JD 121 - OBLIGATIONS AND CONTRACTS

ATTY. LILIBETH D. GABUTERO, CPA, MBA

LAWRENCE EDWARD S. SORIANO

CASE DIGEST
MIDTERM

I. Article 1207. The concurrence of two or more creditors or of two or more debtors in one
and the same obligation does not imply that each one of the former has a right to demand, or
that each one of the latter is bound to render, entire compliance with the prestation. There is a
solidary liability only when the obligation expressly so states, or when the law or the nature of
the obligation requires solidarity.

Article. 1208. If from the law, or the nature or the wording of the obligations to which the
preceding article refers the contrary does not appear, the credit or debt shall be presumed to
be divided into as many shares as there are creditors or debtors, the credits or debts being
considered distinct from one another, subject to the Rules of Court governing the multiplicity of
suits.

CASE #1: MARSMAN DRYSDALE V PHIL GEOANALYTICS and GOTESCO, 183376

RELEVANT FACTS

Petitioner and respondent entered into a Joint Venture Agreement (JVA) for the
construction and development of an office building on a land owned by Marsman Drysdale in Makati
City.

In the JVA, it contained the agreement of both parties on a 50-50 ratio the proceeds of the
project but did not agree on how losses would be divided.

The joint venture engaged the services of Philippine Geoanalytics, Inc. (PGI) to provide
subsurface soil exploration, laboratory testing, seismic study, and geotechnical engineering for the
project. PGI, was, however, able to drill only four of five boreholes needed to conduct its subsurface
soil exploration and laboratory testing, justifying its failure to drill the remaining borehole to the
failure on the part of the joint venture partners to clear the area where the drilling was to be
made. PGI was able to complete its seismic study though.

PGI billed the joint venture (PhP 284,553.50) representing the cost of partial subsurface soil
exploration; and ₱250,800 representing the cost of the completed seismic study. However, PGI was
not paid despite its repeated demands. With this, the latter filed a case against Marsman and
Gotesco.

Marsman passed the obligation to Gotesco because under thejoint venture agreement,
Gotesco was solely liable for the monetary expenses of the project, and Marsman’s participation was
limited to the land.
 Gotesco, on the other hand, asserted that PGI had no cause of action against it as PGI had
yet to complete the services in its contract, and it was Marsman’s failure to clear the property of
debris which prevented PGI from completing its work.

ISSUE

Whether Marsman and Gotesco are jointly liable to pay PGI its unpaid claims.

RULING

Affirmative.

To Marsman Drysdale, it is Gotesco since, under the JVA, construction funding for the
project was to be obtained from Gotesco’s cash contribution, as its (Marsman Drysdale’s)
participation in the venture was limited to the land.

Gotesco maintains, however, that it has no liability to pay PGI since it was due to the fault of
Marsman Drysdale that PGI was unable to complete its undertaking.

PGI executed a technical service contract with the joint venture and was never a party to the
JVA. While the JVA clearly spelled out, inter alia, the capital contributions of Marsman Drysdale
(land) and Gotesco (cash) as well as the funding and financing mechanism for the project, the same
cannot be used to defeat the lawful claim of PGI against the two joint venturers-partners.

Art. 1207 reads:

xxx two or more debtors in one and the same obligation does not imply that each one of the
former has a right to demand, or that each one of the latter is bound to render, entire compliance
with the prestations xxx

Also, Art. 1208:

xxx If from the law, or the nature or the wording of the obligations to which the preceding
article refers the contrary does not appear, the credit or debt shall be presumed to be divided into
as many equal shares as there are creditors or debtors, xxx

The only time that the JVA may be made to apply in the present petitions is when the
liability of the joint venturers to each other would set in.

Allowing Marsman Drysdale to recover from Gotesco what it paid to PGI would not only be
contrary to the law on partnership on division of losses but would partake of a clear case of unjust
enrichment at Gotesco’s expense. The grant by the lower courts of Marsman Drysdale cross-claim
against Gotesco was thus erroneous.

