351 Phil. 664
REGALADO, J.:
Where a party
signs a promissory note as a co-maker and binds herself to be jointly and
severally liable with the principal debtor in case the latter defaults in the
payment of the loan, is such undertaking of the former deemed to be that of a
surety as an insurer of the debt, or of a guarantor who warrants the solvency
of the debtor?
Pursuant to a
promissory note dated March 13, 1990, private respondent M.B. Lending
Corporation extended a loan to the spouses Osmeña and Merlyn Azarraga, together
with petitioner Estrella Palmares, in the amount of P30,000.00 payable
on or before May 12, 1990, with compounded interest at the rate of 6% per annum
to be computed every 30 days from the date thereof.[1] On four occasions after the
execution of the promissory note and even after the loan matured, petitioner
and the Azarraga spouses were able to pay a total of P16,300.00, thereby
leaving a balance of P13,700.00. No payments were made after the last payment on September 26, 1991.[2]
Consequently, on
the basis of petitioner’s solidary liability under the promissory note,
respondent corporation filed a complaint[3] against petitioner Palmares as the
lone party-defendant, to the exclusion of the principal debtors, allegedly by
reason of the insolvency of the latter.
In her Amended
Answer with Counterclaim,[4] petitioner alleged that sometime in
August 1990, immediately after the loan matured, she offered to settle the
obligation with respondent corporation but the latter informed her that they
would try to collect from the spouses Azarraga and that she need not worry
about it; that there has already been a partial payment in the amount of P17,010.00;
that the interest of 6% per month compounded at the same rate per month, as
well as the penalty charges of 3% per month, are usurious and unconscionable;
and that while she agrees to be liable on the note but only upon default of the
principal debtor, respondent corporation acted in bad faith in suing her alone
without including the Azarragas when they were the only ones who benefited from
the proceeds of the loan.
During the
pre-trial conference, the parties submitted the following issues for the
resolution of the trial court: (1) what
the rate of interest, penalty and damages should be; (2) whether the liability
of the defendant (herein petitioner) is primary or subsidiary; and (3) whether
the defendant Estrella Palmares is only a guarantor with a subsidiary liability
and not a co-maker with primary liability.[5]
Thereafter, the
parties agreed to submit the case for decision based on the pleadings filed and
the memoranda to be submitted by them. On November 26, 1992, the Regional Trial Court of Iloilo City, Branch
23, rendered judgment dismissing the complaint without prejudice to the filing
of a separate action for a sum of money against the spouses Osmeña and Merlyn
Azarraga who are primarily liable on the instrument.[6] This was based on the findings of
the court a quo that the filing of the complaint against herein
petitioner Estrella Palmares, to the exclusion of the Azarraga spouses, amounted
to a discharge of a prior party; that the offer made by petitioner to pay the
obligation is considered a valid tender of payment sufficient to discharge a
person’s secondary liability on the instrument; that petitioner, as co-maker,
is only secondarily liable on the instrument; and that the promissory note is a
contract of adhesion.
Respondent Court
of Appeals, however, reversed the decision of the trial court, and rendered
judgment declaring herein petitioner Palmares liable to pay respondent
corporation:
1. The sum ofP13,700.00 representing the outstanding balance still due and owing with interest at six percent (6%) per month computed from the date the loan was contracted until fully paid;
2. The sum equivalent to the stipulated penalty of three percent (3%) per month, of the outstanding balance;
3. Attorney’s fees at 25% of the total amount due per stipulations;
4. Plus costs of suit.[7]
Contrary to the
findings of the trial court, respondent appellate court declared that
petitioner Palmares is a surety since she bound herself to be jointly and
severally or solidarily liable with the principal debtors, the Azarraga
spouses, when she signed as a co-maker. As such, petitioner is primarily liable on the note and hence may be
sued by the creditor corporation for the entire obligation. It also adverted to the fact that petitioner
admitted her liability in her Answer although she claims that the Azarraga
spouses should have been impleaded. Respondent court ordered the imposition of the stipulated 6% interest
and 3% penalty charges on the ground that the Usury Law is no longer
enforceable pursuant to Central Bank Circular No. 905. Finally, it rationalized that even if the
promissory note were to be considered as a contract of adhesion, the same is
not entirely prohibited because the one who adheres to the contract is free to
reject it entirely; if he adheres, he gives his consent.
