Ronquillo v CA The term “individually” has the same meaning as separately or severally.
No. L-55138 September 28 1984
Cuevas, J
Facts:
Ernesto Ronquillo was one of four defendants in a Civil Case filed by respondent
Antonio So for the collection of P117,498.98, the value of the check issued by the said
defendants in payment for foodstuffs delivered to and received by them. The said
checks were dishonored by the drawee bank.
The lower court rendered a decision based on the compromise agreement by the
parities. The agreement reduced the claim to P110,000 and bound the defendants to
initially pay P55,000 of the debt before December 24, 1978. The remaining balance of
55,000 was to be paid by defendants “individually and jointly” before June 30, 1980.
So then filed a Motion for Execution on the ground that the defendants failed to make
the initial payment of P55,000 as provided in the abovementioned decision. Ronquillo
opposed the motion for execution alleging that his inability to make the payment was
due to So’s own act of making himself inaccessible, and tendered the amount of
P13,750 as his share of the P55,000 initial payment. Another defendant, tendered the
same amount. So however refused to accept their payments, demanding the full initial
payment. Ronquillo and Tan deposited the amount with the court. The court ordered
the issuance of a writ of execution for the balance of the initial amount payable to the
two other defendants.
So sought the reconsideration of the Order and prayed for the execution of the decision
in its entirety against all defendants, jointly and severally. Ronquillo opposed the
motion arguing that the lower court decision did not expressly declare the liability of
the 4 defendants to be solidary. Hence, each defendant is obliged to pay only his own
pro-rata or 1/4 of the amount due and payable.
Meanwhile, a writ of execution was issued by the court for the payment of P82,500
[P55,000 (balance from the whole debt) + 27500 (unpaid shares of initial payment
from two other defendants or P13,750 + P13750)] against the properties of the
defendants including Ronquillo, singly or jointly liable. The sheriff issued a notice for
the sale of certain furniture and appliances found in Ronquillo‘s residence to satisfy
the sum of P82,500.
Issue:
W/N the liability of the 4 defendants including Ronquillo solidary.
Held: YES
By the terms of the compromise agreement and the decision based upon it, the
defendants obligated themselves to pay their obligation “individually and jointly”.
OBLICON
An agreement to be “individually liable” undoubtedly creates a several obligation. A
several obligation is one by which one individual binds himself to perform the whole
obligation.
The obligation in the case at bar being described as “individually and jointly”, the same
is therefore enforceable against one of the numerous obligors.
Malayan Insurance Co. v CA
G.R. No. L-36413 September 26, 1988
Padilla, J
Facts:
In 1967, Malayan Insurance Co., Inc., issued in favor of Sio Choy a personal (P600)
and third party liability (P20,000) insurance policy covering Choy’s Willy’s jeep.
During the effectivity of said insurance policy, the insured jeep collided with a
passenger bus owned by PANTRANCO. The jeep was driven by Juan P. Campollo,
employee of San Leon Rice Mill, Inc. Damage was caused to the insured vehicle and
injuries to the driver Campollo, and jeepney passenger Martin C. Vallejos. Campollo
later died.
Vallejos filed an action for damages against Sio Choy, Malayan Insurance Co., Inc.
and the PANTRANCO before the Court of First Instance of Pangasinan. Vallejos
prayed that defendants be ordered to pay him, jointly and severally, the amount of
Php77,000 total for damages.
 Sio Choy filed a cross-claim against Malayan, alleging that he paid 5,000 to
Vallejos and hence must be reimbursed by Malayan pursuant to the third-party
liability clause of their contract
 Malayan then filed a third-party complain against San Leon Rice Mill seeking
reimbursement for whatever amount Malayan would have to pay Sio Choy.
PATRANCO was absolved of liability but the CFI adjudged Sio Choy, Malayan and
third-party defendant San Leon Rice Mill, Inc., were held jointly and severally liable.
The court limited Malayan’s liability to P20,000.00, following the terms of the
insurance contract.
On appeal, the CA affirmed the CFI’s judgment but modified it with regard to San
Leon Rice Mill. It ruled that San Leon Rice Mill, Inc. has no obligation to indemnify
or reimburse the Malayan for whatever amount it has been ordered to pay on its policy,
since the Mill is not a privy to the contract of insurance.
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ISSUE/S
(1) Whether Malayan, Sio Choy and San Leon Rice Mill, Inc. are solidarily liable to
respondent Vallejos.
(2) Whether Malayan is entitled to be reimbursed by San Leon Rice Mill, Inc. for
whatever amount petitioner has been adjudged to pay respondent Vallejos on its
insurance policy.
HELD
(1) NO. Only respondents Sio Choy and San Leon Rice Mill, Inc, to the exclusion of
insurer Malayan, are solidarily liable to Vallejos for the damages awarded to Vallejos
as the basis of their liabilities differ.
Sio Choy is made liable to said plaintiff as owner of the ill-fated Willys jeep, pursuant
to Article 2184 of the Civil Code. The basis of liability of San Leon Rice Mill, Inc. on
the other hand, is by being the employer of the driver of the Willys jeep at the time of
the motor vehicle mishap, under Article 2180 of the Civil Code [EMPLOYER].
Thus, Sio Choy and San Leon Rice Mill, Inc. are the principal tortfeasors who are
primarily liable to respondent Vallejos, as the law states that the responsibility of two
or more persons who are liable for a quasi-delict is solidary.
If Malayan were solidarily liable with the tortfeasors by reason of the indemnity
contract against third party liability (under which an insurer can be directly sued by a
third party) this will result in a violation of the principles underlying solidary
obligation and insurance contracts.
In solidary obligation, the creditor may enforce the entire obligation against one of the
solidary debtors. On the other hand, insurance is defined as „a contract whereby one
undertakes for a consideration to indemnify another against loss, damage, or liability
arising from an unknown or contingent event.
If the ruling of the trial court were to be upheld, Malayan may be compelled by
Vallejos to pay the entire obligation of 29,000 notwithstanding the qualification that
its liability shall not exceed 20k.
While it is true that where the insurance contract provides for indemnity against
liability to third persons, such third persons can directly sue the insurer. However, it
does not mean that the insurer can be held solidarily liable with the insured and/or the
other parties found at fault. The liability of the insurer is based on contract; that of the
insured is based on tort.
(2) YES, this follows the principle of subrogation in insurance contracts.
OBLICON
When the insurance company pays for the loss, such payment operates as an equitable
assignment to the insurer of the property and all remedies which the insured may have
for the recovery thereof. That right is not dependent upon, nor does it grow out of, any
privity of contract, or upon written assignment of claim, and payment to the insured
makes the insurer an assignee in equity.
Malayan, upon paying respondent Vallejos the amount of not exceeding P20,000.00,
shall become the subrogee of the insured, the respondent Sio Choy; as such, it is
subrogated to whatever rights the latter has against respondent San Leon Rice Mill,
Inc. Article 1217 of the Civil Code gives to a solidary debtor who has paid the entire
obligation the right to be reimbursed by his co-debtors for the share which corresponds
to each.
Thus, only respondents Sio Choy and San Leon Rice Mill, Inc. are solidarily liable to
the respondent Martin C. Vallejos for the amount of P29,103.00. Vallejos may enforce
the entire obligation on only one of said solidary debtors.
If Sio Choy as solidary debtor is made to pay for the entire obligation (P29,103.00)
and petitioner, as insurer of Sio Choy, is compelled to pay P20,000.00 of said entire
obligation, petitioner would be entitled, as subrogee of Sio Choy as against San Leon
Rice Mills, Inc., to be reimbursed by the latter in the amount of P14,551.50 (which is
1/2 of P29,103.00 )
