SECOND DIVISION Notwithstanding three extensions granted by plaintiff to

defendant Pacific, the latter failed to finish the contracted works.

FILINVEST LAND, INC., G.R. No.138980 (Annexes G, I and K, Complaint). On 16 October 1979, plaintiff wrote
P e t i t i o n e r, defendant Pacific advising the latter of its intention to takeover the
Present: project and to hold said defendant liable for all damages which it had
incurred and will incur to finish the project. (Annex L, Complaint).
PUNO,
- versus - Chairman, On 26 October 1979, plaintiff submitted its claim against
AUSTRIA-MARTINEZ, defendant Philamgen under its performance and guarantee bond
CALLEJO, SR., (Annex M, Complaint) but Philamgen refused to acknowledge its
TINGA and liability for the simple reason that its principal, defendant Pacific,
HON. COURT OF APPEALS, CHICO-NAZARIO, JJ. refused to acknowledge liability therefore. Hence, this action.
PHILIPPINE AMERICAN GENERAL
INSURANCE COMPANY, and PACIFIC In defense, defendant Pacific claims that its failure to finish
EQUIPMENT CORPORATION, Promulgated: the contracted work was due to inclement weather and the fact that
R e s p o n d e n t s. several items of finished work and change order which plaintiff
September 20, 2005 refused to accept and pay for caused the disruption of work. Since
x--------------------------------------------------x the contractual relation between plaintiff and defendant Pacific
DECISION created a reciprocal obligation, the failure of the plaintiff to pay its
CHICO-NAZARIO, J.: progressing bills estops it from demanding fulfillment of what is
incumbent upon defendant Pacific. The acquiescence by plaintiff in
This is a petition for review on certiorari of the Decision[1] of the Court of granting three extensions to defendant Pacific is likewise a waiver of
the formers right to claim any damages for the delay. Further, the
unilateral and voluntary action of plaintiff in preventing defendant
Appeals dated 27 May 1999 affirming the dismissal by the Regional Trial Court of
Pacific from completing the work has relieved the latter from the
obligation of completing the same.
Makati, Branch 65,[2] of the complaint for damages filed by Filinvest Land, Inc.
On the other hand, Philamgen contends that the various
(Filinvest) against herein private respondents Pacific Equipment Corporation (Pecorp) amendments made on the principal contract and the deviations in
the implementation thereof which were resorted to by plaintiff and
and Philippine American General Insurance Company. co-defendant Pacific without its (defendant Philamgens) written
consent thereto, have automatically released the latter from any or
all liability within the purview and contemplation of the coverage of
the surety bonds it has issued. Upon agreement of the parties to
appoint a commissioner to assist the court in resolving the issues
The essential facts of the case, as recounted by the trial court, are as follows:
confronting the parties, on 7 July 1981, an order was issued by then
Presiding Judge Segundo M. Zosa naming Architect Antonio
Dimalanta as Court Commissioner from among the nominees
On 26 April 1978, Filinvest Land, Inc. (FILINVEST, for submitted by the parties to conduct an ocular inspection and to
brevity), a corporation engaged in the development and sale of determine the amount of work accomplished by the defendant Pacific
residential subdivisions, awarded to defendant Pacific Equipment and the amount of work done by plaintiff to complete the project.
Corporation (PACIFIC, for brevity) the development of its residential
subdivisions consisting of two (2) parcels of land located at Payatas, On 28 November 1984, the Court received the findings
Quezon City, the terms and conditions of which are contained in an made by the Court Commissioner. In arriving at his findings, the
Agreement. (Annex A, Complaint). To guarantee its faithful Commissioner used the construction documents pertaining to the
compliance and pursuant to the agreement, defendant Pacific posted project as basis. According to him, no better basis in the work done
two (2) Surety Bonds in favor of plaintiff which were issued by or undone could be made other than the contract billings and
defendant Philippine American General Insurance (PHILAMGEN, for payments made by both parties as there was no proper procedure
brevity). (Annexes B and C, Complaint). followed in terminating the contract, lack of inventory of work
accomplished, absence of appropriate record of work progress
(logbook) and inadequate documentation and system of construction
management. On the basis of the commissioners report, the trial court dismissed Filinvests