Hence this
petition for review on certiorari wherein it is asserted that:
A. The Court of Appeals erred in ruling that Palmares acted as surety and is therefore solidarily liable to pay the promissory note.
1. The terms of the promissory note are vague. Its conflicting provisions do not establish Palmares’ solidary liability.
2. The promissory note contains provisions which establish the co-maker’s liability as that of a guarantor.
3. There is no sufficient basis for concluding that Palmares’ liability is solidary.
4. The promissory note is a contract of adhesion and should be construed against M.B. Lending Corporation.
5. Palmares cannot be compelled to pay the loan at this point.
B. Assuming that Palmares’ liability is solidary, the Court of Appeals erred in strictly imposing the interests and penalty charges on the outstanding balance of the promissory note.
The foregoing
contentions of petitioner are denied and contradicted in their material points
by respondent corporation. They are
further refuted by accepted doctrines in the American jurisdiction after which
we patterned our statutory law on suretyship and guaranty. This case then affords us the opportunity to
make an extended exposition on the ramifications of these two specialized
contracts, for such guidance as may be taken therefrom in similar local
controversies in the future.
The basis of
petitioner Palmares’ liability under the promissory note is expressed in this
wise:
ATTENTION TO CO-MAKERS: PLEASE READ WELL
I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan, have fully understood the contents of this Promissory Note for Short-Term Loan:
That as Co-maker, I am fully aware that I shall be jointly and severally or solidarily liable with the above principal maker of this note;
That in fact, I hereby agree that M.B. LENDING CORPORATION may demand payment of the above loan from me in case the principal maker, Mrs. Merlyn Azarraga defaults in the payment of the note subject to the same conditions above-contained.[8]
Petitioner
contends that the provisions of the second and third paragraph are conflicting
in that while the second paragraph seems to define her liability as that of a
surety which is joint and solidary with the principal maker, on the other hand,
under the third paragraph her liability is actually that of a mere guarantor
because she bound herself to fulfill the obligation only in case the principal
debtor should fail to do so, which is the essence of a contract of
guaranty. More simply stated, although
the second paragraph says that she is liable as a surety, the third paragraph
defines the nature of her liability as that of a guarantor. According to petitioner, these are two
conflicting provisions in the promissory note and the rule is that clauses in
the contract should be interpreted in relation to one another and not by parts. In other words, the second paragraph should
not be taken in isolation, but should be read in relation to the third
paragraph.
In an attempt to
reconcile the supposed conflict between the two provisions, petitioner avers
that she could be held liable only as a guarantor for several reasons. First, the words “jointly and
severally or solidarily liable” used in the second paragraph are technical and
legal terms which are not fully appreciated by an ordinary layman like herein
petitioner, a 65-year old housewife who is likely to enter into such
transactions without fully realizing the nature and extent of her
liability. On the contrary, the
wordings used in the third paragraph are easier to comprehend. Second, the law looks upon the contract
of suretyship with a jealous eye and the rule is that the obligation of the
surety cannot be extended by implication beyond specified limits, taking into
consideration the peculiar nature of a surety agreement which holds the surety
liable despite the absence of any direct consideration received from either the
principal obligor or the creditor. Third,
the promissory note is a contract of adhesion since it was prepared by
respondent M.B. Lending Corporation. The note was brought to petitioner partially filled up, the contents
thereof were never explained to her, and her only participation was to sign
thereon. Thus, any apparent ambiguity
in the contract should be strictly construed against private respondent
pursuant to Art. 1377 of the Civil Code.[9]
Petitioner
accordingly concludes that her liability should be deemed restricted by the
clause in the third paragraph of the promissory note to be that of a guarantor.
Moreover,
petitioner submits that she cannot as yet be compelled to pay the loan because
the principal debtors cannot be considered in default in the absence of a
judicial or extrajudicial demand. It is
true that the complaint alleges the fact of demand, but the purported demand
letters were never attached to the pleadings filed by private respondent before
the trial court. And, while petitioner
may have admitted in her Amended Answer that she received a demand letter from
respondent corporation sometime in 1990, the same did not effectively put her
or the principal debtors in default for the simple reason that the latter
subsequently made a partial payment on the loan in September, 1991, a fact
which was never controverted by herein private respondent.
