1.

Alternative & Facultative Obligations

i. Art. 1199-1206

Art. 1999

 Alternative Obligation – out of 2 or more prestations which may be given,

ONLY ONE IS DUE.
 Example: A is to give B a car or a pen or a house; A does not need to give all
three, one will suffice.

Art. 1200

 GENERAL RULE:
o The right to choose from alternative obligations belongs to the
DEBTOR.
 LIMITATION: debtor has no right to choose prestations which are:
o Impossible
o Unlawful
o Or which could not have been the object of the obligation.
 EXCEPTION:
o When the contract expressly grants this right to the creditor.
 Note: the difference between an obligation with a period and an alternative
obligation is that the former period is for the benefit of both debtor and
creditor while the latter is that the debtor has the right of choice.

Art. 1201

 GENERAL RULE:
o The choice shall only have effect once it is COMMUNICATED (orally, or
in writing; expressly or impliedly)
o Once the choice has been given notice, it will be binding to the person
who made the choice. Hence, he cannot change or renounce it.
 Reason for COMMUNICATION of choice:
o Inform the creditor that the obligation is now a simple once, no long
alternative, and if already due, for the creditor to receive the object
being delivered, if tender of the same has been made.
o NOT to “give the creditor opportunity to express his consent or to
impugn the choice”, since this deprives the creditor of his right UNDER
THE LAW (error in Ong v. BPI).
 REQUISITES for Making the Choice:
o Made properly so the creditor/his agent will know.
o Made with full knowledge that a selection is being made.
o Made voluntary and freely (w/o force, intimidation, etc…)
 o Made in due time (before or upon maturity)
o Made to all proper persons (if joint creditors, all must be notified)
o Made without conditions unless agreed by the creditor.
o May be waived, expressly or impliedly.

Art. 1202

 Debtor loses the right of choice when all alternative obligations become
impossible, unlawful and etc. which would extinguish them, except ONE (1).
 Example 1: X is obliged to give Y objects A, B, and C. A and B were lost in a
fortuitous event, hence X loses the right of choice and is only left with C.
 Example 2: X is obliged to sell his house, with the right of option to buy the
land or return the advance payment. If X loses his right of option, then he
cannot opt to buy nor return, hence is only left with one (1).

Art. 1203

 If the creditor’s acts prevents debtor from making a choice amongst the
alternatives, the debtor can rescind the contract with damages.
 Note: The contract is not automatically rescinded, creditor may opt to rescind
or still allow it to remain in force.
 Example: A is given the option to teach B personally or buy him a computer. B
moved to Germany, hence preventing A to exercise the first option. A could
either (1) Buy the computer or (2) rescind the contract with damages.

Art. 1204 (choice is with debtor)

 ALL alternatives lost/impossible at the FAULT OF DEBTOR = Creditor seek

damages.
 Damages equal to value of the LAST alternative lost/impossible.
 Damages other than the value of the LAST alternative can also be awarded.

Art. 1205

 Choice is given to CREDITOR; all options shall cease to be alternative from the
day the selection is notified to debtor.
 Responsibilities of DEBTOR:
o If obligations are lost through fortuitous events, debtor shall perform
the obligation chosen by creditor amongst the remainder or perform
the only one (1) that remains.
o If the loss of ONE (1) is the fault of debtor = creditor may claim any of
the remaining, or their values as right to damages. (election of
creditor)
 o If the loss of ALL is the fault of debtor = creditor seek damages
choosing amongst the alternatives based on value.
Art. 1206

 Facultative Obligation – A substitution to the original agreed upon prestation.

The substitution must also be agreed upon.
 Alternative vs. Facultative

Alternative Facultative

Various things are due, but only one Only one thing is due, but it can be
is sufficient. substituted with another.

If ONE prestation is void If the principal obligation is void

(illegal/impossible/etc.), the others (illegal/impossible/etc.), then the
may still be valid and remain. substitute is null and void.

If the principal is null/void, then the

If it is null/void to give/do ALL
substitute is null/void; if the
EXCEPT ONE, the last ONE is still
substitute is null/void, the principal
valid.
must still be given

The right to choose is given to either The right of choice is given ONLY to
the debtor or creditor. the debtor.

ii. Cases
1. Ong Guan Can vs. Century Insurance Company, 46 Phil. 492’

FACTS:

1. The building of the plaintiff was ensured against fire through the
defendant insurance company.
2. In the morning of Feb. 23, 1923, plaintiff’s building caught on fire.
3. Plaintiff sought from the defendant the payment of the value of the burnt
building and merchandise, as stipulated in the insurance policy.
4. Defendant contends that there is clause in the policy which would grant
them an alternative obligation. That is instead of paying the value of the
burned down property, they can opt to reinstate the property but not
exactly or completely.

