SEBASTIAN SIGA-AN, G.R. No.

173227

Petitioner,

Present:

YNARES-SANTIAGO,

Chairperson,

AUSTRIA-MARTINEZ,

-versus CHICO-NAZARIO,

NACHURA, and

LEONARDO-DE CASTRO,* JJ.

Promulgated:

ALICIA VILLANUEVA,

Respondent. January 20, 2009

x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

CHICO-NAZARIO, J.:
Before Us is a Petition1[1] for Review on Certiorari under Rule 45 of the Rules of Court seeking to set aside the
Decision,2[2] dated 16 December 2005, and Resolution,3[3] dated 19 June 2006 of the Court of Appeals in CA-
G.R. CV No. 71814, which affirmed in toto the Decision,4[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[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-
98-0068. 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[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

1 * Per Special Order No. 546, Associate Justice Teresita J. Leonardo-De Castro was designated to sit as
additional member in view of the retirement of Associate Justice Ruben T. Reyes dated 5 January 2009.
[1] Rollo, pp. 9-23.

2[2] Penned by Associate Justice Josefina Guevara-Salonga with Associate Justices Eliezer R. de Los Santos and
Fernanda Lampas-Peralta, concurring; rollo, pp. 24-32.

3[3] Rollo, pp. 34-35.

4[4] Penned by Judge Florentino M. Alumbres; records, pp. 510-516.

5[5] Records, pp. 1-5.

6[6] Id. at 2.
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[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[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[9]

In his answer10[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[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.

7[7] Id. at 2-3.

8[8] Id. at 3-4.

9[9] Id. at 4-5.

10[10] Id. at 150-160.

11[11] Id. at 3-4.

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[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[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;

12[12] Id. at 4-5.

13[13] Id. at 514-515.

(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[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[15]

Petitioner filed a motion for reconsideration of the appellate courts decision but this was denied. 16[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.

14[14] Id. at 515-516.

15[15] Rollo, p. 32.

16[16] Id. at 34-35.

THE RTC AND THE COURT OF APPEALS ERRED IN APPLYING THE PRINCIPLE OF SOLUTIO INDEBITI.17[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[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[19]

Article 1956 of the Civil Code, which refers to monetary interest, 20[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[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[22]

Petitioner presented a handwritten promissory note dated 12 September 1994 23[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
17[17] Id. at 16.

18 [18] Paras, CIVIL CODE OF THE PHILIPPINES ANNOTATED (13th Edition, 1995, Volume V), p. 854; Caguioa,
COMMENTS AND CASES ON CIVIL LAW, (1st Edition, Volume VI), p. 260.

19[19] Baretto v. Santa Marina, 37 Phil. 568, 571 (1918).

20[20] Supra note 18.

21 [21] Ching v. Nicdao, G.R. No. 141181, 27 April 2007, 522 SCRA 316, 361; Tan v. Valdehueza, 160 Phil. 760, 767
(1975).

22[22] TSN, 18 April 2000, pp. 7-8.

23[23] Records, p. 321.

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[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[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[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[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[28] Respondent did
not categorically declare in the same case that she and respondent made an express stipulation in writing as

24[24] Rollo, pp. 70-71; TSN, 18 April 2000, pp. 17-18.

25[25] Id. at 17-18.

26[26] Records, p. 514.

27[27] Pantranco North Express Inc. v. Standard Insurance Company Inc., G.R. No. 140746, 16 March 2005, 453 SCRA
482, 490.
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[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[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[31] The principle

28[28] CA rollo, p. 88.

29[29] Supra note 18 at 856-857.

30[30] Rollo, pp. 18-20.

31[31] Moreo-Lentfer v. Wolf, G.R. No. 152317, 10 November 2004, 441 SCRA 584, 591.
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[32] We have held that the principle of
solutio indebiti applies in case of erroneous payment of undue interest. 33[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[34] Respondent
issued two checks with a total worth of P700,000.00 in favor of petitioner as payment of the loan. 35[35] These
checks were subsequently encashed by petitioner. 36[36] Obviously, there was an excess of P160,000.00 in the
payment for the loan. Petitioner claims that the excess of P160,000.00 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[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[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.

32[32] Id.

33[33] Velez v. Balzarza, 73 Phil. 630, 632 (1942).

34[34] TSN, 18 April 2000, p. 7.

35[35] Exhibits A & B; records, pp. 367, 371 and 372.

36[36] CA rollo, pp. 58-63.

37[37] TSN, 18 April 2000, p. 23.

38[38] CA rollo, pp. 94-96.

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[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[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[41]

Jurisprudence instructs that in awarding attorneys fees, the trial court must state the factual, legal or equitable
justification for awarding the same.42[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

39[39] Records, pp. 510-516.

40[40] Philippine Airlines v. Court of Appeals, G.R. No. 123238, 22 September 2008.

41[41] Id.

42[42] Serrano v. Gutierrez, G.R. No. 162366, 10 November 2006, 506 SCRA 712, 724; Buing v. Santos, G.R. No. 152544,
19 September 2006, 502 SCRA 315, 321-323; Ballesteros v. Abion, G.R. No. 143361, 9 February 2006, 482 SCRA 23, 39-
40.
and the fact that it dragged on for several years. 43[43] Further, respondent testified that she agreed to
compensate her lawyer handling the instant case such amount. 44[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[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[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 of P660,000.00 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.

43[43] Records, p. 515.

44[44] TSN, 18 April 2000, pp. 35-36.

45[45] G.R. No. 97412, 12 July 1994, 234 SCRA 78, 95-97.

46[46] Records, p. 7.
 MINITA V. CHICO-NAZARIO

Associate Justice

WE CONCUR:

CONSUELO YNARES-SANTIAGO

Associate Justice

Chairperson

MA. ALICIA AUSTRIA-MARTINEZ ANTONIO EDUARDO B. NACHURA

Associate Justice Associate Justice

TERESITA J. LEONARDO-DE CASTRO

Associate Justice
ATTESTATION

I attest that the conclusions in the above Decision were reached in consultation before the case was
assigned to the writer of the opinion of the Courts Division.

CONSUELO YNARES-SANTIAGO

Associate Justice

Chairperson, Third Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairpersons Attestation, it is
hereby certified that the conclusions in the above Decision were reached in consultation before the case was
assigned to the writer of the opinion of the Courts Division.
REYNATO S. PUNO

Chief Justice

[G.R. No. 126490. March 31, 1998]

ESTRELLA PALMARES, petitioner, vs. COURT OF APPEALS and M.B. LENDING CORPORATION, respondents.

