11. Filinvest v.

CA
This is a petition for review on certiorari of the Decision[1] of the Court of
Appeals dated 27 May 1999 affirming the dismissal by the Regional Trial Court of
Makati, Branch 65,[2] of the complaint for damages filed by Filinvest Land, Inc.
(Filinvest) against herein private respondents Pacific Equipment Corporation
(Pecorp) and Philippine American General Insurance Company.

The essential facts of the case, as recounted by the trial court, are as follows:
On 26 April 1978, Filinvest Land, Inc. (FILINVEST, for brevity), a
corporation engaged in the development and sale of residential
subdivisions, awarded to defendant Pacific Equipment Corporation
(PACIFIC, for brevity) the development of its residential subdivisions
consisting of two (2) parcels of land located at Payatas, Quezon City, the
terms and conditions of which are contained in an Agreement. (Annex A,
Complaint). To guarantee its faithful compliance and pursuant to the
agreement, defendant Pacific posted two (2) Surety Bonds in favor of
plaintiff which were issued by defendant Philippine American General
Insurance (PHILAMGEN, for brevity). (Annexes B and C, Complaint).
Notwithstanding three extensions granted by plaintiff to defendant
Pacific, the latter failed to finish the contracted works. (Annexes G, I and
K, Complaint). On 16 October 1979, plaintiff wrote defendant Pacific
advising the latter of its intention to takeover the project and to hold said
defendant liable for all damages which it had incurred and will incur to
finish the project. (Annex L, Complaint).
On 26 October 1979, plaintiff submitted its claim against defendant
Philamgen under its performance and guarantee bond (Annex M,
Complaint) but Philamgen refused to acknowledge its liability for the
simple reason that its principal, defendant Pacific, refused to acknowledge
liability therefore. Hence, this action.
In defense, defendant Pacific claims that its failure to finish the
contracted work was due to inclement weather and the fact that several
items of finished work and change order which plaintiff refused to accept

and pay for caused the disruption of work. Since the contractual relation
between plaintiff and defendant Pacific created a reciprocal obligation, the
failure of the plaintiff to pay its progressing bills estops it from demanding
fulfillment of what is incumbent upon defendant Pacific. The acquiescence
by plaintiff in 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 Pacific
from completing the work has relieved the latter from the obligation of
completing the same.
On the other hand, Philamgen contends that the various amendments
made on the principal contract and the deviations in the implementation
thereof which were resorted to by plaintiff and 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 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 submitted by
the parties to conduct an ocular inspection and to determine the amount of
work accomplished by the defendant Pacific and the amount of work done
by plaintiff to complete the project.
On 28 November 1984, the Court received the findings made by the
Court Commissioner. In arriving at his findings, the Commissioner used the
construction documents pertaining to the project as basis. According to him,
no better basis in the work done or undone could be made other than the
contract billings and payments made by both parties as there was no proper
procedure 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.
Based on the billings of defendant Pacific and the payments 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 plaintiff was based on the original contract
amount less value of work accomplished by defendant Pacific in the
amount of P681,717.58 (12,470,000-11,788,282.42).
As regards the alleged repairs made by plaintiff on the construction
deficiencies, the Court Commissioner found no sufficient basis to justify

the same. On the other hand, he found the additional work done by
defendant Pacific in the amount of P477,000.00 to be in order.
On 01 April 1985, plaintiff filed its objections to the Commissioners
Resolution on the following grounds:
a)
Failure of the commissioner to conduct a joint survey which
according to the latter is indispensable to arrive at an equitable and fair
resolution of the issues between the parties;
b)
The cost estimates of the commissioner were based on pure
conjectures and contrary to the evidence; and,
c)
The commissioner made conclusions of law which were
beyond his assignment or capabilities.
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]

On the basis of the commissioners report, the trial court dismissed

Filinvests complaint as well as Pecorps counterclaim. It held:
In resolving this case, the court observes that the appointment of a
Commissioner was a joint undertaking among the parties. The findings of
facts of the Commissioner should therefore not only be conclusive but final
among the parties. The court therefore agrees with the commissioners
findings with respect to

1.
2.
3.

Cost to repair deficiency or defect P532,324.02

Unpaid balance of work done by defendant - P1,939,191.67
Additional
work/change
order
(due
to
defendant) P475,000.00

The unpaid balance due defendant therefore is P1,939,191.67. To

this amount should be added additional work performed by defendant at
plaintiffs instance in the sum 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 deficiency or defect in the work done by defendant. The
commissioner arrived at the figure of P532,324.01 by getting the average
between plaintiffs claim of P758,080.37 and defendants allegation
of P306,567.67. The amount due to defendant per the commissioners report
is thereforeP1,881,867.66.
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 ofSeptember 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
to P475,000.00;

order

due

Pecorp

amounts

(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.

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 the P12,470,000.00 contract price, thus, not shocking and unconscionable
under the circumstances. Moreover, the penalty was fixed to provide for actual or
anticipated liquidated damages and not simply to ensure compliance with the terms
of the contract; hence, pursuant to Laureano v. Kilayco,[9] courts should be slow in
exercising the authority conferred by Art. 1229 of the Civil Code.

We are not swayed.

There is no question that the penalty of P15,000.00 per day of delay was
mutually agreed upon by the parties and that the same is sanctioned by law. A
penal 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 function: (1) to provide for liquidated damages, and (2) to strengthen the
coercive force of the obligation by the threat of greater responsibility in the event
of breach.[12] Article 1226 of the Civil Code states:
Art. 1226. In obligations with a penal clause, the penalty shall
substitute the indemnity for damages and the payment of interests in case of
noncompliance, if there is no stipulation to the contrary. Nevertheless,
damages shall be paid if the obligor refuses to pay the penalty or is guilty of
fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in
accordance with the provisions of this Code.

As a general rule, courts are not at liberty to ignore the freedom of the
parties to agree on such terms and conditions as they see fit as long as they are not

contrary to law, morals, good customs, public order or public policy.

[13]

Nevertheless, courts may equitably reduce a stipulated penalty in the contract in

two instances: (1) if the principal obligation has been partly or irregularly
complied; and (2) even if there has been no compliance if the penalty is iniquitous
or unconscionable in accordance with Article 1229 of the Civil Code which
provides:
Art. 1229. The judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by the
debtor. Even if there has been no performance, the penalty may also be
reduced by the courts if it is iniquitous or unconscionable.