ISSUE:
  Whether the defendant’s contention was valid.
HELD:

 There is no question that the clause indeed grants the defendant the
right of choice between stipulated alternative obligations.
 But the defendants failed to notify the plaintiff of such selection that it
would result in depriving the plaintiff of their right to express consent
or to impugn the selection of the debtor.
 Wherefore the SC has no basis to justify the reversal of lower court’s
decision in imposing to the defendants the payment equivalent to the
value property burned.

2. Joint and Solidary Obligations

i. Art. 1207-1222

Art. 1207

 Joint Obligations – “To each his own”; each obligor only answers for a part of
the whole liability and to each oblige belongs only a part of the correlative
rights.
 Solidary Obligations – “One for all, all for one”; each of the debtor or creditor
can demand or must perform the whole obligation.
 GENERAL RULE:
o Where there are two or more debtors or two or more creditors, the
obligation is JOINT.
 EXCEPTIONS:
o Unless it is stipulated that the obligation is SOLIDARY.
o When the nature of the obligation requires liability to be SOLIDARY.
o When the law declares obligation to be SOLIDARY.

Art. 1208

 This is just the GENERAL RULE stated above in Art. 1207 wherein unless the
EXCEPTIONS are present, the obligation is always presumed to be JOINT.
 Rules of Court still govern the multiplicity of suits.

Art. 1209

 INDIVISIBLE JOINT OBLIGATION

o The obligation is joint but since the object is indivisible; Example: A
and B are jointly liable to give C this particular car. A and B, as expressly
stated, jointly liable, while the car is indivisible.
o Creditor must proceed against ALL the joint debtors
 o If any one of the debtors does not comply with his monetary obligation
for damages.
o If any of the joint debtors become insolvent , the others shall not be
liable for his share.

Art. 1210

 Indivisibility =/= Solidarity, vice versa.

o Joint divisible obligation – A and B are jointly liable to X for 1 million.
o Joint indivisible obligation – A and B are jointly liable to give X this car.
o Solidary divisible obligation – A and B are solidarily bound to give X 1
million.
o Solidary indivisible obligation – A and B are solidarily bound to give X
this car.
 Kinds of Solidarity:

First classification:
a. Active Solidarity – on the part of the creditors or obligees.
b. Passive Solidarity – on the part of the debtors or obligors,
c. Mixed Solidarity – on the part of the obligors and obliges, or on the
part of the debtors and the creditors.

Second classification:
a. Conventional Solidarity – agreed upon by the parties.
b. Legal Solidarity – that imposed by the law.

Art. 1211

 Solidarity despite Different Terms or Conditions

o Uniform – when the debtors are bound by the same stipulation and
clauses
o Otherwise – where the obligors though liable for the same prestation,
are nevertheless not subject to the same secondary stipulations and
clauses.
 Solidarity is still preserved by recognizing in the creditor the power, upon the
fulfillment of the condition or the expiration of the term, of claiming from any
or all of the debtors, that part of the obligation effected by these conditions.

Art. 1212

 Solidary Creditors May Do Useful, Not Prejudicial Acts

o Beneficial Act – To interrupt the running of prescription, the act of one
solidary creditor in making a judicial demand upon any of the solidary
 debtors is sufficient. “The prescription of actions is interrupted when
they are filed before the Courts.” (Art. 1155)
o Prejudicial Act – should not be performed, otherwise, there will be
liability for damages. However, in the case of remission or condonation
(which is really prejudicial), the solidary creditor is allowed to so remit,
and the obligation is extinguished, without prejudice to his liability to
the other creditors. (Art. 1215)

Art. 1213

 GENERAL RULE:
o The solidary creditor cannot assign his rights.
 EXCEPTION:
o He is allowed if all the others consent.