DECISION

REGALADO, J.:

Where a party signs a promissory note as a co-maker and binds herself to be jointly and severally liable with the
principal debtor in case the latter defaults in the payment of the loan, is such undertaking of the former
deemed to be that of a surety as an insurer of the debt, or of a guarantor who warrants the solvency of the
debtor?
Pursuant to a promissory note dated March 13, 1990, private respondent M.B. Lending Corporation extended a
loan to the spouses Osmea and Merlyn Azarraga, together with petitioner Estrella Palmares, in the amount of
P30,000.00 payable on or before May 12, 1990, with compounded interest at the rate of 6% per annum to be
computed every 30 days from the date thereof. i[1] On four occasions after the execution of the promissory note
and even after the loan matured, petitioner and the Azarraga spouses were able to pay a total of P16,300.00,
thereby leaving a balance of P13,700.00. No payments were made after the last payment on September 26,
1991.ii[2]
Consequently, on the basis of petitioners solidary liability under the promissory note, respondent corporation
filed a complaintiii[3] against petitioner Palmares as the lone party-defendant, to the exclusion of the principal
debtors, allegedly by reason of the insolvency of the latter.
In her Amended Answer with Counterclaim, iv[4] petitioner alleged that sometime in August 1990, immediately
after the loan matured, she offered to settle the obligation with respondent corporation but the latter informed
her that they would try to collect from the spouses Azarraga and that she need not worry about it ; that
there has already been a partial payment in the amount of P17,010.00; that the interest of
6% per month compounded at the same rate per month, as well as the penalty charges of 3% per month, are
usurious and unconscionable; and that while she agrees to be liable on the note but only upon default of the
principal debtor, respondent corporation acted in bad faith in suing her alone without including the Azarragas
when they were the only ones who benefited from the proceeds of the loan.
During the pre-trial conference, the parties submitted the following issues for the resolution of the trial court:
(1) what the rate of interest, penalty and damages should be; (2) whether the liability of the defendant (herein
petitioner) is primary or subsidiary; and (3) whether the defendant Estrella Palmares is only a guarantor with a
subsidiary liability and not a co-maker with primary liability. v[5]
Thereafter, the parties agreed to submit the case for decision based on the pleadings filed and the memoranda
to be submitted by them. On November 26, 1992, the Regional Trial Court of Iloilo City, Branch 23, rendered
judgment dismissing the complaint without prejudice to the filing of a separate action for a sum of money
against the spouses Osmea and Merlyn Azarraga who are primarily liable on the instrument. vi[6] This was based
on the findings of the court a quo that the filing of the complaint against herein petitioner Estrella Palmares, to
the exclusion of the Azarraga spouses, amounted to a discharge of a prior party; that the offer made by
petitioner to pay the obligation is considered a valid tender of payment sufficient to discharge a persons
secondary liability on the instrument; that petitioner, as co-maker, is only secondarily liable on the instrument;
and that the promissory note is a contract of adhesion.

Respondent Court of Appeals, however, reversed the decision of the trial court, and rendered judgment
declaring herein petitioner Palmares liable to pay respondent corporation:

1. The sum of P13,700.00 representing the outstanding balance still due and owing with interest at six percent
(6%) per month computed from the date the loan was contracted until fully paid;

2. The sum equivalent to the stipulated penalty of three percent (3%) per month, of the outstanding balance;

3. Attorneys fees at 25% of the total amount due per stipulations;

4. Plus costs of suit.vii[7]

Contrary to the findings of the trial court, respondent appellate court declared that petitioner Palmares is a
surety since she bound herself to be jointly and severally or solidarily liable with the principal debtors, the
Azarraga spouses, when she signed as a co-maker. As such, petitioner is primarily liable on the note and hence
may be sued by the creditor corporation for the entire obligation. It also adverted to the fact that petitioner
admitted her liability in her Answer although she claims that the Azarraga spouses should have been
impleaded. Respondent court ordered the imposition of the stipulated 6% interest and 3% penalty charges on
the ground that the Usury Law is no longer enforceable pursuant to Central Bank Circular No. 905. Finally, it
rationalized that even if the promissory note were to be considered as a contract of adhesion, the same is not
entirely prohibited because the one who adheres to the contract is free to reject it entirely; if he adheres, he
gives his consent.

Hence this petition for review on certiorari wherein it is asserted that:

A. The Court of Appeals erred in ruling that Palmares acted as surety and is therefore solidarily liable to pay the
promissory note.

1. The terms of the promissory note are vague. Its conflicting provisions do not establish Palmares solidary
liability.

2. The promissory note contains provisions which establish the co-makers liability as that of a guarantor.

3. There is no sufficient basis for concluding that Palmares liability is solidary.

4. The promissory note is a contract of adhesion and should be construed against M.B. Lending Corporation.

5. Palmares cannot be compelled to pay the loan at this point.

B. Assuming that Palmares liability is solidary, the Court of Appeals erred in strictly imposing the interests and
penalty charges on the outstanding balance of the promissory note.

The foregoing contentions of petitioner are denied and contradicted in their material points by respondent
corporation. They are further refuted by accepted doctrines in the American jurisdiction after which we
patterned our statutory law on suretyship and guaranty. This case then affords us the opportunity to make an
extended exposition on the ramifications of these two specialized contracts, for such guidance as may be taken
therefrom in similar local controversies in the future.

The basis of petitioner Palmares liability under the promissory note is expressed in this wise:

ATTENTION TO CO-MAKERS: PLEASE READ WELL

I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan, have fully understood the contents of this
Promissory Note for Short-Term Loan:

That as Co-maker, I am fully aware that I shall be jointly and severally or solidarily liable with the above principal
maker of this note;
That in fact, I hereby agree that M.B. LENDING CORPORATION may demand payment of the above loan from
me in case the principal maker, Mrs. Merlyn Azarraga defaults in the payment of the note subject to the same
conditions above-contained.viii[8]

Petitioner contends that the provisions of the second and third paragraph are conflicting in that while the
second paragraph seems to define her liability as that of a surety which is joint and solidary with the principal
maker, on the other hand, under the third paragraph her liability is actually that of a mere guarantor because
she bound herself to fulfill the obligation only in case the principal debtor should fail to do so, which is the
essence of a contract of guaranty. More simply stated, although the second paragraph says that she is liable as a
surety, the third paragraph defines the nature of her liability as that of a guarantor. According to petitioner,
these are two conflicting provisions in the promissory note and the rule is that clauses in the contract should be
interpreted in relation to one another and not by parts. In other words, the second paragraph should not be
taken in isolation, but should be read in relation to the third paragraph.
In an attempt to reconcile the supposed conflict between the two provisions, petitioner avers that she could be
held liable only as a guarantor for several reasons. First, the words jointly and severally or solidarily liable used
in the second paragraph are technical and legal terms which are not fully appreciated by an ordinary layman
like herein petitioner, a 65-year old housewife who is likely to enter into such transactions without fully realizing
the nature and extent of her liability. On the contrary, the wordings used in the third paragraph are easier to
comprehend. Second, the law looks upon the contract of suretyship with a jealous eye and the rule is that the
obligation of the surety cannot be extended by implication beyond specified limits, taking into consideration
the peculiar nature of a surety agreement which holds the surety liable despite the absence of any direct
consideration received from either the principal obligor or the creditor. Third, the promissory note is a contract
of adhesion since it was prepared by respondent M.B. Lending Corporation. The note was brought to petitioner
partially filled up, the contents thereof were never explained to her, and her only participation was to sign
thereon. Thus, any apparent ambiguity in the contract should be strictly construed against private respondent
pursuant to Art. 1377 of the Civil Code. ix[9]

Petitioner accordingly concludes that her liability should be deemed restricted by the clause in the third
paragraph of the promissory note to be that of a guarantor.

