G.R. No.

96405 June 26, 1996

BALDOMERO INCIONG, JR., petitioner,

vs.
COURT OF APPEALS and PHILIPPINE BANK OF COMMUNICATIONS, respondents.

ROMERO, J.:p

This is a petition for review on certiorari of the decision of the Court of Appeals affirming that of the Regional Trial Court of Misamis Oriental, Branch 18, 1 which disposed of Civil
Case No. 10507 for collection of a sum of money and damages, as follows:

WHEREFORE, defendant BALDOMERO L. INCIONG, JR. is adjudged solidarily liable and ordered to pay to the
plaintiff Philippine Bank of Communications, Cagayan de Oro City, the amount of FIFTY THOUSAND PESOS
(P50,000.00), with interest thereon from May 5, 1983 at 16% per annum until fully paid; and 6%  per
annum on the total amount due, as liquidated damages or penalty from May 5, 1983 until fully paid; plus 10%
of the total amount due for expenses of litigation and attorney's fees; and to pay the costs.

The counterclaim, as well as the cross claim, are dismissed for lack of merit.

SO ORDERED.

Petitioner's liability resulted from the promissory note in the amount of P50,000.00 which he signed with Rene C. Naybe and
Gregorio D. Pantanosas on February 3, 1983, holding themselves jointly and severally liable to private respondent Philippine
Bank of Communications, Cagayan de Oro City branch. The promissory note was due on May 5, 1983.

Said due date expired without the promissors having paid their obligation. Consequently, on November 14, 1983 and on June
8, 1984, private respondent sent petitioner telegrams demanding payment thereof.  On December 11, 1984 private 2

respondent also sent by registered mail a final letter of demand to Rene C. Naybe. Since both obligors did not respond to the
demands made, private respondent filed on January 24, 1986 a complaint for collection of the sum of P50,000.00 against the
three obligors.

On November 25, 1986, the complaint was dismissed for failure of the plaintiff to prosecute the case. However, on January 9,
1987, the lower court reconsidered the dismissal order and required the sheriff to serve the summonses. On January 27, 1987,
the lower court dismissed the case against defendant Pantanosas as prayed for by the private respondent herein. Meanwhile,
only the summons addressed to petitioner was served as the sheriff learned that defendant Naybe had gone to Saudi Arabia.

In his answer, petitioner alleged that sometime in January 1983, he was approached by his friend, Rudy Campos, who told him
that he was a partner of Pio Tio, the branch manager of private respondent in Cagayan de Oro City, in the falcata logs
operation business. Campos also intimated to him that Rene C. Naybe was interested in the business and would contribute a
chainsaw to the venture. He added that, although Naybe had no money to buy the equipment, Pio Tio had assured Naybe of
the approval of a loan he would make with private respondent. Campos then persuaded petitioner to act as a "co-maker" in
the said loan. Petitioner allegedly acceded but with the understanding that he would only be a co-maker for the loan of
P50,000.00.

Petitioner alleged further that five (5) copies of a blank promissory note were brought to him by Campos at his office. He
affixed his signature thereto but in one copy, he indicated that he bound himself only for the amount of P5,000.00. Thus, it
was by trickery, fraud and misrepresentation that he was made liable for the amount of P50,000.00.

In the aforementioned decision of the lower court, it noted that the typewritten figure "-- 50,000 --" clearly appears directly
below the admitted signature of the petitioner in the promissory note.   Hence, the latter's uncorroborated testimony on his
3

limited liability cannot prevail over the presumed regularity and fairness of the transaction, under Sec. 5 (q) of Rule 131. The
lower court added that it was "rather odd" for petitioner to have indicated in a copy and not in the original, of the promissory
note, his supposed obligation in the amount of P5,000.00 only. Finally, the lower court held that, even granting that said
limited amount had actually been agreed upon, the same would have been merely collateral between him and Naybe and,
therefore, not binding upon the private respondent as creditor-bank.

The lower court also noted that petitioner was a holder of a Bachelor of Laws degree and a labor consultant who was
supposed to take due care of his concerns, and that, on the witness stand, Pio Tio denied having participated in the alleged
business venture although he knew for a fact that the falcata logs operation was encouraged by the bank for its export
potential.

Petitioner appealed the said decision to the Court of Appeals which, in its decision of August 31, 1990, affirmed that of the
lower court. His motion for reconsideration of the said decision having been denied, he filed the instant petition for review
on certiorari.
On February 6, 1991, the Court denied the petition for failure of petitioner to comply with the Rules of Court and paragraph 2
of Circular
No. 1-88, and to sufficiently show that respondent court had committed any reversible error in its questioned decision.  His 4

motion for the reconsideration of the denial of his petition was likewise denied with finality in the Resolution of April 24,
1991.  Thereafter, petitioner filed a motion for leave to file a second motion for reconsideration which, in the Resolution of
5

May 27, 1991, the Court denied. In the same Resolution, the Court ordered the entry of judgment in this case. 6

Unfazed, petitioner filed a notion for leave to file a motion for clarification. In the latter motion, he asserted that he had
attached Registry Receipt No. 3268 to page 14 of the petition in compliance with Circular No. 1-88. Thus, on August 7, 1991,
the Court granted his prayer that his petition be given due course and reinstated the same. 7

Nonetheless, we find the petition unmeritorious.

Annexed to the petition is a copy of an affidavit executed on May 3, 1988, or after the rendition of the decision of the lower
court, by Gregorio Pantanosas, Jr., an MTCC judge and petitioner's co-maker in the promissory note. It supports petitioner's
allegation that they were induced to sign the promissory note on the belief that it was only for P5,000.00, adding that it was
Campos who caused the amount of the loan to be increased to P50,000.00.