CA decision and resolution are affirmed with modification. Cost against Marsman and
Gotesco.
Obligations with a Penal Clause

II. Article 1226: In obligations with a penal clause, the penalty shall substitute the indemnity
for damages and the payment of interests in case of noncompliance, if there is no stipulation to
the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is
guilty of fraud in the fulfillment of the obligation.

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

CASE #2: FILINVEST V CA, 138980

RELEVANT FACTS
Filinvest Land, Inc awarded to defendant Pacific Equipment Corporation the development of
its residential subdivisions consisting of two (2) parcels of land located at Payatas, Quezon City. To
guarantee its faithful compliance and pursuant to the agreement, defendant Pacific posted two (2)
Surety Bonds in favor of plaintiff which were issued by defendant Philippine American General
Insurance.

Notwithstanding three extensions granted by plaintiff to defendant Pacific, the latter failed to
finish the contracted works. Plaintiff wrote defendant Pacific advising the latter of its intention to
takeover the project and to hold said defendant liable for all damages which it had incurred and will
incur to finish the project.

Plaintiff submitted its claim against defendant Philamgen under its performance and
guarantee bond but Philamgen refused to acknowledge its liability for the simple reason that its
principal, defendant Pacific, refused to acknowledge liability therefore. Hence, this action.

Defendant Pacific therefore became liable for delay when it did not finish the project on
the date agreed on October 15, 1979. The RTC however, finds the claim of P3,990,000.00 in
the form of penalty by reason of delay (P15,000.00/day from April 25, 1979 to Jan. 15, 1980)
to be excessive.

A forfeiture of the amount due defendant from plaintiff appears to be a reasonable

penalty for the delay in finishing the project considering the amount of work already performed
and the fact that plaintiff consented to three prior extensions

ISSUE

Whether the P 15,000/day penalty is excessive.

RULING

Affirmative.

There is no question that the penalty of P15,000.00 per day of delay was mutually
agreed upon by the parties and that the same is sanctioned by law. A penal clause is an
accessory undertaking to assume greater liability in case of breach. It is attached to an
obligation in order to insure performance and has a double function:
 (1) to provide for liquidated damages, and

(2) to strengthen the coercive force of the obligation by the threat of greater
responsibility in the event of breach.

As a general rule, courts are not at liberty to ignore the freedom of the parties to agree on such
terms and conditions as they see fit as long as they are not contrary to law, morals, good
customs, public order or public policy. The judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by the debtor.

Nevertheless, courts may equitably reduce a stipulated penalty in the contract in two
instances: (1) if the principal obligation has been partly or irregularly complied; and (2) even if
there has been no compliance if the penalty is iniquitous or unconscionable in accordance with
Article 1229.

A penalty interest of P15,000.00 per day of delay as liquidated damages

or P3,990,000.00 (representing 32% penalty of the P12,470,000.00 contract price) is
unconscionable considering that the construction was already not far from completion.
III. Article 1229: The judge shall equitably reduce the penalty when the principal obligation
has been partly or irregularly complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is iniquitous or
unconscionable.

CASE #3: FLORENTINO V SUPERVALUE, 172384

RELEVANT FACTS

Petitioner is doing business under the business name "Empanada Royale," a sole
proprietorship engaged in the retail of empanada with outlets in different malls and business
establishments within Metro Manila.

Respondent, on the other hand, is a domestic corporation engaged in the business of

leasing stalls and commercial store spaces located inside SM Malls found all throughout the
country.

Petitioner and respondent executed three Contracts of Lease containing similar terms
and conditions over the cart-type stalls at SM North Edsa and SM Southmall and a store space
at SM Megamall. The term of each contract is for a period of four months and may be renewed
upon agreement of the parties.

Upon the expiration of the original Contracts of Lease, the parties agreed to renew the
same by extending their terms until 31 March 2000.

Before the expiration of said Contracts of Lease, petitioner received two letters from the
respondent. In the first letter, petitioner was charged with violating Section 8 of the Contracts
of Lease by not opening on 16 December 1999 and 26 December 1999.

