Ligutan vs CA DOCTRINE: penalty clause is an accessory undertaking to assume greater liability on the part of the obligor in case of breach.

although parties are free to stipulate in their contract the terms, courts may reduce interest if it is unconscionable F: Ligutan and de Llana obtained a lon from Security bank and trust company. petitioners (ligutan and de llana) executed a promissory note binding themselves solidarily to pay with an interest of 15.189% and pay a penalty of 5% for every month in case of default and in addition, to pay 10% of the total amount due by way of attorneys fees if the matter were indorsed to a lawyer.

despite several demands, petitioner failed to pay.first demand was made on may 20 1982. bank filed a case. RTC ruling: 1. sum of 114k with interest of 15%, 2% sservice charge, 5% penalty charge,commencing on may 20 1982 until fully paid 2. pay further sum of 10% attorneys fees.

petitioners appealed.

CA affirmed except on 2% service charge which was deleted pursuant to Cetral bank circular 783.

parties filed for motion for reconsideration.

petitioners prayed for the reduction of 5%. bank on the other hand prayed that the payment of interest and penalty be commenced not from the date of filinf but from the time of default.

CA resolved the two motion thusly:

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 law so provides. in this case, it was a promissory note hence demand is not necessary. While parties are bound to the stipulations in the contract (specifically interest rates), we take cognizance of their plea for the application of art. 1229 which is partial performance. it is our view that 3% per month penalty or 36% per annum would suffice.

petitioners filed a motion for reconsideration and to admit newly discovered evidence.

appellate court denied.

hence, this present action for review on certiorari.

Respondent, which did not appeal, would have it that the penalty sought to be deleted by petitioner was not even sufficient to fully cover and compensate for the cost of money brought about by the radical devaluation and decrease in the purchasing power of peso.

ISSUE: won penalty should be reduced or interest should be removed

HELD: NO, CA is correct in its reduction of 5% to 3%.

penalty clause is an accessory undertaking to assume greater liability on the part of the obligor in case of breach. although parties are free to stipulate in their contract the terms, courts may reduce interest if it is unconscionable

the court sees no cogent ground to modify the ruling of the CA in view of the fact of the constant breach by the petitioner.

petitioner questions the 15% interest. the court said that it is not excessive to warrant reduction. the essence or rationale for the payment of interest, is not exactly the same as that of surcharge or penalty. 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.

irrelevant: there was no novation in this case.