Based on the billings of defendant Pacific and the payments

complaint as well as Pecorps counterclaim. It held:
made by plaintiff, the work accomplished by the former amounted
to P11,788,282.40 with the exception of the last billing (which was
not acted upon or processed by plaintiff) in the amount
of P844,396.42. The total amount of work left to be accomplished by In resolving this case, the court observes that the
plaintiff was based on the original contract amount less value of work appointment of a Commissioner was a joint undertaking among the
accomplished by defendant Pacific in the amount of P681,717.58 parties. The findings of facts of the Commissioner should therefore
(12,470,000-11,788,282.42). not only be conclusive but final among the parties. The court
therefore agrees with the commissioners findings with respect to
As regards the alleged repairs made by plaintiff on the
construction deficiencies, the Court Commissioner found no sufficient 1. Cost to repair deficiency or
basis to justify the same. On the other hand, he found the additional defect P532,324.02
work done by defendant Pacific in the amount of P477,000.00 to be 2. Unpaid balance of work done by defendant
in order. - P1,939,191.67
3. Additional work/change order (due to
On 01 April 1985, plaintiff filed its objections to the defendant) P475,000.00
Commissioners Resolution on the following grounds:
The unpaid balance due defendant therefore
a) Failure of the commissioner to conduct a is P1,939,191.67. To this amount should be added additional work
joint survey which according to the latter is indispensable to arrive performed by defendant at plaintiffs instance in the sum
at an equitable and fair resolution of the issues between the parties; of P475,000.00. And from this total of P2,414,191.67 should be
deducted the sum of P532,324.01 which is the cost to repair the
b) The cost estimates of the commissioner were deficiency or defect in the work done by defendant. The
based on pure conjectures and contrary to the evidence; and, commissioner arrived at the figure of P532,324.01 by getting the
average between plaintiffs claim of P758,080.37 and defendants
c) The commissioner made conclusions of law allegation of P306,567.67. The amount due to defendant per the
which were beyond his assignment or capabilities. commissioners report is therefore P1,881,867.66.