Respondent also charged petitioner with selling a new variety of empanada called "mini-
embutido" and of increasing the price of her merchandise from P20.00 to P22.00, without the
prior approval of the respondent.

Respondent observed that petitioner was frequently closing earlier than the usual mall
hours, either because of non-delivery or delay in the delivery of stocks to her outlets, again in
violation of the terms of the contract. A stern warning was thus given to petitioner to refrain
from committing similar infractions in the future in order to avoid the termination of the lease
contract.

In the second letter, respondent informed the petitioner that it will no longer renew the
Contracts of Lease for the three outlets, upon their expiration.

Petitioner explained that the "mini-embutido" is not a new variety of empanada but had
similar fillings, taste and ingredients as those of pork empanada; only, its size was reduced in
order to make it more affordable to the buyers.

Such explanation notwithstanding, respondent still refused to renew its Contracts of

Lease with the petitioner. To the contrary, respondent took possession of the store space in SM
Megamall and confiscated the equipment and personal belongings of the petitioner found
therein after the expiration of the lease contract.
 Petitioner demanded that the respondent release the equipment and personal
belongings it seized from the SM Megamall store space and return the security deposits, in the
sum ofP192,000.00, turned over by the petitioner upon signing of the Contracts of Lease.

An action for Specific Performance, Sum of Money and Damages was filed by the
petitioner against the respondent. petitioner alleged that the respondent made verbal
representations that the Contracts of Lease will be renewed from time to time and, through the
said representations, the petitioner was induced to introduce improvements upon the store
space at SM Megamall in the sum of P200,000.00, only to find out a year later that the
respondent will no longer renew her lease contracts for all three outlets.

In addition, petitioner alleged that the respondent, without justifiable cause and without
previous demand, refused to return the security deposits in the amount of P192,000.00.

For its part, respondent countered that petitioner committed several violations of the
terms of their Contracts of Lease by not opening from 16 December 1999 to 26 December
1999, and by introducing a new variety of empanada without the prior consent of the
respondent, as mandated by the provision of Section 2 of the Contract of Lease. Respondent
also alleged that petitioner infringed the lease contract by frequently closing earlier than the
agreed closing hours. Respondent finally averred that petitioner is liable for the amount
P106,474.09, representing the penalty for selling a new variety of empanada, electricity and
water bills, and rental adjustment, among other charges incidental to the lease agreements.
Respondent claimed that the seizure of petitioner‘s personal belongings and equipment was in
the exercise of its retaining lien, considering that the petitioner failed to settle the said
obligations up to the time the complaint was filed.

Considering that petitioner already committed several breaches of contract, the

respondent thus opted not to renew its Contracts of Lease with her anymore. The security
deposits were made in order to ensure faithful compliance with the terms of their lease
agreements; and since petitioner committed several infractions thereof, respondent was
justified in forfeiting the security deposits in the latter‘s favor.

ISSUE

Whether petitioner can reclaim the security deposit.

RULING

The appellate court, in finding that the respondent is authorized to forfeit the security
deposits, relied on the provisions of Sections 5 and 18 of the Contract of Lease, to wit:

Section 5. DEPOSIT. The LESSEE shall make a cash deposit in the sum of
SIXTY THOUSAND PESOS (P60,000.00) equivalent to three (3) months rent
as security for the full and faithful performance to each and every term,
provision, covenant and 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
LESSEE on demand shall make an additional deposit equal to the increase
in rent. The LESSOR shall not be required to keep the deposit separate
from its general funds and the deposit shall not be entitled to interest. The
 deposit shall remain intact during the entire term and shall not be applied
as payment for any monetary obligations of the LESSEE under this
contract. If the LESSEE shall faithfully perform every provision of this
lease[,] the deposit shall be refunded to the LESSEE upon the expiration of
this Lease and upon satisfaction of all monetary obligation to the LESSOR.

xxxx

Section 18. TERMINATION. Any breach, non-performance or non-

observance of the terms and conditions herein provided shall constitute
default which shall be sufficient ground to terminate this lease, its
extension or renewal. In which event, the LESSOR shall demand that
LESSEE immediately vacate the premises, and LESSOR shall forfeit in its
favor the deposit tendered without prejudice to any such other appropriate
action as may be legally authorized.

