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Obligations and Contracts

Obligations with Penal Clause | Art.


1226-1229

Ligutan v CA fees. In its decision3 of 7 March 1996, the appellate court


affirmed the judgment of the trial court except on the matter of
G.R. No. 138677 February 12, 2002 the 2% service charge which was deleted pursuant to Central
Bank Circular No. 783. Not fully satisfied with the decision of the
TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA, appellate court, both parties filed their respective motions for
petitioners, reconsideration.4 Petitioners prayed for the reduction of the 5%
vs. stipulated penalty for being unconscionable. The bank, on the
HON. COURT OF APPEALS & SECURITY BANK & TRUST other hand, asked that the payment of interest and penalty be
COMPANY, respondents. commenced not from the date of filing of complaint but from the
time of default as so stipulated in the contract of the parties.
DECISION
On 28 October 1998, the Court of Appeals resolved the two
VITUG, J.: motions thusly:

Before the Court is a petition for review on certiorari under Rule "We find merit in plaintiff-appellee’s claim that the principal sum
45 of the Rules of Court, assailing the decision and resolutions of of P114,416.00 with interest thereon must commence not on the
the Court of Appeals in CA-G.R. CV No. 34594, entitled "Security date of filing of the complaint as we have previously held in our
Bank and Trust Co. vs. Tolomeo Ligutan, et al." decision but on the date when the obligation became due.

Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained "Default generally begins from the moment the creditor demands
on 11 May 1981 a loan in the amount of P120,000.00 from the performance of the obligation. However, demand is not
respondent Security Bank and Trust Company. Petitioners necessary to render the obligor in default when the obligation or
executed a promissory note binding themselves, jointly and the law so provides.
severally, to pay the sum borrowed with an interest of 15.189%
per annum upon maturity and to pay a penalty of 5% every "In the case at bar, defendants-appellants executed a promissory
month on the outstanding principal and interest in case of note where they undertook to pay the obligation on its maturity
default. In addition, petitioners agreed to pay 10% of the total date 'without necessity of demand.' They also agreed to pay the
amount due by way of attorney’s fees if the matter were indorsed interest in case of non-payment from the date of default.
to a lawyer for collection or if a suit were instituted to enforce
payment. The obligation matured on 8 September 1981; the "x x x xxx xxx
bank, however, granted an extension but only up until 29
December 1981. "While we maintain that defendants-appellants must be bound by
the contract which they acknowledged and signed, we take
Despite several demands from the bank, petitioners failed to cognizance of their plea for the application of the provisions of
settle the debt which, as of 20 May 1982, amounted to Article 1229 x x x.
P114,416.10. On 30 September 1982, the bank sent a final
demand letter to petitioners informing them that they had five "Considering that defendants-appellants partially complied with
days within which to make full payment. Since petitioners still their obligation under the promissory note by the reduction of the
defaulted on their obligation, the bank filed on 3 November 1982, original amount of P120,000.00 to P114,416.00 and in order that
with the Regional Trial Court of Makati, Branch 143, a complaint they will finally settle their obligation, it is our view and we so
for recovery of the due amount. hold that in the interest of justice and public policy, a penalty of
3% per month or 36% per annum would suffice.
After petitioners had filed a joint answer to the complaint, the
bank presented its evidence and, on 27 March 1985, rested its "x x x xxx xxx
case. Petitioners, instead of introducing their own evidence, had
the hearing of the case reset on two consecutive occasions. In "WHEREFORE, the decision sought to be reconsidered is
view of the absence of petitioners and their counsel on 28 hereby MODIFIED. The defendants-appellants Tolomeo Ligutan
August 1985, the third hearing date, the bank moved, and the and Leonidas dela Llana are hereby ordered to pay the plaintiff-
trial court resolved, to consider the case submitted for decision. appellee Security Bank and Trust Company the following:

Two years later, or on 23 October 1987, petitioners filed a motion "1. The sum of P114,416.00 with interest thereon at the rate of
for reconsideration of the order of the trial court declaring them 15.189% per annum and 3% per month penalty charge
as having waived their right to present evidence and prayed that commencing May 20, 1982 until fully paid;
they be allowed to prove their case. The court a quo denied the
motion in an order, dated 5 September 1988, and on 20 October "2. The sum equivalent to 10% of the total amount of the
1989, it rendered its decision,1 the dispositive portion of which indebtedness as and for attorney’s fees."5
read:
On 16 November 1998, petitioners filed an omnibus motion for
"WHEREFORE, judgment is hereby rendered in favor of the reconsideration and to admit newly discovered evidence,6
plaintiff and against the defendants, ordering the latter to pay, alleging that while the case was pending before the trial court,
jointly and severally, to the plaintiff, as follows: petitioner Tolomeo Ligutan and his wife Bienvenida Ligutan
executed a real estate mortgage on 18 January 1984 to secure
"1. The sum of P114,416.00 with interest thereon at the rate of the existing indebtedness of petitioners Ligutan and dela Llana
15.189% per annum, 2% service charge and 5% per month with the bank. Petitioners contended that the execution of the
penalty charge, commencing on 20 May 1982 until fully paid; real estate mortgage had the effect of novating the contract
between them and the bank. Petitioners further averred that the
"2. To pay the further sum equivalent to 10% of the total amount mortgage was extrajudicially foreclosed on 26 August 1986, that
of indebtedness for and as attorney’s fees; and they were not informed about it, and the bank did not credit them
with the proceeds of the sale. The appellate court denied the
"3. To pay the costs of the suit."2 omnibus motion for reconsideration and to admit newly
discovered evidence, ratiocinating that such a second motion for
Petitioners interposed an appeal with the Court of Appeals, reconsideration cannot be entertained under Section 2, Rule 52,
questioning the rejection by the trial court of their motion to of the 1997 Rules of Civil Procedure. Furthermore, the appellate
present evidence and assailing the imposition of the 2% service court said, the newly-discovered evidence being invoked by
charge, the 5% per month penalty charge and 10% attorney's petitioners had actually been known to them when the case was

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Obligations and Contracts
Obligations with Penal Clause | Art.
1226-1229

brought on appeal and when the first motion for reconsideration


was filed.7 The Court of Appeals, exercising its good judgment in the instant
case, has reduced the penalty interest from 5% a month to 3% a
Aggrieved by the decision and resolutions of the Court of month which petitioner still disputes. Given the circumstances,
Appeals, petitioners elevated their case to this Court on 9 July not to mention the repeated acts of breach by petitioners of their
1999 via a petition for review on certiorari under Rule 45 of the contractual obligation, the Court sees no cogent ground to
Rules of Court, submitting thusly - modify the ruling of the appellate court..

"I. The respondent Court of Appeals seriously erred in not Anent the stipulated interest of 15.189% per annum, petitioners,
holding that the 15.189% interest and the penalty of three (3%) for the first time, question its reasonableness and prays that the
percent per month or thirty-six (36%) percent per annum Court reduce the amount. This contention is a fresh issue that
imposed by private respondent bank on petitioners’ loan has not been raised and ventilated before the courts below. In
obligation are still manifestly exorbitant, iniquitous and any event, the interest stipulation, on its face, does not appear
unconscionable. as being that excessive. The essence or rationale for the
payment of interest, quite often referred to as cost of money, is
"II. The respondent Court of Appeals gravely erred in not not exactly the same as that of a surcharge or a penalty. A
reducing to a reasonable level the ten (10%) percent award of penalty stipulation is not necessarily preclusive of interest, if
attorney’s fees which is highly and grossly excessive, there is an agreement to that effect, the two being distinct
unreasonable and unconscionable. concepts which may separately be demanded.18 What may
justify a court in not allowing the creditor to impose full
"III. The respondent Court of Appeals gravely erred in not surcharges and penalties, despite an express stipulation therefor
admitting petitioners’ newly discovered evidence which could not in a valid agreement, may not equally justify the non-payment or
have been timely produced during the trial of this case. reduction of interest. Indeed, the interest prescribed in loan
financing arrangements is a fundamental part of the banking
"IV. The respondent Court of Appeals seriously erred in not business and the core of a bank's existence.19
holding that there was a novation of the cause of action of
private respondent’s complaint in the instant case due to the Petitioners next assail the award of 10% of the total amount of
subsequent execution of the real estate mortgage during the indebtedness by way of attorney's fees for being grossly
pendency of this case and the subsequent foreclosure of the excessive, exorbitant and unconscionable vis-a-vis the time
mortgage."8 spent and the extent of services rendered by counsel for the
bank and the nature of the case. Bearing in mind that the rate of
Respondent bank, which did not take an appeal, would, attorney’s fees has been agreed to by the parties and intended
however, have it that the penalty sought to be deleted by to answer not only for litigation expenses but also for collection
petitioners was even insufficient to fully cover and compensate efforts as well, the Court, like the appellate court, deems the
for the cost of money brought about by the radical devaluation award of 10% attorney’s fees to be reasonable.
and decrease in the purchasing power of the peso, particularly
vis-a-vis the U.S. dollar, taking into account the time frame of its Neither can the appellate court be held to have erred in rejecting
occurrence. The Bank would stress that only the amount of petitioners' call for a new trial or to admit newly discovered
P5,584.00 had been remitted out of the entire loan of evidence. As the appellate court so held in its resolution of 14
P120,000.00.9 May 1999 -