Art. 1214

 To Whom Debtor Must Pay

o GENERAL RULE: to any of the solidary creditors
o EXCEPTION: payment must be made to solidary creditor who made a
DEMAND (extra/judicial)

Art. 1215

 Novation – modification of an obligation by changing its object or principal

conditions, or by substituting the person of the debtor, or by subrogating the
person of the debtor, or by subrogating a third person in the rights of creditor.
 Compensation – is that which takes place when two persons, in their own right,
are creditors and debtors of each other.
 Confusion or Merger – is that which takes place when the characters of
creditor and debtor are merged in the same person, as when my check in the
course of negotiation, is eventually endorsed to me.
 Remission or Waiver – is that act of liberality whereby a creditor condones the
obligation of the debtor; that where the creditor tells the debtor to “forget
about the whole thing”.

ii. Cases
1. Palmares vs. CA, G.R. No. 126490, Mar. 31, 1998, 288 SCRA 422

FACTS:

1. Palmares signed as a co-maker in a loan agreement with M.B. Lending

Corporation.
 2. The promissory note acknowledged that Palmares was “jointly and
severally liable” with the principal debtors.
3. After the creditors demanded Palmares to pay, Palmares requested that
the creditor try to collect from the principal debtors first and offered to
settle the obligation if the creditor fails to collect.
4. Creditor contended that they could demand from Palmares the obligation
to pay the full loan since the contract stipulates.
5. Palmares contended that a layman like her could not possibly understand
the term “jointly and severally liable”.

ISSUE:

 Whether Palmares is indeed solidarily liable with the principal debtors

and may be sued for the entire obligation.

HELD:

 The promissory note clearly and expressly states that Palmares has
solidary liability with the principal debtors.
 Jointly and severally is construed to mean solidarily.
 Palmares cannot use the argument that she did not understand the
status of her liability as she signed a contract which clearly states that
she understood with full knowledge the stipulations of the contract.

2. Sesbreño vs. CA, G.R. No. 89252, May 24, 1993, 222 SCRA 466

FACTS:

1. Petitioner Raul Sesbreño made a money market placement with Philippine

Underwriters Finance Corporation (Philfinance).
2. Sesbreño was issued a promissory note by Delta Motors Corporation
(Delta).
3. Philfinance assigned a portion of the promissory note to Sesbreño.
4. Sesbreño demanded physical delivery of the promissory note from
Pilipinas Bank (Pilipinas), the custodian bank.
5. Pilipinas refused to comply and awaited instructions from Philfinance.

ISSUE:

 Whether Pilipinas is solidarily liable for the promissory note.

HELD:
  The Court is not persuaded. They find nothing in the promissory note
that establishes an obligation on the part of Pilipinas to pay petitioner
the due amount nor any assumption of liability in solidum with
Philfinance and Delta under promissory note.
 The Court also find nothing written in printers ink on the custodian
contract which could reasonably be read as converting Pilipinas into an
obligor under the terms of the promissory note assigned to petitioner,
either upon maturity thereof or at any other time.
 The Court petitioner referred merely to the obligation of private
respondent Pilipinas to effect physical delivery to him of the
promissory note.

3. PNB VS. STA. Maria, G.R. No. L-24765, Aug. 29, 1969, 29 SCRA 303

FACTS:

1. PNB filed a lawsuit against Maximo and his siblings for the collection of
unpaid balances on two agricultural sugar crop loans.
2. The loans were obtained by Maximo from PNB under a special power of
attorney executed by his siblings, granting him the authority to mortgage a
jointly owned parcel of land.
3. Valeriana (one of the siblings) also executed a special power of attorney
granting Maximo the authority to borrow money and mortgage her own
real estate.

ISSUE:
 Whether or not the Maximo’s siblings are jointly and severally, to pay
the plaintiff.

HELD:

 NO, the authority granted by his siblings (except Valeriana) was

merely to mortgage the property jointly owned by them. They did not
grant Maximo any authority to contract for any loans in their names
and behalf.
 We hold that Valeriana's liability for the loans secured by Maximo is
not joint and several or solidary but only joint, pursuant to the
provisions of Article 1207 of the Civil Code
 It should be noted that in the additional special power of attorney
executed by Valeriana, she did not grant Maximo the authority to bind
her solidarity with him on any loans he might secure thereunder.

4. Pacific Banking Corp. vs. Intermediate Appellate Court, G.R. No. 72275, Nov.
13, 1991, 203 SCRA 496
 FACTS:

1. Roberto Regala Jr. bound himself with the principal debtor, Celia
Regala, to pay any and all indebtedness incurred by his wife Celia with
the use of a Pacificard credit card.
2. Roberto's liability as a surety was determined by the terms of the
surety agreement, which stated that his commitment was a continuing
one until all of Celia's liabilities were fully paid.
3. The Intermediate Appellate Court limited Roberto's liability to the
extent of the monthly credit limit granted to Celia and only for the
advances made during a one-year period.