RCBC v CA
G.R. No. 85396 October 27, 1989
Melencio-Herrera, J
Facts:
In 1979, Alfredo Ching signed a 'Comprehensive Surety Agreement' with RCBC,
binding himself to jointly and severally guarantee the prompt payment of all Philippine
Blooming Mills [PBM] obligations owing RCBC in the aggregate sum of Forty
Million (P40,000,000.00) Pesos.
In 1980, PBM filed several applications for letters of credit with RCBC. Everything
being in order, RCBC opened the corresponding letters of credit and imported various
goods for PBM's account. In due time the imported goods arrived and were released,
in trust, to PBM who acknowledged receipt thereof through various trust receipts. All
in all, PBM's obligations stood at P7,982,649.08.
Less than a year later, RCBC filed a Complaint for collection of said sum against
respondents PBM and Alfredo Ching with the then Court of First Instance of Pasig.
Upon filing of a bond satisfactory to the Court, a Writ of Preliminary Attachment was
issued against the assets and properties of respondents PBM and Ching on the same
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day. However it was eventually lifted in view of a counter-bond filed by PBM and
Ching.
Meanwhile, PBM filed a Petition for Suspension of Payments with the SEC, seeking
at the same time its rehabilitation.
In an injunctive Order, all actions for claims against PBM pending before any Court
or tribunal, were ordered suspended by the SEC in order to give the Commission the
opportunity to pass upon the feasibility of any rehabilitation plans. Thereafter, SEC
approved the revised rehabilitation plan and ordered its implementation.
RCBC pursued its claims with the Trial Court and filed a Motion for Summary
Judgment. RCBC contended that respondents PBM and Ching had not denied their
indebtedness to RCBC and, therefore, no genuine issue was raised in the pleadings.
The CFI rendered such summary judgment** in RCBC's favor, declaring PBM and
Ching solidarily liable for the 7M.
On appeal, the CA ruled that it was improper for the CFI to have continued with the
proceedings despite the SEC Order of suspension. Thus, it set aside the summary
judgment and ordered the determination of the merits in the case to be held in
abeyance.
Hence in the instant case, RCBC argues that the SEC injunctive Order pertains and
affects only PBM, the corporation under rehabilitation, and that its right, as creditor,
to proceed against respondent Ching, as Surety, is not affected by said Order.
PBM and Ching counter that the rendition of an Order by the SEC implementing
respondent PBM's rehabilitation plan must necessarily benefit the Surety, inasmuch as
payment of PBM obligations must be made pursuant to that plan
ISSUE:
Will a Securities and Exchange Commission (SEC) Order suspending, during the
pendency of a rehabilitation proceeding, payment of all claims against the principal
debtor bar or preclude the creditor from recovering from the surety?
HELD: NO
Where an obligation expressly states a solidary liability, the concurrence of two or
more creditors or two or more debtors in one and the same obligation implies 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 (Article 1207, Civil Code).
The creditor may proceed against any one of the solidary debtors or some or all of
them simultaneously (Article 1216, Civil Code).
OBLICON
That there exists a Comprehensive Surety Agreement between RCBC and respondent
Ching is admitted. There is no escaping the attendant liability that binds respondent
Ching, as Surety. He is charged as an original promissor by virtue of his primary
obligation under the Suretyship Agreement.
That Agreement is bare of words imputing to respondent Ching any liability other than
that of a Surety who binds himself to insure a debt in his personal capacity, lacking
consideration therefor notwithstanding.
That respondent Ching acted for and on behalf of respondent PBM as part of its usual corporate
procedure is not supported by the evidence nor the pleadings on record, nor the Agreement itself
.We can not give any additional meaning to the plain language of the subject agreement. It is
basic that the parties are bound by the terms of their contract, which is the law between them.
The extent of a surety's liability is determined only by the clause of the contract of suretyship.
It cannot be extended by implication, beyond the terms of the contract. Conversely, liability
therefor may not be restricted unless expressly so stated.
The SEC injunctive Order can not effect a suspension of payment of respondent
Surety's due and demandable obligation, it being clear therefrom that the rehabilitation
receivers were limited "to taking custody and control over all the existing assets and
property of PBM." Nothing in said Order puts respondent Ching within its scope.
In fine, the SEC injunctive Order is of no effect as far as the respondent Surety, Alfredo
Ching, is concerned. He can be sued separately to enforce his liability as Surety for
PBM.
Quiombing v CA
Facts:
This case stemmed from a "Construction and Service Agreement" 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.
Thereafter, Quiombing and Manuelita Saligo entered into a second written agreement
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.
Manuelita Saligo then signed a promissory note for P125,363.50 representing the
amount still due from her and her husband to Nicencio Tan Quiombing.
Despite demands however the Saligos failed to pay. Hence, Quiombing filed a
complaint for recovery of the said amount.
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The defendants moved to dismiss the complaint, contending that Biscocho was an
indispensable party and therefore should have been included as a co-plaintiff. The
complaint was dismissed, but without prejudice to the filing of an amended complaint
to include the other solidary creditor as a co-plaintiff.
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.
The CA 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."
 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.'"
ISSUE/S
(1) 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?
HELD: YES
Either solidary creditor may sue by himself. Although he signed the original
Construction and Service Agreement, Biscocho need not be included as a co-plaintiff.
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.
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.
The same work describes the concept of active solidarity thus: The essence of active
solidarity consists in the authority of each creditor to claim and enforce the rights of
OBLICON
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.
Thus, where the obligation of the parties is solidary, either one of the parties is
indispensable, and the other is not even necessary because complete relief may be
obtained from either.
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.
 Article 1212 of the Civil Code provides: 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."
 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.
Republic Planters Bank v CA
G.R. No. 93073 December 21, 1992
Campos, Jr J
Facts:
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In 1979, World Garment Manufacturing, through its board authorized Shozo
Yamaguchi (president) and Fermin Canlas (treasurer) to obtain credit facilities from
Republic Planters Bank (RPB). For this, 9 promissory notes were executed.
The 9 promissory notes were all worded in the same manner. It provided that for value
received, “I/we jointly and severally” promise to pay to the Order of RPB, signd by
Yamaguchi and Canlas.
Worldwide Garment later changed its name to Pinch Manufacturing Corp. The note
became due and no payment was made. RPB eventually sued Yamaguchi and Canlas.
Canlas, in his defense, averred that he should not be held personally liable for such
authorized corporate acts that he performed inasmuch as he signed the promissory
notes in his capacity as officer of the defunct Worldwide Garment Manufacturing. He
further averred that when he signed the same, the promissory notes were in blank.
ISSUE: Whether or not Canlas should be held solidarily liable with Yamaguchi and
Pinch Manufacturing Corp for the promissory notes.
HELD: YES
Under the Negotiable lnstruments Law, persons who write their names on the face of
promissory notes are makers and are liable as such. By signing the notes, the maker