The affidavit is clearly intended to buttress petitioner's contention in the instant petition that the Court of Appeals should
have declared the promissory note null and void on the following grounds: (a) the promissory note was signed in the office of
Judge Pantanosas, outside the premises of the bank; (b) the loan was incurred for the purpose of buying a second-hand
chainsaw which cost only P5,000.00; (c) even a new chainsaw would cost only P27,500.00; (d) the loan was not approved by
the board or credit committee which was the practice, as it exceeded P5,000.00; (e) the loan had no collateral; (f) petitioner
and Judge Pantanosas were not present at the time the loan was released in contravention of the bank practice, and (g)
notices of default are sent simultaneously and separately but no notice was validly sent to him.  Finally, petitioner contends
8

that in signing the promissory note, his consent was vitiated by fraud as, contrary to their agreement that the loan was only
for the amount of P5,000.00, the promissory note stated the amount of P50,000.00.

The above-stated points are clearly factual. Petitioner is to be reminded of the basic rule that this Court is not a trier of facts.
Having lost the chance to fully ventilate his factual claims below, petitioner may no longer be accorded the same opportunity
in the absence of grave abuse of discretion on the part of the court below. Had he presented Judge Pantanosas affidavit
before the lower court, it would have strengthened his claim that the promissory note did not reflect the correct amount of
the loan.

Nor is there merit in petitioner's assertion that since the promissory note "is not a public deed with the formalities prescribed
by law but . . . a mere commercial paper which does not bear the signature of . . . attesting witnesses," parol evidence may
"overcome" the contents of the promissory note.  The first paragraph of the parol evidence rule   states:
9 10

When the terms of an agreement have been reduced to writing, it is considered as containing all the terms
agreed upon and there can be, between the parties and their successors in interest, no evidence of such
terms other than the contents of the written agreement.

Clearly, the rule does not specify that the written agreement be a public document.

What is required is that the agreement be in writing as the rule is in fact founded on "long experience that written evidence is
so much more certain and accurate than that which rests in fleeting memory only, that it would be unsafe, when parties have
expressed the terms of their contract in writing, to admit weaker evidence to control and vary the stronger and to show that
the
parties intended a different contract from that expressed in the writing signed by them."   Thus, for the parol evidence rule to
11

apply, a written contract need not be in any particular form, or be signed by both parties.   As a general rule, bills, notes and
12

other instruments of a similar nature are not subject to be varied or contradicted by parol or extrinsic evidence.  13

By alleging fraud in his answer,   petitioner was actually in the right direction towards proving that he and his co-makers
14

agreed to a loan of P5,000.00 only considering that, where a parol contemporaneous agreement was the inducing and moving
cause of the written contract, it may be shown by parol evidence.   However, fraud must be established by clear and
15

convincing evidence, mere preponderance of evidence, not even being adequate.   Petitioner's attempt to prove fraud must,
16

therefore, fail as it was evidenced only by his own uncorroborated and, expectedly, self-serving testimony.

Petitioner also argues that the dismissal of the complaint against Naybe, the principal debtor, and against Pantanosas, his co-
maker, constituted a release of his obligation, especially because the dismissal of the case against Pantanosas was upon the
motion of private respondent itself. He cites as basis for his argument, Article 2080 of the Civil Code which provides that:

The guarantors, even though they be solidary, are released from their obligation whenever by some act of
the creditor, they cannot be subrogated to the rights, mortgages, and preferences of the latter.
It is to be noted, however, that petitioner signed the promissory note as a solidary co-maker and not as a guarantor. This is
patent even from the first sentence of the promissory note which states as follows:

Ninety one (91) days after date, for value received, I/we, JOINTLY and SEVERALLY promise to pay to the
PHILIPPINE BANK OF COMMUNICATIONS at its office in the City of Cagayan de Oro, Philippines the sum of
FIFTY THOUSAND ONLY (P50,000.00) Pesos, Philippine Currency, together with interest . . . at the rate of
SIXTEEN (16) per cent  per annum until fully paid.

A solidary or joint and several obligation is one in which each debtor is liable for the entire obligation, and each creditor is
entitled to demand the whole obligation.  7 on the other hand, Article 2047 of the Civil Code states:
1

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

If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of
this Book shall be observed. In such a case the contract is called a suretyship. (Emphasis supplied.)

While a guarantor may bind himself solidarily with the principal debtor, the liability of a guarantor is different from
that of a solidary debtor. Thus, Tolentino explains:

A guarantor who binds himself in solidum with the principal debtor under the provisions of the second
paragraph does not become a solidary co-debtor to all intents and purposes. There is a difference between a
solidary co-debtor and a fiador in solidum (surety). The latter, outside of the liability he assumes to pay the
debt before the property of the principal debtor has been exhausted, retains all the other rights, actions and
benefits which pertain to him by reason of the  fiansa; while a solidary co-debtor has no other rights than
those bestowed upon him in Section 4, Chapter 3, Title I, Book IV of the Civil Code.  18

Section 4, Chapter 3, Title I, Book IV of the Civil Code states the law on joint and several obligations. Under Art. 1207 thereof,
when there are two or more debtors in one and the same obligation, the presumption is that the obligation is joint so that
each of the debtors is liable only for a proportionate part of the debt. There is a solidary liability only when the obligation
expressly so states, when the law so provides or when the nature of the obligation so requires.  19

Because the promissory note involved in this case expressly states that the three signatories therein are jointly and severally
liable, any one, some or all of them may be proceeded against for the entire obligation.   The choice is left to the solidary
20

creditor to determine against whom he will enforce collection.   Consequently, the dismissal of the case against Judge
21

Pontanosas may not be deemed as having discharged petitioner from liability as well. As regards Naybe, suffice it to say that
the court never acquired jurisdiction over him. Petitioner, therefore, may only have recourse against his co-makers, as
provided by law.