A penalty clause, expressly recognized by law,10 is an "Under Section 2, Rule 52 of the 1997 Rules of Civil Procedure,
accessory undertaking to assume greater liability on the part of no second motion for reconsideration of a judgment or final
an obligor in case of breach of an obligation. It functions to resolution by the same party shall be entertained. Considering
strengthen the coercive force of the obligation11 and to provide, that the instant motion is already a second motion for
in effect, for what could be the liquidated damages resulting from reconsideration, the same must therefore be denied.
such a breach. The obligor would then be bound to pay the
stipulated indemnity without the necessity of proof on the "Furthermore, it would appear from the records available to this
existence and on the measure of damages caused by the court that the newly-discovered evidence being invoked by
breach.12 Although a court may not at liberty ignore the freedom defendants-appellants have actually been existent when the
of the parties to agree on such terms and conditions as they see case was brought on appeal to this court as well as when the
fit that contravene neither law nor morals, good customs, public first motion for reconsideration was filed.1âwphi1 Hence, it is
order or public policy, a stipulated penalty, nevertheless, may be quite surprising why defendants-appellants raised the alleged
equitably reduced by the courts if it is iniquitous or newly-discovered evidence only at this stage when they could
unconscionable or if the principal obligation has been partly or have done so in the earlier pleadings filed before this court.
irregularly complied with.13
"The propriety or acceptability of such a second motion for
The question of whether a penalty is reasonable or iniquitous reconsideration is not contingent upon the averment of 'new'
can be partly subjective and partly objective. Its resolution would grounds to assail the judgment, i.e., grounds other than those
depend on such factors as, but not necessarily confined to, the theretofore presented and rejected. Otherwise, attainment of
type, extent and purpose of the penalty, the nature of the finality of a judgment might be stayed off indefinitely, depending
obligation, the mode of breach and its consequences, the on the party’s ingenuousness or cleverness in conceiving and
supervening realities, the standing and relationship of the formulating 'additional flaws' or 'newly discovered errors' therein,
parties, and the like, the application of which, by and large, is or thinking up some injury or prejudice to the rights of the movant
addressed to the sound discretion of the court. In Rizal for reconsideration."20
Commercial Banking Corp. vs. Court of Appeals,14 just an
example, the Court has tempered the penalty charges after At any rate, the subsequent execution of the real estate
taking into account the debtor’s pitiful situation and its offer to mortgage as security for the existing loan would not have
settle the entire obligation with the creditor bank. The stipulated resulted in the extinguishment of the original contract of loan
penalty might likewise be reduced when a partial or irregular because of novation. Petitioners acknowledge that the real
performance is made by the debtor.15 The stipulated penalty estate mortgage contract does not contain any express
might even be deleted such as when there has been substantial stipulation by the parties intending it to supersede the existing
performance in good faith by the obligor,16 when the penalty loan agreement between the petitioners and the bank.21
clause itself suffers from fatal infirmity, or when exceptional Respondent bank has correctly postulated that the mortgage is
circumstances so exist as to warrant it.17

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Obligations and Contracts
Obligations with Penal Clause | Art.
1226-1229

but an accessory contract to secure the loan in the promissory vs.


note. PHILIPPINE AMUSEMENT AND GAMING CORPORATION,
respondent.
Extinctive novation requires, first, a previous valid obligation;
second, the agreement of all the parties to the new contract; DECISION
third, the extinguishment of the obligation; and fourth, the validity
of the new one.22 In order that an obligation may be PANGANIBAN, J.:
extinguished by another which substitutes the same, it is
imperative that it be so declared in unequivocal terms, or that the In legal contemplation, the termination of a contract is not
old and the new obligation be on every point incompatible with equivalent to its rescission. When an agreement is terminated, it
each other.23 An obligation to pay a sum of money is not is deemed valid at inception. Prior to termination, the contract
extinctively novated by a new instrument which merely changes binds the parties, who are thus obliged to observe its provisions.
the terms of payment or adding compatible covenants or where However, when it is rescinded, it is deemed inexistent, and the
the old contract is merely supplemented by the new one.24 parties are returned to their status quo ante. Hence, there is
When not expressed, incompatibility is required so as to ensure mutual restitution of benefits received. The consequences of
that the parties have indeed intended such novation despite their termination may be anticipated and provided for by the contract.
failure to express it in categorical terms. The incompatibility, to As long as the terms of the contract are not contrary to law,
be sure, should take place in any of the essential elements of the morals, good customs, public order or public policy, they shall be
obligation, i.e., (1) the juridical relation or tie, such as from a respected by courts. The judiciary is not authorized to make or
mere commodatum to lease of things, or from negotiorum gestio modify contracts; neither may it rescue parties from
to agency, or from a mortgage to antichresis,25 or from a sale to disadvantageous stipulations. Courts, however, are empowered
one of loan;26 (2) the object or principal conditions, such as a to reduce iniquitous or unconscionable liquidated damages,
change of the nature of the prestation; or (3) the subjects, such indemnities and penalties agreed upon by the parties.
as the substitution of a debtor27 or the subrogation of the
creditor. Extinctive novation does not necessarily imply that the The Case
new agreement should be complete by itself; certain terms and
conditions may be carried, expressly or by implication, over to Before us is a Petition for Review1 under Rule 45 of the Rules of
the new obligation. Court, assailing the May 22, 2002 Decision2 of the Court of
Appeals (CA) in CA-GR CV No. 51629 and its March 4, 2003
WHEREFORE, the petition is DENIED. Resolution3 denying petitioner’s Motion for Reconsideration. The
assailed Decision disposed thus:
SO ORDERED.
"WHEREFORE, in view of the foregoing, judgment is hereby
FOOTNOTES rendered as follows: (1) In Civil Case No. 93-68266, the
appealed decision[,] is AFFIRMED with MODIFICATION[,]
Art. 1226. In obligations with a penal clause, the penalty shall ordering [Respondent] Philippine Amusement and Gaming
substitute the indemnity for damages and the payment of Corporation to pay [Petitioner] Pryce Properties Corporation the
interests in case of noncompliance, if there is no stipulation to total amount of P687,289.50 as actual damages representing the
the contrary. Nevertheless, damages shall be paid if the obligor accrued rentals for the quarter September to November 1993
refuses to pay the penalty or is guilty of fraud in the fulfillment of with interest and penalty at the rate of two percent (2%) per
the obligation. month from date of filing of the complaint until the amount shall
have been fully paid, and the sum of P50,000.00 as attorney’s
The penalty may be enforced only when it is demandable in fees; (2) In Civil Case No. 93-68337, the appealed decision is
accordance with the provisions of this Code. (1152a) REVERSED and SET ASIDE and a new judgment is rendered
ordering [Petitioner] Pryce Properties Corporation to reimburse
Article 2227. Liquidated damages, whether intended as an [Respondent] Philippine Amusement and Gaming Corporation
indemnity or a penalty, shall be equitably reduced if they are the amount of P687,289.50 representing the advanced rental
iniquitous or unconscionable. deposits, which amount may be compensated by [Petitioner]
Pryce Properties Corporation with its award in Civil Case No. 93-
Article 1229. The judge shall equitably reduce the penalty when 68266 in the equal amount of P687,289.50."4
the principal obligation has been partly or irregularly complied
with by the debtor. Even if there has been no performance, the The Facts
penalty may also be reduced by the courts if it is iniquitous or
unconscionable. According to the CA, the facts are as follows:

Insular Bank of Asia and America vs. Spouses Salazar (159 "Sometime in the first half of 1992, representatives from Pryce
SCRA 111), for instance, the Court reduced the penalty charge Properties Corporation (PPC for brevity) made representations
of 2% a month to 1% a month, considering that, on a loan of with the Philippine Amusement and Gaming Corporation
P42,050.00, the debtor spouses paid a total of P68,676.75 which (PAGCOR) on the possibility of setting up a casino in Pryce
was applied by the creditor to satisfy the penalty and interest Plaza Hotel in Cagayan de Oro City. [A] series of negotiations
charges. followed. PAGCOR representatives went to Cagayan de Oro City
to determine the pulse of the people whether the presence of a
Art. 1234. If the obligation has been substantially performed in casino would be welcomed by the residents. Some local
good faith, the obligor may recover as though there had been a government officials showed keen interest in the casino
strict and complete fulfillment, less damages suffered by the operation and expressed the view that possible problems were
obligee. surmountable. Their negotiations culminated with PPC’s counter-
letter proposal dated October 14, 1992.

Pryce Corp v PAGCOR "On November 11, 1992, the parties executed a Contract of
Lease x x x involving the ballroom of the Hotel for a period of
G.R. No. 157480 May 6, 2005 three (3) years starting December 1, 1992 and until November
30, 1995. On November 13, 1992, they executed an addendum
PRYCE CORPORATION (formerly PRYCE PROPERTIES to the contract x x x which included a lease of an additional 1000
CORPORATION), petitioners, square meters of the hotel grounds as living quarters and

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Obligations and Contracts
Obligations with Penal Clause | Art.
1226-1229