In herein case, the trial court ruled that the penalty charge for delay pegged
at P15,000.00 per day of delay in the aggregate amount of P3,990,000.00 -- was
excessive and accordingly reduced it to P1,881,867.66 considering the amount of
work 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]

12. Sunlife of Canada v. Sandra TAN KIT

Factual Antecedents
Respondent Tan Kit is the widow and designated beneficiary of Norberto Tan Kit (Norberto),
whose application for a life insurance policy, with face value of P300,000.00, was granted
by petitioner on October 28, 1999. On February 19, 2001, or within the two-year
contestability period, Norberto died of disseminated gastric carcinoma. Consequently,
respondent Tan Kit filed a claim under the subject policy.
4

In a Letter dated September 3, 2001, petitioner denied respondent Tan Kits claim on
account of Norbertos failure to fully and faithfully disclose in his insurance application
certain material and relevant information about his health and smoking history. Specifically,
Norberto answered "No" to the question inquiring whether he had smoked cigarettes or
cigars within the last 12 months prior to filling out said application. However, the medical
report of Dr. Anna Chua (Dr. Chua), one of the several physicians that Norberto consulted
for his illness, reveals that he was a smoker and had only stopped smoking in August 1999.
According to petitioner, its underwriters would not have approved Norbertos application for
life insurance had they been given the correct information. Believing that the policy is null
and void, petitioner opined that its liability is limited to the refund of all the premiums paid.
Accordingly, it enclosed in the said letter a check for P13,080.93 representing the premium
refund.
7

In a letter dated September 13, 2001, respondent Tan Kit refused to accept the check and
insisted on the payment of the insurance proceeds.
9

On October 4, 2002, petitioner filed a Complaint for Rescission of Insurance Contract

before the Regional Trial Court (RTC) of Makati City.
10

Ruling of the Regional Trial Court

In its November 30, 2005 Decision, the RTC noted that petitioners physician, Dr. Charity
Salvador (Dr. Salvador), conducted medical examination on Norberto. Moreover, petitioners
agent, Irma Joy E. Javelosa (Javelosa), answered "NO" to the question "Are you aware of
anything about the life to be insureds lifestyle, hazardous sports, habits, medical history, or
any risk factor that would have an adverse effect on insurability?" in her Agents Report.
Javelosa also already knew Norberto two years prior to the approval of the latters
application for insurance. The RTC concluded that petitioner, through the above-mentioned
circumstances, had already cleared Norberto of any misrepresentation that he may have
committed. The RTC also opined that the affidavit of Dr. Chua, presented as part of
petitioners evidence and which confirmed the fact that the insured was a smoker and only
stopped smoking a year ago [1999], is hearsay since Dr. Chua did not testify in court.
Further, since Norberto had a subsisting insurance policy with petitioner during his
application for insurance subject of this case, it was incumbent upon petitioner to ascertain
the health condition of Norberto considering the additional burden that it was assuming.
Lastly, petitioner did not comply with the requirements for rescission of insurance contract
as held in Philamcare Health Systems, Inc. v. Court of Appeals. Thus, the dispositive
portion of the RTC Decision:
11

12

WHEREFORE, in view of the foregoing considerations, this court hereby finds in favor of
the [respondents and] against the [petitioner], hence it hereby orders the [petitioner] to pay
the [respondent], Sandra Tan Kit, the sum of Philippine Pesos: THREE HUNDRED
THOUSAND (P300,000.00), representing the face value of the insurance policy with interest
at six percent (6%) per annum from October 4, 2002 until fully paid.
Cost de oficio.
SO ORDERED.

13

Petitioner moved for reconsideration, but was denied in an Order15 dated February 15,
2006.
14

Hence, petitioner appealed to the CA.

Ruling of the Court of Appeals

On appeal, the CA reversed and set aside the RTCs ruling in its Decision16 dated October
17, 2007.

From the records, the CA found that prior to his death, Norberto had consulted two
physicians, Dr. Chua on August 19, 2000, and Dr. John Ledesma (Dr. Ledesma) on
December 28, 2000, to whom he confided that he had stopped smoking only in 1999. At the
time therefore that he applied for insurance policy on October 28, 1999, there is no truth to
his claim that he did not smoke cigarettes within 12 months prior to the said application. The
CA thus held that Norberto is guilty of concealment which misled petitioner in forming its
estimates of the risks of the insurance policy. This gave petitioner the right to rescind the
insurance contract which it properly exercised in this case.
In addition, the CA held that the content of Norbertos medical records are deemed admitted
by respondents since they failed to deny the same despite having received from petitioner a
Request for Admission pursuant to Rule 26 of the Rules of Court. And since an admission
is in the nature of evidence the legal effects of which form part of the records, the CA
discredited the RTCs ruling that the subject medical records and the affidavits executed by
Norbertos physicians attesting to the truth of the same were hearsay.
17

The dispositive portion of the CA Decision reads:

WHEREFORE, the foregoing considered, the instant appeal is hereby GRANTED and the
appealed Decision REVERSED and SET ASIDE, and in lieu thereof, a judgment is hereby
rendered GRANTING the complaint a quo.
Accordingly, [petitioner] is ordered to reimburse [respondents] the sum of P13,080.93
representing the [premium] paid by the insured with interest at the rate of 12% per annum
from the time of the death of the insured until fully paid.
SO ORDERED.

18

The parties filed their separate motions for reconsideration. While respondents questioned
the factual and legal bases of the CA Decision, petitioner, on the other hand, assailed the
imposition of interest on the premium ordered refunded to respondents.
19

However, the appellate court denied the motions in its June 12, 2008 Resolution, viz:
20

WHEREFORE, the foregoing considered, the separate motions for reconsideration filed by
the [petitioner] and the [respondents] are hereby DENIED.
SO ORDERED.

21

Only petitioner appealed to this Court through the present Petition for Review on Certiorari.
Issue
Whether petitioner is liable to pay interest on the premium to be refunded to
respondents.
The Parties Arguments

Petitioner argues that no interest should have been imposed on the premium to be refunded
because the CA Decision does not provide any legal or factual basis therefor; that petitioner
directly and timely tendered to respondents an amount representing the premium refund but
they rejected it since they opted to pursue their claim for the proceeds of the insurance
policy; that respondents should bear the consequence of their unsound decision of rejecting
the refund tendered to them; and, that petitioner is not guilty of delay or of invalid or unjust
rescission as to make it liable for interest. Hence, following the ruling in Tio Khe Chio v.
Court of Appeals, no interest can be assessed against petitioner.
22

Respondents, on the other hand, contend that the reimbursement of premium is clearly a
money obligation or one that arises from forbearance of money, hence, the imposition of
12% interest per annum is just, proper and supported by jurisprudence. While they admit
that they refused the tender of payment of the premium refund, they aver that they only did
so because they did not want to abandon their claim for the proceeds of the insurance
policy. In any case, what petitioner should have done under the circumstances was to
consign the amount of payment in court during the pendency of the case.
Our Ruling
Tio Khe Chio is not applicable in this case.
Petitioner avers that Tio Khe Chio, albeit pertaining to marine insurance, is instructive on the
issue of payment of interest. There, the Court pointed to Sections 243 and 244 of the
Insurance Code which explicitly provide for payment of interest when there is unjustified
refusal or withholding of payment of the claim by the insurer, and to Article 2209 of the
New Civil Code which likewise provides for payment of interest when the debtor is in delay.
1wphi1

23

24

The Court finds, however, that Tio Khe Chio is not applicable here as it deals with payment
of interest on the insurance proceeds in which the claim therefor was either unreasonably
denied or withheld or the insurer incurred delay in the payment thereof. In this case, what is
involved is an order for petitioner to refund to respondents the insurance premium paid by
Norberto as a consequence of the rescission of the insurance contract on account of the
latters concealment of material information in his insurance application. Moreover,
petitioner did not unreasonably deny or withhold the insurance proceeds as it was
satisfactorily established that Norberto was guilty of concealment.
Nature of interest imposed by the CA
There are two kinds of interest monetary and compensatory.
"Monetary interest refers to the compensation set by the parties for the use or forbearance
of money." No such interest shall be due unless it has been expressly stipulated in
writing. "On the other hand, compensatory interest refers to the penalty or indemnity for
damages imposed by law or by the courts." The interest mentioned in Articles 2209 and
2212 of the Civil Code applies to compensatory interest.
25

