty, a person called the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship. It is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulation shall control. 13 In the case at bar, petitioner expressly bound herself to be jointly and severally or solidarily liable with the principal maker of the note. The terms of the contract are clear, explicit and unequivocal that petitioner's liability is that of a surety. Her pretension that the terms "jointly and severally or solidarily liable" contained in the second paragraph of her contract are technical and legal terms which could not be easily understood by an ordinary layman like her is diametrically opposed to her manifestation in the contract

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that she "fully understood the contents" of the promissory note and that she is "fully aware" of her solidary liability with the principal maker. Petitioner admits that she voluntarily affixed her signature thereto; ergo, she cannot now be heard to claim otherwise. Any reference to the existence of fraud is unavailing. Fraud must be established by clear and convincing evidence, mere preponderance of evidence not even being adequate. Petitioner's attempt to prove fraud must, therefore, fail as it was evidenced only by her own uncorroborated and, expectedly, selfserving allegations. 14 Having entered into the contract with full knowledge of its terms and conditions, petitioner is estopped to assert that she did so under a misapprehension or in ignorance of their legal effect, or as to the legal effect of the undertaking. 15 The rule that ignorance of the contents of an instrument does not ordinarily affect the liability of one who signs it also applies to contracts of suretyship. And the mistake of a surety as to the legal effect of her obligation is ordinarily no reason for relieving her of liability. 16 Petitioner would like to make capital of the fact that although she obligated herself to be jointly and severally liable with the principal maker, her liability is deemed restricted by the provisions of the third paragraph of her contract wherein she agreed "that M.B. Lending Corporation may demand payment of the above loan from me in case the principal maker, Mrs. Merlyn Azarraga defaults in the payment of the note," which makes her contract one of guaranty and not suretyship. The purported discordance is more apparent than real. A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor. 17 A suretyship is an undertaking that the debt shall be paid; a guaranty, an undertaking that the debtor shall pay. 18 Stated differently, a surety promises to pay the principal's debt if the principal will not pay, while a guarantor agrees that the creditor, after proceeding against the principal, may proceed against the guarantor if the principal is unable to pay. 19 A surety binds himself to perform if the principal does not, without regard to his ability to do so. A guarantor, on the other hand, does not contract that the principal will pay, but simply that he is able to do so. 20 In other words, a surety undertakes directly for the payment and is so responsible at once if the principal debtor makes default, while a guarantor contracts to pay if, by the use of due diligence, the debt cannot be made out of the principal debtor. 21 Quintessentially, the undertaking to pay upon default of the principal debtor does not automatically remove it from the ambit of a contract of suretyship. The second and third paragraphs of the aforequoted portion of the promissory note do not contain any other condition for the enforcement of respondent corporation's right against petitioner. It has not been shown, either in the contract or the pleadings, that respondent corporation agreed to proceed against herein petitioner only if and when the defaulting principal has become insolvent. A contract of suretyship, to repeat, is that wherein one lends his credit by joining in the principal debtor's obligation, so as to render himself directly and primarily responsible with him, and without reference to the solvency of the principal. 22 In a desperate effort to exonerate herself from liability, petitioner erroneously invokes the rule on strictissimi juris, which holds that when the meaning of a contract of indemnity or guaranty has once been judicially determined under the rule of reasonable construction applicable to all written contracts, then the liability of the surety, under his contract, as thus interpreted and construed, is not to be extended beyond its strict meaning. 23 The rule, however, will apply