Finally, it is
argued that the Court of Appeals gravely erred in awarding the amount of P2,745,483.39
in favor of private respondent when, in truth and in fact, the outstanding
balance of the loan is only P13,700.00. Where the interest charged on the loan is exorbitant, iniquitous or
unconscionable, and the obligation has been partially complied with, the court
may equitably reduce the penalty[10] on grounds of substantial
justice. More importantly, respondent
corporation never refuted petitioner’s allegation that immediately after the
loan matured, she informed said respondent of her desire to settle the
obligation. The court should,
therefore, mitigate the damages to be paid since petitioner has shown a sincere
desire for a compromise.[11]
After a
judicious evaluation of the arguments of the parties, we are constrained to
dismiss the petition for lack of merit, but to except therefrom the issue anent
the propriety of the monetary award adjudged to herein respondent corporation.
At the outset,
let it here be stressed that even assuming arguendo that the promissory
note executed between the parties is a contract of adhesion, it has been the
consistent holding of the Court that contracts of adhesion are not invalid per
se and that on numerous occasions the binding effects thereof have been
upheld. The peculiar nature of such
contracts necessitate a close scrutiny of the factual milieu to which the
provisions are intended to apply. Hence, just as consistently and unhesitatingly, but without
categorically invalidating such contracts, the Court has construed obscurities
and ambiguities in the restrictive provisions of contracts of adhesion strictly
albeit not unreasonably against the drafter thereof when justified in light of
the operative facts and surrounding circumstances.[12] The factual scenario obtaining in
the case before us warrants a liberal application of the rule in favor of
respondent corporation.
The Civil Code
pertinently provides:
Art. 2047. By guaranty, a person called the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship.
It is a cardinal
rule in the interpretation of contracts that if the terms of a contract are
clear and leave no doubt upon the intention of the contracting parties, the
literal meaning of its stipulation shall control.[13] In the case at bar, petitioner
expressly bound herself to be jointly and severally or solidarily liable with
the principal maker of the note. The
terms of the contract are clear, explicit and unequivocal that petitioner’s
liability is that of a surety.
Her pretension
that the terms “jointly and severally or solidarily liable” contained in the
second paragraph of her contract are technical and legal terms which could not
be easily understood by an ordinary layman like her is diametrically opposed to
her manifestation in the contract that she “fully understood the contents” of
the promissory note and that she is “fully aware” of her solidary liability
with the principal maker. Petitioner
admits that she voluntarily affixed her signature thereto; ergo, she cannot now
be heard to claim otherwise. Any
reference to the existence of fraud is unavailing. Fraud must be established by clear and convincing evidence, mere
preponderance of evidence not even being adequate. Petitioner’s attempt to prove fraud must, therefore, fail as it
was evidenced only by her own uncorroborated and, expectedly, self-serving
allegations.[14]
Having entered
into the contract with full knowledge of its terms and conditions, petitioner
is estopped to assert that she did so under a misapprehension or in ignorance
of their legal effect, or as to the legal effect of the undertaking.[15] The rule that ignorance of the
contents of an instrument does not ordinarily affect the liability of one who
signs it also applies to contracts of suretyship. And the mistake of a surety as to the legal effect of her
obligation is ordinarily no reason for relieving her of liability.[16]
Petitioner would
like to make capital of the fact that although she obligated herself to be
jointly and severally liable with the principal maker, her liability is deemed
restricted by the provisions of the third paragraph of her contract wherein she
agreed “that M.B. Lending Corporation may demand payment of the above loan from
me in case the principal maker, Mrs. Merlyn Azarraga defaults in the payment of
the note,” which makes her contract one of guaranty and not suretyship. The purported discordance is more apparent
than real.