26

27

28

29

Clearly and contrary to respondents assertion, the interest imposed by the CA is not
monetary interest because aside from the fact that there is no use or forbearance of money

involved in this case, the subject interest was not one which was agreed upon by the parties
in writing. This being the case and judging from the tenor of the CA, to wit:
Accordingly, [petitioner] is ordered to reimburse [respondents] the sum of P13,080.93
representing the [premium] paid by the insured with interest at the rate of 12% per annum
from time of death of the insured until fully paid.
30

there can be no other conclusion than that the interest imposed by the appellate court is in
the nature of compensatory interest.
The CA incorrectly imposed compensatory interest on the premium refund reckoned from
the time of death of the insured until fully paid
As a form of damages, compensatory interest is due only if the obligor is proven to have
failed to comply with his obligation.
31

In this case, it is undisputed that simultaneous to its giving of notice to respondents that it
was rescinding the policy due to concealment, petitioner tendered the refund of premium by
attaching to the said notice a check representing the amount of refund. However,
respondents refused to accept the same since they were seeking for the release of the
proceeds of the policy. Because of this discord, petitioner filed for judicial rescission of the
contract. Petitioner, after receiving an adverse judgment from the RTC, appealed to the CA.
And as may be recalled, the appellate court found Norberto guilty of concealment and thus
upheld the rescission of the insurance contract and consequently decreed the obligation of
petitioner to return to respondents the premium paid by Norberto. Moreover, we find that
petitioner did not incur delay or unjustifiably deny the claim.
Based on the foregoing, we find that petitioner properly complied with its obligation under
the law and contract. Hence, it should not be made liable to pay compensatory interest.
Considering the prevailing circumstances of the case, we hereby direct petitioner to
reimburse the premium paid within 15 days from date of finality of this Decision. If petitioner
fails to pay within the said period, then the amount shall be deemed equivalent to a
forbearance of credit. In such a case, the rate of interest shall be 6% per annum.
32

33

WHEREFORE, the assailed October 17, 2007 Decision of the Court of Appeals in CA-G.R.
CV No. 86923 is MODIFIED in that petitioner Sun Life of Canada (Philippines), Inc. is
ordered to reimburse to respondents Sandra Tan Kit and the Estate of the Deceased
Norberto Tan Kit the sum of ~13,080.93 representing the premium paid by the insured within
fifteen (15) days from date of finality of this Decision. If the amount is not reimbursed within
said period, the same shall earn interest of 6% per annum until fully paid.
SO ORDERED.

13. SIGA-AN V. VILLANUEVA

Before Us is a Petition[1] for Review on Certiorari under Rule 45 of the

Rules of Court seeking to set aside the Decision,[2] dated 16 December 2005, and
Resolution,[3] dated 19 June 2006 of the Court of Appeals in CA-G.R. CV No.
71814, which affirmed in toto the Decision,[4] dated 26 January 2001, of the Las
Pinas City Regional Trial Court, Branch 255, in Civil Case No. LP-98-0068.
The facts gathered from the records are as follows:
On 30 March 1998, respondent Alicia Villanueva filed a complaint [5] for sum
of money against petitioner Sebastian Siga-an before the Las Pinas City Regional
Trial Court (RTC), Branch 255, docketed as Civil Case No. LP-980068. Respondent alleged that she was a businesswoman engaged in supplying
office materials and equipments to the Philippine Navy Office (PNO) located at
Fort Bonifacio, Taguig City, while petitioner was a military officer and comptroller
of the PNO from 1991 to 1996.
Respondent claimed that sometime in 1992, petitioner approached her inside
the PNO and offered to loan her the amount of P540,000.00. Since she needed
capital for her business transactions with the PNO, she accepted petitioners
proposal. The loan agreement was not reduced in writing. Also, there was no
stipulation as to the payment of interest for the loan.[6]
On 31 August 1993, respondent issued a check worth P500,000.00 to
petitioner as partial payment of the loan. On 31 October 1993, she issued another
check in the amount of P200,000.00 to petitioner as payment of the remaining
balance of the loan. Petitioner told her that since she paid a total amount
of P700,000.00 for the P540,000.00 worth of loan, the excess amount
of P160,000.00 would be applied as interest for the loan. Not satisfied with the
amount applied as interest, petitioner pestered her to pay additional

interest. Petitioner threatened to block or disapprove her transactions with the PNO
if she would not comply with his demand. As all her transactions with the PNO
were subject to the approval of petitioner as comptroller of the PNO, and fearing
that petitioner might block or unduly influence the payment of her vouchers in the
PNO, she conceded. Thus, she paid additional amounts in cash and checks as
interests for the loan. She asked petitioner for receipt for the payments but
petitioner told her that it was not necessary as there was mutual trust and
confidence between them. According to her computation, the total amount she paid
to petitioner for the loan and interest accumulated to P1,200,000.00.[7]
Thereafter, respondent consulted a lawyer regarding the propriety of paying
interest on the loan despite absence of agreement to that effect. Her lawyer told her
that petitioner could not validly collect interest on the loan because there was no
agreement between her and petitioner regarding payment of interest. Since she paid
petitioner a total amount of P1,200,000.00 for the P540,000.00 worth of loan, and
upon being advised by her lawyer that she made overpayment to petitioner, she
sent a demand letter to petitioner asking for the return of the excess amount
of P660,000.00. Petitioner, despite receipt of the demand letter, ignored her claim
for reimbursement.[8]
Respondent prayed that the RTC render judgment ordering petitioner to pay
respondent (1) P660,000.00 plus legal interest from the time of demand;
(2) P300,000.00 as moral damages; (3)P50,000.00 as exemplary damages; and (4)
an amount equivalent to 25% of P660,000.00 as attorneys fees.[9]
In his answer[10] to the complaint, petitioner denied that he offered a loan to
respondent. He averred that in 1992, respondent approached and asked him if he
could grant her a loan, as she needed money to finance her business venture with
the PNO. At first, he was reluctant to deal with respondent, because the latter had a

spotty record as a supplier of the PNO. However, since respondent was an

acquaintance of his officemate, he agreed to grant her a loan. Respondent paid the
loan in full.[11]
Subsequently, respondent again asked him to give her a loan. As respondent
had been able to pay the previous loan in full, he agreed to grant her another
loan. Later, respondent requested him to restructure the payment of the loan
because she could not give full payment on the due date. He acceded to her
request. Thereafter, respondent pleaded for another restructuring of the payment of
the loan. This time he rejected her plea. Thus, respondent proposed to execute a
promissory note wherein she would acknowledge her obligation to him, inclusive
of interest, and that she would issue several postdated checks to guarantee the
payment of her obligation. Upon his approval of respondents request for
restructuring of the loan, respondent executed a promissory note dated 12
September