promises to pay to the order of the payee or any holder according to the tenor thereof.
Canlas is one of the makers of the promissory notes. As such, he cannot escape liability
arising therefrom.
An instrument which begins" with "I" ,We" , or "Either of us" promise to, pay, when
signed by two or more persons, makes them solidarily liable. The fact that the singular
pronoun is used indicates that the promise is individual as to each other; meaning that
each of the co-signers is deemed to have made an independent singular promise to pay
the notes in full.
In the case at bar, the solidary liability of private respondent Fermin Canlas is made
clearer and certain, without reason for ambiguity, by the presence of the phrase "joint
and several" as describing the unconditional promise to pay to the order of Republic
Planters Bank. A joint and several note is one in which the makers bind themselves
both jointly and individually to the payee so that all may be sued together for its
enforcement, or the creditor may select one or more as the object of the suit.
A joint and several obligation in common law corresponds to a civil law solidary
obligation; that is, one of several debtors bound in such wise that each is liable for the
entire amount, and not merely for his proportionate share.
OBLICON
The corporation, upon such change in its name, is in no sense a new corporation, nor
the successor of the original corporation. It is the same corporation with a different
name, and its character is in no respect changed. Canlas’ contention that he signed the
same is in blank is self-serving and deserves scant consideration.
Inciong, Jr v CA
Facts:
Philippine Bank of Communications filed a complaint for collection of sum of money
in the amount of 50,000 against Inciong, Jr, Naybe, and Pantanosas in connection with
a promissory note they issued, jointly and severally, in favor of the Bank in exchange
of a loan.
PBC later released Pantanosas from its obligations. Naybe left for Saudi Arabia hence
can’t be issued summons and the complaint against him was subsequently dropped.
Inciong was left to face the suit. He argued that that since the complaint against Naybe
was dropped, and that Pantanosas was released from his obligations, he too should
have been released.
ISSUE: Whether or not Inciong should be held liable.
HELD: Yes.
Inciong is considering himself as a guarantor in the promissory note. And he was
basing his argument based on Article 2080 of the Civil Code which provides that
guarantors are released from their obligations if the creditors shall release their debtors.
It is to be noted however that Inciong did not sign the promissory note as a guarantor.
He signed it as a solidary co-maker.
A guarantor who binds himself in solidum with the principal debtor 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.
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 creditor
(PBC) to determine against whom he will enforce collection. Consequently, the
dismissal of the case against Pontanosas may not be deemed as having discharged
Inciong from liability as well. As regards Naybe, suffice it to say that the court never
acquired jurisdiction over him. Inciong, therefore, may only have recourse against his
co-makers, as provided by law.
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 Tiu v CA
G.R. No. 107481 November 18, 1993
Melo, J
Facts:
George Tiu and her mother, Rosalina Tiu filed an action for reformation of contract,
delivery of personal property, and damages before the RTC against Juan Go and the
Spouses Lim.
They alleged that they obtained a loan from Go for Php300,000 and they agreed to
mortgage their two condomiums. They allegedly also agreed to pledge jewelries and
issued a check as security for the loan. However, Go made them sign a deed of sale
with right to purchase in favor of the Spouses Lim because being a Chinese national,
Go can not carry real property in his name. A contract of lease was also made in favor
of the Tius so they could continue in possession of the condominiums.
When they allegedly tried to exercise their right of redemption, Go refused. Hence
they filed the action for reformation of contract, alleging that what they really intended
to execute was a deed of mortgage, not a deed of sale with right of repurchase.
Go, on the other hand, claimed that the loan was actually for Php1,060,000 which
remains unpaid and that he was only a witness to the deed of sale and had nothing to
do with it. The Tius later admitted that the loan was indeed for Php1,060,000 but
alleged that it was already paid.
Go also filed a third-party complaint against Joaquin Tiu alleging that the latter
received, for himself and on behalf of the Tius, the amount of Php700,000.
The Php1,060,000 loan was evidenced by a receipt signed by Rosalina, while the
Php700,000 was evidence by a receipt signed by Joaquin on behalf of Rosalina.
The Trial Court rendered a summary judgment, ordering Rosalina to pay Php
1,060,000 and dismissing the third-party complaint against Joaquin. The CA affirmed.
Hence in the instant case, the Tius claimed that that it was error for the RTC to render
a summary judgment and insisted on the mortgage. On the other hand, Go contends
that the Tius, together with Joaquin should have been made solidarily liable for the
loan and not just Rosalina.
Issues:
1.) Whether or not the RTC erroneously rendered a summary judgment and should
have granted the reformation of the contract
2.) Whether or not the Tius and Joaquin are solidarily liable
Held: NO
OBLICON
Summary Judgment/Reformation
Summary judgment was properly rendered as there was no genuine issue of fact that
would necessitate formal trial.
 Appellants Tiu admitted not only the due execution, genuineness and authenticity
of the Deed of Sale of Condominium with Right to Repurchase and Contract of
Lease
 They also admitted that they read and understood the contents of said deeds before
they signed the said documents. T
 hey failed to offer any counter-affidavit to controvert the statement of the Notary
Public
No Solidary Liability
The various receipts clearly show that the appellant George Tiu never signed the
receipts nor received any money from appellant Go while appellant Joaquin Tiu signed
and received the money for and in behalf of Rosalina.
And even if they admitted that they received the money, both are not liable in solidum
because there was no express provision in said receipts that appellants George and
Joaquin Tiu should be liable in solidum.
 There is solidary obligation only when the obligation expressly so states or when
the law or nature of the obligation requires solidarity
Assuming arguendo that they admitted their solidary liability, still they are not liable.
 an admission of two debtors in their brief that their liability in the contract is a
solidary one does not convert the joint character of their obligation as appearing
in their contract, for what determines the nature of the obligation is the tenor of
their contract itself, not the admission of the parties.
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 MWSS v Daway
Facts:
In 1997, MWSS granted Maynilad under a Concession Agreement a twenty-year
period to manage and operate, the existing MWSS water delivery and sewerage
services in the West Zone Service Area, for which Maynilad undertook to pay the
corresponding concession fees.
To secure the payment of the concession fees, Maynilad arranged for a three-year
facility with a number of foreign banks, led by Citicorp International Limited, for the
issuance of an Irrevocable Standby Letter of Credit in the amount of US$120,000,000
in favor of MWSS.
In 2000, Maynilad requested MWSS for a mechanism by which it hoped to recover
the losses it incurred as a result of the depreciation of the Philippine Peso against the
US Dollar. Failing to get what it desired, Maynilad issued a Force Majeure and
unilaterally suspended the payment of the concession fees.
In an effort to salvage the Concession Agreement, the parties entered into a
Memorandum of Agreement wherein Maynilad was allowed to recover foreign
exchange losses under a formula agreed upon between them.
However, Maynilad again filed another Force Majeure Notice and, since MWSS could
not agree with the terms of said Notice, the matter was referred to the Appeals Panel
for arbitration. The Appeals Panel ruled in favor of MWSS and ordered Maynilad to
pay the concession fees.
Maynilad then filed a Petition for Rehabilitation with Prayer for Suspension of Actions