ISSUE:

 WON is ROBERTO is solidarily liable to pay the principal obligation

together with CELIA.

HELD:

 YES, the undertaking signed by Roberto Regala, Jr. although

denominated "Guarantor's Undertaking," was in substance a contract
of surety.
 As a surety he binds himself jointly and severally with the debtor Celia
Regala.
 We do not agree however, that Roberto Jr.'s liability should be limited
to the monthly credit limit of his wife. Private respondent Roberto
Regala, Jr., as surety of his wife, expressly bound himself up to the
extent of Celia’s indebtedness.

5. Ronquillo vs. CA, G.R. No. L-55138, Sept. 28, 1984, 132 SCRA 274

FACTS:

1. Ronquillo and 4 other defendants where liable for a sum of money

against Antonio So.
2. Ronquillo et. al. issued a check to pay for the money but the check
bounced.
3. Ronquillo et. al. and So arrived at a compromise agreement.
4. Ronquillo wants to fulfill his obligation, but So refused his payment
since Ronquillo only wants to pay his “share” of the total amount due
and So warrants from him the full satisfaction of the full payment.

ISSUE:
  Whether or not the compromise agreement intended the liability of the
defendants, including the petitioner, to be solidary.

HELD:

 YES, clearly by the express term of the compromise agreement and the
decision based upon it, the defendants obligated themselves to pay
their obligation "individually and jointly" The term "individually" has the
same meaning as "collectively", "separately", "distinctively",
respectively or "severally". An agreement to be " individually liable "
undoubtedly creates a several obligations, and a "several obligation" is
one by which one individual binds himself to perform the whole
obligation.
 Therefore, the whole obligation is enforceable to each and every
obligor.

6. Quiombing vs. CA, G.R. No. 93010, Aug. 30, 1990, 189 SCRA 325

FACTS:

1. Quiombing and Biscocho entered into a Construction Agreement with

Sps. Saligo to build the latter’s house.
2. In a separate agreement, Quiombing and Saligo entered into an
agreement which only prescribed the manner of payment by Saligo.
3. Despite repeated demands Saligo failed to pay, hence Quiombing (only)
filed a complaint for recovery of the amount plus interest.
4. Saligo moved to dismiss the case stating that Biscocho must be included
in the trial as he is an “indispensable party”.
5. Trial court granted. Quiombing appealed and argued that as a solidary
creditor, he could act by himself alone in the enforcement of his claim
against respondents.

ISSUE:

 Whether or not Quiombing can recover payment alone as a solidary

creditor.

HELD:

 YES, 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 everyone what belongs to him; there is no merger,
 much less a renunciation of rights, but only mutual representation.
(Art. 1207)
 “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.” (Art.
1212)
 Suing for the recovery of the contract price is certainly a useful act that
Quiombing could do by himself alone.
 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.

7. Inciong, Jr. vs. CA, G.R. No. 96405, June 26, 1996, 257 SCRA 578

FACTS:

1. Baldomero Inciong, Jr. signed a promissory note with Rene C. Naybe

and Gregorio D. Pantanosas, making them jointly and severally liable to
the Philippine Bank of Communications.
2. The promissory note was due on May 5, 1983, but the debtors failed to
pay.
3. The bank sent telegrams and a final letter of demand, but the debtors
did not respond.
4. The bank filed a complaint for collection of the sum of money against
the three debtors.
5. The lower court dismissed the case against Pantanosas, but held
Inciong solidarily liable for the amount of P50,000.00, with interest,
liquidated damages, and attorney's fees.
6. Inciong alleged that it was by trickery, fraud and misrepresentation that
he was made liable for the amount of P50,000.00
7. Inciong alleged that 5 copies of a blank promissory note were brought
to him by Campos, his friend who persuaded him to act as a "co-maker"
in the said loan at his office. He affixed his signature but in one copy, he
indicated that he binds himself only for the amount of P5,000.00

ISSUE:

 Whether or not Inciong is liable for the entire obligation.

HELD:

 YES, contrary to the claim of petitioner, dismissal of the complaint

against Naybe, the principal debtor, and against Pantanosas, his co-
 maker did not release petitioner from his obligation even though the
dismissal of the case against Pantanosas was upon the motion of
private respondent itself. It is to be noted that petitioner signed the
promissory note as a solidary co-maker and not as a guarantor.
 Promissory note involved in this case expressly states that the three
signatories therein are join 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 creditor to determine against whom he will
enforce collection. Consequently, the dismissal of the case against
Judge 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.