only after it has been definitely ascertained that the contract is one of suretyship and not a contract of guaranty. It cannot be used as an aid in determining whether a party's undertaking is that of a surety or a guarantor. Prescinding from these jurisprudential authorities, there can be no doubt that the stipulation contained in the third paragraph of the controverted suretyship contract merely elucidated on and made more specific the obligation of petitioner as generally defined in the second paragraph thereof. Resultantly, the theory advanced by petitioner, that she is merely a guarantor because her liability attaches only upon default of the principal debtor, must necessarily fail for being incongruent with the judicial pronouncements adverted to above. It is a well-entrenched rule that in order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall also be principally considered. 24 Several attendant factors in that genre lend support to our finding that petitioner is a surety. For one, when petitioner was informed about the failure of the principal debtor to pay the loan, she immediately offered to settle the account with respondent corporation. Obviously, in her mind, she knew that she was directly and primarily liable upon default of her principal. For another, and this is most revealing, petitioner presented the receipts of the payments already made, from the time of initial payment up to the last, which were all issued in her name and of the Azarraga spouses. 25 This can only be construed to mean that the payments made by the principal debtors were considered by respondent corporation as creditable directly upon the account and inuring to the benefit of petitioner. The concomitant and simultaneous compliance of petitioner's obligation with that of her principals only goes to show that, from the very start, petitioner considered herself equally bound by the contract of the principal makers. In this regard, we need only to reiterate the rule that a surety is bound equally and absolutely with the principal, 26and as such is deemed an original promisor and debtor from the beginning. 27 This is because in suretyship there is but one contract, and the surety is bound by the same agreement which binds the principal. 28 In essence, the contract of a surety starts with the agreement, 29 which is precisely the situation obtaining in this case before the Court. It will further be observed that petitioner's undertaking as co-maker immediately follows the terms and conditions stipulated between respondent corporation, as creditor, and the principal obligors. A surety is usually bound with his principal by the same instrument, executed at the same time and upon the same consideration; he is an original debtor, and his liability is immediate and direct. 30 Thus, it has been held that where a written agreement on the same sheet of paper with and immediately following the principal contract between the buyer and seller is executed simultaneously therewith, providing that the signers of the agreement agreed to the terms of the principal contract, the signers were "sureties" jointly liable with the buyer. 31 A surety usually enters into the same obligation as that of his principal, and the signatures of both usually appear upon the same instrument, and the same consideration usually supports the obligation for both the principal and the surety. 32 There is no merit in petitioner's contention that the complaint was prematurely filed because the principal debtors cannot as yet be considered in default, there having been no judicial or extrajudicial demand made by respondent corporation. Petitioner has agreed that respondent corporation may demand payment of the loan from her in case the principal maker defaults, subject to the same conditions expressed in the promissory note. Significantly, paragraph (G) of the note states that "should I fail to pay in accordance with the above schedule of payment,

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I hereby waive my right to notice and demand." Hence, demand by the creditor is no longer necessary in order that delay may exist since the contract itself already expressly so declares. 33 As a surety, petitioner is equally bound by such waiver. Even if it were otherwise, demand on the sureties is not necessary before bringing suit against them, since the commencement of the suit is a sufficient demand. 34 On this point, it may be worth mentioning that a surety is not even entitled, as a matter of right, to be given notice of the principal's default. Inasmuch as the creditor owes no duty of active diligence to take care of the interest of the surety, his mere failure to voluntarily give information to the surety of the default of the principal cannot have the effect of discharging the surety. The surety is bound to take notice of the principal's default and to perform the obligation. He cannot complain that the creditor has not notified him in the absence of a special agreement to that effect in the contract of suretyship. 35 The alleged failure of respondent corporation to prove the fact of demand on the principal debtors, by not attaching copies thereof to its pleadings, is likewise immaterial. In the absence of a statutory or contractual requirement, it is not necessary that payment or performance of his obligation be first demanded of the principal, especially where demand would have been useless; nor is it a requisite, before proceeding against the sureties, that the principal be called on to account. 36 The underlying principle therefor is that a suretyship is a direct contract to pay the debt of another. A surety is liable as much as his principal is liable, and absolutely liable as soon as default is made, without any demand upon the principal whatsoever or any notice of default. 37 As an original promisor and debtor from the beginning, he is held ordinarily to know every default of his principal. 38 Petitioner questions the propriety of the filing of a complaint solely against her to the exclusion of the principal debtors who allegedly were the only ones who benefited from the proceeds of the loan. What petitioner is trying to imply is that the creditor, herein respondent corporation, should have proceeded first against the principal before suing on her obligation as surety. We disagree. A creditor's right to proceed against the surety exists independently of his right to proceed against the principal. 39Under Article 1216 of the Civil Code, the creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The rule, therefore, is that if the obligation is joint and several, the creditor has the right to proceed even against the surety alone. 40 Since, generally, it is not necessary for the creditor to proceed against a principal in order to hold the surety liable, where, by the terms of the contract, the obligation of the surety is the same that of the principal, then soon as the principal is in default, the surety is likewise in default, and may be sued immediately and before any proceedings are had against the principal. 41 Perforce, in accordance with the rule that, in the absence of statute or agreement otherwise, a surety is primarily liable, and with the rule that his proper remedy is to pay the debt and pursue the principal for reimbursement, the surety cannot at law, unless permitted by statute and in the absence of any agreement limiting the application of the security, require the creditor or obligee, before proceeding against the surety, to resort to and exhaust his remedies against the principal, particularly where both principal and surety are equally bound. 42 We agree with respondent corporation that its mere failure to immediately sue petitioner on her obligation does not release her from liability. Where a creditor refrains from proceeding