A surety is an
insurer of the debt, whereas a guarantor is an insurer of the solvency of the
debtor.[17] A suretyship is an undertaking that
the debt shall be paid; a guaranty, an undertaking that the debtor shall pay.[18] Stated differently, a surety
promises to pay the principal’s debt if the principal will not pay, while a
guarantor agrees that the creditor, after proceeding against the principal, may
proceed against the guarantor if the principal is unable to pay.[19] A surety binds himself to perform
if the principal does not, without regard to his ability to do so. A guarantor, on the other hand, does not
contract that the principal will pay, but simply that he is able to do so.[20] In other words, a surety undertakes
directly for the payment and is so responsible at once if the principal debtor
makes default, while a guarantor contracts to pay if, by the use of due
diligence, the debt cannot be made out of the principal debtor.[21]
Quintessentially,
the undertaking to pay upon default of the principal debtor does not
automatically remove it from the ambit of a contract of suretyship. The second and third paragraphs of the
aforequoted portion of the promissory note do not contain any other condition for
the enforcement of respondent corporation’s right against petitioner. It has not been shown, either in the
contract or the pleadings, that respondent corporation agreed to proceed
against herein petitioner only if and when the defaulting principal has become
insolvent. A contract of suretyship, to
repeat, is that wherein one lends his credit by joining in the principal
debtor’s obligation, so as to render himself directly and primarily responsible
with him, and without reference to the solvency of the principal.[22]
In a desperate
effort to exonerate herself from liability, petitioner erroneously invokes the
rule on strictissimi juris, which holds that when the meaning of a
contract of indemnity or guaranty has once been judicially determined under the
rule of reasonable construction applicable to all written contracts, then the
liability of the surety, under his contract, as thus interpreted and construed,
is not to be extended beyond its strict meaning.[23] The rule, however, will apply only
after it has been definitely ascertained that the contract is one of suretyship
and not a contract of guaranty. It
cannot be used as an aid in determining whether a party’s undertaking is
that of a surety or a guarantor.
Prescinding from
these jurisprudential authorities, there can be no doubt that the stipulation
contained in the third paragraph of the controverted suretyship contract merely
elucidated on and made more specific the obligation of petitioner as generally
defined in the second paragraph thereof. Resultantly, the theory advanced by petitioner, that she is merely a
guarantor because her liability attaches only upon default of the principal
debtor, must necessarily fail for being incongruent with the judicial
pronouncements adverted to above.
It is a
well-entrenched rule that in order to judge the intention of the contracting
parties, their contemporaneous and subsequent acts shall also be principally
considered.[24] Several attendant factors in that
genre lend support to our finding that petitioner is a surety. For one, when petitioner was informed about
the failure of the principal debtor to pay the loan, she immediately offered to
settle the account with respondent corporation. Obviously, in her mind, she knew that she was directly and
primarily liable upon default of her principal. For another, and this is most revealing, petitioner presented the
receipts of the payments already made, from the time of initial payment up to
the last, which were all issued in her name and of the Azarraga spouses.[25] This can only be construed to mean
that the payments made by the principal debtors were considered by respondent
corporation as creditable directly upon the account and inuring to the benefit
of petitioner. The concomitant and simultaneous
compliance of petitioner’s obligation with that of her principals only goes to
show that, from the very start, petitioner considered herself equally bound by
the contract of the principal makers.
In this regard,
we need only to reiterate the rule that a surety is bound equally and absolutely
with the principal,[26] and as such is deemed an original
promisor and debtor from the beginning.[27] This is because in suretyship there
is but one contract, and the surety is bound by the same agreement which binds
the principal.[28] In essence, the contract of a
surety starts with the agreement,[29] which is precisely the situation
obtaining in this case before the Court.
It will further
be observed that petitioner’s undertaking as co-maker immediately follows the
terms and conditions stipulated between respondent corporation, as creditor,
and the principal obligors. A surety is
usually bound with his principal by the same instrument, executed at the same
time and upon the same consideration; he is an original debtor, and his
liability is immediate and direct.[30] Thus, it has been held that where a
written agreement on the same sheet of paper with and immediately following the
principal contract between the buyer and seller is executed simultaneously
therewith, providing that the signers of the agreement agreed to the terms of
the principal contract, the signers were “sureties” jointly liable with the
buyer.[31] A surety usually enters into the
same obligation as that of his principal, and the signatures of both usually
appear upon the same instrument, and the same consideration usually supports
the obligation for both the principal and the surety.[32]
There is no
merit in petitioner’s contention that the complaint was prematurely filed
because the principal debtors cannot as yet be considered in default, there
having been no judicial or extrajudicial demand made by respondent
corporation. Petitioner has agreed that
respondent corporation may demand payment of the loan from her in case the
principal maker defaults, subject to the same conditions expressed in the promissory
note. Significantly, paragraph (G) of
the note states that “should I fail to pay in accordance with the above
schedule of payment, I hereby waive my right to notice and demand.” Hence, demand by the creditor is no longer
necessary in order that delay may exist since the contract itself already
expressly so declares.[33] As a surety, petitioner is equally
bound by such waiver.