playground of the casino personnel. PAGCOR advertised the "PAGCOR sent PPC a letter dated September 20, 1993 x x x
start of their casino operations on December 18, 1992. [stating] that it was not amenable to the payment of the full
rentals citing as reasons unforeseen legal and other
"Way back in 1990, the Sangguniang Panlungsod of Cagayan de circumstances which prevented it from complying with its
Oro City passed Resolution No. 2295 x x x dated November 19, obligations. PAGCOR further stated that it had no other
1990 declaring as a matter of policy to prohibit and/or not to alternative but to pre-terminate the lease agreement due to the
allow the establishment of a gambling casino in Cagayan de Oro relentless and vehement opposition to their casino operations. In
City. Resolution No. 2673 x x x dated October 19, 1992 (or a a letter dated October 12, 1993 x x x, PAGCOR asked PPC to
month before the contract of lease was executed) was refund the total of P1,437,582.25 representing the reimbursable
subsequently passed reiterating with vigor and vehemence the rental deposits and expenses for the permanent improvement of
policy of the City under Resolution No. 2295, series of 1990, the Hotel’s parking lot. In a letter dated November 5, 1993 x x x,
banning casinos in Cagayan de Oro City. On December 7, 1992, PAGCOR formally demanded from PPC the payment of its claim
the Sangguniang Panlungsod of Cagayan de Oro City enacted for reimbursement.
Ordinance No. 3353 x x x prohibiting the issuance of business
permits and canceling existing business permits to any "On November 15, 1993 x x x, PPC filed a case for sum of
establishment for using, or allowing to be used, its premises or money in the Regional Trial Court of Manila docketed as Civil
any portion thereof for the operation of a casino. Case No. 93-68266. On November 19, 1993, PAGCOR also filed
a case for sum of money in the Regional Trial Court of Manila
"In the afternoon of December 18, 1992 and just hours before docketed as Civil Case No. 93-68337.
the actual formal opening of casino operations, a public rally in
front of the hotel was staged by some local officials, residents "In a letter dated November 25, 1993, PPC informed PAGCOR
and religious leaders. Barricades were placed [which] prevented that it was terminating the contract of lease due to PAGCOR’s
some casino personnel and hotel guests from entering and continuing breach of the contract and further stated that it was
exiting from the Hotel. PAGCOR was constrained to suspend exercising its rights under the contract of lease pursuant to
casino operations because of the rally. An agreement between Article 20 (a) and (c) thereof.
PPC and PAGCOR, on one hand, and representatives of the
rallyists, on the other, eventually ended the rally on the 20th of "On February 2, 1994, PPC filed a supplemental complaint x x x
December, 1992. in Civil Case No. 93-68266, which the trial court admitted in an
Order dated February 11, 1994. In an Order dated April 27,
"On January 4, 1993, Ordinance No. 3375-93 x x x was passed 1994, Civil Case No. 93-68377 was ordered consolidated with
by the Sangguniang Panlungsod of Cagayan de Oro City, Civil Case No. 93-68266. These cases were jointly tried by the
prohibiting the operation of casinos and providing for penalty for court a quo. On August 17, 1995, the court a quo promulgated its
violation thereof. On January 7, 1993, PPC filed a Petition for decision. Both parties appealed."5
Prohibition with Preliminary Injunction x x x against then public
respondent Cagayan de Oro City and/or Mayor Pablo P. In its appeal, PPC faulted the trial court for the following reasons:
Magtajas x x x before the Court of Appeals, docketed as CA 1) failure of the court to award actual and moral damages; 2) the
G.R. SP No. 29851 praying inter alia, for the declaration of 50 percent reduction of the amount PPC was claiming; and 3)
unconstitutionality of Ordinance No. 3353. PAGCOR intervened the court’s ruling that the 2 percent penalty was to be imposed
in said petition and further assailed Ordinance No. 4475-93 as from the date of the promulgation of the Decision, not from the
being violative of the non-impairment of contracts and equal date stipulated in the Contract.
protection clauses. On March 31, 1993, the Court of Appeals
promulgated its decision x x x, the dispositive portion of which On the other hand, PAGCOR criticized the trial court for the
reads: latter’s failure to rule that the Contract of Lease had already been
terminated as early as September 21, 1993, or at the latest, on
‘IN VIEW OF ALL THE FOREGOING, Ordinance No. 3353 and October 14, 1993, when PPC received PAGCOR’s letter dated
Ordinance No. 3375-93 are hereby DECLARED October 12, 1993. The gaming corporation added that the trial
UNCONSTITUTIONAL and VOID and the respondents and all court erred in 1) failing to consider that PPC was entitled to avail
other persons acting under their authority and in their behalf are itself of the provisions of Article XX only when PPC was the party
PERMANENTLY ENJOINED from enforcing those ordinances. terminating the Contract; 2) not finding that there were valid,
justifiable and good reasons for terminating the Contract; and 3)
‘SO ORDERED.’ dismissing the Complaint of PAGCOR in Civil Case No. 93-
68337 for lack of merit, and not finding PPC liable for the
"Aggrieved by the decision, then public respondents Cagayan de reimbursement of PAGCOR’S cash deposits and of the value of
Oro City, et al. elevated the case to the Supreme Court in G.R. improvements.
No. 111097, where, in an En Banc Decision dated July 20, 1994
x x x, the Supreme Court denied the petition and affirmed the Ruling of the Court of Appeals
decision of the Court of Appeals.
First, on the appeal of PAGCOR, the CA ruled that the
"In the meantime, PAGCOR resumed casino operations on July PAGCOR’S pretermination of the Contract of Lease was
15, 1993, against which, however, another public rally was held. unjustified. The appellate court explained that public
Casino operations continued for some time, but were later on demonstrations and rallies could not be considered as fortuitous
indefinitely suspended due to the incessant demonstrations. Per events that would exempt the gaming corporation from
verbal advice x x x from the Office of the President of the complying with the latter’s contractual obligations. Therefore, the
Philippines, PAGCOR decided to stop its casino operations in Contract continued to be effective until PPC elected to terminate
Cagayan de Oro City. PAGCOR stopped its casino operations in it on November 25, 1993.
the hotel prior to September, 1993. In two Statements of Account
dated September 1, 1993 x x x, PPC apprised PAGCOR of its Regarding the contentions of PPC, the CA held that under Article
outstanding account for the quarter September 1 to November 1659 of the Civil Code, PPC had the right to ask for (1)
30, 1993. PPC sent PAGCOR another Letter dated September rescission of the Contract and indemnification for damages; or
3, 1993 x x x as a follow-up to the parties’ earlier conference. (2) only indemnification plus the continuation of the Contract.
PPC sent PAGCOR another Letter dated September 15, 1993 x These two remedies were alternative, not cumulative, ruled the
x x stating its Board of Directors’ decision to collect the full CA.
rentals in case of pre-termination of the lease.
As PAGCOR had admitted its failure to pay the rentals for
September to November 1993, PPC correctly exercised the

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Obligations and Contracts
Obligations with Penal Clause | Art.
1226-1229

option to terminate the lease agreement. Previously, the the Civil Code governs; hence, PPC is allegedly no longer
Contract remained effective, and PPC could collect the accrued entitled to future rentals, because it chose to rescind the
rentals. However, from the time it terminated the Contract on Contract.
November 25, 1993, PPC could no longer demand payment of
the remaining rentals as part of actual damages, the CA added. Contract Provisions
Clear and Binding
Denying the claim for moral damages, the CA pointed out the
failure of PPC to show that PAGCOR had acted in gross or Article 1159 of the Civil Code provides that "obligations arising
evident bad faith in failing to pay the rentals from September to from contracts have the force of law between the contracting
November 1993. Such failure was shown especially by the fact parties and should be complied with in good faith."8 In deference
that PPC still had in hand three (3) months advance rental to the rights of the parties, the law9 allows them to enter into
deposits of PAGCOR. The former could have simply applied this stipulations, clauses, terms and conditions they may deem
deposit to the unpaid rentals, as provided in the Contract. convenient; that is, as long as these are not contrary to law,
Neither did PPC adequately show that its reputation had been morals, good customs, public order or public policy. Likewise, it
besmirched or the hotel’s goodwill eroded by the establishment is settled that if the terms of the contract clearly express the
of the casino and the public protests. intention of the contracting parties, the literal meaning of the
stipulations would be controlling.10
Finally, as to the claimed reimbursement for parking lot
improvement, the CA held that PAGCOR had not presented In this case, Article XX of the parties’ Contract of Lease provides
official receipts to prove the latter’s alleged expenses. The in part as follows:
appellate court, however, upheld the trial court’s award to PPC of
P50,000 attorney’s fees. "XX. BREACH OR DEFAULT

Hence this Petition.6 "a) The LESSEE agrees that all the terms, conditions and/or
covenants herein contained shall be deemed essential
Issues conditions of this contract, and in the event of default or breach
of any of such terms, conditions and/or covenants, or should the
In their Memorandum, petitioner raised the following issues: LESSEE become bankrupt, or insolvent, or compounds with his
creditors, the LESSOR shall have the right to terminate and
"MAIN ISSUE: cancel this contract by giving them fifteen (15 days) prior notice
delivered at the leased premises or posted on the main door
"Did the Honorable Court of Appeals commit x x x grave and thereof. Upon such termination or cancellation, the LESSOR
reversible error by holding that Pryce was not entitled to future may forthwith lock the premises and exclude the LESSEE
rentals or lease payments for the unexpired period of the therefrom, forcefully or otherwise, without incurring any civil or
Contract of Lease between Pryce and PAGCOR? criminal liability. During the fifteen (15) days notice, the LESSEE
may prevent the termination of lease by curing the events or
"Sub-Issues: causes of termination or cancellation of the lease.

"1. Were the provisions of Sections 20(a) and 20(c) of the "b) x x x x x x x x x
Contract of Lease relative to the right of PRYCE to terminate the
Contract for cause and to moreover collect rentals from "c) Moreover, the LESSEE shall be fully liable to the LESSOR for
PAGCOR corresponding to the remaining term of the lease valid the rentals corresponding to the remaining term of the lease as
and binding? well as for any and all damages, actual or consequential
resulting from such default and termination of this contract.
"2. Did not Article 1659 of the Civil Code supersede Sections
20(a) and 20(c) of the Contract, PRYCE having ‘rescinded’ the "d) x x x x x x x x x." (Italics supplied)
Contract of Lease?
The above provisions leave no doubt that the parties have
"3. Do the case of Rios, et al. vs. Jacinto Palma Enterprises, et covenanted 1) to give PPC the right to terminate and cancel the
al. and the other cases cited by PAGCOR support its position Contract in the event of a default or breach by the lessee; and 2)
that PRYCE was not entitled to future rentals? to make PAGCOR fully liable for rentals for the remaining term of
the lease, despite the exercise of such right to terminate. Plainly,
"4. Would the collection by PRYCE of future rentals not give rise the parties have voluntarily bound themselves to require strict
to unjust enrichment? compliance with the provisions of the Contract by stipulating that
a default or breach, among others, shall give the lessee the
"5. Could we not have ‘harmonized’ Article 1659 of the Civil termination option, coupled with the lessor’s liability for rentals
Code and Article 20 of the Contract of Lease? for the remaining term of the lease.

"6. Is it not a basic rule that the law, i.e. Article 1659, is deemed For sure, these stipulations are valid and are not contrary to law,
written in contracts, particularly in the PRYCE-PAGCOR morals, good customs, public order or public policy. Neither is
Contract of Lease?"7 there anything objectionable about the inclusion in the Contract
of mandatory provisions concerning the rights and obligations of
The Court’s Ruling the parties.11 Being the primary law between the parties, it
governs the adjudication of their rights and obligations. A court
The Petition is partly meritorious. has no alternative but to enforce the contractual stipulations in
the manner they have been agreed upon and written.12 It is well
Main Issue: to recall that courts, be they trial or appellate, have no power to
make or modify contracts.13 Neither can they save parties from
Collection of Remaining Rentals disadvantageous provisions.