WHEREFORE, the instant petition for review on certiorari is hereby DENIED and the questioned decision of the Court of
Appeals is AFFIRMED. Costs against petitioner.

SO ORDERED.

[G.R. No. 93010. August 30, 1990.]

NICENCIO TAN QUIOMBING, Petitioner, v. COURT OF APPEALS, and Sps. FRANCISCO and MANUELITA A.
SALIGO, Respondents.

M.B. Tomacruz Law Office for Petitioner.

Jose J. Francisco for Private Respondents.

DECISION

CRUZ, J.:

May one of the two solidary creditors sue by himself alone for the recovery of amounts due to both of them without joining
the other creditor as a co-plaintiff? In such a case, is the defendant entitled to the dismissal of the complaint on the ground of
non-joinder of the second creditor as an indispensable party? More to the point, is the second solidary creditor an
indispensable party?
These questions were raised in the case at bar, with both the trial and respondent courts ruling in favor of the defendants. The
petitioner is now before us, claiming that the said courts committed reversible error and misread the applicable laws in
dismissing his complaint.

This case stemmed from a "Construction and Service Agreement" 1 concluded on August 30, 1983, whereby Nicencio Tan
Quiombing and Dante Biscocho, as the First Party, jointly and severally bound themselves to construct a house for private
respondents Francisco and Manuelita Saligo, as the Second Party, for the contract price of P137,940.00, which the latter
agreed to pay.

On October 10, 1984, Quiombing and Manuelita Saligo entered into a second written agreement 2 under which the latter
acknowledged the completion of the house and undertook to pay the balance of the contract price in the manner prescribed
in the said second agreement.

On November 19, 1984, Manuelita Saligo signed a promissory note for P125,363.50 representing the amount still due from
her and her husband, payable on or before December 31, 1984, to Nicencio Tan Quiombing. 3

On October 9, 1986, Quiombing filed a complaint for recovery of the said amount, plus charges and interests, which the
private respondents had acknowledged and promised to pay — but had not, despite repeated demands — as the balance of
the contract price for the construction of their house. 4

Instead of filing an answer, the defendants moved to dismiss the complaint on February 4, 1987, contending that Biscocho
was an indispensable party and therefore should have been included as a co-plaintiff. The motion was initially denied but was
subsequently reconsidered and granted by the trial court. The complaint was dismissed, but without prejudice to the filing of
an amended complaint to include the other solidary creditor as a co-plaintiff. 5

Rather than file the amended complaint, Quiombing chose to appeal the order of dismissal to the respondent court, where he
argued that as a solidary creditor he could act by himself alone in the enforcement of his claim against the private
respondents. Moreover, the amounts due were payable only to him under the second agreement, where Biscocho was not
mentioned at all. cralawnad

The respondent court sustained the trial court and held that it was not correct at that point to assume that Quiombing and
Biscocho were solidary obligees only. It noted that as they had also assumed the reciprocal obligation of constructing the
house, they should also be considered obligors of the private respondents under the contract. If, as was possible, the answer
should allege a breach of the agreement, "the trial court cannot decide the dispute without the involvement of Biscocho
whose rights will necessarily be affected since he is a part of the First Party." cralaw virtua1aw library

Refuting the petitioner’s second contention, the respondent court declared that the "second agreement referred to the
Construction and Service Agreement as its basis and specifically stated that it (was) merely a `part of the original agreement.’"
6

The concept of the solidary obligation requires a brief restatement.

Distinguishing it from the joint obligation, Tolentino makes the following observations in his distinguished work on the Civil
Code: chanrob1es virtual 1aw library

A joint obligation is one in which each of the debtors is liable only for a proportionate part of the debt, and each creditor is
entitled only to a proportionate part of the credit. A solidary obligation is one in which each debtor is liable for the entire
obligation, and each creditor is entitled to demand the whole obligation. Hence, in the former, each creditor can recover only
his share of the obligation, and each debtor can be made to pay only his part; whereas, in the latter, each creditor may
enforce the entire obligation, and each debtor may be obliged to pay it in full. 7

The same work describes the concept of active solidarity thus: chanrob1es virtual 1aw library

The essence of active solidarity consists in the authority of each creditor to claim and enforce the rights of all, with the
resulting obligation of paying every one what belongs to him; there is no merger, much less a renunciation of rights, but only
mutual representation. 8

It would follow from these observations that the question of who should sue the private respondents was a personal issue
between Quiombing and Biscocho in which the spouses Saligo had no right to interfere. It did not matter who as between
them filed the complaint because the private respondents were liable to either of the two as a solidary creditor for the full
amount of the debt. Full satisfaction of a judgment obtained against them by Quiombing would discharge their obligation to
Biscocho, and vice versa; hence, it was not necessary for both Quiombing and Biscocho to file the complaint. Inclusion of
Biscocho as a co-plaintiff, when Quiombing was competent to sue by himself alone, would be a useless formality. chanrobles.com:cralaw:red

Article 1212 of the Civil Code provides: chanrob1es virtual 1aw library

Each one of the solidary creditors may do whatever may be useful to the others, but not anything which may be prejudice to
 the latter.

Suing for the recovery of the contract price is certainly a useful act that Quiombing could do by himself alone.

Parenthetically, it must be observed that the complaint having been filed by the petitioner, whatever amount is awarded
against the debtor must be paid exclusively to him, pursuant to Article 1214. This provision states that "the debtor may pay
any of the solidary creditors; but if any demand, judicial or extrajudicial, has been made by any one of them, payment should
be made to him." cralaw virtua1aw library

If Quiombing eventually collects the amount due from the solidary debtors, Biscocho may later claim his share thereof, but
that decision is for him alone to make. It will affect only the petitioner as the other solidary creditor and not the private
respondents, who have absolutely nothing to do with this matter. As far as they are concerned, payment of the judgment debt
to the complainant will be considered payment to the other solidary creditor even if the latter was not a party to the suit.