In its comment, defendant Pacific alleged that the failure to
conduct joint survey was due to plaintiffs refusal to cooperate. In
fact, it was defendant Pacific who initiated the idea of conducting a
joint survey and inventory dating back 27 November 1983. And even
assuming that a joint survey were conducted, it would have been an
exercise in futility because all physical traces of the actual conditions
then obtaining at the time relevant to the case had already been
obliterated by plaintiff.
On 15 August 1990, a Motion for Judgment Based on the
Commissioners Resolution was filed by defendant Pacific.
On 11 October 1990, plaintiff filed its opposition thereto
which was but a rehash of objections to the commissioners report
earlier filed by said plaintiff.[3]
Although the said amount of P1,881,867.66 would be owing
to defendant Pacific, the fact remains that said defendant was in
delay since April 25, 1979. The third extension agreement
of September 15, 1979 is very clear in this regard. The pertinent
paragraphs read:
a) You will complete all the unfinished works
not later than Oct. 15, 1979. It is agreed and
understood that this date shall DEFINITELY
be the LAST and FINAL extension & there will
be no further extension for any cause
whatsoever.
b) We are willing to waive all penalties for delay
which have accrued since April 25,
1979 provided that you are able to finish all
the items of the contracted works as per
revised CPM; otherwise you shall continue to
 be liable to pay the penalty up to the time that
all the contracted works shall have been
actually finished, in addition to other damages
which we may suffer by reason of the delays
incurred.
Defendant Pacific therefore became liable for delay when it did not
finish the project on the date agreed on October 15, 1979. The court
however, finds the claim of P3,990,000.00 in the form of penalty by
reason of delay (P15,000.00/day from April 25, 1979 to Jan. 15,
1980) to be excessive. A forfeiture of the amount due defendant
from plaintiff appears to be a reasonable penalty for the delay in
finishing the project considering the amount of work already
performed and the fact that plaintiff consented to three prior
extensions.
The foregoing considered, this case is dismissed. The counterclaim
is likewise dismissed.
No Costs.[4]
The Court of Appeals, finding no reversible error in the appealed decision,
affirmed the same.
Hence, the instant petition grounded solely on the issue of whether or not the
liquidated damages agreed upon by the parties should be reduced considering that:
(a) time is of the essence of the contract; (b) the liquidated damages was fixed by the
parties to serve not only as penalty in case Pecorp fails to fulfill its obligation on time,
but also as indemnity for actual and anticipated damages which Filinvest may suffer by
reason of such failure; and (c) the total liquidated damages sought is only 32% of the
total contract price, and the same was freely and voluntarily agreed upon by the
parties.
At the outset, it should be stressed that as only the issue of liquidated
damages has been elevated to this Court, petitioner Filinvest is deemed to have
acquiesced to the other matters taken up by the courts below. Section 1, Rule 45 of
the 1997 Rules of Court states in no uncertain terms that this Courts jurisdiction in
petitions for review on certiorari is limited to questions of law which must be distinctly
set forth.[5] By assigning only one legal issue, Filinvest has effectively cordoned off any
discussion into the factual issue raised before the Court of Appeals.[6] In effect, Filinvest
has yielded to the decision of the Court of Appeals, affirming that of the trial court, in
deferring to the factual findings of the commissioner assigned to the parties case.
Besides, as a general rule, factual matters cannot be raised in a petition for review
on certiorari. This Court at this stage is limited to reviewing errors of law that may have
been committed by the lower courts.[7] We do not perceive here any of the exceptions
to this rule; hence, we are restrained from conducting further scrutiny of the findings
of fact made by the trial court which have been affirmed by the Court of Appeals. Verily,
factual findings of the trial court, especially when affirmed by the Court of Appeals, are
binding and conclusive on the Supreme Court.[8] Thus, it is settled that:
(a) Based on Pecorps billings and the payments made by Filinvest,
the balance of work to be accomplished by Pecorp amounts
to P681,717.58 representing 5.47% of the contract work.
This means to say that Pecorp, at the time of the
termination of its contract, accomplished 94.53% of the
contract work;
(b) The unpaid balance of work done by Pecorp amounts
to P1,939,191.67;
(c) The additional work/change order due Pecorp amounts
to P475,000.00;

(d) The cost to repair deficiency or defect, which is for the account
of Pecorp, is P532,324.02; and
(e) The total amount due Pecorp is P1,881,867.66.
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.
Coming now to the main matter, Filinvest argues that the penalty in its entirety should

be respected as it was a product of mutual agreement and it represents only 32% of

As a general rule, courts are not at liberty to ignore the freedom of the parties
the P12,470,000.00 contract price, thus, not shocking and unconscionable under the

to agree on such terms and conditions as they see fit as long as they are not contrary
circumstances. Moreover, the penalty was fixed to provide for actual or anticipated

to law, morals, good customs, public order or public policy.[13] Nevertheless, courts may
liquidated damages and not simply to ensure compliance with the terms of the contract;

equitably reduce a stipulated penalty in the contract in two instances: (1) if the principal
hence, pursuant to Laureano v. Kilayco,[9] courts should be slow in exercising the

obligation has been partly or irregularly complied; and (2) even if there has been no
authority conferred by Art. 1229 of the Civil Code.

compliance if the penalty is iniquitous or unconscionable in accordance with Article

1229 of the Civil Code which provides:

We are not swayed.