and Proceedings filed by MWSS. The RTC granted the petition and issued a
Rehabilitation Stay Order. Thus the RTC thereby stayed enforcement of all claims
against Maynilad, its guarantors and sureties not solidarily liable with Maynilad.
MWSS then submitted a written notice to Citicorp International saying that that by
virtue of Maynilads failure to perform its obligations under the Concession
Agreement, it was drawing on the Irrevocable Standby Letter of Credit and thereby
demanded payment.
The RTC then issued the appealed decision in this case, where it ruled that the notice
sent by MWSS to Citicorp violated the Rehabilitation Stay Order it previously ordered
and ordered MWSS to withdraw the notice.
MWSS contends that the Rehabilitation Stay Order does not affect its claim against
the Banks since the liability of the Bank and Maynilad is solidary. The L/C, not
OBLICON
forming part of the assets of Maynilad, is outside the scope of the rehabilitation stay
order.
On the other hand, Maynilad insists that there is nothing in the L/C nor in law nor in
the nature of the obligation that would show that the bank is solidarily liable with
Maynilad.
Issue: did the rehabilitation court sitting as such, act in excess of its authority or
jurisdiction when it enjoined herein petitioner from seeking the payment of the
concession fees from the banks that issued the Irrevocable Standby Letter of Credit in
its favor and for the account of respondent Maynilad?
Held: YES
The claim is not one against the debtor but against an entity that respondent Maynilad
has procured to answer for its non-performance of certain terms and conditions of the
Concession Agreement, particularly the payment of concession fees.
The concept of guarantee vis--vis the concept of an irrevocable letter of credit are
inconsistent with each other.
 The guarantee theory destroys the independence of the banks responsibility from
the contract upon which it was opened and the nature of both contracts is mutually
in conflict with each other.
 In contracts of guarantee, the guarantors obligation is merely collateral and it
arises only upon the default of the person primarily liable.
 On the other hand, in an irrevocable letter of credit, the bank undertakes a primary
obligation.
o letter of credit - an engagement by a bank or other person made at the request
of a customer that the issuer shall honor drafts or other demands of payment
upon compliance with the conditions specified in the credit.
They are in effect absolute undertakings to pay the money advanced or the amount for
which credit is given on the faith of the instrument.
They are primary obligations and not accessory contracts and while they are security
arrangements, they are not converted thereby into contracts of guaranty.
What distinguishes letters of credit from other accessory contracts, is the engagement
of the issuing bank to pay the seller once the draft and other required shipping
documents are presented to it. They are definite undertakings to pay at sight once the
documents stipulated therein are presented.
The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules, as provided as well in
the Rehabilitation Stay Order, does not apply to herein petitioner as the prohibition is
on the enforcement of claims against guarantors or sureties of the debtors whose
ZABALA I-E
obligations are not solidary with the debtor. The participating banks obligation are
solidary with respondent Maynilad in that it is a primary, direct, definite and an
absolute undertaking to pay and is not conditioned on the prior exhaustion of the
debtors assets. These are the same characteristics of a surety or solidary obligor.
Being solidary, the claims against them can be pursued separately from and
independently of the rehabilitation case.
Thus, except when a letter of credit specifically stipulates otherwise, the obligation of
the banks issuing letters of credit are solidary with that of the person or entity
requesting for its issuance, the same being a direct, primary, absolute and definite
undertaking to pay the beneficiary upon the presentation of the set of documents
required therein.
Great Asian Sales Center Corp v CA
G.R. No. 105774. April 25, 2002
Carpio, J
Facts:
Great Asian is engaged in the business of buying and selling household appliances. In
1981, it authorized its Treasurer and Gen Manager, Arsenio, by virtue of two board
resolutions, to secure a loan from Bancasia and to sign all papers and documents
necessary to secure such loan. On the second Board Reso, the BOD of Great Asian
authorized Great Asian to secure a discounting line with Bancasia.
Thereafter, Tan Chiong Lin, the President of Great Asian, signed two surety
agreements to guarantee, solidarily, the debts of Great Asian to Bancasia.
Great Asian then signed 4 Deeds of Assignment of Receivables to Bancasia, assigning
15 post-dated checks.
 The Deeds of Assignment enabled Great Asian to generate instant cash from its
fifteen checks, which were still not due and demandable then.
 In short, instead of waiting for the maturity dates of the fifteen postdated checks,
Great Asian sold the checks to Bancasia at less than the total face value of the
checks.
 In exchange for receiving an amount less than the face value of the checks, Great
Asian obtained immediately much needed cash.
 Over three months, Great Asian entered into four transactions of this nature with
Bancasia, showing that Great Asian availed of a discounting line with Bancasia.
The checks, however, were dishonored. Bancasia then, through its lawyer, sent Tan
Chong Lin a letter, notifying him of the dishonor and demanding payment from him.
However, neither Great Asian nor Tan Chong Lin paid Bancasia the dishonored
checks.
OBLICON
Hence, Bancasia filed a complaint for collection of a sum of money against Great
Asian and Tan Chiong Lin. The trial court, as sustained by the CA, adjudged Great
Asian and Tan Chiong Lin solidarily liable for Php1, 042, 005.
In the instant case, Tan Chiong Lin contends that the warranties under the Deeds of
Assignment enlarged or increased his risks under the Surety Agreements. Thus, his
obligation being materially altered, he is released from any liability to Bancasia (may
novation daw). And pursuant to Art 1215, as a solidary debtor, the novation made by
the creditor extinguished his obligation (surety agreement)
Issue: whether or not Tan Chiong Lin is liable to Grean Asian under the Surety
Agreements
Held: YES
The warranties under the Deeds of Assignment are the usual warranties made by one
who discounts receivables with a financing company or bank. The Surety Agreements
uniformly state that Great Asian Sales Center x x x has obtained and/or desires to
obtain loans, overdrafts, discounts and/or other forms of credits from Bancasia.
Tan Chong Lin was clearly on notice that he was holding himself as surety of Great
Asian which was discounting postdated checks issued by its buyers of goods and
merchandise.
Moreover, Tan Chong Lin, as President of Great Asian, cannot feign ignorance of
Great Asians business activities or discounting transactions with Bancasia. Thus, the
warranties do not increase or enlarge the risks of Tan Chong Lin under the Surety
Agreements. There is, moreover, no novation of the debt of Great Asian that would
warrant release of the surety.
In any event, the provisions of the Surety Agreements are broad enough to include the
obligations of Great Asian to Bancasia under the warranties.
The stipulations in the Surety Agreements undeniably mandate the solidary liability of
Tan Chong Lin with Great Asian. Moreover, the stipulations in the Surety Agreements
are sufficiently broad, expressly encompassing all the notes, drafts, bills of exchange,
overdraft and other obligations of every kind which the PRINCIPAL may now or may
hereafter owe the Creditor. Consequently, Tan Chong Lin must be held solidarily
liable with Great Asian for the nonpayment of the fifteen dishonored checks, including
penalty and attorneys fees in accordance with the Deeds of Assignment.
ZABALA I-E
 PNB v Independent Planters
G.R. No. L-28046 May 16, 1983
Plana, J
Facts:
PNB filed a complaint for collection of sum of money before the CFI against several
solidary debtors, including Valencia. The complaint, however, was dismissed by CFI
when Valencia died during the pendency of the case.
The CFI ruled that the complaint should be prosecuted in the testate or intestate