Moreover, petitioner submits that she cannot as yet be compelled to pay the loan because the principal debtors
cannot be considered in default in the absence of a judicial or extrajudicial demand. It is true that the complaint
alleges the fact of demand, but the purported demand letters were never attached to the pleadings filed by
private respondent before the trial court. And, while petitioner may have admitted in her Amended Answer
that she received a demand letter from respondent corporation sometime in 1990, the same did not effectively
put her or the principal debtors in default for the simple reason that the latter subsequently made a partial
payment on the loan in September, 1991, a fact which was never controverted by herein private respondent.
Finally, it is argued that the Court of Appeals gravely erred in awarding the amount of P2,745,483.39 in favor of
private respondent when, in truth and in fact, the outstanding balance of the loan is only P13,700.00. Where
the interest charged on the loan is exorbitant, iniquitous or unconscionable, and the obligation has been
partially complied with, the court may equitably reduce the penalty x[10] on grounds of substantial justice. More
importantly, respondent corporation never refuted petitioners allegation that immediately after the loan
matured, she informed said respondent of her desire to settle the obligation. The court should, therefore,
mitigate the damages to be paid since petitioner has shown a sincere desire for a compromise. xi[11]

After a judicious evaluation of the arguments of the parties, we are constrained to dismiss the petition for lack
of merit, but to except therefrom the issue anent the propriety of the monetary award adjudged to herein
respondent corporation.
At the outset, let it here be stressed that even assuming arguendo that the promissory note executed between
the parties is a contract of adhesion, it has been the consistent holding of the Court that contracts of adhesion
are not invalid per se and that on numerous occasions the binding effects thereof have been upheld. The
peculiar nature of such contracts necessitate a close scrutiny of the factual milieu to which the provisions are
intended to apply. Hence, just as consistently and unhesitatingly, but without categorically invalidating such
contracts, the Court has construed obscurities and ambiguities in the restrictive provisions of contracts of
adhesion strictly albeit not unreasonably against the drafter thereof when justified in light of the operative facts
and surrounding circumstances.xii[12] The factual scenario obtaining in the case before us warrants a liberal
application of the rule in favor of respondent corporation.

The Civil Code pertinently provides:

Art. 2047. By guaranty, a person called the guarantor binds himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this
Book shall be observed. In such case the contract is called a suretyship.
It is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear and leave no doubt
upon the intention of the contracting parties, the literal meaning of its stipulation shall control. xiii[13] In the case
at bar, petitioner expressly bound herself to be jointly and severally or solidarily liable with the principal maker
of the note. The terms of the contract are clear, explicit and unequivocal that petitioners liability is that of a
surety.
Her pretension that the terms jointly and severally or solidarily liable contained in the second paragraph of her
contract are technical and legal terms which could not be easily understood by an ordinary layman like her is
diametrically opposed to her manifestation in the contract that she fully understood the contents of the
promissory note and that she is fully aware of her solidary liability with the principal maker. Petitioner admits
that she voluntarily affixed her signature thereto; ergo, she cannot now be heard to claim otherwise. Any
reference to the existence of fraud is unavailing. Fraud must be established by clear and convincing evidence,
mere preponderance of evidence not even being adequate. Petitioners attempt to prove fraud must, therefore,
fail as it was evidenced only by her own uncorroborated and, expectedly, self-serving allegations. xiv[14]
Having entered into the contract with full knowledge of its terms and conditions, petitioner is estopped to
assert that she did so under a misapprehension or in ignorance of their legal effect, or as to the legal effect of
the undertaking.xv[15] The rule that ignorance of the contents of an instrument does not ordinarily affect the
liability of one who signs it also applies to contracts of suretyship. And the mistake of a surety as to the legal
effect of her obligation is ordinarily no reason for relieving her of liability. xvi[16]

Petitioner would like to make capital of the fact that although she obligated herself to be jointly and severally
liable with the principal maker, her liability is deemed restricted by the provisions of the third paragraph of her
contract wherein she agreed that M.B. Lending Corporation may demand payment of the above loan from me
in case the principal maker, Mrs. Merlyn Azarraga defaults in the payment of the note, which makes her
contract one of guaranty and not suretyship. The purported discordance is more apparent than real.
A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor. xvii[17] A
suretyship is an undertaking that the debt shall be paid; a guaranty, an undertaking that the debtor shall pay. xviii
[18] Stated differently, a surety promises to pay the principals debt if the principal will not pay, while a
guarantor agrees that the creditor, after proceeding against the principal, may proceed against the guarantor if
the principal is unable to pay.xix[19] A surety binds himself to perform if the principal does not, without regard
to his ability to do so. A guarantor, on the other hand, does not contract that the principal will pay, but simply
that he is able to do so.xx[20] In other words, a surety undertakes directly for the payment and is so responsible
at once if the principal debtor makes default, while a guarantor contracts to pay if, by the use of due diligence,
the debt cannot be made out of the principal debtor. xxi[21]
Quintessentially, the undertaking to pay upon default of the principal debtor does not automatically remove it
from the ambit of a contract of suretyship. The second and third paragraphs of the aforequoted portion of the
promissory note do not contain any other condition for the enforcement of respondent corporations right
against petitioner. It has not been shown, either in the contract or the pleadings, that respondent corporation
agreed to proceed against herein petitioner only if and when the defaulting principal has become insolvent. A
contract of suretyship, to repeat, is that wherein one lends his credit by joining in the principal debtors
obligation, so as to render himself directly and primarily responsible with him, and without reference to the
solvency of the principal.xxii[22]
In a desperate effort to exonerate herself from liability, petitioner erroneously invokes the rule on strictissimi
juris, which holds that when the meaning of a contract of indemnity or guaranty has once been judicially
determined under the rule of reasonable construction applicable to all written contracts, then the liability of
the surety, under his contract, as thus interpreted and construed, is not to be extended beyond its strict
meaning.xxiii[23] The rule, however, will apply only after it has been definitely ascertained that the contract is
one of suretyship and not a contract of guaranty. It cannot be used as an aid in determining whether a partys
undertaking is that of a surety or a guarantor.

Prescinding from these jurisprudential authorities, there can be no doubt that the stipulation contained in the
third paragraph of the controverted suretyship contract merely elucidated on and made more specific the
obligation of petitioner as generally defined in the second paragraph thereof. Resultantly, the theory advanced
by petitioner, that she is merely a guarantor because her liability attaches only upon default of the principal
debtor, must necessarily fail for being incongruent with the judicial pronouncements adverted to above.
It is a well-entrenched rule that in order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall also be principally considered. xxiv[24] Several attendant factors in
that genre lend support to our finding that petitioner is a surety. For one, when petitioner was informed about
the failure of the principal debtor to pay the loan, she immediately offered to settle the account with
respondent corporation. Obviously, in her mind, she knew that she was directly and primarily liable upon
default of her principal. For another, and this is most revealing, petitioner presented the receipts of the
payments already made, from the time of initial payment up to the last, which were all issued in her name and
of the Azarraga spouses.xxv[25] This can only be construed to mean that the payments made by the principal
debtors were considered by respondent corporation as creditable directly upon the account and inuring to the
benefit of petitioner. The concomitant and simultaneous compliance of petitioners obligation with that of her
principals only goes to show that, from the very start, petitioner considered herself equally bound by the
contract of the principal makers.
In this regard, we need only to reiterate the rule that a surety is bound equally and absolutely with the
principal,xxvi[26] and as such is deemed an original promisor and debtor from the beginning. xxvii[27] This is
because in suretyship there is but one contract, and the surety is bound by the same agreement which binds
the principal.xxviii[28] In essence, the contract of a surety starts with the agreement, xxix[29] which is precisely the
situation obtaining in this case before the Court.
It will further be observed that petitioners undertaking as co-maker immediately
follows the terms and conditions stipulated between respondent corporation, as
creditor, and the principal obligors. A surety is usually bound with his principal by the same
instrument, executed at the same time and upon the same consideration; he is an original debtor, and his
liability is immediate and direct.xxx[30] Thus, it has been held that where a written agreement on the same
sheet of paper with and immediately following the principal contract between the buyer and seller is executed
simultaneously therewith, providing that the signers of the agreement agreed to the terms of the principal
contract, the signers were sureties jointly liable with the buyer. xxxi[31] A surety usually enters into the same
obligation as that of his principal, and the signatures of both usually appear upon the same instrument, and the
same consideration usually supports the obligation for both the principal and the surety. xxxii[32]
There is no merit in petitioners contention that the complaint was prematurely filed because the principal
debtors cannot as yet be considered in default, there having been no judicial or extrajudicial demand made by
respondent corporation. Petitioner has agreed that respondent corporation may demand payment of the loan
from her in case the principal maker defaults, subject to the same conditions expressed in the promissory note.
Significantly, paragraph (G) of the note states that should I fail to pay in accordance with the above schedule of
payment, I hereby waive my right to notice and demand. Hence, demand by the creditor is no longer necessary
in order that delay may exist since the contract itself already expressly so declares. xxxiii[33] As a surety, petitioner
is equally bound by such waiver.
Even if it were otherwise, demand on the sureties is not necessary before bringing suit against them, since the
commencement of the suit is a sufficient demand. xxxiv[34] On this point, it may be worth mentioning that a
surety is not even entitled, as a matter of right, to be given notice of the principals default. Inasmuch as the
creditor owes no duty of active diligence to take care of the interest of the surety, his mere failure to voluntarily
give information to the surety of the default of the principal cannot have the effect of discharging the surety.
The surety is bound to take notice of the principals default and to perform the obligation. He cannot complain
that the creditor has not notified him in the absence of a special agreement to that effect in the contract of
suretyship.xxxv[35]
The alleged failure of respondent corporation to prove the fact of demand on the principal debtors, by not
attaching copies thereof to its pleadings, is likewise immaterial. In the absence of a statutory or contractual
requirement, it is not necessary that payment or performance of his obligation be first demanded of the
principal, especially where demand would have been useless; nor is it a requisite, before proceeding against the
sureties, that the principal be called on to account. xxxvi[36] The underlying principle therefor is that a suretyship
is a direct contract to pay the debt of another. A surety is liable as much as his principal is liable, and absolutely
liable as soon as default is made, without any demand upon the principal whatsoever or any notice of
default.xxxvii[37] As an original promisor and debtor from the beginning, he is held ordinarily to know every
default of his principal.xxxviii[38]