Art. 1229. The judge shall equitably reduce the penalty

when the principal obligation has been partly or irregularly complied
There is no question that the penalty of P15,000.00 per day of delay was 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
mutually agreed upon by the parties and that the same is sanctioned by law. A penal unconscionable.

clause is an accessory undertaking to assume greater liability in case of breach.[10] It

is attached to an obligation in order to insure performance[11] and has a double

In herein case, the trial court ruled that the penalty charge for delay pegged
function: (1) to provide for liquidated damages, and (2) to strengthen the coercive
at P15,000.00 per day of delay in the aggregate amount of P3,990,000.00 -- was
force of the obligation by the threat of greater responsibility in the event of
excessive and accordingly reduced it to P1,881,867.66 considering the amount of work
breach.[12] Article 1226 of the Civil Code states:
already performed and the fact that [Filinvest] consented to three (3) prior extensions.

The Court of Appeals affirmed the ruling but added as well that the penalty was
unconscionable as the construction was already not far from completion. Said the Court
of Appeals:
Turning now to plaintiffs appeal, We likewise agree with the
trial court that a penalty interest of P15,000.00 per day of delay as
liquidated damages or P3,990,000.00 (representing 32% penalty of
the P12,470,000.00 contract price) is unconscionable considering
that the construction was already not far from completion. Penalty
interests are in the nature of liquidated damages and may be
equitably reduced by the courts if they are iniquitous or
unconscionable (Garcia v. Court of Appeals, 167 SCRA 815, Lambert
v. Fox, 26 Phil. 588). 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. 1229, New Civil Code). Moreover, plaintiffs right
to indemnity due to defendants delay has been cancelled by its
obligations to the latter consisting of unpaid works.
This Court finds no fault in the cost estimates of the court-
appointed commissioner as to the cost to repair deficiency or defect
in the works which was based on the average between plaintiffs
claim of P758,080.37 and defendants P306,567.67 considering the
following factors: that plaintiff did not follow the standard practice of
joint survey upon take over to establish work already accomplished,
balance of work per contract still to be done, and estimate and
inventory of repair (Exhibit H). As for the cost to finish the remaining
works, plaintiffs estimates were brushed aside by the commissioner
on the reasoned observation that plaintiffs cost estimate for work (to
be) done by the plaintiff to complete the project is based on a
contract awarded to another contractor (JPT), the nature and
magnitude of which appears to be inconsistent with the basic
contract between defendant PECORP and plaintiff FILINVEST.[14]
We are hamstrung to reverse the Court of Appeals as it is rudimentary that
the application of Article 1229 is essentially addressed to the sound discretion of the
court.[15]As it is settled that the project was already 94.53% complete and that Filinvest
did agree to extend the period for completion of the project, which extensions Filinvest
included in computing the amount of the penalty, the reduction thereof is clearly
warranted.
Filinvest, however, hammers on the case of Laureano v. Kilayco,[16] decided
in 1915, which cautions courts to distinguish between two kinds of penalty clauses in
order to better apply their authority in reducing the amount recoverable. We held
therein that:
. . . [I]n any case wherein there has been a partial or
irregular compliance with the provisions in a contract for special
indemnification in the event of failure to comply with its
terms, courts will rigidly apply the doctrine of strict
construction against the enforcement in its entirety of the
indemnification, where it is clear from the terms of the
contract that the amount or character of the indemnity is fixed
without regard to the probable damages which might be anticipated
as a result of a breach of the terms of the contract; or, in other
words, where the indemnity provided for is essentially a mere
penalty having for its principal object the enforcement of compliance
with the contract. But the courts will be slow in exercising the
jurisdiction conferred upon them in article 1154 [17] so as to
modify the terms of an agreed upon indemnification where it appears
that in fixing such indemnification the parties had in mind a fair and
reasonable compensation for actual damages anticipated as a result
of a breach of the contract, or, in other words, where the principal
purpose of the indemnification agreed upon appears to have been to
provide for the payment of actual anticipated and liquidated
damages rather than the penalization of a breach of the contract.
(Emphases supplied)
Filinvest contends that the subject penalty clause falls under the second
type, i.e., the principal purpose for its inclusion was to provide for payment of actual
anticipated and liquidated damages rather than the penalization of a breach of the
contract. Thus, Filinvest argues that had Pecorp completed the project on time, it
(Filinvest) could have sold the lots sooner and earned its projected income that would legal results are concerned and that either may be recovered without the necessity of