against the principal, the surety is not exonerated. In other words, mere want of diligence or forbearance does not affect the creditor's rights vis-a-vis the surety, unless the surety requires him by appropriate notice to sue on the obligation. Such gratuitous indulgence of the principal does not discharge the surety whether given at the principal's request or without it, and whether it is yielded by the creditor through sympathy or from an inclination to favor the principal, or is only the result of passiveness. The neglect of the creditor to sue the principal at the time the debt falls due does not discharge the surety, even if such delay continues until the principal becomes insolvent. 43 And, in the absence of proof of resultant injury, a surety is not discharged by the creditor's mere statement that the creditor will not look to the surety, 44 or that he need not trouble himself. 45 The consequences of the delay, such as the subsequent insolvency of the principal, 46 or the fact that the remedies against the principal may be lost by lapse of time, are immaterial. 47 The raison d'tre for the rule is that there is nothing to prevent the creditor from proceeding against the principal at any time. 48 At any rate, if the surety is dissatisfied with the degree of activity displayed by the creditor in the pursuit of his principal, he may pay the debt himself and become subrogated to all the rights and remedies of the creditor. 49 It may not be amiss to add that leniency shown to a debtor in default, by delay permitted by the creditor without change in the time when the debt might be demanded, does not constitute an extension of the time of payment, which would release the surety. 50 In order to constitute an extension discharging the surety, it should appear that the extension was for a definite period, pursuant to an enforceable agreement between the principal and the creditor, and that it was made without the consent of the surety or with a reservation of rights with respect to him. The contract must be one which precludes the creditor from, or at least hinders him in, enforcing the principal contract within the period during which he could otherwise have enforced it, and which precludes the surety from paying the debt. 51 None of these elements are present in the instant case. Verily, the mere fact that respondent corporation gave the principal debtors an extended period of time within which to comply with their obligation did not effectively absolve here in petitioner from the consequences of her undertaking. Besides, the burden is on the surety, herein petitioner, to show that she has been discharged by some act of the creditor, 52 herein respondent corporation, failing in which we cannot grant the relief prayed for. As a final issue, petitioner claims that assuming that her liability is solidary, the interests and penalty charges on the outstanding balance of the loan cannot be imposed for being illegal and unconscionable. Petitioner additionally theorizes that respondent corporation intentionally delayed the collection of the loan in order that the interests and penalty charges would accumulate. The statement, likewise traversed by said respondent, is misleading. In an affidavit 53 executed by petitioner, which was attached to her petition, she stated, among others, that: 8. During the latter part of 1990, I was surprised to learn that Merlyn Azarraga's loan has been released and that she has not paid the same upon its maturity. I received a telephone call from Mr. Augusto Banusing of MB Lending informing me of this fact and of my liability arising from the promissory note which I signed. 9. I requested Mr. Banusing to try to collect first from Merlyn and Osmea Azarraga. At the same time, I offered to pay MB Lending the outstanding balance of the