Regarding the possibility that the private respondents might plead breach of contract in their answer, we agree with the
petitioner that it is premature to consider this conjecture — for such it is — at this stage. The possibility may seem remote,
indeed, since they have actually acknowledged the completion of the house in the second agreement, where they also agreed
to pay the balance of the contract price. At any rate, the allegation, if made and proved, could still be enforceable against the
petitioner alone as one of the solidary debtors, subject to his right of recourse against Biscocho.

The respondent court was correct in ruling that the second agreement, which was concluded alone by the petitioner with the
private respondents, was based on the original Construction and Service Agreement. So too in fact was the promissory note
later signed by Manuelita Saligo since it was for the amount owing on the construction cost. However, this matter is not really
that important now in view of our conclusion that the complaint could have been filed alone by the petitioner.

The rest of the pieces should easily fall into place.

Section 7, Rule 3 of the Rules of Court mandates the inclusion of indispensable parties as follows: chanrob1es virtual 1aw library

Sec. 7. Compulsory joinder of indispensable parties. — Parties in interest without whom no final determination can be had of
an action shall be joined either as plaintiffs or defendants.

Indispensable parties are those with such an interest in the controversy that a final decree would necessarily affect their
rights, so that the court cannot proceed without their presence. Necessary parties are those whose presence is necessary to
adjudicate the whole controversy, but whose interests are so far separable that a final decree can be made in their absence
without affecting them. 9 (Necessary parties are now called proper parties under the 1964 amendments of the Rules of
Court.) 10

According to Justice Jose Y. Feria, "where the obligation of the parties is solidary, either one of the parties is indispensable,
and the other is not even necessary (now proper) because complete relief may be obtained from either." 11

We hold that, although he signed the original Construction and Service Agreement, Biscocho need not be included as a co-
plaintiff in the complaint filed by the petitioner against the private respondents. Quiombing as solidary creditor can by himself
alone enforce payment of the construction costs by the private respondents and as a solidary debtor may by himself alone be
held liable for any possible breach of contract that may be proved by the private respondents. In either case, the participation
of Biscocho is not at all necessary, much less indispensable.

WHEREFORE, the petition is GRANTED. The decision of the respondent court dated March 27, 1990, is SET ASIDE, and the
Regional Trial Court of Antipolo, Rizal, is directed to REINSTATE Civil Case No. 913-A. Costs against the private respondents.

SO ORDERED.

Narvasa (Chairman), Gancayco, Griño-Aquino and Medialdea, JJ., concur.

G.R. No. L-21780             June 30, 1967

MAKATI DEVELOPMENT CORPORATION, plaintiff-appellant,

vs.
EMPIRE INSURANCE CO., defendant-appellee.
RODOLFO P. ANDAL, third-party defendant-appellee.

Salvador J. Lorayes for plaintiff-appellant Makati Development Corporation.

Tomacruz and Ferrer for defendant-appellee Empire Insurance Company, Inc.
Crispin D. Baizas and Associates for defendant-appellee Rodolfo Andal.

CASTRO, J.:
On March 31, 1959, the Makati Development Corporation sold to Rodolfo P. Andal a lot, with an area of 1,589 square meters,
in the Urdaneta Village, Makati, Rizal, for P55,615. 1äwphï1.ñët

A so-called "special condition" contained in the deed of sale provides that "[T]he VENDEE/S shall commence the construction
and complete at least 50% of his/her/their/its residence on the property within two (2) years from March 31, 1959 to the
satisfaction of the VENDOR and, in the event of his/her/their/its failure to do so, the bond which the VENDEE/S has delivered
to the VENDOR in the sum of P11,123.00 and evidenced by a cash bond receipt dated April 10, 1959 will be forfeited in favor
of the VENDOR by the mere fact of failure of the VENDEE/S to comply with this special condition." To insure faithful
compliance with this "condition," Andal gave a surety bond on April 10, 1959 wherein he, as principal, and the Empire
Insurance Company, as surety, jointly and severally, undertook to pay the Makati Development Corporation the sum of
P12,000 in case Andal failed to comply with his obligation under the deed of sale.

Andal did not build his house; instead he sold the lot to Juan Carlos on January 18, 1960. As neither Andal nor Juan Carlos built
a house on the lot within the stipulated period, the Makati Development Corporation, on April 3, 1961, that is, three days
after the lapse of the two-year period, sent a notice of claim to the Empire Insurance Co. advising it of Andal's failure to
comply with his undertaking. Demand for the payment of P12,000 was refused, whereupon the Makati Development
Corporation filed a complaint in the Court of First Instance of Rizal on May 22, 1961 against the Empire Insurance Co. to
recover on the bond in the full amount, plus attorney's fees. In due time, the Empire Insurance Co. filed its answer with a
third-party complaint against Andal. It asked that the complaint be dismissed or, in the event of a judgment in favor of the
Makati Development Corporation, that judgment be rendered ordering Andal to pay the Empire Insurance Co. whatever
amount it maybe ordered to pay the Makati Development Corporation, plus interest at 12%, from the date of the filing of the
complaint until said amount was fully reimbursed, and attorney's fees.

In his answer, Andal admitted the execution of the bond but alleged that the "special condition" in the deed of sale was
contrary to law, morals and public policy. He averred that, at any rate, Juan Carlos had started construction of a house on the
lot.