have been used for its other projects. proving actual damages and both may be reduced when proper.[19]

Unfortunately for Filinvest, the above-quoted doctrine is inapplicable to herein case. Finally, Filinvest advances the argument that while it may be true that courts may

The Supreme Court in Laureano instructed that a distinction between a penalty clause mitigate the amount of liquidated damages agreed upon by the parties on the basis of

imposed essentially as penalty in case of breach and a penalty clause imposed as the extent of the work done, this contemplates a situation where the full amount of

indemnity for damages should be made in cases where there has been neither partial damages is payable in case of total breach of contract. In the instant case, as the

nor irregular compliance with the terms of the contract. In cases where there has been penalty clause was agreed upon to answer for delay in the completion of the project

partial or irregular compliance, as in this case, there will be no substantial difference considering that time is of the essence, the parties thus clearly contemplated the

between a penalty and liquidated damages insofar as legal results are payment of accumulated liquidated damages despite, and precisely because of, partial

concerned.[18] The distinction is thus more apparent than real especially in the light of performance.[20] In effect, it is Filinvests position that the first part of Article 1229 on

certain provisions of the Civil Code of the Philippines which provides in Articles 2226 partial performance should not apply precisely because, in all likelihood, the penalty

and Article 2227 thereof: clause would kick in in situations where Pecorp had already begun work but could not

finish it on time, thus, it is being penalized for delay in its completion.

Art. 2226. Liquidated damages are those agreed upon by
the parties to a contract to be paid in case of breach thereof.

Art. 2227. Liquidated damages, whether intended as an

The above argument, albeit sound,[21] is insufficient to reverse the ruling of the Court
indemnity or a penalty, shall be equitably reduced if they are
iniquitous or unconscionable.
of Appeals. It must be remembered that the Court of Appeals not only held that the

penalty should be reduced because there was partial compliance but categorically

Thus, we lamented in one case that (t)here is no justification for the Civil Code to make stated as well that the penalty was unconscionable. Otherwise stated, the Court of

an apparent distinction between a penalty and liquidated damages because the settled Appeals affirmed the reduction of the penalty not simply because there was partial

rule is that there is no difference between penalty and liquidated damages insofar as compliance per se on the part of Pecorp with what was incumbent upon it but, more
fundamentally, because it deemed the penalty unconscionable in the light of Before we write finis to this legal contest that had spanned across two and a

Pecorps 94.53% completion rate. half decades, we take note of Pecorps own grievance. From its Comment and

In Ligutan v. Court of Appeals,[22] we pointed out that the question of whether Memorandum, Pecorp, likewise, seeks affirmative relief from this Court by praying that

a penalty is reasonable or iniquitous can be partly subjective and partly objective as its not only should the instant case be dismissed for lack of merit, but that Filinvest should

resolution would depend on such factors as, but not necessarily confined to, the type, likewise be made to pay what the Court Commissioner found was due defendant in the

extent and purpose of the penalty, the nature of the obligation, the mode of breach total amount of P2,976,663.65 plus 12% interest from 1979 until full payment thereof

and its consequences, the supervening realities, the standing and relationship of the plus attorneys fees.[24] Pecorp, however, cannot recover that which it seeks as we had

parties, and the like, the application of which, by and large, is addressed to the sound already denied, in a Resolution dated 21 June 2000, its own petition for review of

discretion of the court.[23] the 27 May 1999 decision of the Court of Appeals. Thus, as far as Pecorp is concerned,

the ruling of the Court of Appeals has already attained finality and can no longer be

In herein case, there has been substantial compliance in good faith on the part of disturbed.