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principal obligation should he fail to collect from Merlyn and Osmea Azarraga. Mr. Banusing advised me not to worry because he will try to collect first from Merlyn and Osmea Azarraga. 10. A year thereafter, I received a telephone call from the secretary of Mr. Banusing who reminded that the loan of Merlyn and Osmea Azarraga, together with interest and penalties thereon, has not been paid. Since I had no available funds at that time, I offered to pay MB Lending by delivering to them a parcel of land which I own. Mr. Banusing's secretary, however, refused my offer for the reason that they are not interested in real estate. 11. In March 1992, I received a copy of the summons and of the complaint filed against me by MB Lending before the RTC-Iloilo. After learning that a complaint was filed against me, I instructed Sheila Gatia to go to MB Lending and reiterate my first offer to pay the outstanding balance of the principal obligation of Merlyn Azarraga in the amount of P30,000.00. 12. Ms. Gatia talked to the secretary of Mr. Banusing who referred her to Atty. Venus, counsel of MB Lending. 13. Atty. Venus informed Ms. Gatia that he will consult Mr. Banusing if my offer to pay the outstanding balance of the principal obligation loan (sic) of Merlyn and Osmea Azarraga is acceptable. Later, Atty. Venus informed Ms. Gatia that my offer is not acceptable to Mr. Banusing. The purported offer to pay made by petitioner can not be deemed sufficient and substantial in order to effectively discharge her from liability. There are a number of circumstances which conjointly inveigh against her aforesaid theory. 1. Respondent corporation cannot be faulted for not immediately demanding payment from petitioner. It was petitioner who initially requested that the creditor try to collect from her principal first, and she offered to pay only in case the creditor fails to collect. The delay, if any, was occasioned by the fact that respondent corporation merely acquiesced to the request of petitioner. At any rate, there was here no actual offer of payment to speak of but only a commitment to pay if the principal does not pay. 2. Petitioner made a second attempt to settle the obligation by offering a parcel of land which she owned. Respondent corporation was acting well within its rights when it refused to accept the offer. The debtor of a thing cannot compel the creditor to receive a different one, although the latter may be of the same value, or more valuable than that which is due. 54 The obligee is entitled to demand fulfillment of the obligation or performance as stipulated. A change of the object of the obligation would constitute novation requiring the express consent of the parties. 55 3. After the complaint was filed against her, petitioner reiterated her offer to pay the outstanding balance of the obligation in the amount of P30,000.00 but the same was likewise rejected. Again, respondent corporation cannot be blamed for refusing the amount being offered because it fell way below the amount it had computed, based on the stipulated interests and penalty charges, as owing and due from herein petitioner. A debt shall not be understood to have been paid unless the thing or service in which the obligation consists has been completely delivered or rendered, as the case may be. 56 In other words, the prestation

must be fulfilled completely. A person entering into a contract has a right to insist on its performance in all particulars. 57 Petitioner cannot compel respondent corporation to accept the amount she is willing to pay because the moment the latter accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, then the obligation shall be deemed fully complied with. 58 Precisely, this is what respondent corporation wanted to avoid when it continually refused to settle with petitioner at less than what was actually due under their contract. This notwithstanding, however, we find and so hold that the penalty charge of 3% per month and attorney's fees equivalent to 25% of the total amount due are highly inequitable and unreasonable. It must be remembered that from the principal loan of P30,000.00, the amount of P16,300.00 had already been paid even before the filing of the present case. Article 1229 of the Civil Code provides that the court shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. And, even if there has been no performance, the penalty may also be reduced if it is iniquitous or leonine. In a case previously decided by this Court which likewise involved private respondent M.B. Lending Corporation, and which is substantially on all fours with the one at bar, we decided to eliminate altogether the penalty interest for being excessive and unwarranted under the following rationalization: Upon the matter of penalty interest, we agree with the Court of Appeals that the economic impact of the penalty interest of three percent (3 %) per month on total amount due but unpaid should be equitably reduced. The purpose for which the penalty interest is intended that is, to punish the obligor will have been sufficiently served by the effects of compounded interest. Under the exceptional circumstances in the case at bar, e.g., the original amount loaned was only P15,000.00; partial payment of P8,600.00 was made on due date; and the heavy (albeit still lawful) regular compensatory interest, the penalty interest stipulated in the parties' promissory note is iniquitous and unconscionable and may be equitably reduced further by eliminating such penalty interest altogether. 59 Accordingly, the penalty interest of 3% per month being imposed on petitioner should similarly be eliminated. Finally, with respect to the award of attorney's fees, this Court has previously ruled that even with an agreement thereon between the parties, the court may nevertheless reduce such attorney's fees fixed in the contract when the amount thereof appears to be unconscionable or unreasonable. 60 To that end, it is not even necessary to show, as in other contracts, that it is contrary to morals or public policy. 61 The grant of attorney's fees equivalent to 25% of the total amount due is, in our opinion, unreasonable and immoderate, considering the minimal unpaid amount involved and the extent of the work involved in this simple action for collection of a sum of money. We, therefore, hold that the amount of P10,000.00 as and for attorney's fee would be sufficient in this case. 62 WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the MODIFICATION that the penalty interest of 3% per month is hereby deleted and the award of attorney's fees is reduced to P10,000.00.

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SO ORDERED.