PPC anchors its right to collect future rentals upon the provisions Termination or Rescission?
of the Contract. Likewise, it argues that termination, as defined
under the Contract, is different from the remedy of rescission Well-taken is petitioner’s insistence that it had the right to ask for
prescribed under Article 1659 of the Civil Code. On the other "termination plus the full payment of future rentals" under the
hand, PAGCOR contends, as the CA ruled, that Article 1659 of provisions of the Contract, rather than just rescission under

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Article 1659 of the Civil Code. This Court is not unmindful of the before the courts.22 On the other hand, termination refers to an
fact that termination and rescission are terms that have been "end in time or existence; a close, cessation or conclusion." With
used loosely and interchangeably in the past. But distinctions respect to a lease or contract, it means an ending, usually before
ought to be made, especially in this controversy, in which the the end of the anticipated term of such lease or contract, that
terms mean differently and lead to equally different may be effected by mutual agreement or by one party exercising
consequences. one of its remedies as a consequence of the default of the
other.23
The term "rescission" is found in 1) Article 119114 of the Civil
Code, the general provision on rescission of reciprocal Thus, mutual restitution is required in a rescission (or resolution),
obligations; 2) Article 1659,15 which authorizes rescission as an in order to bring back the parties to their original situation prior to
alternative remedy, insofar as the rights and obligations of the the inception of the contract.24 Applying this principle to this
lessor and the lessee in contracts of lease are concerned; and 3) case, it means that PPC would re-acquire possession of the
Article 138016 with regard to the rescission of contracts. leased premises, and PAGCOR would get back the rentals it
paid the former for the use of the hotel space.
In his Concurring Opinion in Universal Food Corporation v.
CA,17 Justice J. B. L. Reyes differentiated rescission under In contrast, the parties in a case of termination are not restored
Article 1191 from that under Article 1381 et seq. as follows: to their original situation; neither is the contract treated as if it
never existed. Prior to its termination, the parties are obliged to
"x x x. The rescission on account of breach of stipulations is not comply with their contractual obligations. Only after the contract
predicated on injury to economic interests of the party plaintiff has been cancelled will they be released from their obligations.
but on the breach of faith by the defendant, that violates the
reciprocity between the parties. It is not a subsidiary action, and In this case, the actions and pleadings of petitioner show that it
Article 1191 may be scanned without disclosing anywhere that never intended to rescind the Lease Contract from the beginning.
the action for rescission thereunder is subordinated to anything This fact was evident when it first sought to collect the accrued
other than the culpable breach of his obligations to the rentals from September to November 1993 because, as
defendant. This rescission is a principal action retaliatory in previously stated, it actually demanded the enforcement of the
character, it being unjust that a party be held bound to fulfill his Lease Contract prior to termination. Any intent to rescind was not
promises when the other violates his. As expressed in the old shown, even when it abrogated the Contract on November 25,
Latin aphorism: ‘Non servanti fidem, non est fides servanda.’ 1993, because such abrogation was not the rescission provided
Hence, the reparation of damages for the breach is purely for under Article 1659.
secondary.
Future Rentals
"On the contrary, in rescission by reason of lesion or economic
prejudice, the cause of action is subordinated to the existence of As to the remaining sub-issue of future rentals, Rios v. Jacinto25
that prejudice, because it is the raison d’etre as well as the is inapplicable, because the remedy resorted to by the lessors in
measure of the right to rescind. x x x."18 that case was rescission, not termination. The rights and
obligations of the parties in Rios were governed by Article 1659
Relevantly, it has been pointed out that resolution was originally of the Civil Code; hence, the Court held that the damages to
used in Article 1124 of the old Civil Code, and that the term which the lessor was entitled could not have extended to the
became the basis for rescission under Article 1191 (and, lessee’s liability for future rentals.
conformably, also Article 1659).19
Upon the other hand, future rentals cannot be claimed as
Now, as to the distinction between termination (or cancellation) compensation for the use or enjoyment of another’s property
and rescission (more properly, resolution), Huibonhoa v. CA20 after the termination of a contract. We stress that by abrogating
held that, where the action prayed for the payment of rental the Contract in the present case, PPC released PAGCOR from
arrearages, the aggrieved party actually sought the partial the latter’s future obligations, which included the payment of
enforcement of a lease contract. Thus, the remedy was not rentals. To grant that right to the former is to unjustly enrich it at
rescission, but termination or cancellation, of the contract. The the latter’s expense.
Court explained:
However, it appears that Section XX (c) was intended to be a
"x x x. By the allegations of the complaint, the Gojoccos’ aim was penalty clause. That fact is manifest from a reading of the
to cancel or terminate the contract because they sought its mandatory provision under subparagraph (a) in conjunction with
partial enforcement in praying for rental arrearages. There is a subparagraph (c) of the Contract. A penal clause is "an
distinction in law between cancellation of a contract and its accessory obligation which the parties attach to a principal
rescission. To rescind is to declare a contract void in its inception obligation for the purpose of insuring the performance thereof by
and to put an end to it as though it never were. It is not merely to imposing on the debtor a special prestation (generally consisting
terminate it and release parties from further obligations to each in the payment of a sum of money) in case the obligation is not
other but to abrogate it from the beginning and restore the fulfilled or is irregularly or inadequately fulfilled."26
parties to relative positions which they would have occupied had
no contract ever been made. Quite common in lease contracts, this clause functions to
strengthen the coercive force of the obligation and to provide, in
"x x x. The termination or cancellation of a contract would effect, for what could be the liquidated damages resulting from a
necessarily entail enforcement of its terms prior to the breach.27 There is nothing immoral or illegal in such
declaration of its cancellation in the same way that before a indemnity/penalty clause, absent any showing that it was forced
lessee is ejected under a lease contract, he has to fulfill his upon or fraudulently foisted on the obligor.28
obligations thereunder that had accrued prior to his ejectment.
However, termination of a contract need not undergo judicial In obligations with a penal clause, the general rule is that the
intervention. x x x."21 (Italics supplied) penalty serves as a substitute for the indemnity for damages and
the payment of interests in case of noncompliance; that is, if
Rescission has likewise been defined as the "unmaking of a there is no stipulation to the contrary,29 in which case proof of
contract, or its undoing from the beginning, and not merely its actual damages is not necessary for the penalty to be
termination." Rescission may be effected by both parties by demanded.30 There are exceptions to the aforementioned rule,
mutual agreement; or unilaterally by one of them declaring a however, as enumerated in paragraph 1 of Article 1226 of the
rescission of contract without the consent of the other, if a legally Civil Code: 1) when there is a stipulation to the contrary, 2) when
sufficient ground exists or if a decree of rescission is applied for the obligor is sued for refusal to pay the agreed penalty, and 3)

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when the obligor is guilty of fraud. In these cases, the purpose of petitioner the additional amount of P687,289.50 as penalty,
the penalty is obviously to punish the obligor for the breach. which may be set off or applied against the former’s advanced
Hence, the obligee can recover from the former not only the rental deposits. Meanwhile, the CA’s award to petitioner of actual
penalty, but also other damages resulting from the nonfulfillment damages representing the accrued rentals for September to
of the principal obligation. 31 November 1993 -- with interest and penalty at the rate of two
percent (2%) per month, from the date of filing of the Complaint
In the present case, the first exception applies because Article until the amount shall have been fully paid -- as well as the
XX (c) provides that, aside from the payment of the rentals P50,000 award for attorney’s fees, is AFFIRMED. No costs.
corresponding to the remaining term of the lease, the lessee
shall also be liable "for any and all damages, actual or SO ORDERED.
consequential, resulting from such default and termination of this
contract." Having entered into the Contract voluntarily and with Sandoval-Gutierrez, Corona, Carpio-Morales, and Garcia, JJ.,
full knowledge of its provisions, PAGCOR must be held bound to concur.
its obligations. It cannot evade further liability for liquidated
damages. FOOTNOTES

Reduction of Penalty Art. 1191 of the Civil Code states:

In certain cases, a stipulated penalty may nevertheless be "Art. 1191. The power to rescind obligations is implied in
equitably reduced by the courts.32 This power is explicitly reciprocal ones, in case one of the obligors should not comply
sanctioned by Articles 1229 and 2227 of the Civil Code, which with what is incumbent upon him.
we quote:
"The injured party may choose between the fulfillment and the
"Art. 1229. The judge shall equitably reduce the penalty when rescission of the obligation, with the payment of damages in
the principal obligation has been partly or irregularly complied either case. He may also seek rescission, even after he has
with by the debtor. Even if there has been no performance, the chosen fulfillment, if the latter should become impossible.
penalty may also be reduced by the courts if it is iniquitous or
unconscionable." "The court shall decree the rescission claimed, unless there be
just cause authorizing the fixing of a period."
"Art. 2227. Liquidated damages, whether intended as an
indemnity or a penalty, shall be equitably reduced if they are Article 1659 of the Civil Code provides as follows:
iniquitous or unconscionable."
"Art. 1659. If the lessor or the lessee should not comply with the
The question of whether a penalty is reasonable or iniquitous is obligations set forth in articles 1654 and 1657, the aggrieved
addressed to the sound discretion of the courts. To be party may ask for the rescission of the contract and
considered in fixing the amount of penalty are factors such as -- indemnification for damages, or only the latter, allowing the
but not limited to -- the type, extent and purpose of the penalty; contract to remain in force."
the nature of the obligation; the mode of the breach and its
consequences; the supervening realities; the standing and Art. 1380 of the Civil Code reads thus:
relationship of the parties; and the like.33
"Art. 1380. Contracts validly agreed upon may be rescinded in
In this case, PAGCOR’s breach was occasioned by events that, the cases established by law."
although not fortuitous in law, were in fact real and pressing.
From the CA’s factual findings, which are not contested by either
party, we find that PAGCOR conducted a series of negotiations Florentino v Supervalue
and consultations before entering into the Contract. It did so not
only with the PPC, but also with local government officials, who G.R. No. 172384 September 12, 2007
assured it that the problems were surmountable. Likewise,
PAGCOR took pains to contest the ordinances34 before the ERMINDA F. FLORENTINO, Petitioner,
courts, which consequently declared them unconstitutional. On vs.
top of these developments, the gaming corporation was advised SUPERVALUE, INC., Respondent.
by the Office of the President to stop the games in Cagayan de
Oro City, prompting the former to cease operations prior to DECISION
September 1993.
CHICO-NAZARIO, J.:
Also worth mentioning is the CA’s finding that PAGCOR’s casino
operations had to be suspended for days on end since their start Before this Court is a Petition for Review on Certiorari under
in December 1992; and indefinitely from July 15, 1993, upon the Rule 45 of the Revised Rules of Court, filed by petitioner
advice of the Office of President, until the formal cessation of Erminda F. Florentino, seeking to reverse and set aside the
operations in September 1993. Needless to say, these Decision,1 dated 10 October 2003 and the Resolution,2 dated 19
interruptions and stoppages meant that PAGCOR suffered a April 2006 of the Court of Appeals in CA-G.R. CV No. 73853.
tremendous loss of expected revenues, not to mention the fact The appellate court, in its assailed Decision and Resolution,
that it had fully operated under the Contract only for a limited modified the Decision dated 30 April 2001 of the Regional Trial
time. Court (RTC) of Makati, Branch 57, in Civil Case No. 00-1015,
finding the respondent Supervalue, Inc., liable for the sum of
While petitioner’s right to a stipulated penalty is affirmed, we ₱192,000.00, representing the security deposits made by the
consider the claim for future rentals to the tune of P7,037,835.40 petitioner upon the commencement of their Contract of Lease.
to be highly iniquitous. The amount should be equitably reduced. The dispositive portion of the assailed appellate court’s Decision
Under the circumstances, the advanced rental deposits in the thus reads:
sum of P687,289.50 should be sufficient penalty for respondent’s
breach. WHEREFORE, premises considered, the appeal is PARTLY
GRANTED. The April 30, 2001 Decision of the Regional Trial
WHEREFORE, the Petition is GRANTED in part. The assailed Court of Makati, Branch 57 is therefore MODIFIED to wit: (a) the
Decision and Resolution are hereby MODIFIED to include the portion ordering the [herein respondent] to pay the amount of
payment of penalty. Accordingly, respondent is ordered to pay

