373 Phil. 625
YNARES_SANTIAGO, J.:
“WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendant, ordering the latter to pay the former:On appeal, the Court of Appeals modified the decision of the lower court, as follows:
1) the sum of Nine Hundred Eight Thousand Nine Hundred Sixty Six and 77/100 Pesos (P908,966.77), representing actual and contractual damages, with legal interest thereon from August 4, 1982, when the complaint was filed until fully paid, and
2) the further sum equivalent to fifteen percent (15%) of the total of the foregoing for and as attorney’s fees and litigation expenses.”
“WHEREFORE, appealed judgment is modified as above-indicated and appellant is hereby ordered to pay appellee liquidated damages of P150,000.00, to reimburse the latter the amount of P7,907.68 on subject letters of credit, with interest of six (6) percent per annum from August 4, 1982 on said amounts of P150,000.00 and P7,907.68; and to pay attorney’s fees of P20,000.00. Costs against appellee.”Both DOMEL and NNRMC assail the above-quoted decision in separate petitions which have been consolidated before this Court.
“Experience had shown that it would be more expedient that goods and materials to be delivered must first be inspected so as to avoid additional handling expenses in case the deliveries were rejected because the purchase of the supplies and materials may not conform to what is being specified. If inspections were conducted, the danger and expenses connected therewith for the return of the rejected materials would be minimized. In other words, the need for the inspection cannot be done away to avoid further losses not only on the part of the obligor but also for the benefit of the obligee, although indirectly, in the sense that in case the supplies and materials are rejected the obligee also suffers from the diminished profits.In short, DOMEL claims that NNRMC must first inspect the ordered items before delivery could be made.“x x x x x x x x x
“In other words, because of the fact that the subject supplies were understood to come from the Visayas and parts of far flung Mindanao, there is indeed a need for inspection because several deliveries would be made. This is so because if the inspection is not conducted, what would stop the private respondent from rejecting all deliveries and in such eventuality, as the petitioner herein would be placing said orders from suppliers from Visayas and far flung Mindanao only to be rejected by the private respondent upon delivery; hence, the losses to be shouldered by the petitioner under an inequitable arrangement would be unthinkable. It thus follows then that the inspection is indispensably necessary to give rise to the agreement to supply.”[4]
“20,000 bundles of buri midribs ‘Class A and B; Palawan, Zamboanga, Cotabato origin; 1,000 pcs. per bundle, 6 ft. up”The purchase order[6] for rattan poles contains the following specifications, thus:
“2,000 bundles of buri midribs “Class A and B; Palawan, Zamboanga, Cotabato origin, 1,000 pcs. per bundle 3 ft. - 5 ft.”
“300,000 pieces of rattan poles, Palasan variety, 1-1/4 and up, straightened, cleaned, chemically treated, single, scraped and free from molds, and pinholes, by 14 feet long, Cotabato/Zamboanga origin”The purchase orders were duly noted and confirmed by Mr. Gerardo R. Jose, the Vice President of DOMEL. It is thus clear that DOMEL agreed to provide the buri midribs and the rattan poles in accordance with the specifications provided by NNRMC.
1. DOMEL is liable to NNRMC for the full amount of contractually determined liquidated damages; andIn the assailed decision modifying the decision of the lower court as to the stipulated amount of liquidated damages, the Court of Appeals ratiocinated thus:
2. DOMEL is liable to NNRMC for actual and contractual damages in the total amount of P908,966.77 with legal interest thereon from January 19, 1982 when extrajudicial demand was made, until fully paid and 15% of the foregoing sum for and as attorney’s fees and litigation expenses.