1994

wherein

she

admitted

having

borrowed

an

amount

of P1,240,000.00, inclusive of interest, from petitioner and that she would pay said
amount in March 1995. Respondent also issued to him six postdated checks
amounting to P1,240,000.00 as guarantee of compliance with her obligation.
Subsequently, he presented the six checks for encashment but only one check was
honored.He demanded that respondent settle her obligation, but the latter failed to
do so. Hence, he filed criminal cases for Violation of the Bouncing Checks Law
(Batas Pambansa Blg. 22) against respondent. The cases were assigned to the
Metropolitan Trial Court of Makati City, Branch 65 (MeTC).[12]
Petitioner insisted that there was no overpayment because respondent
admitted in the latters promissory note that her monetary obligation as of 12
September 1994 amounted to P1,240,000.00 inclusive of interests. He argued that
respondent was already estopped from complaining that she should not have paid
any interest, because she was given several times to settle her obligation but failed

to do so. He maintained that to rule in favor of respondent is tantamount to

concluding that the loan was given interest-free. Based on the foregoing averments,
he asked the RTC to dismiss respondents complaint.
After trial, the RTC rendered a Decision on 26 January 2001 holding that
respondent made an overpayment of her loan obligation to petitioner and that the
latter should refund the excess amount to the former. It ratiocinated that
respondents obligation was only to pay the loaned amount of P540,000.00, and that
the alleged interests due should not be included in the computation of respondents
total monetary debt because there was no agreement between them regarding
payment of interest. It concluded that since respondent made an excess payment to
petitioner in the amount of P660,000.00 through mistake, petitioner should return
the said amount to respondent pursuant to the principle of solutio indebiti.[13]
The RTC also ruled that petitioner should pay moral damages for the
sleepless nights and wounded feelings experienced by respondent. Further,
petitioner should pay exemplary damages by way of example or correction for the
public good, plus attorneys fees and costs of suit.
The dispositive portion of the RTC Decision reads:
WHEREFORE, in view of the foregoing evidence and in the light of the
provisions of law and jurisprudence on the matter, judgment is hereby rendered in
favor of the plaintiff and against the defendant as follows:
(1)
Ordering defendant to pay plaintiff the amount of P660,000.00
plus legal interest of 12% per annum computed from 3 March 1998 until the
amount is paid in full;
(2) Ordering defendant to pay plaintiff the amount of P300,000.00 as
moral damages;
(3) Ordering defendant to pay plaintiff the amount of P50,000.00 as
exemplary damages;

(4) Ordering defendant to pay plaintiff the amount equivalent to 25%

of P660,000.00 as attorneys fees; and
(5) Ordering defendant to pay the costs of suit.[14]

Petitioner appealed to the Court of Appeals. On 16 December 2005, the

appellate court promulgated its Decision affirming in toto the RTC Decision, thus:
WHEREFORE, the foregoing considered, the instant appeal is hereby
DENIED and the assailed decision [is] AFFIRMED in toto.[15]

Petitioner filed a motion for reconsideration of the appellate courts decision

but this was denied.[16] Hence, petitioner lodged the instant petition before us
assigning the following errors:
I.
THE RTC AND THE COURT OF APPEALS ERRED IN RULING THAT NO
INTEREST WAS DUE TO PETITIONER;
II.
THE RTC AND THE COURT OF APPEALS ERRED IN APPLYING THE
PRINCIPLE OF SOLUTIO INDEBITI.[17]

Interest is a compensation fixed by the parties for the use or forbearance of

money. This is referred to as monetary interest. Interest may also be imposed by
law or by courts as penalty or indemnity for damages. This is called compensatory
interest.[18] The right to interest arises only by virtue of a contract or by virtue of
damages for delay or failure to pay the principal loan on which interest is
demanded.[19]
Article 1956 of the Civil Code, which refers to monetary interest,
[20]

specifically mandates that no interest shall be due unless it has been expressly

stipulated in writing. As can be gleaned from the foregoing provision, payment of

monetary interest is allowed only if: (1) there was an express stipulation for the
payment of interest; and (2) the agreement for the payment of interest was reduced
in writing. The concurrence of the two conditions is required for the payment of
monetary interest. Thus, we have held that collection of interest without any
stipulation therefor in writing is prohibited by law.[21]
It appears that petitioner and respondent did not agree on the payment of
interest for the loan. Neither was there convincing proof of written agreement
between the two regarding the payment of interest. Respondent testified that
although she accepted petitioners offer of loan amounting to P540,000.00, there
was, nonetheless, no verbal or written agreement for her to pay interest on the loan.
[22]

Petitioner presented a handwritten promissory note dated 12 September

1994[23] wherein respondent purportedly admitted owing petitioner capital and
interest. Respondent, however, explained that it was petitioner who made a
promissory note and she was told to copy it in her own handwriting; that all her
transactions with the PNO were subject to the approval of petitioner as comptroller
of the PNO; that petitioner threatened to disapprove her transactions with the PNO
if she would not pay interest; that being unaware of the law on interest and fearing
that petitioner would make good of his threats if she would not obey his instruction
to copy the promissory note, she copied the promissory note in her own
handwriting; and that such was the same promissory note presented by petitioner
as alleged proof of their written agreement on interest. [24] Petitioner did not rebut
the foregoing testimony. It is evident that respondent did not really consent to the
payment of interest for the loan and that she was merely tricked and coerced by
petitioner to pay interest. Hence, it cannot be gainfully said that such promissory

note pertains to an express stipulation of interest or written agreement of interest

on the loan between petitioner and respondent.
Petitioner, nevertheless, claims that both the RTC and the Court of Appeals
found that he and respondent agreed on the payment of 7% rate of interest on the
loan; that the agreed 7% rate of interest was duly admitted by respondent in her
testimony in the Batas Pambansa Blg. 22 cases he filed against respondent; that
despite such judicial admission by respondent, the RTC and the Court of Appeals,
citing Article 1956 of the Civil Code, still held that no interest was due him since
the agreement on interest was not reduced in writing; that the application of Article
1956 of the Civil Code should not be absolute, and an exception to the application
of such provision should be made when the borrower admits that a specific rate of
interest was agreed upon as in the present case; and that it would be unfair to allow
respondent to pay only the loan when the latter very well knew and even admitted
in the Batas Pambansa Blg. 22 cases that there was an agreed 7% rate of interest on
the loan.[25]
We have carefully examined the RTC Decision and found that the RTC did
not make a ruling therein that petitioner and respondent agreed on the payment of
interest at the rate of 7% for the loan. The RTC clearly stated that although
petitioner and respondent entered into a valid oral contract of loan amounting
to P540,000.00, they, nonetheless, never intended the payment of interest thereon.
[26]

While the Court of Appeals mentioned in its Decision that it concurred in the

RTCs ruling that petitioner and respondent agreed on a certain rate of interest as
regards the loan, we consider this as merely an inadvertence because, as earlier
elucidated, both the RTC and the Court of Appeals ruled that petitioner is not
entitled to the payment of interest on the loan. The rule is that factual findings of
the trial court deserve great weight and respect especially when affirmed by the

appellate court.[27] We found no compelling reason to disturb the ruling of both

courts.
Petitioners reliance on respondents alleged admission in the Batas Pambansa
Blg. 22 cases that they had agreed on the payment of interest at the rate of 7%
deserves scant consideration. In the said case, respondent merely testified that after
paying the total amount of loan, petitioner ordered her to pay interest.
[28]