proceeding for the settlement of the estate of Valencia, citing Section 06 Rule 86 of
the Rules of Court. The said provision provides that:
“where the obligation of the decedent is solidary with another debtor, the claim shall
be filed against the decedent as if he were the only debtor, without prejudice to the
right of the estate to recover contribution from the other debtor.”
Thus, in the instant case, PNB invokes its right of recourse against one, some or all of
its solidary debtors under Art 1216.
Issue: whether in an action for collection of a sum of money based on contract against
all the solidary debtors, the death of one defendant deprives the court of jurisdiction to
proceed with the case against the surviving defendants.
Held: NO
Article 1216 grants the creditor the substantive right to seek satisfaction of his credit
from one, some or all of his solidary debtors, as he deems fit or convenient for the
protection of his interests.
If, after instituting a collection suit based on contract against some or all of them and,
during its pendency, one of the defendants dies, the court retains jurisdiction to
continue the proceedings and decide the case in respect of the surviving defendants.
A cursory perusal of Section 6, Rule 86 of the Revised Rules of Court reveals that
nothing therein prevents a creditor from proceeding against the surviving solidary
debtors. Said provision merely sets up the procedure in enforcing collection in case a
creditor chooses to pursue his claim against the estate of the deceased solidary, debtor.
OBLICON
Universal Motors Corp v CA
G.R. No. L-47432 January 27, 1992
Medialdea, J
Facts:
In 1962 private respondents Rafael Verendia, Teodoro Galicia and Marcelina Galicia
purchased from petitioner Universal Motors Corporation two (2) Mercedes Benz
trucks at a cash price of P33,608.27 each payable within ninety (90) days.
Private respondents then failed to pay the cash price within the 90-day period.
However, they re-scheduled their account giving them 30 months to comply with
payment.
Private respondents executed a promissory note in favor of the petitioner covering the
re-scheduled account
.
But despite repeated demands, the private respondents failed to comply with their
foregoing undertaking. Hence, Universal Motors commenced a complaint for the
recovery of the unpaid balance with the Court of First Instance of Manila.
The lower court ordered respondents to pay, jointly and severally to the Plaintiff,
Universal Motors Corporation, the sum of P47,732.35, with interest.
Only respondent Verendia appealed, contending that he actually overpaid. The
decision was reversed and set aside and ordered restitution to the defendants by the
plaintiff of whatever amounts received in excess of the amount due under the
promissory note, with interest at the legal rate from the date with overpayment.
In the instant case Universal Motors contends that the appealed decision should apply
only to Verendia and not to the other debtors since as to them, the CFI decision had
already become final and executory.
ISSUES:
WON the result of the appeal of respondent Verendia will inure to the benefit of the
other respondents who have not appealed the decision.
HELD: YES, the decision will inure to the benefit of the other respondents
The Court will not allow the absurd situation where a co-defendant who is adjudged
to be primarily liable for sums of money and for tort would be charged for an amount
lesser than what its co- defendant is bound to pay.
Such a situation runs counter to the principle of solidarity in obligations as between
co-defendants established by a judgment for recovery of sum of money and damages.
ZABALA I-E
It is obvious that the respondent court committed no error in ruling that its decision
inures to the benefit of all the private respondents regardless of the fact that only one
appealed.
It is erroneous to rule that the decision of the trial court could be reversed as to the
appealing private respondent and continue in force against the other private
respondents. The latter could not remain bound after the former had been released;
although the other private respondents had not joined in the appeal, the decision
rendered by the respondent court inured to their benefit.
When the obligation of the other solidary debtors is so dependent on that of their co-
solidary debtor, the release of the one who appealed, provided it be not on grounds
personal to such appealing private respondent, operates as well as to the others who
did not appeal. It is for this reason, that a decision or judgment in favor of the private
respondent who appealed can be invoked as res judicata by the other private
respondents.
SBTC v Cuenca
G.R. No. 138544 October 3, 2000
Panganiban, J
Facts:
In 1980, SBTC granted Sta. Ines Melale Corp (SIMC) a credit line in the amount of
Php8 million effective until November 30 1981.
To secure the payment of amounts drawn by SIMC, SIMC executed a chattel mortgage
over some of its machinery and equipment. Cuenca, its President, likewise issued an
Indemnity Agreement in favor of SBTC whereby he solidarily bound himself to pay
whatever amount SIMC may be indebted to the bank, including renewals and
extensions of the credit accommodation.
4 days prior to the expiration of the credit loan facility, SIMC made a first drawdown
from its credit line in the amount of Php6million. It executed a promissory note
therefor.
Cuenca then resigned as President and Chairman of BOD of SIMC, and his shares
were sold at a public bidding.
Subsequently, SIMC again availed of its credit line and obtained another 6 million
peso loan for which it executed another promissory note.
SIMC however encountered difficulty in paying its amortizations. Hence, pursuant to
its request, SIMC and SBTC entered into a Loan Agreement, which is essentially re-
structure of its indebtedness. The Loan Agreement was entered into without the
consent or knowledge of Cuenca.
OBLICON
SIMC still defaulted in the payment of its restricted loan and hence SBTC filed a
collection of sum of money against SIMC and Cuenca. The Trial Court ruled in favor
of SBTC. Thus, Cuenca appealed to the CA.
The CA however released Cuenca from his liability, ruling that the Loan Agreement
was a novation of the 1980 credit accommodation which in effect extinguished the
Indemnity Agreement having been entered into without the consent or knowledge of
Cuenca.
In the instant case, SBTC contends that there was no nnovation because there was no
absolute incompatibility between the old and the new obligations, and that the latter
did not extinguish the earlier one. It further contends that Cuenca waived its right to
give his consent under the Indemnity Agreement
Issue: whether the 1989 Loan Agreement novated the original credit accommodation
and Cuencas liability under the Indemnity Agreement
Held: YES
An obligation may be extinguished by novation. Novation of a contract is never
presumed. It has been held that in the absence of an express agreement, novation takes
place only when the old and the new obligations are incompatible on every point
Indeed, the following requisites must be established:
(1) there is a previous valid obligation;
(2) the parties concerned agree to a new contract;
(3) the old contract is extinguished; and
(4) there is a valid new contract.
Clearly, the requisites of novation are present in this case.
 The 1989 Loan Agreement extinguished the obligation obtained under the 1980
credit accomodation.
 This is evident from its explicit provision to liquidate the principal and the interest
of the earlier indebtedness and the testimony of the bank officer that the proceeds
of the 1989 Loan Agreement were used to pay-off the original indebtedness.
Furthermore, several incompatibilities between the 1989 Agreement and the 1980
original obligation demonstrate that the two cannot coexist.
 While the 1980 credit accommodation had stipulated that the amount of loan was
not to exceed P8 million, the 1989 Agreement provided that the loan was P12.2
million.
 The periods for payment were also different.
Since the 1989 Loan Agreement had extinguished the original credit accommodation,
the Indemnity Agreement, an accessory obligation, was necessarily extinguished also.
ZABALA I-E
Consent
An essential alteration in the terms of the Loan Agreement without the consent of the
surety extinguishes the latters obligation.