Hearing was held and, on March 28, 1963, the lower court rendered judgment, sentencing the Empire Insurance Co. to pay
the Makati Development Corporation the amount of P1,500, with interest at the rate of 12% from the time of the filing of the
complaint until the amount was fully paid, and to pay attorney's fees in the amount of P500, and the proportionate part of the
costs. The court directed that in case the amount of the judgment was paid by the Empire Insurance Co., Andal should in turn
pay the former the sum of P1,500 with interest at 12% from the time of the filing of the complaint to the time of payment and
to pay attorney's fees in the sum of P500 and proportionate part of the costs. The Makati Development Corporation appealed
directly to this Court.

In reducing Andal's liability for breach of his undertaking from P12,000, as stipulated in the bond to P1,500, the court noted
that

While no building has actually been constructed before the target date which is March 31, 1961, it is also a fact that
even before that date the entire area was already fenced with a stone wall and building materials were also stocked
in the premises which are clear indicia of the owner's desire to construct his house with the least possible delay. As a
matter of fact the incontrovertible testimony of Juan Carlos is to the effect that by the end of April 1961, he had
finished very much more than the required 50% stipulated in the contract of sale. In short there was only really a little
delay.

But the appellant argues that Andal became liable for the full amount of his bond upon his failure to build a house within the
two-year period which expired on March 31, 1961 and that the trial court was without authority to reduce Andal's liability on
the basis of Carlos' construction of a house a month after the stipulated period because there was no privity of contract
between Carlos and the Makati Development Corporation.

To begin with, the so-called "special condition" in the deed of sale is in reality an obligation1 — to build a house at least 50 per
cent of which must be finished within two years. It was to secure the performance of this obligation that a penal clause was
inserted.

While it is true that in obligations with a penal sanction the penalty takes the place of "damages and the payment of interest
in case of non-compliance"2 and that the obligee is entitled to recover upon the breach of the obligation without the need of
proving damages,3 it is nonetheless true that in certain instances a mitigation of the obligor's liability is allowed. Thus article
1229 of the Civil Code states:

The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied
with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is
iniquitous or unconscionable.

Here the trial court found that Juan Carlos had finished more than 50 per cent of his house by April, 1961, or barely a month
after the expiration on March 31, 1961 of the stipulated period. There was therefore a partial performance of the obligation
within the meaning and intendment of article 1229.4 The case of General Ins. & Surety Corp. vs. Republic, G.R. L-13873, Jan. 31,
 19635 cannot be invoked as authority for the forfeiture of the full amount of the bond because unlike this case there was in
that case no performance at all of any part of the obligation to secure the payment of salaries to teachers. Indeed, it has been
held that where there has been partial or irregular compliance with the provisions in a contract for special indemnification in
the event of failure to comply with its terms, courts will rigidly apply the doctrine of strict construction against the
enforcement in its entirety of the indemnification, where it is clear from the contract that the amount or character of the
indemnity is fixed without regard to the probable damages which might be anticipated as a result of a breach of the terms of
the contract, or, in other words, where the indemnity provided for is essentially a mere penalty having for its object the
enforcement of compliance with the contract.6 The penal clause in this case was inserted not to indemnify the Makati
Development Corporation for any damage it might suffer as a result of a breach of the contract but rather to compel
performance of the so-called "special condition" and thus encourage home building among lot owners in the Urdaneta Village.

Considering that a house had been built shortly after the period stipulated, the substantial, if tardy, performance of the
obligation, having in view the purpose of the penal clause, fully justified the trial court in reducing the penalty.

Still it is insisted that Carlos' construction of a house on the lot sold cannot be considered a partial performance of Andal's
obligation because Carlos bears no contractual relation to the Makati Development Corporation. This case is in many respects
analogous to Insular Gov't. vs. Amechazurra, 10 Phil. 637 (1908) where a similar claim was made by a party and rejected by
this Court. There the defendant gave a bond for $800 to guarantee the return to the plaintiff of four firearms issued to him
"on demand" of the Government. Three of the firearms were stolen from the defendant so that on demand of the
Government he was able to produce only one. Subsequently the constabulary recovered two of the missing guns and the
question was whether defendant was entitled to a mitigation of liability even if recovery of the firearms was made possible
through the efforts of third parties (the Constabulary) This Court gave an affirmative answer.

Indeed the stipulation in this case to commence the construction and complete at least 50 per cent of the vendee's house
within two years cannot be construed as imposing a strictly personal obligation on Andal. To adopt such a construction would
be to limit Andal's right to dispose of the lot. There is nothing in the deed of sale restricting Andal's right to sell the lot at least
within the two-year period and we think it plain that a reading of such a limitation on one of the rights of ownership must rest
on more explicit language in the contract. It cannot be left to mere inference.

Accordingly, the decision appealed from is affirmed, at appellant's cost.

G.R. No. 116285            October 19, 2001

ANTONIO TAN, petitioner,
vs.
COURT OF APPEALS and the CULTURAL CENTER OF THE PHILIPPINES, respondents.

DE LEON, JR., J.:

Before us is a petition for review of the Decision1 dated August 31, 1993 and Resolution2 dated July 13, 1994 of the Court of
Appeals affirming the Decision3 dated May 8, 1991 of the Regional Trial Court (RTC) of Manila, Branch 27.