3. Divisible and Indivisible Obligations

i. Art. 1223-1225
ii. Case
1. Government vs. CFI, G.R. No. L-32162, Sept. 28, 1984, 132 SCRA 156

FACTS:

1. Respondent, V.D. Isip Sons & Associates, entered into a contract with
the City of Pasay for the construction of a new Pasay City Hall.
2. The contract stated that the work would be done in stages, with the
contractor advancing the necessary amount for each stage and the city
reimbursing the cost of the completed work before proceeding to the
next stage.
3. Pasay City only paid a portion of the agreed amount.
4. Contractor filed action for specific performance with damages.
5. Pasay City and Contractor entered into an agreement.
6. an application for and notice of garnishment were made and effected
upon the funds of appellant Pasay City. Pasay City filed an urgent
motion to set aside the respondent Court's order that granted an order
of execution and to quash the writ of execution issued.
7. Pasay City argued that the obligations of the parties under the
Compromise Agreement were reciprocal and the appellee not having
put up a new performance bond in the sufficient amount equivalent to
20% of the remaining cost of construction as per agreement, the
appellants cannot be obliged to pay the sum due appellee as yet
8. Contractor contended that they submitted a performance bond in the
amount of P60,000.00 which was thereafter increased to P100,000.00
to make it equal to 20% of the cost of the next stage of the construction
to be undertaken. Since the work is to be undertaken by stages, it
would be unreasonable to compel to submit a performance bond equal
 to the cost of the entire project, it not being known when the City of
Pasay shall have the funds for the completion thereof and it claims it
does not even have money to pay for the phase of the work finished
years ago.

ISSUE:

 Whether or not the 20% performance bond required to be submitted

refers to the entire unfinished work.

HELD:

 NO, this contract involves stage-by-stage construction and payment

approach which would inevitably lead to the conclusion that the parties
to the compromise contemplated a divisible obligation necessitating
therefore a performance bond "in proportion to" the uncompleted
work
 In the compromise agreement the words "in proportion to" were
utilized. If the parties really intended the legal rate of 20% performance
bond refer to the whole unfinished work, then the provision should
have required the contractor to submit and file a new performance
bond to cover the remaining value/cost of the unfinished work of the
construction. Using the words “in proportion” significantly changed the
meaning of the paragraph to ultimately mean a performance bond
equal to 20% of the next stage of work to be done.

4. Obligations with a Penal Clause

i. Art. 1226-1230
ii. Cases
1. Suatengco vs. Reyes, 574 SCRA 187 (2008)

FACTS:

1. Spouses Suatengo issued a promissory note binding themselves jointly

and separately (solidarily) to pay Reyes the amount they borrowed
from him.
2. Sps. unable to fulfill their obligation, were declared in default and the
RTC ordered them to pay Attorney’s Fees equivalent to 20% of the sum
to be paid.
3. CA upheld this decision.
4. Petitioners point to the unqualified rate of 5% stipulated in the
promissory note as the "stipulated amount" which was way lower than
the 20% as awarded by the RTC. They argued that the testimony of
Atty. Edmundo O. Reyes that the attorney's fees should be 20% of the
 outstanding balance cannot prevail over the 5% stipulated in the
promissory note.

ISSUE:

 W.O.N. the imposed 20% attorney’s fee prevail over the stipulation of
5%.

HELD:

 NO, the stipulation on attorney's fees contained in the said Promissory

Note constitutes what is known as a penal clause.
 A penalty clause, expressly recognized by law, is an accessory
undertaking to assume greater liability on the part of the obligor in case
of breach of an obligation. It functions to strengthen the coercive force
of obligation and to provide, in effect, for what could be the liquidated
damages resulting from such a breach. It is well-settled that so long as
such stipulation does not contravene law, morals, or public order, it is
strictly binding upon the obligor. The attorney's fees so provided are
awarded in favor of the litigant, not his counsel.
 Strictly speaking, the attorney's fees herein litigated are in the nature of
liquidated damages and not the attorney's fees recoverable as between
attorney and client enunciated and regulated by the Rules of Court.
Liquidated damages are those agreed upon by the parties to a contract
to be paid in case of breach thereof.