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. 125059 March 17, 2000 FRANCISCO T. SYCIP, JR., petitioner, vs. COURT OF APPEALS and PEOPLE OF THE PHILIPPINES, respondents. QUISUMBING, J.: For review on certiorari is the decision of the Court of Appeals, dated February 29, 1996, in CA-G.R. CR No. 15993, which affirmed the judgment of the Regional Trial Court of Quezon City, Branch 95, in Criminal Cases Nos. Q-91-25910 to 15, finding petitioner guilty beyond reasonable doubt of violating B.P. Blg. 22, the Bouncing Checks Law. The facts in this case, as culled from the records, are as follows: On August 24, 1989, Francisco T. Sycip agreed to buy, on installment, from Francel Realty Corporation (FRC), a townhouse unit in the latter's project at Bacoor, Cavite. Upon execution of the contract to sell, Sycip, as required, issued to FRC, forty-eight (48) postdated checks, each in the amount of P9,304.00, covering 48 monthly installments. After moving in his unit, Sycip complained to FRC regarding defects in the unit and incomplete features of the townhouse project. FRC ignored the complaint. Dissatisfied, Sycip served on FRC two (2) notarial notices to the effect that he was suspending his installment payments on the unit pending compliance with the project plans and specifications, as approved by the Housing and Land Use Regulatory Board (HLURB). Sycip and 12 out of 14 unit buyers then filed a complaint with the HLURB. The complaint was dismissed as to the defects, but FRC was ordered by the HLURB to finish all incomplete features of its townhouse project. Sycip appealed the dismissal of the complaint as to the alleged defects. Notwithstanding the notarial notices, FRC continued to present for encashment Sycip's postdated checks in its possession. Sycip sent "stop payment orders" to the bank. When FRC continued to present the other postdated checks to the bank as the due date fell, the bank advised Sycip to close his checking account to avoid paying bank charges every time he made a "stop payment" order on the forthcoming checks. Due to the closure of petitioner's checking account, the drawee bank dishonored six postdated

checks. FRC filed a complaint against petitioner for violations of B.P. Blg. 22 involving said dishonored checks. On November 8, 1991, the Quezon City Prosecutor's Office filed with the RTC of Quezon City six Informations docketed as Criminal Cases No. Q-9125910 to Q-91-25915, charging petitioner for violation of B.P. Blg. 22. The accusative portion of the Information in Criminal Case No. Q-91-25910 reads: That on or about the 30th day of October 1990 in Quezon City, Philippines and within the jurisdiction of this Honorable Court, the said accused, did then and there, willfully, unlawfully and feloniously make, draw and issue in favor of Francel Realty Corporation a check 813514 drawn against Citibank, a duly established domestic banking institution in the amount of P9,304.00 Philippine Currency dated/postdated October 30, 1990 in payment of an obligation, knowing fully well at the time of issue that she/he did not have any funds in the drawee bank of (sic) the payment of such check; that upon presentation of said check to said bank for payment, the same was dishonored for the reason that the drawer thereof, accused Francisco T. Sycip, Jr. did not have any funds therein, and despite notice of dishonor thereof, accused failed and refused and still fails and refused (sic) to redeem or make good said check, to the damage and prejudice of the said Francel Realty Corporation in the amount aforementioned and in such other amount as may be awarded under the provisions of the Civil Code. 1 CONTRARY TO LAW. Criminal Cases No. Q-91-25911 to Q-91-25915, with Informations similarly worded as in Criminal Case No. Q-91-25910, except for the dates, and check 2 numbers were consolidated and jointly tried. When arraigned, petitioner pleaded "Not Guilty" to each of the charges. Trial then proceeded. The prosecution's case, as summarized by the trial court and adopted by the appellate court, is as follows: The prosecution evidence established that on or about August 24, 1989, at the office of the private complainant Francel Realty Corporation (a private domestic corporation engaged in the real estate business) at 822 Quezon Avenue, QC, accused Francisco Sycip, Jr. drew, issued, and delivered to private complainant Francel Realty Corporation (FRC hereinafter) six checks (among a number of other checks), each for P9,304.00 and drawn pay to the order of FRC and against Francisco's account no. 845515 with Citibank, to wit: Check No. 813514 dated October 30, 1990 (Exh. C), Check No. 813515 dated November 30, 1990 (Exh. D), Check No. 813518 dated February 28, 1991 (Exh. E), Check No. 813516 dated December 30, 1990 (Exh. F), Check No. 813517 dated January 30,