While respondent held himself liable for the credit accommodation or any
modification thereof, such clause should be understood in the context of the P8 million
limit and the November 30, 1981 term.
It did not give the bank or Sta. Ines any license to modify the nature and scope of the
original credit accommodation, without informing or getting the consent of respondent
who was solidarily liable. Taking the banks submission to the extreme, respondent (or
his successors) would be liable for loans even amounting to, say, P100 billion obtained
100 years after the expiration of the credit accommodation, on the ground that he
consented to all alterations and extensions thereof.

Indeed, it has been held that a contract of surety cannot extend to more than what is
stipulated. It is strictly construed against the creditor, every doubt being resolved
against enlarging the liability of the surety

Continuing Surety
Contending that the Indemnity Agreement was in the nature of a continuing surety,
petitioner maintains that there was no need for respondent to execute another surety
contract to secure the 1989 Loan Agreement.

A continuing guaranty is one which covers all transactions, including those arising in
the future, which are within the description or contemplation of the contract of
guaranty, until the expiration or termination thereof.

To repeat, in the present case, the Indemnity Agreement was subject to the two
limitations of the credit accommodation:
(1) that the obligation should not exceed P8 million, and
(2) that the accommodation should expire not later than November 30, 1981.

Hence, it was a continuing surety only in regard to loans obtained on or before the
aforementioned expiry date and not exceeding the total of P8 million.

OBLICON ZABALA I-E

 OBLIGATIONS WITH A PENAL CLAUSE
(Arts. 1226 to 1230)
Bahcrach v Espiritu
G.R. No. 124853. February 24, 1998
Davide, Jr., J
Facts:
The case involves two cases:
First case
the defendant Faustino Espiritu purchased from Bahrach Motor a two-ton White truck
for P11,983.50.
 Paid a 1k downpayment, balance to be paid within the periods agreed upon.
To secure the payment of the balance, the defendants mortgaged the said truck
purchased and, as well as three others other trucks. The two other trucks mortgaged
were co-owned by Faustino with his brother Rosario. Faustino failed to pay
P10,477.82 of the price secured by this mortgage.
Second case
Faustino bought a one-ton White truck from Bahrach motor for the sum of P7,136.50,
and after having deducted the P500 cash payment and the 12 per cent annual interest
on the unpaid principal, obligated himself to make payment of this sum within the
periods agreed upon.
To secure payment, Faustino also mortgaged the truck purchased and two other trucks,
the same that were mortgaged in the purchase of the other truck referred to in the other
case. The defendant failed to pay P4,208.28 of this sum.
In both sales it was agreed that 12 per cent interest would be paid upon the unpaid
portion of the price at the executon of the contracts, and in case of non-payment of the
total debt upon its maturity, 25 per cent thereon, as penalty.
In view of Faustino’s failure to pay, Bahrach foreclosed the mortgages and filed a
complaint. The trial court ordered Fasutino to pay Bahrach the remaining balance of
the two trucks, with interest at the rate of 12%, as well as 25% as penalty each.
Thus in the instant case, Faustino contends that the 25 per cent penalty upon the debt,
in addition to the interest of 12 per cent per annum, makes the contract usurious.
Issue: whether or not the contract is usurious
Held: NO
OBLICON
The Civil Code permits the agreement upon a penalty apart from the interest. Should
there be such an agreement, the penalty does not include the interest, and may be
demanded separetely. The penalty is not to be added to the interest for the
determination of whether the interest exceeds the rate fixed by the law, since said rate
was fixed only for the interest.
But considering that the obligation was partly performed, and making use of the power
given to the court by article 1154 of the Civil Code, this penalty is reduced to 10 per
cent of the unpaid debt.
Robes-Francisco Corp v CFI
G.R. No. L-41093 October 30, 1978
Palma, J
Facts:
In May 1962, Robes Corporation entered into a contract of sale with Millan for a parcel
of land in the amount of 3,864.00 payable in installments. Millan complied with her
obligation and made her final payment of P5,193.63 including interests and expenses
for registration of title. Thereafter, she demanded the execution of a deed of absolute
sale for the property and the TCT.
The TCT was not given but the deed of sale was executed. One of the provisions
therein provides that “in case the VENDOR fails to issue the transfer certificate of
title, it shall bear the obligation to refund to the VENDEE the total amount already
paid for, plus an interest at the rate of 4% per annum.”
Notwithstanding the lapse of 6 months, the Corporation failed to cause the issuance of
the TCT. Hence, Millan filed a complaint for specific performance before the CFI.
The CFI then ordered the corporation to:
1. register the deed of absolute sale and secure the corresponding title within ten days.
2. Should this be impossible said Corporation shall pay Millan the total amount she
paid P5,193.63 with interest at 4% per annum.
3. In either case Robes Corporation is sentenced to pay Millan nominal damages of
P20,000.00 plus P5,000.00 attorney’s fees.
Thus, in the instant case, the Corporation contends that Millan was bound by the 4%
penalty stipulated in the deed of absolute sale, and cannot recover more than what is
agreed upon. It invokes Art 1226 of the Civil Code which 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.
Issue: whether or not Millan is entitled to nominal damages
Held: YES, however the award is reduced to 10, 000.
ZABALA I-E
The contention of the Corporation is devoid of merit. The Corporation would have
been correct if the clause in question were to be considered a penal clause.
However, said clause does not convey any penalty, for even without it, pursuant to
Article 2209 of the Civil Code, the vendee would be entitled to recover the amount
paid by her with legal rate of interest which is even more than the 4% provided for in
the clause.
It is therefore inconceivable that the aforecited provision in the deed of sale is a penal
clause which will preclude an award of damages to the vendee Millan.
Still, the amount of P20,000.00 is excessive under the circumstances since there was
no bad faith or fraud on the part of the Corporation. It expected that arrangements were
possible for the GSIS to make partial releases of the subdivision lots from the overall
real estate mortgage. It was simply unfortunate that petitioner did not succeed in that
regard.
Thus, 10, 000 would be just considering that the Corporation failed to convey the TCT
almost 3 years since the final payment.
Country Bakers v CA
G.R. No. 85161 September 9, 1991
Medialdea, J
Facts:
Oscar Ventanilla Enterprises Corporation (OVEC), as lessor, and Enrique F. Sy, as
lessee, entered into a lease agreement over the ABC Theaters and the land on which
they are situated in Cabanatuan City for a term of 6 years.
After more than two (2) years, the lessor OVEC made demands for the repossession
of the said leased properties in view of the Sy’s arrears in monthly rentals and non-
payment of amusement taxes.
 However, pursuant to Sy’s request for reconsideration, the parties entered into a
Supplemental Agreement whereby the arrears in rental was reduced from125k to
71k.
Still, Sy failed to pay the amusement taxes, notwithstanding the fact that he had been
deducting the amount of P4,000.00 from his monthly rental with the obligation to remit
the said deductions to the city government. As such, demand letters were sent to Sy
demanding payment of the rental arrears and amusement taxes. OVEC warned that
failure to do so would entitle OVEC to re-enter and repossess the properties pursuant
to their lease contract and supplemental agreement.
OBLICON
Yet, Sy still failed to pay the liabilities, and hence OVEC padlocked the gates of the
three theaters and took possession thereof. The deposits made by Sy for the lease were
deemed forfeited by OVEC.
Sy then filed an action for reformation of the lease agreement, damages and injunction.
The injunction was issued because of the 500k bond given by CBISCO and Sy
regained possession and operation of the theaters. Sy argued that the 600k deposit was
too big and that the forfeiture clause stipulated would unjustly enrich OVEC.
OVEC alleged in its answer by way of counterclaims that the forfeiture is pursuant to
their Agreement and that it would lose 50k for every month that the possession and
operation of said three theaters remain with Sy and as well as P500,000.00 for
attorney’s fees.
The RTC held that Sy is not entitled to the reformation of the lease agreement; that the
repossession of the leased premises by OVEC after the cancellation and termination
of the lease and forfeiture of the cash deposit was in accordance with the lease
agreement and the law applicable thereto.
On appeal to the CA, the court affirmed the RTC decision. In the instant case, Sy and
CBISCO that the forfeiture clause stipulated in the lease agreement would unjustly
enrich the respondent OVEC at the expense of Sy and CBISCO — contrary to law,
morals, good customs, public order or public policy.
ISSUE/S
(1) Whether the penalty clauses unjustly enriched OVEC at the expense of Sy.
(2) Whether there can be set-off arising from the damage caused by the injunction
against the remaining cash deposit of Sy.
HELD
(1) NO.
A provision which calls for the forfeiture of the remaining deposit, without prejudice
to any other obligation still owing, in the event of the termination or cancellation of
the agreement by reason of the lessee’s violation of any of the terms and conditions of
the agreement is a penal clause that may be validly entered into.
A penal clause is an accessory obligation which the parties attach to a principal
obligation for the purpose of insuring the performance thereof by imposing on the
debtor a special prestation (generally consisting in the payment of a sum of money) in
case the obligation is not fulfilled or is irregularly or inadequately fulfilled.
GENERAL RULE: in obligations with a penal clause, the penalty shall substitute the
indemnity for damages and the payment of interests in case of non-compliance.
ZABALA I-E
In such case, proof of actual damages suffered by the creditor is not necessary in order
that the penalty may be demanded.
EXCEPTIONS:
1. when there is a stipulation to the contrary;
2. when the obligor is sued for refusal to pay the agreed penalty;
3. when the obligor is guilty of fraud
It is evident that in all said cases, the purpose of the penalty is to punish the obligor.
Therefore, the obligee can recover from the obligor not only the penalty but also the
damages resulting from the non-fulfillment or defective performance of the principal
obligation.
In the case at bar, inasmuch as the forfeiture clause provides that the deposit shall be
deemed forfeited, without prejudice to any other obligation still owing by the lessee to
the lessor, the penalty cannot substitute for the P100,000.00 supposed damage
resulting from the issuance of the injunction against the P290,000.00 remaining cash
deposit. This supposed damage suffered by OVEC was the alleged P10,000.00 a month
increase in rental from P50,000.00 to P60,000.00), which OVEC failed to realize for
ten months from February to November, 1980 in the total sum of P1 00,000.00. This
opportunity cost which was duly proven before the trial court, was correctly made
chargeable by the said court against the injunction bond posted by CBISCO.
(2) NO.
The undertaking assumed by CBISCO under subject injunction refers to “all such
damages as such party may sustain by reason of the injunction if the Court should
finally decide that the Plaintiff was/were not entitled thereto.”
Thus, the respondent Court correctly sustained the trial court in holding that the bond
shall and may answer only for damages which OVEC may suffer as a result of the
injunction.
The arrears in rental, the unmeritted amounts of the amusement tax delinquency, the
amount of P1 00,000.00 (P10,000.00 portions of each monthly rental which were not
deducted from plaintiff s cash deposit from February to November, 1980 after the
forfeiture of said cash deposit on February 11, 1980) and attorney;s fees which were
all charged against Sy were correctly considered by the respondent Court as damages
which OVEC sustained NOT as a result of the injunction.
BALANE NOTE
In case of any of the exception, you pay both the penalty and the entire amount of
damages, because this is more in line with the nature of the penalty clause.
OBLICON
Heirs of Uy Ek Liong v Castillo
G.R. No. 176425 June 05 2013
Perez, J
Facts:
Spouses Felipe and Mauricia Castillo owned 4 parcels of land in Lucena. With the
death of Felipe, a deed of extrajudicial partition over his estate was executed by his
heirs. The subject properties were then used as security by Mauricia in the purchase
of a tractor. It was then sold to ICP and subsequently to PMPCI.
The other heirs then filed an action for the annulment of the transaction. They engaged
in the services of Atty. Zepeda as well as the assistance of Manuel Uy Ek Liong as
financier for the case.
 In exchange, it was stipulated in their agreement that in the event of a favorable
decision, Atty. Zepeda and Manuel would be entitled to a 40% of the all the
realties and/or monetary benefits, gratuities or damages which may be adjudicated
in favor of respondents.
 They likewise entered into a Kasunduan whereby the heirs agreed to sell 60% of
their shares in the subject parcel of land in favor of Manuel for the sum of 180k.
Any party violating the Kasunduan would pay a penalty of 50k, plus atty’s fees
and litigation expenses.
The heirs then obtained a favorable decision from the Court. Hence, they wrote a letter
to petitioners (since Manuel died) informing them that they were now willing to sell
their share for Php500 per sqm or a total of 15 million. Petitioners however insisted on
the 180k purchase price agreed upon in the Kasunduan, and requested the executin of
the necessary Deed of Sale.
The Castillo heirs however refused, calling the Manuel heirs’ attention to their
supposed right to ask for an additional consideration under the Kasuanduan.
Hence the Manuel heirs filed a complaint for specific performance with indemnities
for moral and exemplary damages, attorney’s fees and litigation expenses.
The Manuel heirs contend that the 180k consideration under the Kasunsuan was
inadequate and tantamount to unjust enrichment considering that the current market
value of the parcels of land was 9 million. Petitioners insist on the last paragraph of
the Kasunduan provides that the parties may enter into such other stipulations as would
be necessary to ensure the fruition of the sale.
The RTC rendered a decision finding the Kasunduan valid and binding and ordered
the Manuel heirs to execute the deed of sale as well as to pay 150k as moral and
exemplary damages and attys fees.
The CA however reversed, finding the Kasunduan as invalid and unconscionable.
ZABALA I-E
Issue: whether or not the Kasunduan and the penalty may be enforced, in addition to
the moral and exemplary damages