“x x x The lower court did not err in finding a breach of contract on the part of defendant appellant. The mere fact that plaintiff’s representative failed to make the requested inspection of the initial stocks of buri midribs and rattan poles in appellant’s warehouse did not constitute a complete defense or justification for the admitted failure of the appellant to deliver the contracted items. At best, such circumstance alone could merely mitigate defendant-appellant’s liability for the liquidated damages of P2,000.00 per day of delay. As correctly observed by the trial court, even assuming that the 5,000 buri midribs and 2,000 rattan poles then ready for inspection were really available for delivery upon satisfactory inspection thereof, such quantities were shy of what appellant was bound to deliver to appellee. But, of course, it can be perceived that the failure of plaintiff to make the promised inspection could have slowed down or deterred appellant’s efforts to meet its commitment, in view of its uncertainty of the acceptability of its stock of buri midribs and rattan poles. However, such failure of plaintiff to cause the desired inspection of appellant’s stock of buri midribs and rattan poles did not totally excuse appellant from increasing its supply of such items. At the very least, it should have brought samples of the buri midribs and rattan poles it had to the office of appellee in order to make sure that what it was procuring were acceptable to the appellee. It was not enough for appellant to write appellee about the matter. More follow-ups on its part were required under the circumstances. Its failure to do so exposed itself to the inevitable conclusion that it was actually unable to fill-up the quantity and quality of buri midribs and rattan poles contracted for the appellee. Therefore, the failure of plaintiff’s Yatco to make the promised inspection of appellant’s stocks can only serve to mitigate appellant’s civil liability for the breach of contract litigated upon. Instead of requiring appellant to pay the stipulated liquidated damages of P2,000.00 for every day of delay, P1,000.00 per day should suffice under the premises. Conformably, the P300,000.00 of liquidated damages awarded below should be reduced to only P150,000.00.”While we do not agree with the Court of Appeals that the failure of NNRMC to conduct the inspection mitigated DOMEL’s liability for liquidated damages, nevertheless, we agree in the reduction of the amount of liquidated damages to only P150,000.00. The amount of P2,000.00 as penalty for every day of delay is excessive and unconscionable.
Article 1229 of the Civil Code states, thus:In determining whether a penalty clause is “iniquitous and unconscionable,” a court may very well take into account the actual damages sustained by a creditor who was compelled to sue the defaulting debtor, which actual damages would include the interest and penalties the creditor may have had to pay on its own from its funding source.[8] In this case, NNRMC was only able to prove that it incurred the amounts of P5,995.83 as opening charges on the two Letters of Credit and an additional P1,911.85 as amendment charges on the same Letters of Credit. Other than that, NNRMC failed to prove it had suffered actual damages resulting from the nondelivery of the specified buri midribs and rattan poles. In fact, what it allegedly suffered are what it calls “Foregone Interest Income” and “Foregone Profit” from the two Letters of Credit. Such could not be considered as actual damages. We agree with the following observation of the Court of Appeals:
“The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable.”
Article 2227 of the Civil Code likewise states, thus:
“Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable.”
“Necessarily, We discern some merit in the second assignment of error. The trial court erred in holding the appellant liable for P908,966.72 in damages. The said unitemized amounts and various types of damages is too much and has to be reduced within reasonable limits. As already elaborated upon in connection with the first assignment of error, the amount of liquidated damages has to be lessened to P150,000.00. But the charges of P5,995.83 and P1,911.85 on the two letters of credit involved should be reimbursed by appellant (tsn, p. 23, July 13, 1983 hearing). As regards the alleged forgone profits of P206,943.00 testified on by Jose Victorioso as the profit appellee could have realized had appellant been able to supply the goods in question, we consider such amount of expected profit highly conjectural and speculative (p. 24, id.). The aforesaid testimony regarding the matter of profits is utterly lacking of the requisite details on how such huge amount of profits could be made possible. Plaintiff-appellee’s witness did not detail out how such huge amount of gain could have been derived from the would-be exportation of buri midribs and rattan poles. Well-entrenched is the doctrine that actual, compensatory and consequential damages must be proved, and cannot be presumed (Hua Liong Electrical Equipment Corporation v. Reyes 145 SCRA 713). If, as in this case, the proof adduced thereon is flimsy and insufficient, no damages will be allowed (Rubio v. Court of Appeals, 141 SCRA 488). Verily, the testimonial evidence on alleged unrealized profits earlier referred to is not enough to warrant the award of damages appealed from. It is too scanty, vague and unspecified to induce faith and reliance. Absent the needed quantum of proof, We are of the sense that, apart from the aforestated amount of liquidated damages and reimbursement of the charges paid by appellee for the unutilized letters of credit, no other damages can be granted.”WHEREFORE, the Decision of the Court of Appeals in C.A.-G.R. CV No. 08952, dated August 22, 1988, is AFFIRMED in toto.