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₱192,000.00 representing the security deposits and ₱50,000.00 seized from the SM Megamall store space and return the
as attorney’s fees in favor of the [herein petitioner] as well as security deposits, in the sum of ₱192,000.00, turned over by the
giving [respondent] the option to reimburse [petitioner] ½ of the petitioner upon signing of the Contracts of Lease. On 15 June
value of the improvements introduced by the [petitioner] on the 2000, petitioner sent respondent another letter reiterating her
leased [premises] should [respondent] choose to appropriate previous demands, but the latter failed or refused to comply
itself or require the [petitioner] to remove the improvements, is therewith. 15
hereby REVERSED and SET ASIDE; and (b) the portion
ordering the return to [petitioner] the properties seized by On 17 August 2000, an action for Specific Performance, Sum of
[respondent] after the former settled her obligation with the latter Money and Damages was filed by the petitioner against the
is however MAINTAINED.3 respondent before the RTC of Makati, Branch 57.16

The factual and procedural antecedents of the instant petition In her Complaint docketed as Civil Case No. 00-1015, petitioner
are as follows: alleged that the respondent made verbal representations that the
Contracts of Lease will be renewed from time to time and,
Petitioner is doing business under the business name through the said representations, the petitioner was induced to
"Empanada Royale," a sole proprietorship engaged in the retail introduce improvements upon the store space at SM Megamall
of empanada with outlets in different malls and business in the sum of ₱200,000.00, only to find out a year later that the
establishments within Metro Manila.4 respondent will no longer renew her lease contracts for all three
outlets.17
Respondent, on the other hand, is a domestic corporation
engaged in the business of leasing stalls and commercial store In addition, petitioner alleged that the respondent, without
spaces located inside SM Malls found all throughout the justifiable cause and without previous demand, refused to return
country.5 the security deposits in the amount of ₱192,000.00.18

On 8 March 1999, petitioner and respondent executed three Further, petitioner claimed that the respondent seized her
Contracts of Lease containing similar terms and conditions over equipment and personal belongings found inside the store space
the cart-type stalls at SM North Edsa and SM Southmall and a in SM Megamall after the lease contract for the said outlet
store space at SM Megamall. The term of each contract is for a expired and despite repeated written demands from the
period of four months and may be renewed upon agreement of petitioner, respondent continuously refused to return the seized
the parties.6 items.19

Upon the expiration of the original Contracts of Lease, the Petitioner thus prayed for the award of actual damages in the
parties agreed to renew the same by extending their terms until sum of ₱472,000.00, representing the sum of security deposits,
31 March 2000.7 cost of improvements and the value of the personal properties
seized. Petitioner also asked for the award of ₱300,000.00 as
Before the expiration of said Contracts of Lease, or on 4 moral damages; ₱50,000.00 as exemplary damages; and
February 2000, petitioner received two letters from the ₱80,000.00 as attorney’s fees and expenses of litigation.20
respondent, both dated 14 January 2000, transmitted through
facsimile transmissions.8 For its part, respondent countered that petitioner committed
several violations of the terms of their Contracts of Lease by not
In the first letter, petitioner was charged with violating Section 8 opening from 16 December 1999 to 26 December 1999, and by
of the Contracts of Lease by not opening on 16 December 1999 introducing a new variety of empanada without the prior consent
and 26 December 1999.9 of the respondent, as mandated by the provision of Section 2 of
the Contract of Lease. Respondent also alleged that petitioner
Respondent also charged petitioner with selling a new variety of infringed the lease contract by frequently closing earlier than the
empanada called "mini-embutido" and of increasing the price of agreed closing hours. Respondent finally averred that petitioner
her merchandise from ₱20.00 to ₱22.00, without the prior is liable for the amount ₱106,474.09, representing the penalty for
approval of the respondent.10 selling a new variety of empanada, electricity and water bills, and
rental adjustment, among other charges incidental to the lease
Respondent observed that petitioner was frequently closing agreements. Respondent claimed that the seizure of petitioner’s
earlier than the usual mall hours, either because of non-delivery personal belongings and equipment was in the exercise of its
or delay in the delivery of stocks to her outlets, again in violation retaining lien, considering that the petitioner failed to settle the
of the terms of the contract. A stern warning was thus given to said obligations up to the time the complaint was filed.21
petitioner to refrain from committing similar infractions in the
future in order to avoid the termination of the lease contract.11 Considering that petitioner already committed several breaches
of contract, the respondent thus opted not to renew its Contracts
In the second letter, respondent informed the petitioner that it will of Lease with her anymore. The security deposits were made in
no longer renew the Contracts of Lease for the three outlets, order to ensure faithful compliance with the terms of their lease
upon their expiration on 31 March 2000.12 agreements; and since petitioner committed several infractions
thereof, respondent was justified in forfeiting the security
In a letter-reply dated 11 February 2000, petitioner explained that deposits in the latter’s favor.
the "mini-embutido" is not a new variety of empanada but had
similar fillings, taste and ingredients as those of pork empanada; On 30 April 2001, the RTC rendered a Judgment22 in favor of
only, its size was reduced in order to make it more affordable to the petitioner and found that the physical takeover by the
the buyers.13 respondent of the leased premises and the seizure of petitioner’s
equipment and personal belongings without prior notice were
Such explanation notwithstanding, respondent still refused to illegal. The decretal part of the RTC Judgment reads:
renew its Contracts of Lease with the petitioner. To the contrary,
respondent took possession of the store space in SM Megamall WHEREFORE, premises duly considered, judgment is hereby
and confiscated the equipment and personal belongings of the rendered ordering the [herein respondent] to pay [herein
petitioner found therein after the expiration of the lease petitioner] the amount of ₱192,000.00 representing the security
contract.14 deposits made by the [petitioner] and ₱50,000.00 as and for
attorney’s fees.
In a letter dated 8 May 2000, petitioner demanded that the
respondent release the equipment and personal belongings it

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Obligations with Penal Clause | Art.
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The [respondent] is likewise ordered to return to the [petitioner] Section 18. TERMINATION. Any breach, non-performance or
the various properties seized by the former after settling her non-observance of the terms and conditions herein provided
account with the [respondent]. shall constitute default which shall be sufficient ground to
terminate this lease, its extension or renewal. In which event, the
Lastly, the [respondent] may choose either to reimburse the LESSOR shall demand that LESSEE immediately vacate the
[petitioner] one half (1/2) of the value of the improvements premises, and LESSOR shall forfeit in its favor the deposit
introduced by the plaintiff at SM Megamall should [respondent] tendered without prejudice to any such other appropriate action
choose to appropriate the improvements to itself or require the as may be legally authorized.28
[petitioner] to remove the improvements, even though the
principal thing may suffer damage thereby. [Petitioner] shall not, Since it was already established by the trial court that the
however, cause anymore impairment upon the said leased petitioner was guilty of committing several breaches of contract,
premises than is necessary. the Court of Appeals decreed that she cannot therefore rightfully
demand the return of the security deposits for the same are
The other damages claimed by the plaintiff are denied for lack of deemed forfeited by reason of evident contractual violations.
merit.
It is undisputed that the above-quoted provision found in all
Aggrieved, the respondent appealed the adverse RTC Judgment Contracts of Lease is in the nature of a penal clause to ensure
to the Court of Appeals. petitioner’s faithful compliance with the terms and conditions of
the said contracts.
In a Decision23 dated 10 October 2003, the Court of Appeals
modified the RTC Judgment and found that the respondent was A penal clause is an accessory undertaking to assume greater
justified in forfeiting the security deposits and was not liable to liability in case of breach. It is attached to an obligation in order
reimburse the petitioner for the value of the improvements to insure performance and has a double function: (1) to provide
introduced in the leased premises and to pay for attorney’s fees. for liquidated damages, and (2) to strengthen the coercive force
In modifying the findings of the lower court, the appellate court of the obligation by the threat of greater responsibility in the
declared that in view of the breaches of contract committed by event of breach.29 The obligor would then be bound to pay the
the petitioner, the respondent is justified in forfeiting the security stipulated indemnity without the necessity of proof of the
deposits. Moreover, since the petitioner did not obtain the existence and the measure of damages caused by the breach.30
consent of the respondent before she introduced improvements Article 1226 of the Civil Code states:
on the SM Megamall store space, the respondent has therefore
no obligation to reimburse the petitioner for the amount Art. 1226. In obligations with a penal clause, the penalty shall
expended in connection with the said improvements.24 The substitute the indemnity for damages and the payment of
Court of Appeals, however, maintained the order of the trial court interests in case of noncompliance, if there is no stipulation to
for respondent to return to petitioner her properties after she has the contrary. Nevertheless, damages shall be paid if the obligor
settled her obligations to the respondent. The appellate court refuses to pay the penalty or is guilty of fraud in the fulfillment of
denied petitioner’s Motion for Reconsideration in a Resolution25 the obligation.
dated 19 April 2006.
The penalty may be enforced only when it is demandable in
Hence, this instant Petition for Review on Certiorari26 filed by accordance with the provisions of this Code.
the petitioner assailing the Court of Appeals Decision. For the
resolution of this Court are the following issues: As a general rule, courts are not at liberty to ignore the freedoms
of the parties to agree on such terms and conditions as they see
I. Whether or not the respondent is liable to return the security fit as long as they are not contrary to law, morals, good customs,
deposits to the petitions. public order or public policy. Nevertheless, courts may equitably
reduce a stipulated penalty in the contracts in two instances: (1)
II. Whether or not the respondent is liable to reimburse the if the principal obligation has been partly or irregularly complied
petitioner for the sum of the improvements she introduced in the with; and (2) even if there has been no compliance if the penalty
leased premises. is iniquitous or unconscionable in accordance with Article 1229
of the Civil Code which clearly provides:
III. Whether or not the respondent is liable for attorney’s fees.27
Art. 1229. The judge shall equitably reduce the penalty when the
The appellate court, in finding that the respondent is authorized principal obligation has been partly or irregularly complied with
to forfeit the security deposits, relied on the provisions of by the debtor. Even if there has been no performance, the
Sections 5 and 18 of the Contract of Lease, to wit: penalty may also be reduced by the courts if it is iniquitous or
unconscionable.31
Section 5. DEPOSIT. The LESSEE shall make a cash deposit in
the sum of SIXTY THOUSAND PESOS (P60,000.00) equivalent In ascertaining whether the penalty is unconscionable or not, this
to three (3) months rent as security for the full and faithful court set out the following standard in Ligutan v. Court of
performance to each and every term, provision, covenant and Appeals,32 to wit:
condition of this lease and not as a pre-payment of rent. If at any
time during the term of this lease the rent is increased[,] the The question of whether a penalty is reasonable or iniquitous
LESSEE on demand shall make an additional deposit equal to can be partly subjective and partly objective. Its resolution would
the increase in rent. The LESSOR shall not be required to keep depend on such factor as, but not necessarily confined to, the
the deposit separate from its general funds and the deposit shall type, extent and purpose of the penalty, the nature of the
not be entitled to interest. The deposit shall remain intact during obligation, the mode of breach and its consequences, the
the entire term and shall not be applied as payment for any supervening realities, the standing and relationship of the
monetary obligations of the LESSEE under this contract. If the parties, and the like, the application of which, by and large, is
LESSEE shall faithfully perform every provision of this lease[,] addressed to the sound discretion of the court. xxx.
the deposit shall be refunded to the LESSEE upon the expiration
of this Lease and upon satisfaction of all monetary obligation to In the instant case, the forfeiture of the entire amount of the
the LESSOR. security deposits in the sum of ₱192,000.00 was excessive and
unconscionable considering that the gravity of the breaches
xxxx committed by the petitioner is not of such degree that the
respondent was unduly prejudiced thereby. It is but equitable