Since it was already established by the trial court that the petitioner was guilty of
committing several breaches of contract, the Court of Appeals decreed that she cannot
therefore rightfully demand the return of the security deposits for the same are deemed
forfeited by reason of evident contractual violations.

It is undisputed that the above-quoted provision found in all Contracts of Lease is in the
nature of a penal clause to ensure petitioner‘s faithful compliance with the terms and conditions
of the said contracts.

A penal clause is an accessory undertaking to assume greater liability in case of breach.

It is attached to an obligation in order to insure performance and has a double function: (1) to
provide for liquidated damages, and (2) to strengthen the coercive force of the obligation by
the threat of greater responsibility in the event of breach. The obligor would then be bound to
pay the stipulated indemnity without the necessity of proof of the existence and the measure of
damages caused by the breach. Article 1226 of the Civil Code states:

Art. 1226. In obligations with a penal clause, the penalty shall substitute
the indemnity for damages and the payment of interests in case of
noncompliance, if there is no stipulation to the contrary. Nevertheless,
damages shall be paid if the obligor refuses to pay the penalty or is guilty
of fraud in the fulfillment of the obligation.

The penalty may be enforced only when it is demandable in accordance

with the provisions of this Code.

As a general rule, courts are not at liberty to ignore the freedoms of the parties to agree
on such terms and conditions as they see fit as long as they are not contrary to law, morals,
good customs, public order or public policy. Nevertheless, courts may equitably reduce a
stipulated penalty in the contracts in two instances: (1) if the principal obligation has been
partly or irregularly complied with; and (2) even if there has been no compliance if the penalty
is iniquitous or unconscionable in accordance with Article 1229 of the Civil Code which clearly
provides:
 Art. 1229. The judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by the
debtor. Even if there has been no performance, the penalty may also be
reduced by the courts if it is iniquitous or unconscionable.

In ascertaining whether the penalty is unconscionable or not, this court set out the
following standard in Ligutan v. Court of Appeals, to wit:

The question of whether a penalty is reasonable or iniquitous can

be partly subjective and partly objective. Its resolution would depend on
such factor as, but not necessarily confined to, the type, extent and
purpose of the penalty, the nature of the obligation, the mode of breach
and its consequences, the supervening realities, the standing and
relationship of the parties, and the like, the application of which, by and
large, is addressed to the sound discretion of the court. xxx.

In the instant case, the forfeiture of the entire amount of the security deposits in the
sum of P192,000.00 was excessive and unconscionable considering that the gravity of the
breaches committed by the petitioner is not of such degree that the respondent was unduly
prejudiced thereby. It is but equitable therefore to reduce the penalty of the petitioner to 50%
of the total amount of security deposits.

It is in the exercise of its sound discretion that this court tempered the penalty for the
breaches committed by the petitioner to 50% of the amount of the security deposits. The
forfeiture of the entire sum of P192,000.00 is clearly a usurious and iniquitous penalty for the
transgressions committed by the petitioner. The respondent is therefore under the obligation to
return the 50% of P192,000.00 to the petitioner.

Turning now to the liability of the respondent to reimburse the petitioner for one-half of
the expenses incurred for the improvements on the leased store space at SM Megamall:

The Section 11 in the Contract of Lease mandates that before the petitioner can
introduce any improvement on the leased premises, she should first obtain respondent‘s
consent. In the case at bar, it was not shown that petitioner previously secured the consent of
the respondent before she made the improvements on the leased space in SM Megamall. It was
not even alleged by the petitioner that she obtained such consent or she at least attempted to
secure the same. On the other hand, the petitioner asserted that respondent allegedly
misrepresented to her that it would renew the terms of the contracts from time to time after
their expirations, and that the petitioner was so induced thereby that she expended the sum of
P200,000.00 for the improvement of the store space leased.