Respondent did not categorically declare in the same case that she and

respondent made an express stipulation in writing as regards payment of interest at

the rate of 7%. As earlier discussed, monetary interest is due only if there was
an express stipulation in writing for the payment of interest.
There are instances in which an interest may be imposed even in the absence
of express stipulation, verbal or written, regarding payment of interest. Article
2209 of the Civil Code states that if the obligation consists in the payment of a sum
of money, and the debtor incurs delay, a legal interest of 12% per annum may be
imposed as indemnity for damages if no stipulation on the payment of interest was
agreed upon. Likewise, Article 2212 of the Civil Code provides that interest due
shall earn legal interest from the time it is judicially demanded, although the
obligation may be silent on this point.
All the same, the interest under these two instances may be imposed only as
a penalty or damages for breach of contractual obligations. It cannot be charged as
a compensation for the use or forbearance of money. In other words, the two
instances apply only to compensatory interest and not to monetary interest. [29] The
case at bar involves petitioners claim for monetary interest.
Further, said compensatory interest is not chargeable in the instant case
because it was not duly proven that respondent defaulted in paying the loan. Also,

as earlier found, no interest was due on the loan because there was no written
agreement as regards payment of interest.
Apropos the second assigned error, petitioner argues that the principle
of solutio indebiti does not apply to the instant case. Thus, he cannot be compelled
to return the alleged excess amount paid by respondent as interest.[30]
Under Article 1960 of the Civil Code, if the borrower of loan pays interest
when there has been no stipulation therefor, the provisions of the Civil Code
concerning solutio indebiti shall be applied. Article 2154 of the Civil Code
explains the principle of solutio indebiti. Said provision provides that if something
is received when there is no right to demand it, and it was unduly delivered
through mistake, the obligation to return it arises. In such a case, a creditor-debtor
relationship is created under a quasi-contract whereby the payor becomes the
creditor who then has the right to demand the return of payment made by mistake,
and the person who has no right to receive such payment becomes obligated to
return the same. The quasi-contract of solutio indebiti harks back to the ancient
principle that no one shall enrich himself unjustly at the expense of another.[31] The
principle of solutio indebiti applies where (1) a payment is made when there exists
no binding relation between the payor, who has no duty to pay, and the person who
received the payment; and (2) the payment is made through mistake, and not
through liberality or some other cause.[32] We have held that the principle of solutio
indebiti applies in case of erroneous payment of undue interest.[33]
It was duly established that respondent paid interest to petitioner.
Respondent was under no duty to make such payment because there was no
express stipulation in writing to that effect. There was no binding relation between
petitioner and respondent as regards the payment of interest. The payment was

clearly a mistake. Since petitioner received something when there was no right to
demand it, he has an obligation to return it.
We shall now determine the propriety of the monetary award and damages
imposed by the RTC and the Court of Appeals.
Records show that respondent received a loan amounting to P540,000.00
from petitioner.[34] Respondent issued two checks with a total worth of P700,000.00
in favor of petitioner as payment of the loan. [35] These checks were subsequently
encashed by petitioner.[36] Obviously, there was an excess of P160,000.00 in the
payment for the loan. Petitioner claims that the excess ofP160,000.00 serves as
interest on the loan to which he was entitled. Aside from issuing the said two
checks, respondent also paid cash in the total amount of P175,000.00 to petitioner
as interest.[37]Although no receipts reflecting the same were presented because
petitioner refused to issue such to respondent, petitioner, nonetheless, admitted in
his Reply-Affidavit[38] in the Batas Pambansa Blg. 22 cases that respondent paid
him a total amount of P175,000.00 cash in addition to the two checks. Section 26
Rule 130 of the Rules of Evidence provides that the declaration of a party as to a
relevant fact may be given in evidence against him. Aside from the amounts
of P160,000.00 and P175,000.00 paid as interest, no other proof of additional
payment as interest was presented by respondent. Since we have previously found
that petitioner is not entitled to payment of interest and that the principle of solutio
indebiti applies to the instant case, petitioner should return to respondent the excess
amount of P160,000.00 and P175,000.00 or the total amount of P335,000.00.
Accordingly, the reimbursable amount to respondent fixed by the RTC and the
Court of Appeals should be reduced from P660,000.00 to P335,000.00.
As earlier stated, petitioner filed five (5) criminal cases for violation of Batas
Pambansa Blg. 22 against respondent. In the said cases, the MeTC found

respondent guilty of violating Batas Pambansa Blg. 22 for issuing five dishonored
checks to petitioner. Nonetheless, respondents conviction therein does not affect
our ruling in the instant case. The two checks, subject matter of this case,
totaling P700,000.00 which respondent claimed as payment of the P540,000.00
worth of loan, were not among the five checks found to be dishonored or bounced
in the five criminal cases. Further, the MeTC found that respondent made an
overpayment of the loan by reason of the interest which the latter paid to petitioner.
[39]

Article 2217 of the Civil Code provides that moral damages may be
recovered if the party underwent physical suffering, mental anguish, fright, serious
anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation
and similar injury. Respondent testified that she experienced sleepless nights and
wounded feelings when petitioner refused to return the amount paid as interest
despite her repeated demands. Hence, the award of moral damages is
justified. However, its corresponding amount of P300,000.00, as fixed by the RTC
and the Court of Appeals, is exorbitant and should be equitably reduced. Article
2216 of the Civil Code instructs that assessment of damages is left to the discretion
of the court according to the circumstances of each case. This discretion is limited
by the principle that the amount awarded should not be palpably excessive as to
indicate that it was the result of prejudice or corruption on the part of the trial
court.[40] To our mind, the amount of P150,000.00 as moral damages is fair,
reasonable, and proportionate to the injury suffered by respondent.
Article 2232 of the Civil Code states that in a quasi-contract, such as solutio
indebiti, exemplary damages may be imposed if the defendant acted in an
oppressive manner. Petitioner acted oppressively when he pestered respondent to
pay interest and threatened to block her transactions with the PNO if she would not
pay interest. This forced respondent to pay interest despite lack of agreement

thereto. Thus, the award of exemplary damages is appropriate. The amount

of P50,000.00 imposed as exemplary damages by the RTC and the Court is fitting
so as to deter petitioner and other lenders from committing similar and other
serious wrongdoings.[41]
Jurisprudence instructs that in awarding attorneys fees, the trial court must
state the factual, legal or equitable justification for awarding the same. [42] In the
case under consideration, the RTC stated in its Decision that the award of attorneys
fees equivalent to 25% of the amount paid as interest by respondent to petitioner is
reasonable and moderate considering the extent of work rendered by respondents
lawyer in the instant case and the fact that it dragged on for several years.
[43]

Further, respondent testified that she agreed to compensate her lawyer handling

the instant case such amount.[44] The award, therefore, of attorneys fees and its
amount equivalent to 25% of the amount paid as interest by respondent to
petitioner is proper.
Finally, the RTC and the Court of Appeals imposed a 12% rate of legal
interest on the amount refundable to respondent computed from 3 March 1998
until its full payment. This is erroneous.
We held in Eastern Shipping Lines, Inc. v. Court of Appeals,[45] that when an
obligation, not constituting a loan or forbearance of money is breached, an interest
on the amount of damages awarded may be imposed at the rate of 6% per
annum. We further declared that when the judgment of the court awarding a sum of
money becomes final and executory, the rate of legal interest, whether it is a
loan/forbearance of money or not, shall be 12% per annum from such finality until
its satisfaction, this interim period being deemed equivalent to a forbearance of
credit.