Petitioner questions the propriety of the filing of a complaint solely against her to the exclusion of the principal
debtors who allegedly were the only ones who benefited from the proceeds of the loan. What petitioner is
trying to imply is that the creditor, herein respondent corporation, should have proceeded first against the
principal before suing on her obligation as surety. We disagree.
A creditors right to proceed against the surety exists independently of his right to proceed against the
principal.xxxix[39] Under
Article 1216 of the Civil Code, the creditor may proceed
against any one of the solidary debtors or some or all of them
simultaneously. The rule, therefore, is that if the obligation is joint and
several, the creditor has the right to proceed even against the surety
alone. [40] Since, generally, it is not necessary for a creditor to proceed against a principal in order to hold
xl

the surety liable, where, by the terms of the contract, the obligation of the surety is the same as that of the
principal, then as soon as the principal is in default, the surety is likewise in default, and may be sued
immediately and before any proceedings are had against the principal. xli[41] Perforce, in accordance with the
rule that, in the absence of statute or agreement otherwise, a surety is primarily liable, and with the rule that
his proper remedy is to pay the debt and pursue the principal for reimbursement, the surety cannot at law,
unless permitted by statute and in the absence of any agreement limiting the application of the security,
require the creditor or obligee, before proceeding against the surety, to resort to and exhaust his remedies
against the principal, particularly where both principal and surety are equally bound. xlii[42]
We agree with respondent corporation that its mere failure to immediately sue petitioner on her obligation
does not release her from liability. Where a creditor refrains from proceeding against the principal, the surety is
not exonerated. In other words, mere want of diligence or forbearance does not affect the creditors rights vis--
vis the surety, unless the surety requires him by appropriate notice to sue on the obligation. Such gratuitous
indulgence of the principal does not discharge the surety whether given at the principals request or without it,
and whether it is yielded by the creditor through sympathy or from an inclination to favor the principal, or is
only the result of passiveness. The neglect of the creditor to sue the principal at the time the debt falls due
does not discharge the surety, even if such delay continues until the principal becomes insolvent. xliii[43] And, in
the absence of proof of resultant injury, a surety is not discharged by the creditors mere statement that the
creditor will not look to the surety, xliv[44] or that he need not trouble himself. xlv[45] The consequences of the
delay, such as the subsequent insolvency of the principal, xlvi[46] or the fact that the remedies against the
principal may be lost by lapse of time, are immaterial. xlvii[47]
The raison dtre for the rule is that there is nothing to prevent the creditor from proceeding against the principal
at any time.xlviii[48] At any rate, if the surety is dissatisfied with the degree of activity displayed by the creditor in
the pursuit of his principal, he may pay the debt himself and become subrogated to all the rights and remedies
of the creditor. xlix[49]
It may not be amiss to add that leniency shown to a debtor in default, by delay permitted by the creditor
without change in the time when the debt might be demanded, does not constitute an extension of the time of
payment, which would release the surety. l[50] In order to constitute an extension discharging the surety, it
should appear that the extension was for a definite period, pursuant to an enforceable agreement between the
principal and the creditor, and that it was made without the consent of the surety or with a reservation of rights
with respect to him. The contract must be one which precludes the creditor from, or at least hinders him in,
enforcing the principal contract within the period during which he could otherwise have enforced it, and which
precludes the surety from paying the debt. li[51]
None of these elements are present in the instant case. Verily, the mere fact that respondent corporation gave
the principal debtors an extended period of time within which to comply with their obligation did not
effectively absolve herein petitioner from the consequences of her undertaking. Besides, the burden is on the
surety, herein petitioner, to show that she has been discharged by some act of the creditor, lii[52] herein
respondent corporation, failing in which we cannot grant the relief prayed for.

As a final issue, petitioner claims that assuming that her liability is solidary, the interests and penalty charges on
the outstanding balance of the loan cannot be imposed for being illegal and unconscionable. Petitioner
additionally theorizes that respondent corporation intentionally delayed the collection of the loan in order that
the interests and penalty charges would accumulate. The statement, likewise traversed by said respondent, is
misleading.
In an affidavitliii[53] executed by petitioner, which was attached to her petition, she stated, among others, that:

8. During the latter part of 1990, I was surprised to learn that Merlyn Azarragas loan has been released and that
she has not paid the same upon its maturity. I received a telephone call from Mr. Augusto Banusing of MB
Lending informing me of this fact and of my liability arising from the promissory note which I signed.

9. I requested Mr. Banusing to try to collect first from Merlyn and Osmea Azarraga. At the same time, I offered
to pay MB Lending the outstanding balance of the principal obligation should he fail to collect from Merlyn and
Osmea Azarraga. Mr. Banusing advised me not to worry because he will try to collect first from Merlyn and
Osmea Azarraga.

10. A year thereafter, I received a telephone call from the secretary of Mr. Banusing who reminded that the loan
of Merlyn and Osmea Azarraga, together with interest and penalties thereon, has not been paid. Since I had no
available funds at that time, I offered to pay MB Lending by delivering to them a parcel of land which I own. Mr.
Banusings secretary, however, refused my offer for the reason that they are not interested in real estate.

11. In March 1992, I received a copy of the summons and of the complaint filed against me by MB Lending
before the RTC-Iloilo. After learning that a complaint was filed against me, I instructed Sheila Gatia to go to MB
Lending and reiterate my first offer to pay the outstanding balance of the principal obligation of Merlyn
Azarraga in the amount of P30,000.00.