The facts are as follows:

On May 14, 1978 and July 6, 1978, petitioner Antonio Tan obtained two (2) loans each in the principal amount of Two Million
Pesos (P2,000,000.00), or in the total principal amount of Four Million Pesos (P4,000,000.00) from respondent Cultural Center
of the Philippines (CCP, for brevity) evidenced by two (2) promissory notes with maturity dates on May 14, 1979 and July 6,
1979, respectively. Petitioner defaulted but after a few partial payments he had the loans restructured by respondent CCP,
and petitioner accordingly executed a promissory note (Exhibit "A") on August 31, 1979 in the amount of Three Million Four
Hundred Eleven Thousand Four Hundred Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32) payable in five (5)
installments. Petitioner Tan failed to pay any installment on the said restructured loan of Three Million Four Hundred Eleven
Thousand Four Hundred Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32), the last installment falling due on
December 31, 1980. In a letter dated January 26, 1982, petitioner requested and proposed to respondent CCP a mode of
paying the restructured loan, i.e., (a) twenty percent (20%) of the principal amount of the loan upon the respondent giving its
conformity to his proposal; and (b) the balance on the principal obligation payable in thirty-six (36) equal monthly installments
until fully paid. On October 20, 1983, petitioner again sent a letter to respondent CCP requesting for a moratorium on his loan
obligation until the following year allegedly due to a substantial deduction in the volume of his business and on account of the
peso devaluation. No favorable response was made to said letters. Instead, respondent CCP, through counsel, wrote a letter
dated May 30, 1984 to the petitioner demanding full payment, within ten (10) days from receipt of said letter, of the
petitioner’s restructured loan which as of April 30, 1984 amounted to Six Million Eighty-Eight Thousand Seven Hundred Thirty-
Five Pesos and Three Centavos (P6,088,735.03).

On August 29, 1984, respondent CCP filed in the RTC of Manila a complaint for collection of a sum of money, docketed as Civil
Case No. 84-26363, against the petitioner after the latter failed to settle his said restructured loan obligation. The petitioner
interposed the defense that he merely accommodated a friend, Wilson Lucmen, who allegedly asked for his help to obtain a
loan from respondent CCP. Petitioner claimed that he has not been able to locate Wilson Lucmen. While the case was pending
in the trial court, the petitioner filed a Manifestation wherein he proposed to settle his indebtedness to respondent CCP by
proposing to make a down payment of One Hundred Forty Thousand Pesos (P140,000.00) and to issue twelve (12) checks
every beginning of the year to cover installment payments for one year, and every year thereafter until the balance is fully
paid. However, respondent CCP did not agree to the petitioner’s proposals and so the trial of the case ensued.

On May 8, 1991, the trial court rendered a decision, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendant, ordering defendant to pay
plaintiff, the amount of P7,996,314.67, representing defendant’s outstanding account as of August 28, 1986, with the
corresponding stipulated interest and charges thereof, until fully paid, plus attorney’s fees in an amount equivalent to
25% of said outstanding account, plus P50,000.00, as exemplary damages, plus costs.

Defendant’s counterclaims are ordered dismissed, for lack of merit.

SO ORDERED.4

The trial court gave five (5) reasons in ruling in favor of respondent CCP. First, it gave little weight to the petitioner’s
contention that the loan was merely for the accommodation of Wilson Lucmen for the reason that the defense propounded
was not credible in itself. Second, assuming, arguendo, that the petitioner did not personally benefit from the said loan, he
should have filed a third party complaint against Wilson Lucmen, the alleged accommodated party but he did not. Third, for
three (3) times the petitioner offered to settle his loan obligation with respondent CCP. Fourth, petitioner may not avoid his
liability to pay his obligation under the promissory note (Exh. "A") which he must comply with in good faith pursuant to Article
1159 of the New Civil Code. Fifth, petitioner is estopped from denying his liability or loan obligation to the private respondent.

The petitioner appealed the decision of the trial court to the Court of Appeals insofar as it charged interest, surcharges,
attorney’s fees and exemplary damages against the petitioner. In his appeal, the petitioner asked for the reduction of the
penalties and charges on his loan obligation. He abandoned his alleged defense in the trial court that he merely
accommodated his friend, Wilson Lucmen, in obtaining the loan, and instead admitted the validity of the same. On August 31,
1993, the appellate court rendered a decision, the dispositive portion of which reads:

WHEREFORE, with the foregoing modification, the judgment appealed from is hereby AFFIRMED.

SO ORDERED.5

In affirming the decision of the trial court imposing surcharges and interest, the appellate court held that:

We are unable to accept appellant’s (petitioner’s) claim for modification on the basis of alleged partial or irregular
performance, there being none. Appellant’s offer or tender of payment cannot be deemed as a partial or irregular
performance of the contract, not a single centavo appears to have been paid by the defendant.

However, the appellate court modified the decision of the trial court by deleting the award for exemplary damages and
reducing the amount of awarded attorney’s fees to five percent (5%), by ratiocinating as follows:

Given the circumstances of the case, plus the fact that plaintiff was represented by a government lawyer, We believe
the award of 25% as attorney’s fees and P500,000.00 as exemplary damages is out of proportion to the actual
damage caused by the non-performance of the contract and is excessive, unconscionable and iniquitous.

In a Resolution dated July 13, 1994, the appellate court denied the petitioner’s motion for reconsideration of the said decision.

Hence, this petition anchored on the following assigned errors:

THE HONORABLE COURT OF APPEALS COMMITTED A MISTAKE IN GIVING ITS IMPRIMATUR TO THE DECISION OF THE TRIAL
COURT WHICH COMPOUNDED INTEREST ON SURCHARGES.

II

THE HONORABLE COURT OF APPEALS ERRED IN NOT SUSPENDING IMPOSITION OF INTEREST FOR THE PERIOD OF TIME THAT
PRIVATE RESPONDENT HAS FAILED TO ASSIST PETITIONER IN APPLYING FOR RELIEF OF LIABILITY THROUGH THE COMMISSION
ON AUDIT AND THE OFFICE OF THE PRESIDENT.

III

THE HONORABLE COURT OF APPEALS ERRED IN NOT DELETING AWARD OF ATTORNEY’S FEES AND IN REDUCING PENALTIES.
Significantly, the petitioner does not question his liability for his restructured loan under the promissory note marked Exhibit
"A". The first question to be resolved in the case at bar is whether there are contractual and legal bases for the imposition of
the penalty, interest on the penalty and attorney’s fees.