2. Titan Construction Corp. vs. Uni-Field Enterprises, Inc., 517 SCRA 180 (2007)

FACTS:

1. Petitioner Titan Construction Corporation is engaged in the

construction business, while respondent Uni-Field Enterprises, Inc. is
engaged in the business of selling various construction materials.
2. Petitioner purchased on credit various construction supplies and
materials from respondent. Petitioner was only able to pay partial the
amount of the full balance due. Respondent sent a demand letter to
petitioner. But the balance remained unpaid.
3. Respondent filed a complaint for collection of sum of money with
damages against petitioner.
4. Petitioner admitted the purchases but disputed the amount claimed by
respondent. Petitioner also interposed a counterclaim and sought to
recover damages from respondent based on damaged vinyl tiles, non-
delivery of materials, and advances for utility expenses, dues, and
 insurance premiums on the condominium unit turned over by
petitioner to respondent.
5. RTC: Judgment in favor of respondent; petitioner ordered to pay the
principal amount, interest charges at 24% per annum, liquidated
damages, attorney’s fees equivalent to 25% of the amount due and
payable.
6. CA affirmed RTC’s decision.

ISSUE:

 W.O.N. the award of the interest charges, liquidated damages, and

attorney’s fees is iniquitous or unconscionable.

HELD:

 YES, the law allows a party to recover attorney's fees under a written
agreement. (Art. 1226)
 On the other hand, the law also allows parties to a contract to stipulate
on liquidated damages to be paid in case of breach. A stipulation on
liquidated damages is a penalty clause where the obligor assumes a
greater liability in case of breach of an obligation. The obligor is bound
to pay the stipulated amount without need for proof on the existence
and on the measure of damages caused by the breach.
 Art. 1229 empower the courts to reduce the penalty if it is iniquitous or
unconscionable. The determination of whether the penalty is iniquitous
or unconscionable is addressed to the sound discretion of the court an
depends on several factors such as the type, extent, and purpose of the
penalty, the nature of the obligation, the mode of breach and its
consequences.
 The court found the penalty equivalent to 25% of whatever amount is
due and payable to be exorbitant.

3. Ruiz vs. CA, 401 SCRA 410 (2003)

FACTS:
ISSUE:
HELD:

4. SSS vs. Moonwalk, G.R. No. 73345, Apr. 7, 1993, 221 SCRA 119

FACTS:

1. Moonwalk has unpaid balance from the loan it received from SSS in
which the later demanded Moonwalk to pay.
 2. The contract of loan has a stipulated penalty in case Moonwalk would
default or be in delay of its obligation.
3. But because of the demand for payment, Moonwalk made several
payments until it was able to fulfill its obligation. Because of this
payment the obligation of Moonwalk was considered extinguished, and
pursuant to said extinguishment, the real estate mortgages given by
Moonwalk were released.
4. SSS still wants to pursue the penalty.

ISSUE:

 Whether or not the penalty is demandable even after the

extinguishment of the principal obligation?

HELD:

 NO, it is clear that a penal clause is intended to prevent the obligor

from defaulting in the performance of his obligation. Thus, if there
should be default, the penalty may be enforced (Art. 1226).
 But the obligation of Moonwalk was fully complied with, hence
extinguished.
 That being so, there is no basis for demanding the penal clause since
the obligation has been extinguished. Here there has been a waiver of
the penal clause as it was not demanded before the full obligation was
fully paid and extinguished.

5. Allen vs. Province of Albay, G.R. No. 11433, Dec. 20, 1916, 35 Phil.826

FACTS:

1. Contractor Arthur F. Allen seeks compensation for delays in the

construction of a bridge caused by the defendants, the Province of
Albay and the Province of Ambos Camarines.
2. Defendants allegedly failed to promptly deliver materials and imposed
a strict quarantine on draft animals, resulting in a substantial delay.
3. The contract for the construction of the bridge fixed a certain sum as
liquidated damages for each day's delay in completing the work within
the agreed time.
4. Plaintiff alleges that defendants' failure to deliver steel on time caused
the delay.

ISSUE:

 Whether the defendants were responsible for the delay.

  Whether the plaintiff is entitled to compensation for damages.

HELD:

 The court ruled in favor of the defendants.

 Although the court found the defendants failed to promptly deliver the
steel and the imposition of the quarantine were not significant to the
delay. Nonetheless, these actions waived the time limit.
 The contract fixed liquidated damages for each day's delay, but the
defendants' actions waived the time limit.
 The contractor was only bound to finish the construction within a
reasonable time.
 The delay could not be apportioned between the parties.
 The only remedy for the defendants was a right of action for actual
damages suffered.