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therefore to reduce the penalty of the petitioner to 50% of the leased, the lessor upon the termination of the lease shall pay the
total amount of security deposits. lessee one-half of the value of the improvements at that time.
Should the lessor refuse to reimburse said amount, the lessee
It is in the exercise of its sound discretion that this court may remove the improvements, even though the principal thing
tempered the penalty for the breaches committed by the may suffer damage thereby. He shall not, however, cause any
petitioner to 50% of the amount of the security deposits. The more impairment upon the property leased than is necessary.
forfeiture of the entire sum of ₱192,000.00 is clearly a usurious
and iniquitous penalty for the transgressions committed by the While it is true that under the above-quoted provision of the Civil
petitioner. The respondent is therefore under the obligation to Code, the lessor is under the obligation to pay the lessee one-
return the 50% of ₱192,000.00 to the petitioner. half of the value of the improvements made should the lessor
choose to appropriate the improvements, Article 1678 however
Turning now to the liability of the respondent to reimburse the should be read together with Article 448 and Article 546 of the
petitioner for one-half of the expenses incurred for the same statute, which provide:
improvements on the leased store space at SM Megamall, the
following provision in the Contracts of Lease will enlighten us in Art. 448. The owner of the land on which anything has been built,
resolving this issue: sown or planted in good faith, shall have the right to appropriate
as his own the works, sowing or planting, after payment of the
Section 11. ALTERATIONS, ADDITIONS, IMPROVEMENTS, indemnity provided for in articles 546 and 548, or to oblige the
ETC. The LESSEE shall not make any alterations, additions, or one who built or planted to pay the price of the land, and the one
improvements without the prior written consent of LESSOR; and who sowed, the proper rent. However, the builder or planter
all alterations, additions or improvements made on the leased cannot be obliged to buy the land if its value is considerably
premises, except movable or fixtures put in at LESSEE’s more than that of the building or trees. In such case, he shall pay
expense and which are removable, without defacing the reasonable rent, if the owner of the land does not choose to
buildings or damaging its floorings, shall become LESSOR’s appropriate the building or trees after proper indemnity. The
property without compensation/reimbursement but the LESSOR parties shall agree upon the terms of the lease and in case of
reserves the right to require the removal of the said alterations, disagreement, the court shall fix the terms thereof.
additions or improvements upon expiration of the lease.
xxxx
The foregoing provision in the Contract of Lease mandates that
before the petitioner can introduce any improvement on the Art. 546. Necessary expenses shall be refunded to every
leased premises, she should first obtain respondent’s consent. In possessor; but only possessor in good faith may retain the thing
the case at bar, it was not shown that petitioner previously until he has been reimbursed therefor.
secured the consent of the respondent before she made the
improvements on the leased space in SM Megamall. It was not Useful expenses shall be refunded only to the possessor in good
even alleged by the petitioner that she obtained such consent or faith with the same right of retention, the person who has
she at least attempted to secure the same. On the other hand, defeated him in the possession having the option of refunding
the petitioner asserted that respondent allegedly misrepresented the amount of the expenses or of paying the increase in value
to her that it would renew the terms of the contracts from time to which the thing may have acquired by reason thereof.
time after their expirations, and that the petitioner was so
induced thereby that she expended the sum of ₱200,000.00 for Thus, to be entitled to reimbursement for improvements
the improvement of the store space leased. introduced on the property, the petitioner must be considered a
builder in good faith. Further, Articles 448 and 546 of the Civil
This argument was squarely addressed by this court in Code, which allow full reimbursement of useful improvements
Fernandez v. Court of Appeals,33 thus: and retention of the premises until reimbursement is made, apply
only to a possessor in good faith, i.e., one who builds on land
The Court ruled that the stipulation of the parties in their lease with the belief that he is the owner thereof. A builder in good faith
contract "to be renewable" at the option of both parties stresses is one who is unaware of any flaw in his title to the land at the
that the faculty to renew was given not to the lessee alone nor to time he builds on it.35 In this case, the petitioner cannot claim
the lessor by himself but to the two simultaneously; hence, both that she was not aware of any flaw in her title or was under the
must agree to renew if a new contract is to come about. belief that she is the owner of the subject premises for it is a
settled fact that she is merely a lessee thereof.1âwphi1
Petitioner’s contention that respondents had verbally agreed to
extend the lease indefinitely is inadmissible to qualify the terms In Geminiano v. Court of Appeals,36 this Court was emphatic in
of the written contract under the parole evidence rule, and declaring that lessees are not possessors or builders in good
unenforceable under the statute of frauds.34 faith, thus:

Moreover, it is consonant with human experience that lessees, Being mere lessees, the private respondents knew that their
before occupying the leased premises, especially store spaces occupation of the premises would continue only for the life of the
located inside malls and big commercial establishments, would lease. Plainly, they cannot be considered as possessors nor
renovate the place and introduce improvements thereon builders in good faith.
according to the needs and nature of their business and in
harmony with their trademark designs as part of their marketing In a plethora of cases, this Court has held that Article 448 of the
ploy to attract customers. Certainly, no inducement or Civil Code, in relation to Article 546 of the same Code, which
misrepresentation from the lessor is necessary for this purpose, allows full reimbursement of useful improvements and retention
for it is not only a matter of necessity that a lessee should re- of the premises until reimbursement is made, applies only to a
design its place of business but a business strategy as well. possessor in good faith, i.e., one who builds on land with the
belief that he is the owner thereof. It does not apply where one's
In ruling that the respondent is liable to reimburse petitioner one only interest is that of a lessee under a rental contract;
half of the amount of improvements made on the leased store otherwise, it would always be in the power of the tenant to
space should it choose to appropriate the same, the RTC relied "improve" his landlord out of his property.
on the provision of Article 1678 of the Civil Code which provides:
Since petitioner’s interest in the store space is merely that of the
Art. 1678. If the lessee makes, in good faith, useful lessee under the lease contract, she cannot therefore be
improvements which are suitable to the use for which the lease considered a builder in good faith. Consequently, respondent
is intended, without altering the form or substance of the property may appropriate the improvements introduced on the leased

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premises without any obligation to reimburse the petitioner for specified for the added consideration of ₱100,000.00 as alleged
the sum expended. in paragraphs 2 and 3 of the complaint, Annex "C" hereof.

Anent the claim for attorney’s fees, we resolve to likewise deny b. [Petitioner Rogelio] admits full payment of plaintiff to him the
the award of the same. Attorney’s fees may be awarded when a amount of ₱1,530,000.00 leaving the balance of ₱570,000.00 of
party is compelled to litigate or to incur expenses to protect its the contractual price of ₱2,100,000.00 for the construction of the
interest by reason of unjustified act of the other.37 buildings aforementioned.

In the instant petition, it was not shown that the respondent c. [Petitioner Rogelio] agrees to fully complete the construction of
unjustifiably refused to grant the demands of the petitioner so as the residential/commercial building mentioned in paragraph 1
to compel the latter to initiate legal action to enforce her right. As hereof provided plaintiff would pay to him, subject to hereunder
we have found herein, there is basis for respondent’s refusal to terms, the aforesaid amount of ₱570,000.00.
return to petitioner the security deposits and to reimburse the
costs of the improvements in the leased premises. The award of d. The plaintiff agrees to pay [petitioner Rogelio] the amount of
attorney’s fees is therefore not proper in the instant case. ₱570,000.00 subject to the terms hereunder set forth and subject
strictly to the condition that [petitioner Rogelio] will finish the
WHEREFORE, premises considered, the instant Petition is building above-described pursuant to the agreements [Annex(es)
PARTLY GRANTED. The Court of Appeals Decision dated 10 "A" and "B"] set forth in paragraph 1 hereof.
October 2003 in CA-G.R. CV No. 73853 is hereby AFFIRMED
with the MODIFICATION that the respondent may forfeit only e. Plaintiff shall pay [petitioner Rogelio] the amount of
50% of the total amount of the security deposits in the sum of ₱570,000.00 as follows:
₱192,000.00, and must return the remaining 50% to the
petitioner. No costs. i. ₱370,000.00 – the 5th day from approval of this compromise
agreement by this Honorable Court and to coincide (with) the
SO ORDERED. start of the 75 days for [petitioner Rogelio] to complete the
construction of the building.
Diamond Builders v Country Bankers
ii. ₱200,000.00 – When the aforedescribed building is fully
G.R. No. 171820 December 13, 2007 constructed pursuant to agreements stated in paragraph 1
hereof.
DIAMOND BUILDERS CONGLOMERATION, ROGELIO S.
ACIDRE, TERESITA P. ACIDRE, GRACE C. OSIAS, VIOLETA iii. Said building must be fully finished pursuant to the agreement
S. FAIYAZ and EMMA S. CUTILLAR, Petitioners, stated in paragraph 1 hereof within 75 days (excluding Sundays
vs. and Holidays) counted from receipt of payment of ₱370,000.00.
COUNTRY BANKERS INSURANCE CORPORATION, The date of receipt to be issued by [petitioner Rogelio] will
Respondent. control. The 75th day will be 12:00 noon of the 75th day.

