PALMARES vs.

CA (288 SCRA 422)

FACTS:

Private respondent M.B. Lending Corporation extended a loan to the spouses Osmeña
and Merlyn Azarraga. in the amount of P30,000.00 payable on or before May 12, 1990, with
compounded interest at the rate of 6% per annum to be computed every 30 days from the date
thereof. Estrella Palmares, is a co-maker and she bind herself to be jointly and severally liable
with the principal debtors in case of default in the payment of loan.
The principal debtors failed to pay their loan. MB Lending proceeded to collect against
her (Estrella Palmares). She offered some compromise in the payment of loan.

(On four occasions after the execution of the promissory note and even after the loan matured,
petitioner and the Azarraga spouses were able to pay a total of P16,300.00, thereby leaving a
balance of P13,700.00. No payments were made after the last payment on September 26,
1991. Consequently, on the basis of petitioner's solidary liability under the promissory note,
respondent corporation filed a complaint against petitioner Palmares as the lone party-
defendant, to the exclusion of the principal debtors, allegedly by reason of the insolvency of the
latter.)

ISSUES:

(1) Where a party signs a promissory note as a co-maker and binds herself to be jointly and
severally liable with the principal debtor in case the latter defaults in the payment of the loan, is
such undertaking of the former deemed to be that of a surety as an insurer of the debt, or of a
guarantor who warrants the solvency of the debtor? WON Palmares is liable?

(2) WON the penalty charge of 3% per month and attorney's fees equivalent to 25% of the total
amount due are highly inequitable and unreasonable.

HELD:

(1) YES.

If a person binds himself solidarily with the principal debtor. In such case the contract is called a
suretyship. a surety is bound equally and absolutely with the principal, and as such is deemed
an original promisor and debtor from the beginning. This is because in suretyship there is but
one contract, and the surety is bound by the same agreement which binds the principal. In
essence, the contract of a surety starts with the agreement, which is precisely the situation
obtaining in this case before the Court.

It is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear and
leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulation
shall control. In the case at bar, petitioner expressly bound herself to be jointly and severally or
solidarily liable with the principal maker of the note. The terms of the contract are clear, explicit
and unequivocal that petitioner's liability is that of a surety.

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

The SC has deleted the penalty interest of 3% from the decision of the CA and reduced
attorney’s fees from 25% of the stipulated amount to P10,000.00