In the present case, petitioners obligation arose from a quasi-contract

of solutio indebiti and not from a loan or forbearance of money. Thus, an interest
of 6% per annum should be imposed on the amount to be refunded as well as on
the damages awarded and on the attorneys fees, to be computed from the time of
the extra-judicial demand on 3 March 1998,[46] up to the finality of this Decision. In
addition, the interest shall become 12% per annum from the finality of this
Decision up to its satisfaction.
WHEREFORE, the Decision of the Court of Appeals in CA-G.R. CV No.
71814,

dated

16

December

2005,

is

hereby AFFIRMED with

the

following MODIFICATIONS: (1) the amount ofP660,000.00 as refundable

amount of interest is reduced to THREE HUNDRED THIRTY FIVE THOUSAND
PESOS (P335,000.00); (2) the amount of P300,000.00 imposed as moral damages
is reduced to ONE HUNDRED FIFTY THOUSAND PESOS (P150,000.00); (3) an
interest of 6% per annum is imposed on the P335,000.00, on the damages awarded
and on the attorneys fees to be computed from the time of the extra-judicial
demand on 3 March 1998 up to the finality of this Decision; and (4) an interest of
12% per annum is also imposed from the finality of this Decision up to its
satisfaction. Costs against petitioner.
SO ORDERED.
14. SEGOVIA DEVELOPMENT CORPORATION, petitioner, vs.J.L. DUMATOL REALTY
and DEVELOPMENT CORPORATION, respondent.
BELLOSILLO, J.:
This is a Petition for Review on Certiorari under Rule 45 seeking the reversal and
nullification of the Decision of the Court of Appeals 1 and the reinstatement and affirmance in
toto of the decision of the Office of the President, as well as the nullification and reversal of
the Resolution of the appellate court which denied its Motion for Reconsideration.
Petitioner SEGOVIA DEVELOPMENT CORPORATION (SEGOVIA for brevity) and
respondent J. L. DUMATOL REALTY AND DEVELOPMENT CORPORATION (DUMATOL
for brevity) are domestic corporations engaged in the business of real estate development.

On 2 March 1989 petitioner SEGOVIA and respondent DUMATOL entered into three (3)
separate but identical contracts to sell involving three (3) condominium units, namely, Units
Nos. 703, 704 and 904, of the Heart Tower Condominium located at Lot 5, Block 2, Valero
Street, Salcedo Village, Makati City. The total contract price for the three (3) units was
P6,050,000.00 under the following terms and conditions:

Reservation Deposit
Downpayment
12 Monthly Installments
Beginning 25 April 1989
Parking Lot
Total Contract Price

Unit 703

Unit 704

Unit 904

P 50,000.00

P 50,000.00

P 50,000.00

770,000.00

770,000.00

820,000.00

90,000.00

90,000.00

90,000.00

100,000.00

100,000.00

100,000.00

P2,000,000.00

P2,000,000.00

P2,050,000.00

The contracts, which were in standard form approved by the Housing and Land Use
Regulatory Board (HLURB), contained the following provisions:
a. Escalation Clause
2.5 Should there be an increase or decrease in the total Consumer Price Index (CPI)
(as set forth by the Central Bank of the Philippines or by any agency of the
government), of more that FIFTEEN (15%) PERCENT, from the time this Contract is
executed, a corresponding adjustment in the unpaid balance or remaining
installment under this Contract shall be made. The amount of adjustment shall be the
net percentage of change in excess of FIFTEEN (15%) PERCENT. The Buyer has
the option to accelerate payments or pay the balance in full without interest to avoid
upward adjustments.
b. Cancellation by the Seller
4.1 x x x x Where less than 2 years of installments were paid, the SELLER shall give
the BUYER a grace period of 60 days but a penalty of 3% per month shall be levied
upon unpaid installments. If the BUYER fails to comply, the SELLER may cancel the
Contract after 30 days from receipt by the BUYER of the Notice of Cancellation or
the Demand of Rescission of the Contract by a notarial act without need of judicial
action.
Out of the total contract price of P6,050,000.00, respondent DUMATOL was able to pay only
the amount of P450,000.00 for the three (3)units as follows:
Amount Paid (In
Pesos)

Date of Payment

Mode of Payment

23 February 1989

PSB Check No.

242943

P 150,000.00

15 June 1989

PSB Check No.

2,000,000.00

257286
17 August 1989

PSB Check No.

318839

1,000,000.00

17 August 1989

PSB Check No.

337265

500,000.00

28 December 1989

PSB Check No.

396410

250,000.00

30 January 1990

PSB Check No.

396468

500,000.00

31 January 1990 (thru

respondent's agent Julius
Stracham)

UDB Check No.

125417

100.000.00
Total

P4,500,000.00

However, the check paid by respondent DUMATOL through Julius Stracham was
dishonored by the bank so that only P4,400,000.00 was credited to the account of
respondent DUMATOL.
Since respondent DUMATOL had been in default in updating its accounts, petitioner
SEGOVIA sent on 5 November 1990 a Notice of Rescession officially notifying respondent
that the contract to sell for Unit 904 was being rescinded. 2
On 15 November 1990 a meeting was held between the two (2) contracting parties whereby
it was approved in principle that petitioner would withdraw the action for rescission subject
to the condition that respondent would pay for the following: (a) the total balance for the
three (3) condominium units, together with interest and the related charges amounting to
P2,808,699.00, would be settled not later than 12:00 o'clock noon of 7 December 1990;
and, (b) liquidated damages amounting to P700,000.00. 3
In its reply dated 23 November 1990 respondent DUMATOL disputed the computation made
by petitioner and informed the, latter that it was prepared to pay the remaining balance of
the purchase price plus interests, which amounted to only P1,977,200.00.
In the meantime, in November 1990 respondent received from one Edilberto Bravo an offer
to buy Units 703 and 704 at the price of P3,700,000.00 each. However, after being,
informed of petitioner's letter to respondent dated 16 November 1990, Mr. Bravo, fearful of
being embroiled in the dispute, withdrew his offer.
On 29 November 1990 respondent DUMATOL lodged a complaint 4 with the HLURB praying
among others that the three percent (3%) interest rate being assessed by petitioner on the
defaulted payments be declared erroneous and that petitioner be likewise ordered to pay
P3,400,000.00 compensatory damages.
On 4 December 1990, the settlement of the outstanding balance of the purchase price not
having materialized, respondent received another notice of cancellation from petitioner, this