Even if it were
otherwise, demand on the sureties is not necessary before bringing suit against
them, since the commencement of the suit is a sufficient demand.[34] On this point, it may be worth
mentioning that a surety is not even entitled, as a matter of right, to be
given notice of the principal’s default. Inasmuch as the creditor owes no duty of active diligence to take care
of the interest of the surety, his mere failure to voluntarily give information
to the surety of the default of the principal cannot have the effect of
discharging the surety. The surety is
bound to take notice of the principal’s default and to perform the obligation. He cannot complain that the creditor has not
notified him in the absence of a special agreement to that effect in the
contract of suretyship.[35]
The alleged
failure of respondent corporation to prove the fact of demand on the principal
debtors, by not attaching copies thereof to its pleadings, is likewise
immaterial. In the absence of a
statutory or contractual requirement, it is not necessary that payment or
performance of his obligation be first demanded of the principal, especially
where demand would have been useless; nor is it a requisite, before proceeding
against the sureties, that the principal be called on to account.[36] The underlying principle therefor
is that a suretyship is a direct contract to pay the debt of another. A surety is liable as much as his principal
is liable, and absolutely liable as soon as default is made, without any demand
upon the principal whatsoever or any notice of default.[37] As an original promisor and debtor
from the beginning, he is held ordinarily to know every default of his
principal.[38]
Petitioner
questions the propriety of the filing of a complaint solely against her to the
exclusion of the principal debtors who allegedly were the only ones who
benefited from the proceeds of the loan. What petitioner is trying to imply is that the creditor, herein
respondent corporation, should have proceeded first against the principal
before suing on her obligation as surety. We disagree.
A creditor’s
right to proceed against the surety exists independently of his right to
proceed against the principal.[39] Under Article 1216 of the Civil
Code, the creditor may proceed against any one of the solidary debtors or some
or all of them simultaneously. The rule,
therefore, is that if the obligation is joint and several, the creditor has the
right to proceed even against the surety alone.[40] Since, generally, it is not
necessary for a creditor to proceed against a principal in order to hold the
surety liable, where, by the terms of the contract, the obligation of the
surety is the same as that of the principal, then as soon as the principal is
in default, the surety is likewise in default, and may be sued immediately and
before any proceedings are had against the principal.[41] Perforce, in accordance with the
rule that, in the absence of statute or agreement otherwise, a surety is
primarily liable, and with the rule that his proper remedy is to pay the debt
and pursue the principal for reimbursement, the surety cannot at law, unless
permitted by statute and in the absence of any agreement limiting the
application of the security, require the creditor or obligee, before proceeding
against the surety, to resort to and exhaust his remedies against the
principal, particularly where both principal and surety are equally bound.[42]
We agree with
respondent corporation that its mere failure to immediately sue petitioner on
her obligation does not release her from liability. Where a creditor refrains from proceeding against the principal,
the surety is not exonerated. In other
words, mere want of diligence or forbearance does not affect the creditor’s
rights vis-à-vis the surety, unless the surety requires him by appropriate
notice to sue on the obligation. Such
gratuitous indulgence of the principal does not discharge the surety whether
given at the principal’s request or without it, and whether it is yielded by
the creditor through sympathy or from an inclination to favor the principal, or
is only the result of passiveness. The
neglect of the creditor to sue the principal at the time the debt falls due
does not discharge the surety, even if such delay continues until the principal
becomes insolvent.[43] And, in the absence of proof of
resultant injury, a surety is not discharged by the creditor’s mere statement
that the creditor will not look to the surety,[44] or that he need not trouble
himself.[45] The consequences of the delay, such
as the subsequent insolvency of the principal,[46] or the fact that the remedies
against the principal may be lost by lapse of time, are immaterial.[47]
The raison
d’être for the rule is that there is nothing to prevent the creditor from
proceeding against the principal at any time.[48] At any rate, if the surety is
dissatisfied with the degree of activity displayed by the creditor in the
pursuit of his principal, he may pay the debt himself and become subrogated to
all the rights and remedies of the creditor.[49]
It may not be
amiss to add that leniency shown to a debtor in default, by delay permitted by
the creditor without change in the time when the debt might be demanded, does
not constitute an extension of the time of payment, which would release the
surety.[50] In order to constitute an extension
discharging the surety, it should appear that the extension was for a definite
period, pursuant to an enforceable agreement between the principal and the
creditor, and that it was made without the consent of the surety or with a
reservation of rights with respect to him. The contract must be one which precludes the creditor from, or at least
hinders him in, enforcing the principal contract within the period during which
he could otherwise have enforced it, and which precludes the surety from paying
the debt.[51]
None of these
elements are present in the instant case. Verily, the mere fact that respondent corporation gave the principal
debtors an extended period of time within which to comply with their obligation
did not effectively absolve herein petitioner from the consequences of her
undertaking. Besides, the burden is on
the surety, herein petitioner, to show that she has been discharged by some act
of the creditor,[52] herein respondent corporation,
failing in which we cannot grant the relief prayed for.