Pecorp which renders unconscionable the application of the full force of the penalty

especially if we consider that in 1979 the amount of P15,000.00 as penalty for delay WHEREFORE, premises considered, the Decision of the Court of Appeals

per day was quite steep indeed. Nothing in the records suggests that Pecorps delay in dated 27 May 1999 is AFFIRMED. No pronouncement as to costs.

the performance of 5.47% of the contract was due to it having acted negligently or in SO ORDERED.

bad faith. Finally, we factor in the fact that Filinvest is not free of blame either as it

likewise failed to do that which was incumbent upon it, i.e., it failed to pay Pecorp for

work actually performed by the latter in the total amount of P1,881,867.66. Thus, all

things considered, we find no reversible error in the Court of Appeals exercise of

discretion in the instant case.

 [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 attorneys fees if the matter were indorsed to a lawyer for
collection or if a suit were instituted to enforce payment. The obligation matured on 8
September 1981; the bank, however, granted an extension but only up until 29
December 1981.
Despite several demands from the bank, petitioners failed to settle the debt
which, as of 20 May 1982, amounted to P114,416.10. On 30 September 1982, the bank
sent a final demand letter to petitioners informing them that they had five days within
which to make full payment. Since petitioners still defaulted on their obligation, the
bank filed on 3 November 1982, with the Regional Trial Court of Makati, Branch 143, a
complaint for recovery of the due amount.
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 dispositiveportion 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 attorneys 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 fees. In its decision[3] 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-appellees 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.
xxxxxxxxx
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.
xxxxxxxxx
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 attorneys 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 Llanawith 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 attorneys 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 respondents
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 obligation[11] and to provide, in effect,
for what could be the liquidated damages resulting from such a breach. The obligor
would then be bound to pay the stipulated indemnity without the necessity of proof on
the existence and on the measure of damages caused by the breach. [12] Although a
court may not at liberty ignore the freedom of the parties to agree on such terms and
conditions as they see fit that contravene neither law nor morals, good customs, public
order or public policy, a stipulated penalty, nevertheless, may be equitably reduced by
the courts if it is iniquitous or unconscionable or if the principal obligation has been
partly or irregularly complied with.[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 debtors 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]
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 attorneys 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%
attorneys 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 -
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 debtor[27] 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.