time officially informing respondent that theContracts to Sell for Units 703, 704 and 904
were being cancelled without need of judicial action. 5
On 5 December 1990 respondent consigned6 with the HLURB the amount of P1,977,220.00
in the form of Philippine Savings Bank Check No. 203331 which represented what it
believed to be its remaining accountability to petitioner SEGOVIA.
On 24 May 1991, after due consideration of the respective position papers of the
contending parties, the HLURB Arbiter rendered a Judgment: (a) ordering DUMATOL to pay
SEGOVIA the amount of P2,559,900.00 which represented the balance due on Units 703,
704 and 904 of the Heart Tower Condominium; (b) ordering DUMATOL to pay the
outstanding association dues, utility bills and 1990 real estate taxes for the three (3) units;
(c) ordering SEGOVIA to pay DUMATOL P2,746,773.05 as compensatory damages; and,
(d) dismissing the case against SEGOVIA for lack of merit. 7
On appeal, the HLURB increased the account liability of respondent DUMATOL to
P3,275,202.40 representing the principal balance, accrued interest and penalties as of 25
June 1991, as well as an additional three percent (3%) penalty per month for each delayed
payment with six percent (6%) interest per annum beyond that date until fully paid. The
Board likewise ordered respondent DUMATOL to pay petitioner SEGOVIA P30,000.00 as
attorney's fees.8
Not satisfied with the decision both parties elevated the controversy to the Office of the
President which dismissed the appeal of respondent but partly gave due course to that of
petitioner. In its judgment, the Office of the President modified the decision of the HLURB by
ordering respondent DUMATOL: (a) to pay petitioner SEGOVIA the amount of
P3,275,487.56, instead of P3,275,202.40, representing the principal balance, accrued
interests and penalties as of 25 June 1991, as well as an additional three percent (3%) per
month for each delayed payment, with six percent (6%) interest per annum beyond that
date until fully paid; and, (b) to pay fifty percent (50%) of the amount of P3,126,372.11 as
contract price adjustment, with six percent (6%) interest per annum from 15 November 1990
until fully paid.
On 12 January 1999 respondent DUMATOL filed before the Court of Appeals a petition
seeking to annul and set aside the decision of the Office of the President. In its appeal,
respondent prayed that the decision of 24 May 1991 rendered by the HLURB Arbiter in the
proceeding below be reinstated. Respondent argued that the three percent (3%) penalty
charge was iniquitous and unconscionable and therefore unjustified; that its acts of
tendering and consigning the sum of P1,977,200.00 with the HLURB suspended the
running of such interest charges; that its constitutional right to due process was violated by
the Office of President when it adopted the computation submitted by petitioner on appeal
to the HLURB Commissioners; and, that there was no basis for the imposition of the six
percent (6% ) interest per annum.
The Court of Appeals granted the petition and nullified the decision rendered by the Office
of the President. It opined that respondent's act of consigning to the HLURB the amount of
P1,977,200.00 by way of check after tender of payment, was refused by petitioner
amounted to substantial compliance with the requirements of a valid consignation. Although

the appellate court deemed it pointless to pass upon the propriety of imposing the penalty
charge, nonetheless, it noted that under the circumstances of the case the three percent
(3%) penalty charge was indeed iniquitous and unconscionable. According to the Court of
Appeals9 x x x it bears considering that the petitioner (respondent herein) stands to lose all,
three condominium units, notwithstanding the fact that the total payments made by it
in the amount of P4,400,000.00 would have been enough to pay for two (2)
condominium units x x x x Petitioner (herein respondent) may lose all three units
because of the unconscionable penalty charges, which are evidently
disproportionate to the principal obligation.
On the matter of the additional six percent (6%) per annum as damages, the court a
quo held that there was no legal basis for its imposition. The record shows that this matter
was raised for the first time on appeal as a claim for the twelve percent (12%) interest which
was subsequently reduced by the HLURB Commissioners to six percent (6%) per annum.
The pivotal issue to be resolved is whether the Decision of the Court of Appeals which set
aside the decision of the Office of the President and reinstated that of the HLURB is
sufficiently supported by law and the facts of the case.
To give finality to the main issue, we have to resolve certain equally contentious points
which have bewildered the parties at the very outset, specifically: (a) whether the
computation of respondent's unpaid obligation to petitioner by the Office of the President is
correct; (b) whether there is valid consignation of payment by respondent which therefore
justified the suspension of the imposition. of the three percent (3%) penalty interest
provided under the contract; (c) whether petitioner Is entitled to the six percent (6%) interest
per annum as damages; (d) whether petitioner is liable to pay respondent compensatory
damages for unrealized profits; (e) whether petitioner is entitled to the fifty percent (50%)
contract price adjustment; and, (f) whether petitioner is entitled to recover attorney's fees.
For clarity, we shall proceed with the first issue by setting forth certain established facts,
namely: (a) that the contract price for the three (3) condominium units purchased by
respondent is P6,050,000.00; and, (b) under each contract to sell respondent (buyer)
committed to pay P90.000.00 for each unit or a total of P270,000.00 for twelve (12) months
for the three (3) units, beginning 25 April 1989. Simply stated, by 25 March 1990,
respondent-buyer should have already completed the payment of the three (3)
condominium units otherwise the unpaid instalments would be subject to a penalty of three
percent (3%) interest; and, (c) respondent-buyer had not paid its account balance and had
been in arrears from month to month.
We observe that the contending realty firms, and even the tribunals below, are riot in
agreement as to the liability of respondent DUMATOL. In its decision, the HLURB Arbiter
ordered respondent to pay petitioner the sum of P2,559,900.00 representing the balance on
the units subject of the contracts to sell. The HLURB however noted that the computation
made by the HLURB Arbiter should have taken into consideration the date when the
contract was executed, the installments due, the penalties and interests, the payments
made and the application of payments. The Office of the President, for its part, claimed that

respondent incurred arrearages as of 25 June 1991 in the amount of P3,275,487.56. This

last computation was adopted by the Court of Appeals in its assailed Decision,
Petitioner now assails before us the Arbiter's determination of respondent's account balance
for being erroneous. Petitioner contends that the computation showed nineteen (19)
monthly instalments of P270,000.00 instead of the agreed twelve (12) months of
P270,000.00 for the three (3) units. Further, petitioner points out that the HLURB Arbiter
erroneously considered the downpayment for the three (3) units in the amount of
P2,360,000.00 as part of the unpaid balance, contrary to the explicit and express provisions
of the contracts to sell.
On the other hand, respondent begrudges the adoption by the office of the President and
the HLURB Commissioners of a computation entirely based on the computation made by
petitioner which, according to respondent, is violative of its right to due process for it
deprives respondent of the opportunity to contest the document, to cross-examine the
person who prepared it, and to present countervailing evidence.
Given the inconsistent and contradictory claims by the contending parties, exacerbated by
the discrepant figures of the court below, it is imperative that a more accurate determination
of respondent's accountability be made by a lower body in order to settle the question with
finality.
On the second issue, it is crucial to rule upon the validity of respondent's consignation in
order to determine its effect on the running of the three percent (3%) interest. Consignation
to be valid and effective must comply with the following requisites, namely:
(a) Tender of payment and refusal to accept without reason; 10
(b) Previous notice of consignation to the persons interested in its fulfillment; 11
(c) After the deposit or consignation has been made, the persons interested shall be
notified thereof.12
The factual milieu of this case reveals that on 10 December 1990, respondent consigned
with the HLURB Philippine Savings Bank Check No. 203331 for P1,977,220.00 after it
received from petitioner the Notice of Cancellation of the three (3) contracts. Patently, the
consignment was made only to forestall an action for rescission which petitioner might take.
Be that as it may, respondent never made any prior tender of payment to petitioner
notwithstanding respondent's submission that there was substantial compliance with the
requirements of consignation in light of our ruling in Licuanan v. Diaz13 In addition, it must be stated that in the case of Soco v. Militante (123 SCRA 160,
166-167 [1983]), the Court ruled that the codal provisions of the Civil Code dealing
with consignation (Articles 1252 -1261) should be accorded mandatory construction "We do not agree with the questioned decision. We hold that the essential
requisites of a valid consignation must be complied with fully and strictly in
accordance with the law. Articles 1256-1261, New Civil Code. That these