DECISION iv. From receipt of the aforesaid amount of ₱370,000.00,


[petitioner Rogelio] shall submit in favor of plaintiff a performance
NACHURA, J.: or surety bond in the equivalent amount of ₱370,000.00 – to
answer or indemnify plaintiff in the event the building is not
Before us is a petition for review on certiorari to annul the finished on the 75th day.
Decision1 of the Court of Appeals (CA) in CA-G.R. C.V. No.
48603, which reversed the Decision2 of the Regional Trial Court, v. In the event the building is finished within 75 days as
Branch 7, Manila (RTC Manila) in Civil Case No. 92-62029 and heretofore stated and pursuant to the agreements set forth in
granted respondent Country Bankers Insurance Corporation’s paragraph 1 hereof, in addition to the amount of ₱200,000.00,
(Country Bankers’) prayer for a sum of money against the the plaintiff shall also pay [petitioner Rogelio] the amount of
petitioners. ₱90,000.00 by way of [bonus]. However, in the event [petitioner
Rogelio] shall fail to fully complete the construction of the
The controversy originated from a civil case3 pending before the building pursuant to the agreements set forth in paragraph 1
Regional Trial Court, Branch 125, Caloocan City (RTC hereof within 75 days as heretofore stated, [petitioner Rogelio]
Caloocan) filed by Marceliano Borja (Borja) against Rogelio S. shall not be entitled to any further payments and the
Acidre (Rogelio) for the latter’s breach of his obligation to performance or surety bond above-mentioned shall be fully
construct a residential and commercial building. Rogelio is the implemented by way of penalizing [petitioner Rogelio] and/or as
sole proprietor of petitioner Diamond Builders Conglomeration award for damages in favor of plaintiff.
(DBC).
xxxx
To put an end to the foregoing litigation, the parties entered into
a Compromise Agreement4 which provided, in part: f. x x x

COMPROMISE AGREEMENT g. That the construction herein contemplated shall not extend
beyond 75 days. Said period shall commence five days from the
1. x x x date of the final approval hereof by this Honorable Court.

a. In lieu of rescission, the parties have mutually agreed, subject i. That any violation and/or avoidance of the terms and
to the provisions hereunder, to fully implement the building conditions of this Compromise Agreement by either of the parties
contract dated October 1, 1990 and supplemented on October 2, herein shall forthwith entitle the aggrieved party to an immediate
1990 with an additional scope of work marked as Annex "A" of execution hereof and to the necessary and corresponding reliefs
the complaint and the Letter-Agreement dated November 16, and remedies therefore. (Emphasis supplied.)
1991 signed by the [petitioner Rogelio] and plaintiff’s son(,)
Ferdinand A. Borja, marked as Annex "B" of the complaint, which The RTC Caloocan approved the Compromise Agreement and
required full compliance of the structural design of Engr. Ramos rendered a Decision5 in accordance with the terms and
and explicit reminders in the constructing of the conditions contained therein.
residential/commercial building and the additional works therein

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In compliance with the Compromise Agreement, Rogelio WHEREFORE, and considering the foregoing, judgment is
obtained a Surety Bond6 from Country Bankers in favor of the hereby rendered:
spouses Borja.7 In this regard, Rogelio and his spouse,
petitioner Teresita P. Acidre, together with DBC employees 1. Dismissing the complaint for lack of merit;
Grace C. Osias, Violeta S. Faiyaz and Emma S. Cutillar (the
other petitioners herein), signed an Indemnity Agreement8 2. On the counterclaim, ordering [Country Bankers] to pay
consenting to their joint and several liability to Country Bankers [petitioners] attorney’s fees of ₱50,000.00, plus the costs of suit.
should the surety bond be executed upon.
SO ORDERED.
On April 23, 1992, Country Bankers received a Motion for
Execution9 of the surety bond filed by Borja with the RTC On appeal, the CA reversed and set aside the decision of the
Caloocan for Rogelio’s alleged violation of the Compromise RTC Manila, to wit:
Agreement. Consequently, Country Bankers, in a letter10 dated
May 13, 1992, advised petitioners that in the event it is WHEREFORE, premises considered, the Appeal is GRANTED
constrained to pay under the surety bond to Borja, it shall and the Decision dated November 2, 1992 of Branch 7 of the
proceed against petitioners for reimbursement. Regional Trial Court of Manila is hereby REVERSED and a new
one entered, ordering [petitioners] to pay [Country Bankers] the
In turn, petitioners wrote Country Bankers informing the latter of sum of THREE HUNDRED SEVENTY THOUSAND PESOS
the filing of an Opposition to Borja’s Motion for Execution.11 In (₱370,000.00), as reimbursement or actual damages, plus
spite of the opposition, however, the RTC Caloocan issued a interest thereon at the rate of 12% per annum computed from the
Writ of Execution12 on May 25, 1992. Petitioners then filed a date of judicial demand, or from July 24, 1992, the date of filing
motion for reconsideration. of the complaint until the said amount has been fully paid.

On May 29, 1992, Sheriff Perceverando Pangan of RTC SO ORDERED.


Caloocan served Country Bankers a copy of the writ. Posthaste,
Country Bankers, in writing, requested Sheriff Pangan for a 10- In reversing the trial court, the CA ruled that Country Bankers, as
day grace period within which to settle the claim.13 surety of Rogelio’s loan obligation, did not effect voluntary
payment on the bond. The appellate court found that what
Subsequently, Rogelio filed an Urgent Omnibus Motion14 to Country Bankers paid was an obligation legally due and
suspend the Writ of Execution and to resolve the Motion for demandable. It declared that Country Bankers acted upon
Reconsideration dated June 3, 1992. Upon receipt of the compulsion of a writ of execution, which appears to have been
Omnibus Motion, Country Bankers forthwith wrote Sheriff regularly, and validly issued, and, by its very nature, is
Pangan and requested that the implementation of the Writ of immediately enforceable.
Execution be held in abeyance so as not to render moot and
academic the RTC Caloocan’s resolution on the Omnibus Hence, this appeal positing a sole issue for our resolution, to wit:
Motion.15
Whether petitioners should indemnify Country Bankers for the
Nonetheless, on June 9, 1992, Country Bankers was served a payment of the surety bond.
Notice of Levy/Sheriff’s Sale16 with a list of its personal
properties to be sold at the scheduled public auction on June 15, In fine, petitioners contend that Country Bankers is not entitled to
1992. reimbursement when it voluntarily paid the surety bond
considering it knew full well the remedies availed of by
The next day, or on June 10, 1992, Country Bankers verified with petitioners to stay the execution of the compromise judgment.
the RTC Caloocan the status of petitioners’ Omnibus Motion. It Thus, Country Bankers must bear the loss or damage arising
was informed that the motion had yet to be acted upon. On the from its voluntary act.
same date, Sheriff Pangan arrived at Country Bankers’ office,
and the latter was thus constrained to pay the amount of the We deny the appeal and affirm the appellate court’s ruling.
surety bond.17 Country Bankers should be reimbursed for the ₱370,000.00 it
paid to Borja under the surety bond.
Significantly, on June 22, 1992, twelve (12) days after the
satisfaction of judgment in Civil Case No. C-14745, Rogelio filed In impugning the CA’s decision, petitioners invoke their pending
a Petition for Certiorari and Prohibition with Preliminary Omnibus Motion to stay the execution of the compromise
Injunction and Restraining Order18 with the CA, docketed as judgment. Petitioners’ theory is that, although the RTC Caloocan
CA-G.R. SP No. 28205. Although the appellate court issued a had already issued a writ of execution and Country Bankers had
Temporary Restraining Order (TRO), the petition was eventually been served a Notice of Levy/Sheriff’s Sale of its properties at
denied due course and dismissed outright for being fait accompli, the impending public auction, the payment made by Country
as what it sought to enjoin or prohibit had already been fully Bankers to Borja is a voluntary act. Petitioners push their theory
satisfied and executed.19 even further, and deign to suggest that Country Bankers should
have itself intervened in the proceedings before the RTC
In the meantime, after Country Bankers was compelled to pay Caloocan to stay the writ of execution.
the amount of the surety bond, it demanded reimbursement from
the petitioners under the Indemnity Agreement.20 However, We reject this preposterous suggestion. Petitioners ought to be
petitioners refused to reimburse Country Bankers. reminded of the nature of a judgment on a compromise and a
writ of execution issued in connection therewith.
In addition, upon the dismissal of their petition in CA-G.R. SP
No. 28205, petitioners wrote Country Bankers and informed the A compromise judgment is a decision rendered by a court
latter that the voluntary payment of the bond effectively sanctioning the agreement between the parties concerning the
prevented them from contesting the validity of the issuance of determination of the controversy at hand. Essentially, it is a
the Writ of Execution.21 contract, stamped with judicial imprimatur, between two or more
persons, who, for preventing or putting an end to a lawsuit,
As a result, Country Bankers filed a complaint for sum of money adjust their difficulties by mutual consent in the manner which
against the petitioners which, as previously stated, the RTC they agree on, and which each of them prefers in the hope of
Manila dismissed. It disposed of the case, thus: gaining, balanced by the danger of losing.22 Upon court
approval of a compromise agreement, it transcends its identity
as a mere contract binding only upon the parties thereto, as it

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becomes a judgment that is subject to execution in accordance obligor shall pay in case, certified bank check payable to the
with Rule 39 of the Rules of Court.23 judgment oblige, or any other form of payment acceptable to the
latter, the amount of the judgment debt under proper receipt
Ordinarily, a judgment based on compromise is not appealable. directly to the judgment oblige or his authorized representative if
It should not be disturbed except upon a showing of vitiated present at the time of payment. The lawful fees shall be handed
consent or forgery. The reason for the rule is that when both under proper receipt to the executing sheriff who shall turn over
parties enter into an agreement to end a pending litigation and the said amount within the same day to the clerk of court of the
request that a decision be rendered approving said agreement, it court that issued the writ.
is only natural to presume that such action constitutes an implicit,
as undeniable as an express, waiver of the right to appeal As Rogelio’s obligation under the compromise agreement, and
against said decision.24 Thus, a decision on a compromise approved by the RTC Caloocan, had a penal clause33 which is
agreement is final and executory, and is conclusive between the monetary in nature,34 the writ of execution availed of by Borja,
parties.25 and paid by Country Bankers, strictly complied with the rules on
execution of money judgments.
It is beyond cavil that if a party fails or refuses to abide by a
compromise agreement, the other party may either enforce the It is true that the petitioners did not directly question the
compromise or regard it as rescinded and insist upon his original compromise judgment. What was pending before the Caloocan
demand.26 Following this mandatory rule, the RTC Caloocan RTC was petitioners’ Omnibus Motion praying for a stay in the
granted Borja’s motion, and subsequently issued an order to the implementation of the writ of execution. However, the bottom line
sheriff to execute the compromise judgment. Notwithstanding the issue raised in the Omnibus Motion is, actually, a question on the
foregoing, petitioners still maintain that since they had taken compromise judgment, since its resolution would require an
steps to stay the execution of the compromise judgment, Country inquiry into the stipulations contained in the Compromise
Bankers, with full knowledge of their active opposition to the Agreement, particularly the provision on immediate execution.
execution thereof, should not have readily complied with the
RTC Caloocan Order. Thus, when the RTC Manila ruled that the payment on the bond
made by Country Bankers was voluntary, the lower court
Petitioners’ argument contemplates a brazen defiance of a effectively disregarded the rule on the non-appealable nature
validly issued court order, which had not been restrained by the and the immediately executory character of a judgment on a
appellate court or this Court. The argument is unacceptable. compromise.