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1991 (Exh. G) and Check No. 813519 dated March 30, 1991 (Exh. H), as and in partial payment of the unpaid balance of the purchase price of the house and lot subject of the written contract executed and entered into by and between FRC as seller and Francisco as buyer on said date of August 24, 1989 (Exh. B, also Exh. 1). The total stipulated purchase price for the house and lot was P451,700.00, of which Francisco paid FRC in the sum of P135,000.00 as down payment, with Francisco agreeing and committing himself to pay the balance of P316,000.00 in 48 equal monthly installments of P9,304.00 (which sum already includes interest on successive monthly balance) effective September 30, 1989 and on the 30th day of each month thereafter until the stipulated purchase price is paid in full. The said six Citibank checks, Exhs. C thru H, as earlier indicated were drawn, issued, and delivered by Francisco in favor of FRC as and in partial payment of the said 48 equal monthly installments under their said contract (Exh. B, also Exh. 1). Sometime in September 1989, the Building Official's certificate of occupancy for the subject house a residential townhouse was issued (Exh. N) and Francisco took possession and started in the use and occupancy of the subject house and lot.1wphi1.nt When the subject six checks, Exhs. C thru H, were presented to the Citibank for payment on their respective due dates, they were all returned to FRC dishonored and unpaid for the reason: account closed as indicated in the drawee bank's stamped notations on the face and back of each check; in fact, as indicated in the corresponding record of Francisco's account no. 815515 with Citibank, said account already had a zero balance as early as September 14, 1990 (Exh. 1-5). Notwithstanding the fact that FRC, first thru its executive vice president and project manager and thereafter thru its counsel, had notified Francisco, orally and in writing, of the checks' dishonor and demanded from him the payment of the amount thereof, still Francisco did not pay or make good any 3 of the checks (Exhs. I thru K). . . The case for the defense, as summarized also by the trial court and adopted by the Court of Appeals, is as follows: The defense evidence in sum is to the effect that after taking possession and starting in the use and occupancy of the subject townhouse unit, Francisco became aware of its various construction defects; that he called the attention of FRC, thru its project manager, requesting that appropriate measures be forthwith instituted, but despite his several requests, FRC did not acknowledge, much less attend to them; that Francisco thus mailed to FRC a verified letter dated June 6, 1990 (Exh. 2) in sum giving notice that effective June

1990, he will cease and desist "from paying my monthly amortization of NINE THOUSAND THREE HUNDRED FOUR (P9,304.00) PESOS towards the settlement of my obligation concerning my purchase of Unit No. 14 of FRC Townhomes referred to above, unless and until your Office satisfactorily complete(s) the construction, renovation and/or repair of my townhouses ( sic) unit referred to above" and that should FRC "persist in ignoring my aforesaid requests, I shall, after five (5) days from your receipt of this Verified Notice, forthwith petition the [HLURB] for Declaratory Relief and Consignation to grant me provisional relief from my obligation to pay my monthly amortization to your good Office and allow me to deposit said amortizations with [HLURB] pending your completion of FRC Townhomes Unit in question"; that Francisco thru counsel wrote FRC, its president, and its counsel notices/letters in sum to the effect that Francisco and all other complainants in the [HLURB] case against FRC shall cease and desist from paying their monthly amortizations unless and until FRC satisfactorily completes the construction of their units in accordance with the plans and specifications thereof as approved by the [HLURB] and as warranted by the FRC in their contracts and that the dishonor of the subject checks was a natural consequence of such suspension of payments, and also advising FRC not to encash or deposit all other postdated checks issued by Francisco and the other complainants and still in FRC's possession (Exhs. 3 thru 5); that Francisco and the other complainants filed the [HLURB] case against FRC and later on a decision was handed down therein and the same is pending appeal with the Board (Exhs. 6, 7, & 12 thru 17, also Exh. 8); that as of the time of presentation of the subject checks for payment by the drawee bank, Francisco had at least P150,000.00 cash or credit with Citibank (Exhs. 10 & 11) and, that Francisco closed his account no. 845515 with Citibank conformably with the bank's customer service officer's advice to close his said account instead of making a stoppayment order for each of his more than 30 post-dated checks still in FRC's possession at the time, so as to avoid the P600.00-penalty imposed by the bank for every check subject of a stop-payment 4 order. On March 11, 1994, the trial court found petitioner guilty of violating Section 1 of B.P. Blg. 22 in each of the six cases, disposing as follows: WHEREFORE, in each of Crim. Cases Nos. Q-91-25910, Q-9125911, Q-91-25912, Q-91-25913, Q-91-25914 and Q-91-25915, the Court finds accused Francisco T. Sycip, Jr. guilty beyond reasonable doubt of a violation of Sec. 1 of Batas Pambansa Blg. 22 and, accordingly, he is hereby sentenced in and for each case to suffer imprisonment of thirty (30) days and pay the costs. Further, the