The petitioner imputes error on the part of the appellate court in not totally eliminating the award of attorney’s fees and in
not reducing the penalties considering that the petitioner, contrary to the appellate court’s findings, has allegedly made
partial payments on the loan. And if penalty is to be awarded, the petitioner is asking for the non-imposition of interest on the
surcharges inasmuch as the compounding of interest on surcharges is not provided in the promissory note marked Exhibit "A".
The petitioner takes exception to the computation of the private respondent whereby the interest, surcharge and the
principal were added together and that on the total sum interest was imposed. Petitioner also claims that there is no basis in
law for the charging of interest on the surcharges for the reason that the New Civil Code is devoid of any provision allowing
the imposition of interest on surcharges.

We find no merit in the petitioner’s contention. Article 1226 of the New Civil Code provides that:

In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of
interests in case of non-compliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if
the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation.

The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.

In the case at bar, the promissory note (Exhibit "A") expressly provides for the imposition of both interest and penalties in case
of default on the part of the petitioner in the payment of the subject restructured loan. The pertinent6 portion of the
promissory note (Exhibit "A") imposing interest and penalties provides that:

For value received, I/We jointly and severally promise to pay to the CULTURAL CENTER OF THE PHILIPPINES at its office in
Manila, the sum of THREE MILLION FOUR HUNDRED ELEVEN THOUSAND FOUR HUNDRED + PESOS (P3,411,421.32) Philippine
Currency, xxx.

xxx           xxx           xxx

With interest at the rate of FOURTEEN per cent (14%) per annum from the date hereof until paid. PLUS THREE
PERCENT (3%) SERVICE CHARGE.

In case of non-payment of this note at maturity/on demand or upon default of payment of any portion of it when
due, I/We jointly and severally agree to pay additional penalty charges at the rate of TWO per cent (2%) per month on
the total amount due until paid, payable and computed monthly. Default of payment of this note or any portion
thereof when due shall render all other installments and all existing promissory notes made by us in favor of the
CULTURAL CENTER OF THE PHILIPPINES immediately due and demandable. (Underscoring supplied)

xxx           xxx           xxx

The stipulated fourteen percent (14%) per annum interest charge until full payment of the loan constitutes the monetary
interest on the note and is allowed under Article 1956 of the New Civil Code.7 On the other hand, the stipulated two percent
(2%) per month penalty is in the form of penalty charge which is separate and distinct from the monetary interest on the
principal of the loan.

Penalty on delinquent loans may take different forms. In Government Service Insurance System v. Court of Appeals,8 this Court
has ruled that the New Civil Code permits an agreement upon a penalty apart from the monetary interest. If the parties
stipulate this kind of agreement, the penalty does not include the monetary interest, and as such the two are different and
distinct from each other and may be demanded separately. Quoting Equitable Banking Corp. v. Liwanag,9 the GSIS case went
on to state that such a stipulation about payment of an additional interest rate partakes of the nature of a penalty clause
which is sanctioned by law, more particularly under Article 2209 of the New Civil Code which provides that:

If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for
damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the
absence of stipulation, the legal interest, which is six per cent per annum.

The penalty charge of two percent (2%) per month in the case at bar began to accrue from the time of default by the
petitioner. There is no doubt that the petitioner is liable for both the stipulated monetary interest and the stipulated penalty
charge. The penalty charge is also called penalty or compensatory interest. Having clarified the same, the next issue to be
resolved is whether interest may accrue on the penalty or compensatory interest without violating the provisions of Article
1959 of the New Civil Code, which provides that:
 Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn interest. However, the
contracting parties may by stipulation capitalize the interest due and unpaid, which as added principal, shall earn new
interest.

According to the petitioner, there is no legal basis for the imposition of interest on the penalty charge for the reason that the
law only allows imposition of interest on monetary interest but not the charging of interest on penalty. He claims that since
there is no law that allows imposition of interest on penalties, the penalties should not earn interest. But as we have already
explained, penalty clauses can be in the form of penalty or compensatory interest. Thus, the compounding of the penalty or
compensatory interest is sanctioned by and allowed pursuant to the above-quoted provision of Article 1959 of the New Civil
Code considering that:

First, there is an express stipulation in the promissory note (Exhibit "A") permitting the compounding of interest. The fifth
paragraph of the said promissory note provides that: "Any interest which may be due if not paid shall be added to the total
amount when due and shall become part thereof, the whole amount to bear interest at the maximum rate allowed by
law."10 Therefore, any penalty interest not paid, when due, shall earn the legal interest of twelve percent (12%) per annum,11 in
the absence of express stipulation on the specific rate of interest, as in the case at bar.

Second, Article 2212 of the New Civil Code provides that "Interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent upon this point." In the instant case, interest likewise began to run on the
penalty interest upon the filing of the complaint in court by respondent CCP on August 29, 1984. Hence, the courts a quo did
not err in ruling that the petitioner is bound to pay the interest on the total amount of the principal, the monetary interest
and the penalty interest.

The petitioner seeks the elimination of the compounded interest imposed on the total amount based allegedly on the case
of National Power Corporation v. National Merchandising Corporation,12 wherein we ruled that the imposition of interest on
the damages from the filing of the complaint is unjust where the litigation was prolonged for twenty-five (25) years through
no fault of the defendant. However, the ruling in the said National Power Corporation (NPC) case is not applicable to the case
at bar inasmuch as our ruling on the issue of interest in that NPC case was based on equitable considerations and on the fact
that the said case lasted for twenty-five (25) years "through no fault of the defendant." In the case at bar, however, equity
cannot be considered inasmuch as there is a contractual stipulation in the promissory note whereby the petitioner expressly
agreed to the compounding of interest in case of failure on his part to pay the loan at maturity. Inasmuch as the said
stipulation on the compounding of interest has the force of law between the parties and does not appear to be inequitable or
unjust, the said written stipulation should be respected.