12. Ms. Gatia talked to the secretary of Mr. Banusing who referred her to Atty. Venus, counsel of MB Lending.

13. Atty. Venus informed Ms. Gatia that he will consult Mr. Banusing if my offer to pay the outstanding balance
of the principal obligation loan (sic) of Merlyn and Osmea Azarraga is acceptable. Later, Atty. Venus informed
Ms. Gatia that my offer is not acceptable to Mr. Banusing.

The purported offer to pay made by petitioner can not be deemed sufficient and substantial in order to
effectively discharge her from liability. There are a number of circumstances which conjointly inveigh against
her aforesaid theory.

1. Respondent corporation cannot be faulted for not immediately demanding payment from petitioner. It was
petitioner who initially requested that the creditor try to collect from her principal first, and she offered to pay
only in case the creditor fails to collect. The delay, if any, was occasioned by the fact that respondent
corporation merely acquiesced to the request of petitioner. At any rate, there was here no actual offer of
payment to speak of but only a commitment to pay if the principal does not pay.
2. Petitioner made a second attempt to settle the obligation by offering a parcel of land which she owned.
Respondent corporation was acting well within its rights when it refused to accept the offer. The debtor of a
thing cannot compel the creditor to receive a different one, although the latter may be of the same value, or
more valuable than that which is due. liv[54] The obligee is entitled to demand fulfillment of the obligation or
performance as stipulated. A change of the object of the obligation would constitute novation requiring the
express consent of the parties.lv[55]
3. After the complaint was filed against her, petitioner reiterated her offer to pay the outstanding balance of the
obligation in the amount of P30,000.00 but the same was likewise rejected. Again, respondent corporation
cannot be blamed for refusing the amount being offered because it fell way below the amount it had
computed, based on the stipulated interests and penalty charges, as owing and due from herein petitioner. A
debt shall not be understood to have been paid unless the thing or service in which the obligation consists has
been completely delivered or rendered, as the case may be. lvi[56] In other words, the prestation must be
fulfilled completely. A person entering into a contract has a right to insist on its performance in all particulars. lvii
[57]
Petitioner cannot compel respondent corporation to accept the amount she is willing to pay because the
moment the latter accepts the performance, knowing its incompleteness or irregularity, and without expressing
any protest or objection, then the obligation shall be deemed fully complied with. lviii[58] Precisely, this is what
respondent corporation wanted to avoid when it continually refused to settle with petitioner at less than what
was actually due under their contract.

This notwithstanding, however, we find and so hold that the penalty charge of 3% per month and attorneys fees
equivalent to 25% of the total amount due are highly inequitable and unreasonable.

It must be remembered that from the principal loan of P30,000.00, the amount of
P16,300.00 had already been paid even before the filing of the present case . Article 1229
of the Civil Code provides that the court shall equitably reduce the penalty when the principal obligation has
been partly or irregularly complied with by the debtor. And, even if there has been no performance, the penalty
may also be reduced if it is iniquitous or leonine.

In a case previously decided by this Court which likewise involved private respondent M.B. Lending Corporation,
and which is substantially on all fours with the one at bar, we decided to eliminate altogether the penalty
interest for being excessive and unwarranted under the following rationalization:
Upon the matter of penalty interest, we agree with the Court of Appeals that the economic impact of the
penalty interest of three percent (3%) per month on total amount due but unpaid should be equitably reduced.
The purpose for which the penalty interest is intended - that is, to punish the obligor - will have been
sufficiently served by the effects of compounded interest. Under the exceptional circumstances in the case at
bar, e.g., the original amount loaned was only P15,000.00; partial payment of P8,600.00 was made on due date;
and the heavy (albeit still lawful) regular compensatory interest, the penalty interest stipulated in the parties
promissory note is iniquitous and unconscionable and may be equitably reduced further by eliminating such
penalty interest altogether.lix[59]

Accordingly, the penalty interest of 3% per month being imposed on petitioner should similarly be eliminated.
Finally, with respect to the award of attorneys fees, this Court has previously ruled that even with an agreement
thereon between the parties, the court may nevertheless reduce such attorneys fees fixed in the contract when
the amount thereof appears to be unconscionable or unreasonable. lx[60] To that end, it is not even necessary to
show, as in other contracts, that it is contrary to morals or public policy. lxi[61] The grant of attorneys fees
equivalent to 25% of the total amount due is, in our opinion, unreasonable and immoderate, considering the
minimal unpaid amount involved and the extent of the work involved in this simple action for collection of a
sum of money. We, therefore, hold that the amount of P10,000.00 as and for attorneys fee would be sufficient
in this case.lxii[62]
WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the MODIFICATION that the penalty
interest of 3% per month is hereby deleted and the award of attorneys fees is reduced to P10,000.00.

SO ORDERED.

Melo, Puno, Mendoza, and Martinez, JJ., concur.

i[1] Annex C, Petition; Rollo, 49.

ii[2] Rollo, 38.

iii[3] Annex D, id., ibid., 51.

iv[4] Annex H, id., ibid., 69.

v[5] Rollo, 76.

vi[6] Annex I, Petition; Rollo, 73; penned by Presiding Judge Tito G. Gustilo.

vii[7] Annex A, id., ibid., 36; Associate Justice Jose C. de la Rama, ponente, with Associate Justices Emeterio C.
Cui and Eduardo G. Montenegro, concurring.

viii[8] Rollo, 50.

ix[9] Art. 1377. The interpretation of obscure words or stipulations in a contract shall not favor the party who
caused the obscurity.

x[10] Article 1229, Civil Code.

xi[11] Citing Article 2031, id.

xii[12] Philippine Airlines, Inc. vs. Court of Appeals, et al., G.R. No. 119706, March 14, 1996, 255 SCRA 48.

xiii[13] Abella vs. Court of Appeals, et al., G.R. No. 107606, June 20, 1996, 257 SCRA 482.

xiv[14] Inciong, Jr. vs. Court of Appeals, et al., G.R. No. 96405, June 26, 1996, 257 SCRA 578.

xv[15] 72 CJS, Principal and Surety, 83, 565.

xvi[16] Churchill vs. Bradley, 5 A. 189.

xvii[17] Northern State Bank of Grand Forks vs. Bellamy, 125 N.W. 888.

xviii[18] Shearer vs. R.S. Peele & Co., 36 N.E. 455.

xix[19] W.T. Rawleigh Co. vs. Overstreet, et al., 32 S.E. 2d 574.

xx[20] Manry vs. Waxelbaum Co., 33 S.E. 701.

xxi[21] 40A Words and Phrases 429.

xxii[22] Erbelding vs. Noland, Co., Inc., 64 S.E. 2d 218.

xxiii[23] Covey, et al. vs. Schiesswohl, 114 P. 292.

xxiv[24] Article 1371, Civil Code.

xxv[25] Rollo, 67-68.

xxvi[26] 18A Words and Phrases 657.

xxvii[27] Hall, et al. vs. Weaver, 34 F. 104.

xxviii[28] Howell vs. Commissioner of Internal Revenue, 69 F.2d 447.

xxix[29] Shores-Mueller Co. vs. Palmer, et al., 216 S.W. 295.

xxx[30] Treweek vs. Howard, et al., 39 P. 20.

xxxi[31] W.T. Rawleigh Co. vs. Overstreet, et al., 32 S.E. 2d 574.

xxxii[32] Liquidating Midland Bank vs. Stecker, et al., 179 N.E. 504.
xxxiii[33] Article 1169, Civil Code.

xxxiv[34] Rowe, et al. vs. Bank of New Brockton, 92 So. 643.

xxxv[35] 74 Am Jur 2d, Principal and Surety, 35, 36.