6. State Investment House vs. Court of Appeals, G.R. No. 112590, July 12, 2001

FACTS:

1. Petitioner, State Investment House, Inc. (SIHI), seeks to recover a

deficiency payment from private respondents, Lomuyon Timber
Industries, Inc., Amanda Malonjao, and Rufino Malonjao, after
foreclosing on their mortgaged properties.
2. Petitioner claims that private respondents still owe them an amount of
P6,833,021.62 after the foreclosure sale.
3. Both the trial court and the appellate court rejected the claim due to
the penalty charge of 3% per month imposed on the principal
obligation, which they deemed iniquitous and unconscionable.

ISSUE:

 Whether the petitioner is entitled to recover the deficiency amount

after the foreclosure sale.
HELD:

 NO, The penalty charge of 3% per month imposed by the petitioner on

the principal obligation was iniquitous and unconscionable.
 The court applied Article 1229 of the Civil Code, which allows for the
equitable reduction of penalties that are iniquitous or unconscionable.
  While the payment of penalties is sanctioned by law, the court has the
authority to reduce the penalty if it is deemed iniquitous or
unconscionable.
 The court found that the penalty charge imposed by the petitioner was
excessive and unjust, and therefore, the petitioner was not entitled to
the deficiency payment.
 The court considered the circumstances of the case, including the fact
that the foreclosed properties were valuable and had greatly
appreciated in value.
 The petitioner had already recouped its investment and earned more
than enough profit through the penalty charges.
 The disallowance of the deficiency payment was a reduction of the
penalty charges, not a deletion of the penalties, and was in accordance
with the law.

7. Spouses Solangon vs. Salazar, G.R. No. 125944, June 29, 2001

FACTS:

1. Petitioners, Spouses Solangon, obtained from respondent, Salazar 3

separate loans by real estate mortgage with an interest of 6% per
month or 72% per annum.
2. Petitioners failed to pay their 3rd loan obligation so respondent
foreclosed the mortgage.
3. Petitioner the filed for annulment of mortgage before the RTC, while
contending that the real estate mortgage was executed to secure
payment of the principal loan and that the subsequent mortgages were
merely continuations of the first one, which were null and void for
unconscionable rate of interest.
4. RTC dismissed the complaint.
5. CA then affirmed RTC’s decision saying that Usury Law had been
repealed, and that there is no more maximum rate of interest.

ISSUE:

 WON the rate of 6% per month or 72% per annum is usurious.

HELD:

 NO. The aforementioned interest rate was not usurious.

 However, while the Usury Law ceiling on interest rates was lifted by CB
Circular No. 905, nothing in the said circular grants lenders carte
blanche (unlimited discretionary power) to raise interest rates to levels
which will slave their borrowers.
  This court held that the rates must be equitably reduced for being
iniquitous, unconscionable and exorbitant, hence contrary to morals, if
not against the law.
 Wherefore, CA’s decision is affirmed but with modifications in the
interest rate of 72% per annum to 12% per annum.

8. Barons Marketing Corp. vs. CA, 286 SCRA 96

FACTS:

1. Private respondent Phelps Dodge Phils., Inc. appointed petitioner

Barons Marketing Corporation as one of its dealers of electrical wires
and cables.
2. Petitioner, Barons Marketing purchased on credit from respondent
wires and cables.
3. Petitioner was only able to pay a portion out of its total purchases.
4. Respondent wrote petitioner several demands for the payment of the
balance.
5. In response, petitioner requested if the balance could be paid on
installments.
6. But respondent rejected Barons offer and reiterated full payment of the
balance.
7. Hence, respondent filed this complaint in the RTC-Pasig for the
recovery of the balance, including interest.
8. In the ruling of the RTC, the trial court compelled Barons Marketing to
pay 25% of the preceding obligation for and as attorney's fees.

ISSUE:

 WON private respondent is entitled to interest and attorney’s fees.

HELD:

 YES, pursuant to Art. 1226, the 25% payment constitutes a penal

clause.
 But pursuant to Art. 1229, and since the SC found the payment to be
exorbitant, the SC reduced it to 10%.