As a final
issue, petitioner claims that assuming that her liability is solidary, the
interests and penalty charges on the outstanding balance of the loan cannot be
imposed for being illegal and unconscionable. Petitioner additionally theorizes that respondent corporation intentionally
delayed the collection of the loan in order that the interests and penalty
charges would accumulate. The
statement, likewise traversed by said respondent, is misleading.
In an affidavit[53] executed by petitioner, which was
attached to her petition, she stated, among others, that:
8. During the latter part of 1990, I was surprised to learn that Merlyn Azarraga’s loan has been released and that she has not paid the same upon its maturity. I received a telephone call from Mr. Augusto Banusing of MB Lending informing me of this fact and of my liability arising from the promissory note which I signed.
9. I requested Mr. Banusing to try to collect first from Merlyn and Osmeña Azarraga. At the same time, I offered to pay MB Lending the outstanding balance of the principal obligation should he fail to collect from Merlyn and Osmeña Azarraga. Mr. Banusing advised me not to worry because he will try to collect first from Merlyn and Osmeña Azarraga.
10. A year thereafter, I received a telephone call from the secretary of Mr. Banusing who reminded that the loan of Merlyn and Osmeña Azarraga, together with interest and penalties thereon, has not been paid. Since I had no available funds at that time, I offered to pay MB Lending by delivering to them a parcel of land which I own. Mr. Banusing’s secretary, however, refused my offer for the reason that they are not interested in real estate.
11. In March 1992, I received a copy of the summons and of the complaint filed against me by MB Lending before the RTC-Iloilo. After learning that a complaint was filed against me, I instructed Sheila Gatia to go to MB Lending and reiterate my first offer to pay the outstanding balance of the principal obligation of Merlyn Azarraga in the amount ofP30,000.00.
12. Ms. Gatia talked to the secretary of Mr. Banusing who referred her to Atty. Venus, counsel of MB Lending.
13. Atty. Venus informed Ms. Gatia that he will consult Mr. Banusing if my offer to pay the outstanding balance of the principal obligation loan (sic) of Merlyn and Osmeña Azarraga is acceptable. Later, Atty. Venus informed Ms. Gatia that my offer is not acceptable to Mr. Banusing.
The purported
offer to pay made by petitioner can not be deemed sufficient and substantial in
order to effectively discharge her from liability. There are a number of circumstances which conjointly inveigh
against her aforesaid theory.
1. Respondent corporation cannot
be faulted for not immediately demanding payment from petitioner. It was petitioner who initially requested
that the creditor try to collect from her principal first, and she offered to
pay only in case the creditor fails to collect. The delay, if any, was occasioned by the fact that respondent
corporation merely acquiesced to the request of petitioner. At any rate, there was here no actual offer
of payment to speak of but only a commitment to pay if the principal does not
pay.