xxxvi[36] Smith vs. US, 8 L Ed 130.

xxxvii[37] Rouse, et al. vs. Wooten, 53 S.E. 430.

xxxviii[38] Hall vs. Weaver, 34 F. 104.

xxxix[39] Christenson vs. Diversified Builders, Inc., et al., 331 F.2d 992.

xl[40] 74 Am Jur 2d, Principal and Surety, 144, 103.

xli[41] Standard Accident Insurance Co. vs. Standard Oil Co., 133 So.2d 539; School District No. 65 of Lincoln
County vs. Universal Surety Co., 135 N.W.2d 232; Depot Realty Syndicate vs. Enterprise Brewing Co., 171 P.
223.

xlii[42] 72 CJS, Principal and Surety, 287, 744-745.

xliii[43] 74 Am Jur 2d, Principal and Surety, 68, 53-54.

xliv[44] First National Bank of Huntington vs. Williams, et al., 26 N.E. 75.

xlv[45] National Bank of Commerce vs. Gilvin, 152 S.W. 652.

xlvi[46] Kerby, et al. vs. State ex rel. Frohmiller, 157 P.2d 698.

xlvii[47] 72 CJS, Principal and Surety, 208, 673.

xlviii[48] Scott vs. Gaulding, et al., 122 ALR 200.

xlix[49] 74 Am Jur 2d, Principal and Surety, 68, 53.

l[50] Ibid., id., 59, 48-49.

li[51] 72 CJS, Principal and Surety, 173, 651.

lii[52] Op. cit., 270, 723.

liii[53] Annex E, Petition; Rollo, 54.

liv[54] Article 1244, Civil Code.

lv[55] Padilla, A., Civil Code Annotated, Vol. IV, 1987 ed., 434.

lvi[56] Article 1233, Civil Code.

lvii[57] Tolentino, A., Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol. IV, 1986 ed.,
280.

lviii[58] Article 1235, Civil Code.

lix[59] Magallanes, et al. vs. Court of Appeals, et al., G.R. No. 112614, May 16, 1994, Third Division, Minute
Resolution.

lx[60] Security Bank & Trust Co., et al. vs. Court of Appeals, et al., G.R. No. 117009, October 11, 1995, 249
SCRA 206.

lxi[61] Medco Industrial Corporation, et al. vs. The Hon. Court of Appeals, et al., G.R. No. 84610, November 24,
1988, 167 SCRA 838.

lxii[62] Supra, fn. 59.

FIRST DIVISION

SPOUSES VIRGILIO AND DIGNA G.R. No. 159748

ANASTACIO-CALINA,
Petitioners,
Present:

PUNO, C.J., Chairperson,

SANDOVAL-GUTIERREZ,
- versus - CORONA,
AZCUNA, and
GARCIA, JJ.

DEVELOPMENT BANK Promulgated:

OF THE PHILIPPINES,
Respondent. July 31, 2007
x------------------------------------------------x

DECISION

PUNO, C.J.:

Before the Court is a petition for review on certiorari filed under Rule 45 of the Revised Rules of Court.
Petitioner spouses VIRGILIO AND DIGNA ANASTACIO-CALINA (Spouses Calina) seek to reverse the decision[1] of
the Court of Appeals in CA-G.R. CV No. 570655, which set aside the decision of the trial court dated October 14,
1996.
On July 16, 1975, the Spouses Calina and respondent DEVELOPMENT BANK OF THE PHILIPPINES (DBP)
entered into an agricultural (deep-sea fishing) loan agreement, whereby respondent lent to petitioners the
amount of P1,356,000.00.
On July 24, 1975, as security for payment of the loan, petitioners executed a promissory note[2] in
favor of respondent, promising to pay the aforementioned sum, together with 12% interest per annum, in the
following manner:
- At the end of the third month after date of full release or completion of boat (if full release is not availed of),
only interest and advances due shall be paid;

- Thereafter, the loan shall be repayable within five (5) years, the first payment to be made on ____________
and the subsequent payments on the _____day of every three (3) months thereafter, and each of all such
payments shall be NINETY ONE THOUSAND ONE HUNDRED FORTY FOUR AND 50/100 PESOS (P91,144.50),
which shall cover amortizations on the principal and interest at the above mentioned rate.[3]

On the same date, petitioners also executed a Deed of Undertaking,[4] which provided the following pertinent
conditions for the loan:
1. That the loan shall be utilized specifically to finance 80% of the total fixed cost portion of the loan as follows:
P1,345,258.00 - Acquisition of one (1) unit Purse Seine Type fishing vessel complete with engine and
accessories; and
350,000.00 - Purchase of Purse Seine nets and accessories
P1,695,258.00 - Total Fixed Cost
P 339,258.00 - Borrowers Equity
P1,356,000.00 - DBP/IBRD Fund

2. Borrower shall put up out of his own funds the amount of P614,658.00 (P339,258.00 for fixed cost
and P275,400.00 for operating cost) representing his counterpart of total project costs to be financed. Borrower
shall show proof of the availability of the amount of P275,400.00 required for operating cost before initial
release of the loan.

3. Borrower shall avail of the proceeds of the loan within a period of six (6) months from date of
perfection of documents for the loan.

xxx
5. This loan shall be secured by chattel mortgage on one (1) unit Purse Seine type fishing boat,
complete with engine and accessories, including purse seine nets.

xxx

10. That should the borrower fail to avail of the loan or any balance thereof within the said period and
should he request for the extension thereof, he shall thereby be obligated to pay thereafter a commitment fee
of of 1% per month on the unreleased proceeds of the loan until the same are fully released or cancelled upon
written request of the borrower. This provision is, however, without prejudice to the right of the Bank to cancel
the loan, recover such amounts as may have been already released therefrom and/or avail of the remedies
provided for in the promissory note and mortgage contract or alternatively, the ordinary remedies in law should
the delays in the borrowers availing of the proceeds of the loan constitute a violation of the promissory note
and mortgage contract in accordance with the provisions thereof, and/or impair the security position of the
Bank.

11. That the Bank reserves the right to reduce or stop releases/advances if after inspection and
verification the accomplishment in the financed project does not justify giving full amount, or if the conditions
of the project do not show improvements commensurate with the amounts already advanced/released. In such
an event or in the event of abandonment of the project, all advances/releases made shall automatically
become due and demandable and the Bank shall take such legal steps as are necessary to protect its interest.

xxx

17. That the fishing vessel to be mortgaged in favor of DBP shall be covered by an all risk insurance policy. In the
event that any of the fishing vessel(s) become uninsurable the borrower shall reduce the outstanding balance
of the loan to the loan value of the remaining acceptable securities.

xxx

21. That the borrower shall secure and submit the following:

xxx
c. A performance bond equivalent to 80% of hull cost to guarantee that the fishing vessel shall be constructed in
accordance with the plan approved by the said Commission, within one (1) year from date of first release of
loan, said performance bond to be cancelled only upon completion of the vessel and presentation to the DBP of
a Certificate of Admeasurement and Safety issued by said Commission for the vessel.

x x x.