The private respondent’s Statement of Account (marked Exhibits "C" to "C-2") 13 shows the following breakdown of the
petitioner’s indebtedness as of August 28, 1986:

Principal P2,838,454.68
Interest P 576,167.89
Surcharge P4,581,692.10
P7,996,314.67

The said statement of account also shows that the above amounts stated therein are net of the partial payments amounting
to a total of Four Hundred Fifty-Two Thousand Five Hundred Sixty-One Pesos and Forty-Three Centavos (P452,561.43) which
were made during the period from May 13, 1983 to September 30, 1983. 14 The petitioner now seeks the reduction of the
penalty due to the said partial payments. The principal amount of the promissory note (Exhibit "A") was Three Million Four
Hundred Eleven Thousand Four Hundred Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32) when the loan was
restructured on August 31, 1979. As of August 28, 1986, the principal amount of the said restructured loan has been reduced
to Two Million Eight Hundred Thirty-Eight Thousand Four Hundred Fifty-Four Pesos and Sixty-Eight Centavos (P2,838,454.68).
Thus, petitioner contends that reduction of the penalty is justifiable pursuant to Article 1229 of the New Civil Code which
provides that: "The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly
complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is
iniquitous or unconscionable." Petitioner insists that the penalty should be reduced to ten percent (10%) of the unpaid debt in
accordance with Bachrach Motor Company v. Espiritu.15

There appears to be a justification for a reduction of the penalty charge but not necessarily to ten percent (10%) of the unpaid
balance of the loan as suggested by petitioner. Inasmuch as petitioner has made partial payments which showed his good
faith, a reduction of the penalty charge from two percent (2%) per month on the total amount due, compounded monthly,
until paid can indeed be justified under the said provision of Article 1229 of the New Civil Code.

In other words, we find the continued monthly accrual of the two percent (2%) penalty charge on the total amount due to be
unconscionable inasmuch as the same appeared to have been compounded monthly.

Considering petitioner’s several partial payments and the fact he is liable under the note for the two percent (2%) penalty
charge per month on the total amount due, compounded monthly, for twenty-one (21) years since his default in 1980, we find
it fair and equitable to reduce the penalty charge to a straight twelve percent (12%) per annum on the total amount due
starting August 28, 1986, the date of the last Statement of Account (Exhibits "C" to "C-2"). We also took into consideration the
offers of the petitioner to enter into a compromise for the settlement of his debt by presenting proposed payment schemes to
respondent CCP. The said offers at compromise also showed his good faith despite difficulty in complying with his loan
obligation due to his financial problems. However, we are not unmindful of the respondent’s long overdue deprivation of the
use of its money collectible from the petitioner.

The petitioner also imputes error on the part of the appellate court for not declaring the suspension of the running of the
interest during that period when the respondent allegedly failed to assist the petitioner in applying for relief from liability. In
this connection, the petitioner referred to the private respondent’s letter16 dated September 28, 1988 addressed to petitioner
which partially reads:

Dear Mr. Tan:

xxx           xxx           xxx

With reference to your appeal for condonation of interest and surcharge, we wish to inform you that the center will
assist you in applying for relief of liability through the Commission on Audit and Office of the President xxx.

While your application is being processed and awaiting approval, the center will be accepting your proposed payment
scheme with the downpayment of P160,000.00 and monthly remittances of P60,000.00 xxx.

xxx           xxx           xxx

The petitioner alleges that his obligation to pay the interest and surcharge should have been suspended because the
obligation to pay such interest and surcharge has become conditional, that is dependent on a future and uncertain event
which consists of whether the petitioner’s request for condonation of interest and surcharge would be recommended by the
Commission on Audit and the Office of the President to the House of Representatives for approval as required under Section
36 of Presidential Decree No. 1445. Since the condition has not happened allegedly due to the private respondent’s reneging
on its promise, his liability to pay the interest and surcharge on the loan has not arisen. This is the petitioner’s contention.

It is our view, however, that the running of the interest and surcharge was not suspended by the private respondent’s promise
to assist the petitioners in applying for relief therefrom through the Commission on Audit and the Office of the President.

First, the letter dated September 28, 1988 alleged to have been sent by the respondent CCP to the petitioner is not part of the
formally offered documentary evidence of either party in the trial court. That letter cannot be considered evidence pursuant
to Rule 132, Section 34 of the Rules of Court which provides that: "The court shall consider no evidence which has not been
formally offered xxx." Besides, the said letter does not contain any categorical agreement on the part of respondent CCP that
the payment of the interest and surcharge on the loan is deemed suspended while his appeal for condonation of the interest
and surcharge was being processed.

Second, the private respondent correctly asserted that it was the primary responsibility of petitioner to inform the
Commission on Audit and the Office of the President of his application for condonation of interest and surcharge. It was
incumbent upon the petitioner to bring his administrative appeal for condonation of interest and penalty charges to the
attention of the said government offices.

On the issue of attorney’s fees, the appellate court ruled correctly and justly in reducing the trial court’s award of twenty-five
percent (25%) attorney’s fees to five percent (5%) of the total amount due.

WHEREFORE, the assailed Decision of the Court of Appeals is hereby AFFIRMED with MODIFICATION in that the penalty charge
of two percent (2%) per month on the total amount due, compounded monthly, is hereby reduced to a straight twelve
percent (12%) per annum starting from August 28, 1986. With costs against the petitioner.

SO ORDERED.