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accused is hereby ordered to pay the offended party, Francel Realty Corporation, as and for actual damages, the total sum of fifty-five thousand eight hundred twenty four pesos (P55,824.00) with interest thereon at the legal rate from date of commencement of these actions, that is, November 8, 1991, until full payment thereof. SO ORDERED. Dissatisfied, Sycip appealed the decision to the Court of Appeals. His appeal was docketed as CA-G.R. CR No. 15993. But on February 29, 1996, the appellate court ruled: On the basis of the submission of the People, We find and so hold that appellant has no basis to rely on the provision of PD 957 to justify the non-payment of his obligation, the closure of his checking account and the notices sent by him to private complainant that he 6 will stop paying his monthly amortizations. Petitioner filed a motion for reconsideration on March 18, 1996, but it was denied per Resolution dated April 22, 1996. Hence, the instant petition anchored on the following assignment of errors: I THE APPELLATE COURT ERRED IN AFFIRMING THE DECISION OF THE LOWER COURT FINDING THAT THE ACCUSEDAPPELLANT DID NOT HAVE ANY JUSTIFIABLE CAUSE TO STOP OR OTHERWISE PREVENT THE PAYMENT OF THE SUBJECT CHECKS BY THE DRAWEE BANK. II THE LOWER COURT ERRED IN FINDING THAT THE ACCUSEDAPPELLANT MUST BE DEEMED TO HAVE WAIVED HIS RIGHT TO COMPLAIN AGAINST THE DEVELOPMENT OF THE TOWNHOUSE UNIT AND THE TOWNHOUSE PROJECT. III THE APPELLATE COURT ERRED IN AFFIRMING THE DECISION OF THE LOWER COURT THAT THE ACCUSED-APPELLANT DID NOT HAVE SUFFICIENT FUNDS WITH THE DRAWEE BANK TO COVER THE SUBJECT CHECKS UPON PRESENTMENT FOR PAYMENT THEREOF. IV THE APPELLATE COURT ERRED IN AFFIRMING THE DECISION OF THE LOWER COURT CONVICTING THE ACCUSEDAPPELLANT AND AWARDING DAMAGES IN FAVOR OF PRIVATE 7 COMPLAINANT. The principal issue before us is whether or not the Court of Appeals erred in affirming the conviction of petitioner for violation of the Bouncing Checks Law. Petitioner argues that the court a quo erred when it affirmed his conviction for violation of B.P. Blg. 22, considering that he had cause to stop payment of

the checks issued to respondent. Petitioner insists that under P.D. No. 957, the buyer of a townhouse unit has the right to suspend his amortization payments, should the subdivision or condominium developer fail to develop or complete the project in accordance with duly-approved plans and specifications. Given the findings of the HLURB that certain aspects of private complainant's townhouse project were incomplete and undeveloped, the exercise of his right to suspend payments should not render him liable under B.P. Blg. 22. The Solicitor General argues that since what petitioner was charged with were violations of B.P. Blg. 22, the intent and circumstances surrounding the 8 issuance of a worthless check are immaterial. The gravamen of the offense charged is the act itself of making and issuing a worthless check or one that is dishonored upon its presentment for payment. Mere issuing of a bad check is malum prohibitum, pernicious and inimical to public welfare. In his view, P.D. No. 957 does not provide petitioner a sufficient defense against the charges against him. 9 Under the provisions of the Bouncing Checks Law (B.P. No. 22), an offense is committed when the following elements are present: (1) the making, drawing and issuance of any check to apply for account or for value; (2) the knowledge of the maker, drawer, or issuer that at the time of issue he does not have sufficient funds in or credit with the drawee bank for the payment of such check in full upon its presentment; and (3) the subsequent dishonor of the check by the drawee bank for insufficiency of funds or credit or dishonor for the same reason had not the drawer, without any valid cause, ordered the bank to stop 10 payment. In this case, we find that although the first element of the offense exists, the other elements have not been established beyond reasonable doubt. To begin with, the second element involves knowledge on the part of the issuer at the time of the check's issuance that he did not have enough funds or credit in the bank for payment thereof upon its presentment. B.P. No. 22 creates a presumption juris tantum that the second element prima facie exists when the first and third elements of the offense are 11 present. But such evidence may be rebutted. If not rebutted or contradicted, it will suffice to sustain a judgment in favor of the issue, which it 12 supports. As pointed out by the Solicitor General, such knowledge of the insufficiency of petitioner's funds "is legally presumed from the dishonor of 13 his checks for insufficiency of funds." But such presumption cannot hold if there is evidence to the contrary. In this case, we find that the other party has presented evidence to contradict said presumption. Hence, the prosecution is duty bound to prove every element of the offense charged, and not merely rely on a rebuttable presumption.