Pursuant to the conditions set by the Deed of Undertaking, on July 31, 1975, Towers Assurance
Corporation, acting as surety for petitioners, executed a Performance Bond for the amount of P319,085.60.
In August 1975, using the first release of the loan from DBP and their own funds to pay for materials
and labor costs, the Spouses Calina commenced the construction of a fishing boat on a beach in Panakan,
Palawan.[5] In September 1975, the second release of the loan was given to petitioners by DBP. Petitioners
used 95% of this amount to purchase one unit of a Cummins Marine Diesel Engine. Prior to installation in the
fishing boat, the engine was placed in storage. On September 25, 1975, the third release of the loan was given
to purchase other equipment. At this point, DBP had already released P451,589.80 to petitioners.
In December 1975, petitioners requested DBP to conduct its inspection of the partially completed keel
of the fishing boat. However, the inspectors of DBP were unavailable and failed to visit the construction site.
In the last week of January 1976, typhoon Asyang hit Palawan, and totally destroyed the fishing boat under
construction. All materials were washed out to sea.
On January 26, 1978, petitioner Virgilio Calina informed the DBP of his decision to abandon the project.[6] He
requested the DBP to grant him 60 days within which to sell the Cummins Marine Diesel Engine and out of the
proceeds thereof, pay all his obligations to DBP.
On October 3, 1978, the DBP wrote a letter to the petitioners, demanding immediate payment of P666,195.55,
representing the amount of their obligation plus interest from August 18, 1978, excluding daily additional
interest.[7]
On December 11, 1980, DBP filed a complaint for sum of money, with a prayer for the issuance of a writ
of preliminary attachment for the Cummins Marine Diesel Engine, against the Spouses Calina and Towers
Assurance Corporation. Defendant Towers Assurance Corporation raised the defenses of laches and of the fact
that the surety bond was never exposed to any risk, as the amount of the debt was used for the purchase of the
Cummins Marine Diesel Engine, and not for the purpose of constructing the fishing vessel.[8] The Spouses
Calina filed their Answer with Counterclaim[9] for payment of damages on August 14, 1981. On October 20,
1981, the court issued the writ of attachment against the Cummins Marine Diesel Engine.
In a bid to settle their financial obligations to DBP, petitioners sought buyers for the Cummins Marine Diesel
Engine by advertising in several newspapers. On September 17, 1984, Pacific Power and Process Corporation
offered to buy the Cummins Marine Diesel Engine for P600,000.00.[10] On October 29, 1984, petitioners
requested[11] the DBP to signify its conformity to the sale. The DBP refused, and decided to sell the engine at
public auction. The auction was held on March 8, 1985, but no bids were made for the engine. On August 26,
1985, DBP wrote petitioners a letter,[12] finally agreeing to the sale of the engine for P600,000.00, and the
payment of the proceeds thereof as settlement for their agricultural (deep-sea fishing) loan. DBP also agreed to
condone any penalty charges and interest on past due interest computed up to the date of payment of the said
amount.
Unfortunately, the petitioners buyer had already lost interest.[13] They tried to find other buyers but to no
avail. Thus, the Cummins Marine Diesel Engine remained unsold.
In the course of the trial, the parties finally came to an agreement for the disposition of the engine. On August
28, 1989, they filed a Joint Motion to Lift the Writ of Attachment so that they could sell the engine pending
litigation and apply the proceeds of the sale to the payment of the Spouses Calinas outstanding account with
DBP, without prejudice to whatever negotiation and agreements that the parties may enter into to settle the
case amicably in the event the sales proceeds of the Cummins Marine Diesel Engine is not sufficient to pay
off the total obligation.[14] The trial court granted the motion.
On February 3, 1992, the engine was sold for the sum of P550,000.00, and the amount was applied to the loan.
The parties, however, could not agree whether the total amount of the loan had been fully settled, hence the
trial continued.
Finally, the trial court rendered its decision, the dispositive portion of which stated:
FINDINGS AND CONCLUSIONS:

The Court finds that the CALINA (sic) received from DBP only the amount of P451,589.80 of the agreed
P1,356,000.00 loan, and this amount was used to purchase the subject Cummins Engine. The non-completion
of the vessel was caused by fortuitous event which affected both parties that the DBP novated the contract
when it agreed to condone the interest and penalties but was revoked by the failure of CALINA to pay the
amount of P600,000.00. However, the Court finds that the subsequent agreement of both parties to sell the
subject Engine for P550,000.00 is considered by the Court as substantial compliance of the novated contract for
the DBP to condone the interests and penalties, and is in fact more than sufficient to offset the loan of
P451,589.80 after condonation of the interest and penalties.

On the above findings, the Court concludes that, based on the subsequent novation of the contract
after the project was discontinued due to fortuitous event, and with the proceeds of the mutually agreed sale
of the subject Cummins Engine absorbed by the DBP, the loan obligation is considered as settled and/or fully
paid.

WHEREFORE, premises above considered, this case is hereby DISMISSED.[15]

On July 29, 1998, DBP filed a petition for review[16] with the Court of Appeals, assigning the following errors to
the decision of the trial court:

1. The court a quo gravely erred in concluding that DBP novated the contract when it agreed to condone the
interest and penalties but was revoked by the failure of Calina to pay the amount of P600,000.00;

2. The court a quo gravely erred in concluding that the subsequent agreement of both parties to sell the subject
engine for P550,000.00 is considered by the [c]ourt as substantial compliance of the novated contract for the
DBP to condone the interests and penalties;

3. The court a quo gravely erred in concluding that the receipt of DBP of the amount of P550,000.00 realized
from the sale of the marine diesel engine is more than sufficient to offset the loan of P451,589.80 after
condonation of interest and penalties. Hence, the loan obligation x x x is considered as settled and/or fully paid;
and

4. The court a quo gravely erred is (sic) not ordering the defendants-appellees Spouses Virgilio G. Calina and
Digna Anastacio to pay DBP the remaining balance of their loan obligation, plus interest until fully paid, and the
pre-agreed attorneys fees.

It was also averred that even if the DBP through its Board of Governors expressly approved and agreed
not only to condone the penalty charges and interest, but also the dismissal of the complaint upon payment of
P600,000.00,[17] this issue of novation is already moot as it had been revoked by the petitioners failure to pay
the said amount.
On August 27, 2003, the appellate court rendered its Decision,[18] reversing the trial court, viz:
WHEREFORE, in view of the foregoing, the October 14, 1996 Decision of Branch 61, Regional Trial Court, Makati
City in Civil Case No. 1622 is REVERSED and SET ASIDE and a new one entered ordering defendants-appellees,
Spouses Virgilio Calina and Digna Anastacio, to pay plaintiff-appellant, Development Bank of the Philippines, the
amount of P666,195.55 plus 12% interest from August 18, 1878 (sic) until fully paid to be computed based on
diminishing balance method less the P550,000.00 proceeds from the sale of the aforesaid Cummins Engine and
10% attorneys fees.[19]

In their Petition for Review on Certiorari,[20] petitioners assigned the following errors to the appellate courts
decision:

1. The Court of Appeals gravely erred when it required petitioners to pay interest on the advance of
P451,589.80 made by DBP, in violation of the Agreement between the parties and without any valid document
in support thereof.
2. The Court of Appeals gravely erred when it ruled that there was partial condonation of the interest due,
but the said condonation was revoked when petitioners still did not pay the loan despite the reduction in
interest.
3. The Court of Appeals seriously erred when it failed to consider and appreciate that what transpired
between the parties, after the filing of the complaint in the trial court, was a compromise settlement and not a
condonation of interest.
4. The Court of Appeals erred in not holding that the P550,000.00 proceeds in the sale of the Cummins
Diesel engine was more than sufficient to off-set the principal loan of P451,589.80.
5. The Court of Appeals gravely erred in awarding 10% attorneys fees despite the absence of bad faith on the
part of petitioners, and neither does this case fall under any of the circumstances provided for in Art. 2208 of
our Civil Code.
6. In the remote possibility, this Honorable Court is not persuaded by petitioners argument, it is respectfully
submitted that the interest to be awarded should be reckoned from the date of the compromise settlement
between the parties, and only on the remaining balance of P50,000.00.