9. Manila Racing Club vs. Manila Jockey Club, 69 Phil.55

FACTS:
 1. Rafael J. Campos entered into a contract with the Manila Jockey Club,
an unregistered partnership, whereby he purchased from it the parcel
of land.
2. It was agreed that should the purchaser fail to pay the amount
corresponding to each installment in due time, the vendor may rescind
the contract and keep the amounts paid for itself.
3. Then the Manila Racing Club, Inc., was organized and Campos
transferred to it all his rights and obligations under his contract with the
Manila Jockey Club.
4. As the third installment became due and the Campos could not pay it,
the vendor declared the contract cancelled and kept the amount of
P100,000 already paid, corresponding to the first two installments.
5. Campos filed complaint for recovery against Manila Jockey Club and its
partners for the recovery from them of the forfeited amount of
P100,000 and for the payment of P50,000 as damages.

ISSUE:

 WON, the penal clause of the contract referring to the forfeiture of the
P100,000 already paid is valid.

HELD:

 YES, this clause regarding the forfeiture of what has been partially paid
is valid. It is in the nature of a penal clause which may be legally
established by the parties.
 In its double purpose of insuring compliance with the contract and of
otherwise measuring beforehand the damages which may result from
non-compliance, it is not contrary to law, morals or public order
because it was voluntarily and knowingly agreed upon by the parties.
Viewing concretely the true effects thereof in the present case, the
amount forfeited constitutes only 8 percent of the stipulated price,
which is not excessive if considered as the profit which would have
been obtained had the contract been complied with.
 On the date the third installment became due, the plaintiff had
subscribed shares of its capital stock in the amount of P600,000, paid in
part and the remainder payable on demand. The deduction from all this
is that the breach of the contract cannot be attributed to the
defendants and, much less, to the company which, it is also alleged, the
defendants brought into being to defeat the organization of the
plaintiff.

10. Ligutan vs. CA, et. al., GR No. 138677, Feb. 12, 2002
FACTS:

1. Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained a loan in

the amount of P120,000.00 from respondent Security Bank and Trust
Company.
2. Petitioners executed a promissory note binding themselves, jointly and
severally, to pay the sum borrowed with an interest of 15.189% per
annum upon maturity and to pay a penalty of 5% every month on the
outstanding principal and interest in case of default.
3. Petitioners agreed to pay 10% of the total amount due by way of
attorney's fees if the matter were indorsed to a lawyer for collection or
if a suit were instituted to enforce payment.
4. When the obligation matured and despite several demands from the
bank, petitioners failed to settle the debt.
5. The bank filed a complaint for recovery of the due amount.
6. Petitioners prayed for the reduction of the 5% stipulated penalty for
being unconscionable.
7. Petitioners filed an omnibus motion for reconsideration and to admit
newly discovered evidence that while the case was pending with the
trial court, a real estate mortgage was executed to secure the existing
indebtedness of petitioners with the bank. Petitioners contended that
the execution of the real estate mortgage had the effect of novating
the contract between them and the bank. Petitioners further averred
that the mortgage was extrajudicially foreclosed, that they were not
informed about it, and the bank did not credit them with the proceeds
of the sale.

ISSUE:

a. WON, the imposition of the 5% per month penalty charge and 10%
attorney's fees are exorbitant, iniquitous and unconscionable.
b. WON, there was a novation due to the subsequent execution of the
real estate mortgage during the pendency of this case and the
subsequent foreclosure of the mortgage.

HELD:

a. NO,
i. The essence or rationale for the payment of interest, quite often
referred to as cost of money, is not exactly the same as that of a
surcharge or a penalty.
ii. the interest prescribed in loan financing arrangements is a
fundamental part of the banking business and the core of a bank's
existence.
 iii. Bearing in mind that the rate of attorney's fees has been agreed to
by the parties and intended to answer not only for litigation
expenses but also for collection efforts as well, the Court, like the
appellate court, deems the award of 10% attorney's fees to be
reasonable.
b. NO,
i. Petitioners acknowledge that the real estate mortgage contract
does not contain any express stipulation by the parties intending
it to supersede the existing loan agreement between the
petitioners and the bank. Respondent bank has correctly
postulated that the mortgage is but an accessory contract to
secure the loan in the promissory note.
ii. Extinctive novation requires, first, a previous valid obligation;
second, the agreement of all the parties to the new contract;
third, the extinguishment of the obligation; and fourth, the
validity of the new one. In order that an obligation may be
extinguished by another which substitutes the same, it is
imperative that it be so declared in unequivocal terms, or that the
old and the new obligation be on every point incompatible with
each other. When not expressed, incompatibility is required so as
to ensure that the parties have indeed intended such a novation
despite their failure to express it in categorical terms.