Articles must be accorded a mandatory construction is clearly evident and

plain from the very language of the codal provisions themselves which require
absolute compliance with the essential requisites therein provided.
Substantial compliance is not enough for that would render only directory
construction of the law. The use of the words "shall" and "must" which are
imperative, operating to impose a duty which may be enforced, positively
indicated that all the essential requisites of a valid consignation must be
complied with. The Civil Code Articles expressly and explicitly direct what
must be essentially done in order that consignation shall be valid and
effectual x x x x
In opposing the three percent (3%) penalty interest, respondent, as sustained by the Court
of Appeals, invokes Art. 1229 of the Civil Code which provides 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.
Respondent also claims that the spirit of the above provision is re-echoed in Art. 2227 of the
Civil Code which provides Liquidated damages, whether intended as an indemnity or a penalty, shall be
equitably reduced if they are iniquitous or unconscionable.
We agree. The three percent (3%) penalty interest is patently iniquitous and unconscionable
as to warrant the exercise by this Court of its judicial discretion. A close reading of the
contracts to sell will show that the three percent (3%) penalty interest on unpaid instalments
on a monthly basis (per Sec. 4.1) would translate to a yearly penalty interest of thirty-six
percent (36%). Assuming that respondent has an outstanding balance which runs into
millions (P2,559,900.00 per HLURB Arbiter's computation), the payments respondent made
(amounting to P4.4 million out of the P6.05 million contract price) would be virtually wiped
out if the three percent (3%) penalty interest were imposed on the account balance.
With more reason should we question the wisdom of such stipulated provision considering
that respondent DUMATOL stands to lose the three (3) condominium units notwithstanding
the fact that it has substantially complied with its contractual obligations. Pending
determination of the actual liability of respondent, we could only speculate on how
staggering the increase in the unpaid instalments of the respondent would now be after
more than a decade of litigation.
Although this Court on various occasions has eliminated altogether the three percent (3%)
penalty interest for being unconscionable,14 we are not inclined to do the same in this case.
A reduction is more consistent with fairness and equity. We should not lose sight of the fact
that petitioner remain an unpaid seller that it has suffered, one way or another, from
respondent's non-performance of its contractual obligations. In view of such glaring reality,
we invoke the authority granted to us by Art. 1229 of the Civil Code, and as equity dictates,

the penalty interest is accordingly reimposed on a reduced rate of one percent (1%) interest
per month or twelve percent (12%) per annum.
With respect to the six percent (6%) interest per annum imposed as damages, we disallow
the same for lack of legal basis. As correctly pointed out by the Court of Appeals, the
contracts to sell do not provide for a six percent (6%) interest on the unpaid principal and
accumulated penalty and interest charges. The interest was raised for the first time on
appeal as a claim for twelve, percent (12%) interest which was subsequently reduced to six
percent (6%) by the HLURB. In disallowing the interest, we quote with approval the
observation of the appellate court15 x x x x We hold that there is no legal basis for its imposition. It is a basic legal
principle that parties may not raise a new cause of action on appeal x x x x This
matter was raised for the first time on appeal as a claim for 12% interest which was
subsequently reduced by the HULRB Commissioners to 6% per annum.
Respondents, (petitioner herein) never made a counterclaim for these amounts in
their answer and position paper during the proceedings at the arbiter's level x x x x
Neither can we find statutory justification for the imposition of the six percent (6%) interest in
Art. 122616 of the Civil Code. An obligation with a penal clause is one that contains an
accessory undertaking, primarily intended to induce faithful performance of the principal
prestation. Such cannot be true in this case because there is no stipulation in the contracts
to sell imposing the six percent (6%) interest as penalty for the non-performance of the
contractual obligations.
The Court of Appeals next invokes Art. 2212 of the Civil Code Interest due shall earn legal interest from the time it is judicially demanded, although
the obligation may be silent upon this point.
Nonetheless, the court a quo deleted the six percent (6%) legal interest in view of the failure
of petitioner to comply with the requirement of judicial demand. We recall that the matter of
the six percent (6%) interest was not demanded by petitioner in its counterclaim but was
imposed only at the instance of the HLURB in its decision on appeal.
Apropos the fourth issue, we do not agree with the appellate court that respondent
DUMATOL is entitled to actual damages for unrealized profits. The sworn affidavit of Mr.
Edilberto Bravo shows that he offered to buy for a definite price two (2) condominium units
from respondent. The sale did not materialize however when Mr. Bravo withdrew his offer
after perusing petitioner's letter dated 16 November 1990 for fear of getting involved in a
litigation over the units. A cursory reading of the letter however will show that it contains
basically a mere confirmation of an agreement by both parties during a meeting the
previous day for the settlement of the total account balance. If indeed damages were
sustained by respondent as a result of the aborted sale, it was not directly attributable to
petitioner. What is undeniable is that respondent is in arrears in the payment of its accounts
and petitioner, by sending a letter, was merely trying to enforce an agreement which it
should not be denied of. In fine, we find the evidence grossly anemic to support
respondent's claim for actual damages.

Anent the fifth issue, we agree with the Court of Appeals that he award of a fifty percent
(50%) contract price adjustment in favor of petitioner should be disallowed. We note that as
early as in the proceeding before the HLURB Arbiter, the "Consumer Price Index for All
Income Households" (supposedly the basic for the adjustment of the contract price per Sec.
2.5 of the Contract to Sell)as part of petitioner's evidence, was not admitted for lack o
proper authentication by the National Statistical Coordination Board. An authenticated copy
subsequently submitted by the petitioner was likewise not admitted by the HLURB on the
ground that the rules of evidence demand that documents should have been presented and
proved at the trial stage. It is elementary that documents forming no part of the evidence
before the appellate court shall not be considered in the disposition of the issues.
On the last question, we agree with the observation of the Office of the President and the
Court of Appeals that petitioner is not entitled to attorney's fees for lack of legal and factual
basis. Mere filing of a complaint does not ipso facto entitle a party to attorney's fees.
Respondent disputed the amount being levied against it in the belief that petitioner's
computation is not in accordance with the terms of the contracts to sell. The filing of the
complainant was means sanctioned by law to protect its rights and interests.
WHEREFORE, the assailed Decision of the Court of Appeals dated 30 July 1999 insofar as
it (a) deleted for lack of basis the six percent (6%) interest per annum imposed on the
unpaid instalments and penalty; (b) disallowed a fifty percent (50%) contract price
adjustment; and, (c) did not award attorney's fees in favor of petitioner Segovia
Development Corporation, is AFFIRMED.
The Decision however is MODIFIED in that (a) the penalty interest per month on the unpaid
instalments is reimposed on a reduced rate of one percent (1%) penalty interest per month
or twelve percent (12%) per annum; and, (b) the award of actual or compensatory damages
in favor of respondent J. L. Dumatol Realty and Development Corporation for unrealized
profits is deleted.
Let this case be remanded to the HLURB Arbiter for proper computation of respondent's
liability consistent with the guidelines set forth in the body of this Decision. No costs.
SO ORDERED.

1wphi1.nt