In its Comment, [21] respondent DBP contended:

1. The petition raises only questions of fact, and should not be given due course.
2. The Court of Appeals did not err when it ordered petitioners to pay interest on the amount actually
received as proceeds of their loan, as the promissory note they executed provides for this. Moreover, as
petitioners were in default in the payment of their debt, they are liable to pay additional interest equal to 12%
of the entire unpaid obligation as indemnity for damages sustained by the respondent.

3. The petitioners did not challenge the finding of the court a quo that although the DBP novated the
contract by agreeing to condone interest and penalties, this condonation was revoked by the petitioners failure
to pay the agreed amount. Therefore, the petitioners could not state as erroneous the decision of the Court of
Appeals when it affirmed the aforestated finding of the trial court and not as a compromise settlement. The July
14, 1989 Motion (Exhibit 16) was not connected to DBPs letter dated August 26, 1985 (Exhibit 13).

Since the petitioners raised the defense of novation before the trial court and the Court of Appeals, it is now
barred from abandoning this theory and adopting a new one. They can no longer claim that there had been no
novation, but that the parties had entered into a compromise agreement.

Respondent never entered into any compromise agreement with petitioners. What it only sought was the trial
courts approval to sell the Cummins engine and to partially apply the proceeds thereof to the outstanding
obligations of petitioners.

4. The CA did not err in finding that the proceeds from the sale of the Cummins engine was not sufficient to
fully offset the petitioners outstanding obligation to respondent. As of August 18, 1978, petitioners already
owed respondent P666,195.55. Petitioners are liable to pay 12% regular interest per annum to the principal
obligation (P451,589.80), plus attorneys fees of 10%.
5. In the promissory note and the deed of undertaking, petitioners agreed to pay attorneys fees in case the
respondent is forced to engage a lawyer to enforce its right against the petitioners.

6. Because the compromise agreement based on DBPs letter (exhibit 13) did not come to fruition, the
amount of petitioners debt to the respondent cannot be pegged at P600,000.00 only.

We affirm the ruling of the appellate court with modifications.

First, it is a fact that petitioners owe respondent a debt of money. Both parties agree that of the amount
stipulated in the promissory note, P451,589.80 had already been given to petitioners by the respondent. When
petitioners informed respondent of their intention to desist from continuing the project due to the impossibility
of complying with the conditions in the promissory note and deed of undertaking, that immediately rendered
due and demandable any amount advanced to them by the respondent. From this time onward, petitioners had
the obligation to pay respondent the amount of P451,589.80. On October 3, 1978, pursuant to paragraph 11 of
the Deed of Undertaking, the respondent formalized its demand and wrote the petitioners, seeking immediate
payment of P666,195.55, representing the amount of petitioners obligation plus interest from August 18, 1978,
excluding daily additional interest.
Second, it is improper for this Court to determine whether there was a compromise agreement entered into by
the parties. This Court is not a trier of facts, nor will it disturb the trial courts findings of fact, such findings
being, as a rule, binding and conclusive.[22] This doctrine admits of only a few exceptions, such as when the
findings are grounded entirely on speculation, surmises or conjectures; when an interference made by the
appellate court from its factual findings is manifestly mistaken, absurd or impossible; when there is grave abuse
of discretion in the appreciation of facts; when the findings of the appellate court go beyond the issues of the
case, run contrary to the admissions of the parties to the case or fail to notice certain relevant facts which, if
properly considered, will justify a different conclusion; when there is a misappreciation of facts; when the
findings of fact are conclusions without mention of the specific evidence on which they are based, are premised
on the absence of evidence or are contradicted by evidence on record.[23] None of these exceptions are
present in the case at bar.
From the onset of the trial, the Spouses Calina had advocated the theory that there had been a novation of the
contract they had entered into with DBP. Based on this stance and the evidence presented by both parties, the
trial court declared that it is an admitted fact that the DBP considered to condone interest and penalties, but
this was subsequently revoked when CALINA failed to comply with the condition to pay the amount of
P600,000.00 and that the DBP novated the contract when it agreed to condone the interest and penalties but
was revoked by the failure of CALINA to pay the amount of P600,000.00. Petitioners did not challenge this
ruling of the trial court in the appellate court. They cannot now raise this issue in their petition before this
Court. To countenance such action would be unfair to the respondent and offensive to the basic rules of fair
play, justice and due process.[24]
There is no question that petitioners failed to comply with the original terms of the agreement. It is erroneous
for the petitioners to blame the respondent for their failure to comply with their contract. The respondent was
well within right when it sought to sell the engine at public auction. Indeed, if the auction succeeded, it would
have benefited all the parties concerned, as the engine could have been sold at a much higher price.
We note that throughout the proceedings before the trial court, the appellate court and before this Court,
petitioners have not assailed the computation of their debt. Thus, it is settled that as of August 18, 1978,
petitioners owed P666,195.55 to the respondent. As of February 3, 1992, petitioners had paid P550,000.00 to
the respondent.
Plainly, the petitioners have not fully paid their obligation to the respondent. Persons who receive loans of
money are bound by law to pay to the creditor an equal amount of the same quality.[25]
In addition, respondent had the right to demand interest on its loan based on their contract. In their promissory
note,[26] petitioners agreed to pay 12% interest per annum on their loan. Article 1253 of the New Civil Code
provides that, if the debt produces interest, payment of the principal shall not be deemed to have been made
until the interests have been covered. The respondent is a bank. To hold that bank debtors should not pay
interest on their loans would be anathema to the nature of any banks business. The charging of interest for
loans forms a very essential and fundamental element of the banking business. In fact, it may be considered to
be the very core of the bankings existence or being.[27]
We now determine the obligation owed by petitioners to respondent. It is clear that petitioners have to pay
P666,195.55, plus 12% interest based on the principal amount of the debt, computed from August 18, 1978 to
February 2, 1992. From this sum, the P550,000.00 paid by petitioners must be deducted. The remaining
balance, plus 12% interest thereto until the date of full payment, constitute the liability of the petitioners to the
respondent.
Finally, we disallow the payment of attorneys fees awarded by the appellate court. Attorneys fees partake of the
nature of liquidated damages. It is true that the promissory note and the deed of undertaking executed by the
petitioners provided for the payment of attorneys fees should respondent be forced to litigate. However, a
fortuitous event, typhoon Asyang, caused the destruction of the fishing boat subject of the project. This
supervening event, independent of the will of the obligor, cannot render the latter liable[28] beyond the
restitution of what they may have received in advance from the creditor. Consequently, petitioners cannot be
made to pay attorneys fees on damages.[29]

IN VIEW WHEREOF, the decision of the Court of Appeals is affirmed, with the modification that the petitioners
are ordered to pay to respondent the amount of P666,195.55, plus 12% interest computed from August 18,
1978 until February 2, 1992. From this sum, P550,000.00, representing the previous payment of the petitioners,
must be deducted. On the remaining balance shall be added the payment of 12% interest, to be computed from
February 3, 1992 until full payment.
The award of attorneys fees is deleted.
No pronouncement as to costs.
SO ORDERED.

REYNATO S. PUNO
Chief Justice

WE CONCUR:

ANGELINA SANDOVAL-GUTIERREZ
Associate Justice
RENATO C. CORONA ADOLFO S. AZCUNA

Associate Justice Associate Justice

CANCIO C. GARCIA
Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above
decision had been reached in consultation before the case was assigned to the writer of the opinion of the
Courts Division.

REYNATO S. PUNO
Chief Justice