2. Petitioner made a second attempt to settle the
obligation by offering a parcel of land which she owned. Respondent corporation was acting well
within its rights when it refused to accept the offer. The debtor of a thing cannot compel the
creditor to receive a different one, although the latter may be of the same
value, or more valuable than that which is due.[54] The obligee is entitled to demand fulfillment of the
obligation or performance as stipulated. A change of the object of the obligation would constitute novation
requiring the express consent of the parties.[55]
3. After the complaint was filed against her, petitioner reiterated her offer to pay the outstanding balance of the
obligation in the amount of P30,000.00 but the same was likewise
rejected. Again, respondent corporation
cannot be blamed for refusing the amount being offered because it fell way
below the amount it had computed, based on the stipulated interests and penalty
charges, as owing and due from herein petitioner. A debt shall not be understood to have been paid unless the thing
or service in which the obligation consists has been completely delivered or
rendered, as the case may be.[56] In other words, the prestation must be fulfilled
completely. A person entering into a
contract has a right to insist on its performance in all particulars.[57]
Petitioner
cannot compel respondent corporation to accept the amount she is willing to pay
because the moment the latter accepts the performance, knowing its
incompleteness or irregularity, and without expressing any protest or
objection, then the obligation shall be deemed fully complied with.[58] Precisely, this is what respondent
corporation wanted to avoid when it continually refused to settle with
petitioner at less than what was actually due under their contract.
This
notwithstanding, however, we find and so hold that the penalty charge of 3% per
month and attorney’s fees equivalent to 25% of the total amount due are highly
inequitable and unreasonable.
It must be
remembered that from the principal loan of P30,000.00, the amount of P16,300.00
had already been paid even before the filing of the present case. Article 1229 of the Civil Code provides that
the court shall equitably reduce the penalty when the principal obligation has
been partly or irregularly complied with by the debtor. And, even if there has been no performance,
the penalty may also be reduced if it is iniquitous or leonine.
In a case
previously decided by this Court which likewise involved private respondent
M.B. Lending Corporation, and which is substantially on all fours with the one
at bar, we decided to eliminate altogether the penalty interest for being
excessive and unwarranted under the following rationalization:
Upon the matter of penalty interest, we agree with the Court of Appeals that the economic impact of the penalty interest of three percent (3%) per month on total amount due but unpaid should be equitably reduced. The purpose for which the penalty interest is intended - that is, to punish the obligor - will have been sufficiently served by the effects of compounded interest. Under the exceptional circumstances in the case at bar, e.g., the original amount loaned was onlyP15,000.00; partial payment ofP8,600.00 was made on due date; and the heavy (albeit still lawful) regular compensatory interest, the penalty interest stipulated in the parties’ promissory note is iniquitous and unconscionable and may be equitably reduced further by eliminating such penalty interest altogether.[59]
Accordingly, the penalty interest of 3% per month being imposed on
petitioner should similarly be eliminated.
Finally, with
respect to the award of attorney’s fees, this Court has previously ruled that
even with an agreement thereon between the parties, the court may nevertheless
reduce such attorney’s fees fixed in the contract when the amount thereof
appears to be unconscionable or unreasonable.[60] To that end, it is not even
necessary to show, as in other contracts, that it is contrary to morals or
public policy.[61] The grant of attorney’s fees
equivalent to 25% of the total amount due is, in our opinion, unreasonable and
immoderate, considering the minimal unpaid amount involved and the extent of
the work involved in this simple action for collection of a sum of money. We, therefore, hold that the amount of P10,000.00
as and for attorney’s fee would be sufficient in this case.[62]
WHEREFORE, the judgment appealed from is
hereby AFFIRMED, subject to the MODIFICATION that the penalty interest of 3%
per month is hereby deleted and the award of attorney’s fees is reduced to P10,000.00.
SO ORDERED.
[1] Annex C,
Petition; Rollo, 49.
[2] Rollo,
38.
[3] Annex D, id.,
ibid., 51.
[4] Annex H, id.,
ibid., 69.
[5] Rollo,
76.
[6] Annex I,
Petition; Rollo, 73; penned by Presiding Judge Tito G. Gustilo.
[7]
Annex A, id., ibid.,
36; Associate Justice Jose C. de la Rama, ponente, with Associate
Justices Emeterio C. Cui and Eduardo G. Montenegro, concurring.
[8] Rollo, 50.
[9] Art.
1377. The interpretation of obscure words or stipulations in a contract
shall not favor the party who caused the obscurity.
[10] Article
1229, Civil Code.
[11] Citing Article
2031, id.
[12]
Philippine Airlines, Inc. vs. Court of Appeals, et al., G.R. No.
119706, March 14, 1996, 255 SCRA 48.