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 SO ORDERED.
entertained. Considering that the instant motion is already a second motion for Melo, (Chairman), Panganiban, Sandoval-Gutierrez, and Carpio, JJ., concur.
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. 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 partys
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
 FIRST DIVISION
[G.R. No. 8254. March 3, 1914. ]
MARIANO GONZAGA ET AL., Plaintiffs-Appellants, v. FELISA GARCIA ET
AL., Defendants-Appellees.
Perfecto Gabriel for Appellants.
Fernando Manikis for Appellees.
SYLLABUS
1. VENDOR AND PURCHASER; EXECUTION SALE OF RIGHT TO REPURCHASE;
SUBSEQUENT SALE BY EXECUTION PURCHASER. — A judgment creditor purchased
the right to repurchase under a pacto de retro sale of land of his judgment debtor, at
an execution sale. The period for redemption of the interest thus sold under
execution expired without the judgment debtor’s having exercised his right of
redemption. The latter did, however, tender the repurchase price under the pacto de
retro contract to the vendee, who accepted it, at the same time canceling the
annotation of the said contract in the property registry. Petitioner’s claim of
ownership of the land, based on a subsequent purchase from the judgment creditor,
was invalid, as the latter did not acquire the fee by the repurchase of the land under
the pacto de retro contract by the judgment debtor. Article 1158 of the Civil Code is
not applicable to this case for the reason that the judgment creditor was not a debtor
of the pacto de retro vendee. Having acquired the right to repurchase, the exercise of
this right was optional with him.
DECISION
TRENT, J. :
An appeal form a decision of the Court of Land Registration, denying the registration,
in the name of the appellants, of a parcel of land. The location and identity of the
land are undisputed.
The admitted facts are these: Rufino Francisco acquired the land in question by
inheritance from the registered owner. On August 20, 1909, he sold it with the right
to repurchase the same within one year and with the understanding that the time
could be extended one year more, to Vicente San Martin. This sale was registered on
August 26, 1909. On August 30, 1909, Francisco’s right to repurchase was attached
by one Del Rosario. This right of repurchase was sold under execution on December
29, 1909, at a sheriff’s sale, Del Rosario being the purchaser. The certificate of sale
was registered January 6, 1910, and Francisco having failed to exercise his right of
redemption within one year, the sheriff issued his deed to Del Rosario for the interest
of Francisco in the land thus sold at the execution sale. This deed was registered
January 27, 1911. In November or December, 1911, Del Rosario sold the land to
Mariano Gonzaga. In the meantime Martin appeared before the Court of Land
Registration and asked that the inscription in the registry of the sale to him under
pacto de retro be canceled for the reason that Francisco had paid him the redemption
price. This was done on August 22, 1910. On November 9, 1908, Francisco sold the
same land to Jose de Lavengco. The document evidencing this sale was never
registered. The opponents are the widow and minor children of Jose de Lavengco.
Neither Jose nor the opponents ever entered into the possession of the property. The
appellants knew nothing of the sale by Rufino Francisco to Jose de Lanvengco. Did
the appellants acquire a registerable title?
Section 6, paragraph 5. of Act No. 1108, section 2283 (e), Compilation, provides that:
"Instruments known as pacto de retro, made under sections fifteen hundred and
seven and fifteen hundred and twenty of the Spanish Civil Code in force in these
Islands, may be registered under this title, and application for registration thereof
may be made by the owner who executed the pacto de retro sale under the same
conditions and in the same manner as mortgagors are authorized to make application
for registration."cralaw virtua1aw library
The right to repurchase real estate sold under pacto de retro is subject to execution
and may be sold at public auction to satisfy a judgment against the owner of such a
right. By virtue of the sheriff’s sale of December 29, 1909, Del Rosario acquired the
right to repurchase the land in question from Martin. In November or December,
1911, Del Rosario sold all of his interest to the appellants. The only interest acquired
by Del Rosario at the sheriff’s sale was the right to repurchase from Martin because
this was the only interest that Francisco had at that time. Francisco repurchased the
land several months before Del Rosario sold his interest to the appellants. It is
therefore clear that the appellants acquired no interest whatever in the land unless
the repurchase made by Francisco vested the title in Del Rosario, the then owner of
the right to repurchase. We think that Francisco’s repurchase did not have this effect.
When Francisco’s right to repurchase was sold at public auction the judgment against
him was completely satisfied, and he was therefore a stranger to the proceedings.
But it is said that under the provisions of article 1158 of the Civil Code the repurchase
by Francisco was a payment for Del Rosario and that the former may recover from
the latter the price paid.
This article reads: "Any person, whether he has an interested or not in the fulfillment
of the obligation, and whether the debtor knows and approves it or is not aware
thereof, can make the payment. The person paying for the account of another may
recover from the debtor what he may have paid, unless he has done it against his
express will. In such case he can only recover from the debtor in so far as the
payment has been useful to him."cralaw virtua1aw library
Del Rosario was not a debtor. He was under no obligations to repurchase the land
from Martin. He had a right to do so but whether he exercised this right or not
depended upon his own volition. Article 1158 is not for these reasons applicable.
The judgment appealed from is therefore affirmed, with costs against the appellants.