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Admittedly, what are involved here are postdated checks. Postdating simply means that on the date indicated on its face, the check would be properly 14 funded, not that the checks should be deemed as issued only then. The checks in this case were issued at the time of the signing of the Contract to Sell in August 1989. But we find from the records no showing that the time said checks were issued, petitioner had knowledge that his deposit or credit in the bank would be insufficient to cover them when presented for 15 encashment. On the contrary, there is testimony by petitioner that at the time of presentation of the checks, he had P150,000,00 cash or credit with Citibank. As the evidence for the defense showed, the closure of petitioner's Account No. 845515 with Citibank was not for insufficiency of funds. It was made upon the advice of the drawee bank, to avoid payment of hefty bank charges each time petitioner issued a "stop payment" order to prevent encashment of 16 postdated checks in private respondent's possession. Said evidence contradicts the prima facie presumption of knowledge of insufficiency of funds. But it establishes petitioner's state of mind at the time said checks were issued on August 24, 1989. Petitioner definitely had no knowledge that his funds or credit would be insufficient when the checks would be presented for encashment. He could not have foreseen that he would be advised by his own bank in the future, to close his account to avoid paying the hefty banks charges that came with each "stop payment" order issued to prevent private respondent from encashing the 30 or so checks in its possession. What the prosecution has established is the closure of petitioner's checking account. But this does not suffice to prove the second element of the offense under B.P. Blg. 22, which explicitly requires "evidence of knowledge of insufficient funds" by the accused at the time the check or checks are presented for encashment. To rely on the presumption created by B.P. No. 22 as the prosecution did in this case, would be to misconstrue the import of requirements for conviction under the law. It must be stressed that every element of the offense must be proved beyond reasonable doubt, never presumed. Furthermore, penal statutes are strictly construed against the State and liberally in favor of the accused. Under the Bouncing Checks Law, the punishable act must come 17 clearly within both the spirit and letter of the statute. While B.P. Blg. 22 was enacted to safeguard the interest of the banking 18 system, it is difficult to see how conviction of the accused in this case will protect the sanctity of the financial system. Moreover, protection must also 19 be afforded the interest of townhouse buyers under P.D. No. 957. A statute must be construed in relation to other laws so as to carry out the legitimate 20 ends and purposes intended by the legislature. Courts will not strictly follow the letter of one statute when it leads away from the true intent of legislature and when ends are inconsistent with the general purpose of the

act. More so, when it will mean the contravention of another valid statute. Both laws have to be reconciled and given due effect. Note that we have upheld a buyer's reliance on Section 23 of P.D. 957 to suspend payments until such time as the owner or developer had fulfilled its 22 obligations to the buyer. This exercise of a statutory right to suspend installment payments, is to our mind, a valid defense against the purported violations of B.P. Blg. 22 that petitioner is charged with. Given the findings of the HLURB as to incomplete features in the construction of petitioner's and other units of the subject condominium bought on installment from FRC, we are of the view that petitioner had a valid cause to order his bank to stop payment. To say the least, the third element of "subsequent dishonor of the check. . . without valid cause" appears to us not established by the prosecution. As already stated, the prosecution tried to establish the crime on a prima facie presumption in B.P. Blg. 22. Here that presumption is unavailing, in the presence of a valid cause to stop payment, thereby negating the third element of the crime.1wphi1 Offenses punished by a special law, like the Bouncing Checks Law, are not subject to the Revised Penal Code, but the Code is supplementary to such a 23 law. We find nothing in the text of B.P. Blg. 22, which would prevent the 24 Revised Penal Code from supplementing it. Following Article 11 (5) of the Revised Penal Code, petitioner's exercise of a right of the buyer under Article 23 of P.D. No. 957 is a valid defense to the charges against him. WHEREFORE, the instant petition is GRANTED. Petitioner Francisco T. Sycip, Jr., is ACQUITTED of the charges against him under Batas Pambansa Blg. 22, for lack of sufficient evidence to prove the offenses charged beyond reasonable doubt. No pronouncement as to costs. SO ORDERED.

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