[13] Abella vs.
Court of Appeals, et al., G.R.
No. 107606, June 20, 1996, 257 SCRA 482.
[14] Inciong,
Jr. vs. Court of Appeals, et al., G.R. No. 96405,
June 26, 1996, 257 SCRA 578.
[15] 72 CJS,
Principal and Surety, § 83, 565.
[16] Churchill
vs. Bradley, 5 A. 189.
[17] Northern
State Bank of Grand Forks vs. Bellamy, 125 N.W. 888.
[18] Shearer vs.
R.S. Peele & Co., 36 N.E. 455.
[19] W.T.
Rawleigh Co. vs. Overstreet, et al., 32 S.E. 2d 574.
[20] Manry vs.
Waxelbaum Co., 33 S.E. 701.
[21] 40A Words
and Phrases 429.
[22] Erbelding
vs. Noland, Co., Inc., 64 S.E. 2d 218.
[23] Covey, et
al. vs. Schiesswohl, 114 P. 292.
[24] Article
1371, Civil Code.
[25] Rollo,
67-68.
[26] 18A Words
and Phrases 657.
[27] Hall, et
al. vs. Weaver, 34 F. 104.
[28] Howell vs.
Commissioner of Internal Revenue, 69 F.2d 447.
[29]
Shores-Mueller Co. vs. Palmer, et al., 216 S.W. 295.
[30] Treweek vs.
Howard, et al., 39 P. 20.
[31] W.T.
Rawleigh Co. vs. Overstreet, et al., 32 S.E. 2d 574.
[32]
Liquidating Midland Bank vs. Stecker, et al., 179 N.E. 504.
[33] Article
1169, Civil Code.
[34] Rowe, et
al. vs. Bank of New Brockton, 92 So. 643.
[35] 74 Am Jur
2d, Principal and Surety, § 35, 36.
[36] Smith vs.
US, 8 L Ed 130.
[37] Rouse, et
al. vs. Wooten, 53 S.E. 430.
[38] Hall vs.
Weaver, 34 F. 104.
[39]
Christenson vs. Diversified Builders, Inc., et al., 331 F.2d 992.
[40] 74 Am Jur
2d, Principal and Surety, § 144, 103.
[41] Standard
Accident Insurance Co. vs. Standard
Oil Co., 133 So.2d 539; School District No. 65 of Lincoln County vs.
Universal Surety Co., 135 N.W.2d 232; Depot Realty Syndicate vs.
Enterprise Brewing Co., 171 P. 223.
[42] 72 CJS,
Principal and Surety, § 287,
744-745.
[43] 74 Am Jur
2d, Principal and Surety, § 68, 53-54.
[44] First
National Bank of Huntington vs. Williams, et al., 26 N.E. 75.
[45] National
Bank of Commerce vs. Gilvin, 152 S.W. 652.
[46] Kerby, et
al. vs. State ex rel. Frohmiller, 157 P.2d 698.
[47] 72 CJS,
Principal and Surety, § 208, 673.
[48] Scott vs.
Gaulding, et al., 122 ALR 200.
[49] 74 Am Jur
2d, Principal and Surety, § 68, 53.
[50] Ibid.,
id., § 59,
48-49.
[51] 72 CJS,
Principal and Surety, § 173, 651.
[52] Op.
cit., § 270, 723.
[53] Annex E,
Petition; Rollo, 54.
[54] Article
1244, Civil Code.
[55] Padilla, A.,
Civil Code Annotated, Vol. IV, 1987 ed., 434.
[56] Article
1233, Civil Code.
[57]
Tolentino, A., Commentaries and Jurisprudence on the Civil Code of the
Philippines, Vol. IV, 1986 ed., 280.
[58] Article
1235, Civil Code.
[59]
Magallanes, et al. vs. Court of Appeals, et al., G.R. No.
112614, May 16, 1994, Third
Division, Minute Resolution.
[60] Security
Bank & Trust Co., et al. vs.
Court of Appeals, et al., G.R. No. 117009, October 11, 1995, 249 SCRA 206.
[61] Medco
Industrial Corporation, et al. vs. The Hon. Court of
Appeals, et al., G.R. No. 84610,
November 24, 1988, 167 SCRA 838.
[62] Supra,
fn. 59.