Held: YES, the Kasunduan and penalty may be enforced, but the moral and
exemplary damages should be removed.

Kasunduan
In the absence of any showing that the parties were able to agree on new stipulations
that would modify their agreement, we find that petitioners and respondents are bound
by the original terms embodied in the Kasunduan.

Obligations arising from contracts, after all, have the force of law between the
contracting parties who are expected to abide in good faith with their contractual
commitments, not weasel out of them.

Penalty and Moral and Exemplary Damages

In the absence of a showing that they expressly reserved the right to pay the penalty in
lieu of the performance of their obligation under the Kasunduan, respondents were
correctly ordered by the RTC to execute and deliver a deed of conveyance over their
60% share in the subject parcels in favor of petitioners.

However, since the parties also fixed liquidated damages in the sum of ₱50,000.00 in
case of breach, we find that said amount should suffice as petitioners' indemnity,
without further need of compensation for moral and exemplary damages. In
obligations with a penal clause, the penalty generally substitutes the indemnity for
damages and the payment of interests in case of non-compliance.

The RTC's award of attorney's fees in the sum of ₱50,000.00 is, however, proper.
Aside from the fact that the penal clause included a liability for said award in the event
of litigation over a breach of the Kasunduan, petitioners were able to prove that they
incurred said sum in engaging the services of their lawyer to pursue their rights and
protect their interests.