This argument was squarely addressed by this court in Fernandez v. Court of Appeals,
thus:

The Court ruled that the stipulation of the parties in their lease contract "to
be renewable" at the option of both parties stresses that the faculty to
renew was given not to the lessee alone nor to the lessor by himself but to
 the two simultaneously; hence, both must agree to renew if a new contract
is to come about.

Petitioner‘s contention that respondents had verbally agreed to extend the lease
indefinitely is inadmissible to qualify the terms of the written contract under the parole evidence
rule, and unenforceable under the statute of frauds.

Moreover, it is consonant with human experience that lessees, before occupying the
leased premises, especially store spaces located inside malls and big commercial
establishments, would renovate the place and introduce improvements thereon according to the
needs and nature of their business and in harmony with their trademark designs as part of their
marketing ploy to attract customers. Certainly, no inducement or misrepresentation from the
lessor is necessary for this purpose, for it is not only a matter of necessity that a lessee should
re-design its place of business but a business strategy as well.
CASE #4: SEGOVIA CORP V J.L. REALTY, 141283

RELEVANT FACTS

Petitioner SEGOVIA DEVELOPMENT CORPORATION and respondent J. L. DUMATOL

REALTY AND DEVELOPMENT CORPORATION are domestic corporations engaged in the
business of real estate development.

SEGOVIA and respondent DUMATOL entered into three (3) separate but identical
contracts to sell involving three (3) condominium units, namely, Units Nos. 703, 704 and 904,
of the Heart Tower Condominium. The total contract price for the three (3) units was
P6,050,000.00.

Unit 703 Unit 704 Unit 904

Reservation Deposit P 50,000.00 P 50,000.00 P 50,000.00
Downpayment 770,000.00 770,000.00 820,000.00
12 Monthly Installments Beginning 90,000.00 90,000.00 90,000.00
25 April 1989
Parking Lot 100,000.00 100,000.00 100,000.00
Total Contract Price P2,000,000.00 P2,000,000.00 P2,050,000.00

The contracts, which were in standard form approved by the Housing and Land Use
Regulatory Board (HLURB), contained the following provision:

4.1 x x x x Where less than 2 years of installments were paid, the SELLER shall give the
BUYER a grace period of 60 days but a penalty of 3% per month shall be levied upon unpaid
installments. If the BUYER fails to comply, the SELLER may cancel the Contract after 30 days
from receipt by the BUYER of the Notice of Cancellation or the Demand of Rescission of the
Contract by a notarial act without need of judicial action.

Out of the total contract price of P6,050,000.00, respondent DUMATOL was able to pay
only the amount of P450,000.00 for the three (3)units. However, the check paid by respondent
DUMATOL through Julius Stracham (P 100, 000) was dishonored by the bank so that only
P4,400,000.00 was credited to the account of respondent DUMATOL.

Date of Payment Mode of Payment Amount Paid (In Pesos)

23 February 1989 PSB Check No. 242943 P 150,000.00
15 June 1989 PSB Check No. 257286 2,000,000.00
17 August 1989 PSB Check No. 318839 1,000,000.00
17 August 1989 PSB Check No. 337265 500,000.00
28 December 1989 PSB Check No. 396410 250,000.00
30 January 1990 PSB Check No. 396468 500,000.00
31 January 1990 (thru respondent's UDB Check No. 125417 100.000.00
agent Julius Stracham)
Total P4,500,000.00

A meeting was held between the two (2) contracting parties whereby it was approved in
principle that petitioner would withdraw the action for rescission subject to the condition that
respondent would pay for the following: (a) the total balance for the three (3) condominium
units, together with interest and the related charges amounting to P2,808,699.00, would be
settled not later than 12:00 o'clock noon of 7 December 1990; and, (b) liquidated damages
amounting to P700,000.00. Respondent DUMATOL disputed the computation made by
petitioner and informed the, latter that it was prepared to pay the remaining balance of the
purchase price plus interests, which amounted to only P1,977,200.00.