The Compromise Agreement between Borja and Rogelio Moreover, it has not escaped our attention that petitioners
explicitly provided that the latter’s failure to complete belatedly filed a Petition for Certiorari and Prohibition with prayer
construction of the building within the stipulated period27 shall for a TRO with the CA, ostensibly to stop the execution of the
cause the full implementation of the surety bond as a penalty for compromise judgment. Not only was the filing thereof late, it was
the default, and as an award of damages to Borja. Furthermore, done twelve (12) days after the satisfaction of the compromise
the Compromise Agreement contained a default executory judgment. We are, therefore, perplexed why, despite the urgency
clause in case of a violation or avoidance of the terms and of the matter, petitioners merely banked on a pending motion for
conditions thereof. Therefore, the payment made by Country reconsideration to stay the enforcement of an already issued writ
Bankers to Borja was proper, as failure to pay would have of execution. Petitioners’ total reliance thereon was certainly
amounted to contumacious disobedience of a valid court order. misplaced.

Clearly, even without the aforesaid default clause, the Admittedly, the general rule is that certiorari will not lie unless a
compromise judgment remained executory as against Rogelio, motion for reconsideration is first filed before the respondent
as the principal obligor (co-debtor), and Country Bankers as tribunal to allow it an opportunity to correct the imputed errors.35
surety of the obligation. Section 4, Rule 39 of the Rules of Court Nonetheless, the rule admits of exceptions, thus:
provides:
(a) where the order is a patent nullity, as where the court a quo
SEC. 4. Judgments not stayed by appeal. – Judgments in has no jurisdiction;
actions for injunction, receivership, accounting and support, and
such other judgments as are now or may hereafter be declared (b) where the questions raised in the certiorari proceedings have
to be immediately executory, shall be enforceable after their been duly raised and passed upon by the lower court, or are the
rendition and shall not be stayed by an appeal taken therefrom, same as those raised and passed upon in the lower court;
unless otherwise ordered by the trial court. On appeal therefrom,
the appellate court in its discretion may make an order (c) where there is an urgent necessity for the resolution of the
suspending, modifying, restoring or granting the injunction, question and any further delay would prejudice the interests of
receivership, accounting, or award of support. the Government or of the petitioner or the subject matter of the
action is perishable;
The stay of execution shall be upon such terms as to bind or
otherwise as may be considered proper for the security or (d) where, under the circumstances, a motion for reconsideration
protection of the rights of the adverse party. would be useless;

Other judgments in actions declared to be immediately executory (e) where petitioner was deprived of due process and there is
and not stayed by the filing of an appeal are for: (1) extreme urgency for relief;
compromise,28 (2) forcible entry and unlawful detainer,29 (3)
direct contempt,30 and (4) expropriation.31 (f) where, in a criminal case, relief from an order of arrest is
urgent and the granting of such relief by the trial court is
Likewise, Section 9, paragraph (a),32 of the same Rule outlines improbable;
the procedure for execution of judgments for money, thus:
(g) where the proceedings in the lower court are a nullity for lack
SEC. 9 Execution of judgments for money, how enforced. – of due process;

(a) Immediate payment on demand. – The officer shall enforce (h) where the proceedings was ex-parte or in which the petitioner
an execution of a judgment for money by demanding from the had no opportunity to object; and
judgment obligor the immediate payment of the full amount
stated in the writ of execution and all lawful fees. The judgment

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(i) where the issue raised is one purely of law or where public compromise, shall be prima facie evidence of said payment,
interest is involved.36 settlement or compromise, as well as the liability of [petitioners]
in any and all suits and claims against [petitioners] arising out of
Evidently, it would not have been premature for petitioners to said bond or this bond application.
have filed a petition before the CA, upon the issuance by the
RTC Caloocan of a writ of execution, because the RTC Ineluctably, petitioners are obligated to reimburse Country
Caloocan already denied their Opposition to Borja’s Motion for Bankers the amount of ₱370,000.00.
Execution on the surety bond. If, as petitioners insist, they had a
meritorious challenge to the satisfaction of the writ of execution, Finally, petitioners desperately attempt to inveigle out of this
they should have immediately filed a Petition for Certiorari with burden, which is of their own making, by imputing a lack of
the CA and therein alleged the exceptional circumstance initiative on Country Banker’s part to intervene in the execution
warranting the non-filing of a motion for reconsideration. proceedings before the RTC.
Petitioners should not have persisted on waiting for the
resolution of their Omnibus Motion. This contention, as with the rest of petitioners’ arguments,
deserves scant consideration. Suffice it to state that Country
We have consistently ruled that an order for the issuance of a Bankers is a surety of the obligation with a penal clause,
writ of execution is ordinarily not appealable. The reason for this constituted in the compromise judgment; it is not a joint and
is that the merits of the case should not be delved into anew solidary co-debtor of Rogelio.
after a determination has been made thereon with finality.37
Otherwise, there would be practically no end to litigation since In the recent case of Escaňo v. Ortigas,39 we elucidated on the
the losing party would always try to thwart execution by distinction between a surety as a co-debtor under a suretyship
appealing from every order granting the writ. In this case, this agreement and a joint and solidary co-debtor, thus:
aphorism should apply. Rogelio, after agreeing to an amicable
settlement with Borja to put an end to the case before the RTC (A)s indicated by Article 2047, a suretyship requires a principal
Caloocan, cannot flout compliance of the court order of debtor to whom the surety is solidarily bound by way of an
execution by refusing to reimburse Country Bankers, the surety ancillary obligation of segregate identity from the obligation
of his obligation in the compromise agreement. between the principal debtor and the creditor. The suretyship
does not bind the surety to the creditor, inasmuch as the latter is
Still, petitioners stubbornly refuse to pay Country Bankers, vested with the right to proceed against the former to collect the
contending that the CA itself, in CA-G.R. SP No. 28205, declared credit in lieu of proceeding against the principal debtor for the
that the payment effected was voluntary. same obligation. At the same time, there is also a legal tie
created between the surety and the principal debtor to which the
We are not persuaded. creditor is not privy or party to. The moment the surety fully
answers to the creditor for the obligation created by the principal
Article 2047 of the Civil Code specifically calls for the application debtor, such obligation is extinguished. At the same time, the
of the provisions on solidary obligations to suretyship contracts. surety may seek reimbursement from the principal debtor for the
In particular, Article 1217 of the Civil Code recognizes the right of amount paid, for the surety does in fact "become subrogated to
reimbursement from a co-debtor (the principal co-debtor, in case all the rights and remedies of the creditor."
of suretyship) in favor of the one who paid (i.e., the surety).38 In
contrast, Article 1218 of the Civil Code is definitive on when WHEREFORE, the Petition is DENIED. The Decision of the
reimbursement is unavailing, such that only those payments Court of Appeals in CA-G.R. C.V. No. 48603 is hereby
made after the obligation has prescribed or became illegal shall AFFIRMED. Costs against the petitioner.
not entitle a solidary debtor to reimbursement. Nowhere in the
invoked CA Decision does it declare that a surety who pays, by SO ORDERED.
virtue of a writ of execution, is not entitled to reimbursement from
the principal co-debtor. The CA Decision was confined to the FOOTNOTES
mootness of the issue presented and petitioners’ preclusion from
the relief it prayed for, i.e., a stay of the writ of execution, Escaňo v. Ortigas, G.R. No. 151953, June 29, 2007. See
considering that the writ had already been satisfied. Lapanday Agricultural v. Court of Appeals, 381 Phil. 41, 52
(2000). Art. 1217 reads in part:
More importantly, the Indemnity Agreement signed by Rogelio
and the other petitioners explicitly provided for an incontestability Payment made by one of the solidary debtors extinguishes the
clause on payments made by Country Bankers.1âwphi1 The obligation. If two or more solidary debtors offer to pay, the
said clause reads: creditor may choose which offer to accept xxx.

INCONTESTABILITY OF PAYMENTS MADE BY THE He who made payment may claim from his co-debtors only on
COMPANY: - Any payment or disbursement made by [Country the share which corresponds to each, with interest for the
Bankers] on account of the above-mentioned Bond, its renewals, payment already made. If the payment is made before the debt
extensions, alterations or substitutions either in the belief that is due, no interest for the intervening period may be demanded
[Country Bankers] was obligated to make such payment or in the xxx.
belief that said payment was necessary or expedient in order to
avoid greater losses or obligations for which [Country Bankers]
might be liable by virtue of the terms of the above-mentioned
Bond, its renewals, extensions, alterations, or substitutions, shall
be final and shall not be disputed by the undersigned, who
hereby jointly and severally bind themselves to indemnify
[Country Bankers] of any and all such payments, as stated in the
preceding clauses.

In case [Country Bankers] shall have paid, settled or


compromised any liability, loss, costs, damages, attorney’s fees,
expenses, claims, demands, suits, or judgments as above-
stated, arising out of or in connection with said bond, an itemized
statement thereof, signed by an officer of [Country Bankers] and
other evidence to show said payment, settlement or

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