OBLICON ZABALA I-E

 Lo v CA
G.R. No. 141434. September 23, 2003
Corona, J
Facts:
At the core of the present controversy are two parcels of land with an office building
constructed thereon, located in Malabon.
Lo acquired the subject parcels of land in an auction sale from the Land Bank of the
Philippines (Land Bank).
Private respondent National Onion Growers Cooperative Marketing Association, Inc.,
an agricultural cooperative, was the occupant of the disputed parcels of land under a
subsisting contract of lease with Land Bank. The lease was valid until December 31,
1995.
Upon the expiration of the lease contract, petitioner demanded that private respondent
vacate the leased premises and surrender its possession to him. Private respondent
refused on the ground that it was, at the time, contesting petitioner’s acquisition of the
parcels of land in question in an action for annulment of sale, redemption and damages.
Hence, Lo filed an action for ejectment before the MTC and asked, inter alia, for the
imposition of the contractually stipulated penalty of P5,000 per day of delay in
surrendering the possession of the property to him.
The MTC rendered judgment in favor of Lo, as affirmed by the RTC. However, the
CA modified the decision, reducing the penalty from 5k to 1k a day.
Thus, in the instant case, Lo contests the alleged lack of authority of the Court of
Appeals to reduce the penalty awarded by the trial court, the same having been
stipulated by the parties in their Contract of Lease.
ISSUE:
W/N the CA erred in reducing the penalty awarded by the trial court, the same having
been stipulated by the parties in their Contract of Lease?
HELD:
NO. The petition has no merit.
Generally, 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.
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Nevertheless, courts may equitably reduce a stipulated penalty in the contract if it is
iniquitous or unconscionable, or if the principal obligation has been partly or
irregularly complied with, under Art 1226 of the Civil Code.
The question of whether a penalty is reasonable or iniquitous is addressed to the sound
discretion of the court and depends on several factors, including, but not limited to, the
following: 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.
In this case, the stipulated penalty was reduced by the appellate court for being
unconscionable and iniquitous.
 As provided in the Contract of Lease, private respondent was obligated to pay a
monthly rent of P30,000.
 On the other hand, the stipulated penalty was pegged at P5,000 for each day of
delay or P150,000 per month, an amount five times the monthly rent.
This penalty was not only exorbitant but also unconscionable, taking into account that
private respondent’s delay in surrendering the leased premises was because of a well-
founded belief that its right of preemption to purchase the subject premises had been
violated. Considering further that private respondent was an agricultural cooperative,
collectively owned by farmers with limited resources, ordering it to pay a penalty of
P150,000 per month on top of the monthly rent of P30,000 would seriously deplete its
income and drive it to bankruptcy.
GSIS v CA
G.R. No. L-52478 October 30, 1986
Paras, J
Facts:
Sps. Nemencio and Josefina Medina applied with GSIS for a loan of P600k. GSIS
approved only the amount of P350k subject to the ff. conditions:
(1) interest rate at 9% annum compounded monthly
(2) any installment that remains due and unpaid shall bear interest at the rate of
9%/12%/month.
Office of the Economic Coordinator reduced the amount to P295k which the Medinas
accepted and executed a real estate mortgage (original mortgage, 4 April 1962) in favor
of GSIS. Upon the request of Medinas, GSIS and the Eco. Coordinator approved the
restoration of the loan to P350k (denominated as Account No. 31055).
Medinas then executed an Amendment of Real Estate Mortgage which states that the
mortgage will now cover the amount of P350k instead of P295k, and the payment of
monthly amortization including principal and interest. Further, all other terms and
ZABALA I-E
conditions in the original mortgage insofar as they are not inconsistent with the
amended mortgage are confirmed, ratified and in full force and effect.
Another loan was approved by GSIS for the amount of P230k on the security of the
same mortgaged properties and to bear interest at 9%/annum.
Medinas defaulted in their payment of the monthly amortization and their fire
insurance premium. GSIS then imposed 9%/12% interest on installment due and
unpaid. GSIS notified and demanded payment from Medinas otherwise it would
foreclose the mortgage.
GSIS filed an application for Foreclosure of Mortgage with the Sheriff of Manila.
Medinas then file with CFI Manila a complaint praying for the issuance of TRO and
writ of preliminary injunction but no TRO/writ of preliminary injunction was issued.
Properties of Medinas were sold at public auction to GSIS as the highest bidder.
Medina then filed and Amended Complaint with CFI praying for the declaration of
nullity of their two real estate mortgage contract with GSIS as well as the extra-judicial
foreclosure.
RTC: Extra-judicial foreclosure null and void and Certificate of Title in favor of GSIS
is of no legal force and effect. Medinas to pay P1, 611.12 in full payment of their
obligation with interest of 9%/annum.
GSIS and Medinas both appealed to CA.
CA: RTC judgment affirmed. GSIS to reimburse P9, 580.00 as overpayment to
Medinas.
Issue: Whether or not the interest rates on the loan accounts of the Medinas are
usurious.
Held: NO
Usury Law applies only to interest by way of compensation for the use or forbearance
of money. Interest by way of damages is governed by Article 2209 of the Civil Code
of the Philippines which provides:
Art. 2209. 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, …
Civil Code permits the agreement upon a penalty apart from the interest. Should there
be such an agreement, the penalty does not include the interest, and as such the two
are different and distinct things which may be demanded separately. Reiterating the
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same principle in the later case of Equitable Banking Corp. (supra), where this Court
held that the stipulation about payment of such additional rate partakes of the nature
of a penalty clause, which is sanctioned by law.
Jison v CA
G.R. No. L-45349 August 15, 1988
Cortes, J
Facts:
Petitioners, the spouses Jison, entered into a Contract to Sell with private respondent,
Robert O. Phillips & Sons, Inc., whereby the latter agreed to sell to the former a lot at
the Victoria Valley Subdivision in Antipolo, Rizal for the agreed price of P55,000.00,
with interest at 8% per annum, payable on an installment basis.
Pursuant to the contract, petitioners paid private respondents a down payment of
P11,000.00 and a monthly installment of P533.85.
Thereafter, due to the failure of petitioners to build a house as provided in the contract,
the stipulated penalty of P5.00 per square meter was imposed to the effect that the
monthly amortization was increased to P707.24.
However, petitioners again failed to pay the monthly installments due. Thus
respondents sent a letter to petitioners calling their attention to the fact that their
account was four months overdue and reminded them of the automatic rescission under
their contract.
When petitioners again failed to pay the monthly installments due, private respondent
returned petitioners' check and informed them that the contract was cancelled when
petitioners failed to pay the monthly installment due, thereby making their account
delinquent for three months.
Petitioners tendered payment for all the installments already due but the tender was
refused. Thus, petitioners countered by filing a complaint for specific performance
with the Court of First Instance of Rizal and consigning the monthly installments due
with the court.
The Trial Court rendered judgment in favor of private respondent, dismissing the
complaint and declaring the contract cancelled and all payments already made by
petitioner forfeited. The CA affirmed.
Issue: whether or not the rescission of the contract and forfeiture of payments already
made were proper
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Held: YES, the rescission and forfeiture was valid. However, the amount to be
forfeited must be reduced.

Rescission: validly made pursuant to their contract and petitioners were given
sufficient notice.

While the resolution of the contract and the forfeiture of the amounts already paid are
valid and binding upon petitioners, the Court is convinced that the forfeiture of the
amount of P5.00 although it includes the accumulated fines for petitioners' failure to
construct a house as required by the contract, is clearly iniquitous considering that the
contract price is only P6,173.15

The forfeiture of fifty percent (50%) of the amount already paid, or P3,283.75 appears
to be a fair settlement.
 In arriving at this amount the Court gives weight to the fact that although
petitioners have been delinquent in paying their amortizations several times to the
prejudice of private respondent, with the cancellation of the contract the
possession of the lot reverts to private respondent who is free to resell it to another
party.

The Court's decision to reduce the amount forfeited finds support in the Civil Code.
As stated in paragraph 3 of the contract, in case the contract is cancelled, the amounts
already paid shall be forfeited in favor of the vendor as liquidated damages. The Code
provides that liquidated damages, whether intended as an indemnity or a penalty, shall
be equitably reduced if they are iniquitous or unconscionable.

Further, in obligations with a penal clause, the judge shall equitably reduce the penalty
when the principal obligation has been partly or irregularly complied with by the
debtor and where the indemnity provided for is essentially a mere penalty for having
for its principal object the enforcement of compliance with the contract.

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