Respondent DUMATOL lodged a complaint with the HLURB praying among others that
the three percent (3%) interest rate being assessed by petitioner on the defaulted payments be
declared erroneous and that petitioner be likewise ordered to pay P3,400,000.00 compensatory
damages.

The settlement of the outstanding balance of the purchase price not having
materialized, respondent received another notice of cancellation from petitioner, this time
officially informing respondent that the Contracts to Sell for Units 703, 704 and 904 were being
cancelled without need of judicial action.

Respondent consigned with the HLURB the amount of P1,977,220.00 in the form of
Philippine Savings Bank Check No. 203331 which represented what it believed to be its
remaining accountability to petitioner SEGOVIA.

Respondent argued that the three percent (3%) penalty charge was iniquitous and
unconscionable and therefore unjustified and that its acts of tendering and consigning the sum
of P1,977,200.00 with the HLURB suspended the running of such interest charges.

ISSUE

Whether the three percent (3%) penalty interest is patently iniquitous and unconscionable.

RULING

We agree.

In opposing the three percent (3%) penalty interest, respondent, as sustained by the
Court of Appeals, invokes Art. 1229 of the Civil Code which provides -

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

Respondent also claims that the spirit of the above provision is re-echoed in Art. 2227 of
the Civil Code which provides -

Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably

reduced if they are iniquitous or unconscionable.

The three percent (3%) penalty interest is patently iniquitous and unconscionable as to
warrant the exercise by this Court of its judicial discretion. A close reading of the contracts to
sell will show that the three percent (3%) penalty interest on unpaid installments on a monthly
basis (per Sec. 4.1) would translate to a yearly penalty interest of thirty-six percent (36%).
Assuming that respondent has an outstanding balance which runs into millions (P2,559,900.00
per HLURB Arbiter's computation), the payments respondent made (amounting to P4.4 million
out of the P6.05 million contract price) would be virtually wiped out if the three percent (3%)
penalty interest were imposed on the account balance.

Although this Court on various occasions has eliminated altogether the three percent
(3%) penalty interest for being unconscionable, we are not inclined to do the same in this case.
A reduction is more consistent with fairness and equity. We should not lose sight of the fact
that petitioner remain an unpaid seller that it has suffered, one way or another, from
respondent's non-performance of its contractual obligations. In view of such glaring reality, we
invoke the authority granted to us by Art. 1229 of the Civil Code, and as equity dictates, the
penalty interest is accordingly reimposed on a reduced rate of one percent (1%) interest per
month or twelve percent (12%) per annum.
CASE #5: TAN V CA, 126285

RELEVANT FACTS

Petitioner Antonio Tan obtained two (2) loans each in the principal amount of
P2,000,000.00, or in the total principal amount of P4,000,000.00 from respondent Cultural
Center of the Philippines (CCP, for brevity) evidenced by two (2) promissory notes.

Petitioner defaulted but after a few partial payments he had the loans restructured by
respondent CCP, and petitioner accordingly executed a promissory note in the amount of
P3,411,421.32 payable in five (5) installments. Petitioner Tan failed to pay any installment on
the said restructured loan of P3,411,421.32.

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.

Instead, respondent CCP, through counsel, wrote a letter to the petitioner demanding
full payment, within ten (10) days from receipt of said letter, of the petitioner‘s restructured
loan which amounted to P6,088,735.03.

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.

The appellate court rendered a decision affirming the decision of the trial court.
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%).

ISSUE

Whether there are contractual and legal bases for the imposition of the penalty, interest
on the penalty and attorney’s fees.

RULING
 The private respondent‘s Statement of Account 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

TOTAL 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 P452,561.43 which were made during the
period from May 13, 1983 to September 30, 1983. The petitioner now seeks the reduction of
the penalty due to the said partial payments. The principal amount of the promissory note was
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 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.

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.

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.