sanctioned by law, more particularly under Article 2209 of the

New Civil Code which provides that: 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, and in
the absence of stipulation, the legal interest, which is six per cent
per annum. The penalty charge of two percent (2%) per month in
VOL. 367, OCTOBER 19, 2001 571
the case at bar began to accrue from the time of
Tan vs. Court of Appeals

* _______________
G.R. No. 116285. October 19, 2001.
* SECOND DIVISION.
ANTONIO TAN, petitioner, vs. COURT OF APPEALS and
the CULTURAL CENTER OF THE PHILIPPINES,
respondents. 572

Loans; Interest Rates; Penal Clauses; Interests and penalties

may both be awarded where the promissory note expressly provides 572 SUPREME COURT REPORTS ANNOTATED
for the imposition of both in cases of default.—We find no merit in
the petitioner’s contention. Article 1226 of the New Civil Code Tan vs. Court of Appeals
provides that: In obligations with a penal clause, the penalty shall
substitute the indemnity for damages and the payment of default by the petitioner. There is no doubt that the petitioner is
interests in case of non-compliance, if there is no stipulation to liable for both the stipulated monetary interest and the stipulated
the contrary. Nevertheless, damages shall be paid if the obligor penalty charge. The penalty charge is also called penalty or
refuses to pay the penalty or is guilty of fraud in the fulfillment of compensatory interest.
the obligation. The penalty may be enforced only when it is
Same; Same; Same; The compounding of the penalty or
demandable in accordance with the provisions of this Code. In the
compensatory interest is sanctioned by and allowed pursuant to
case at bar, the promissory note (Exhibit “A”) expressly provides
Article 1959 of the New Civil Code.—Having clarified the same,
for the imposition of both interest and penalties in case of default
the next issue to be resolved is whether interest may accrue on
on the part of the petitioner in the payment of the subject
the penalty or compensatory interest without violating the
restructured loan.
provisions of Article 1959 of the New Civil Code, which provides
Same; Same; Same; Words and Phrases; The New Civil Code that: Without prejudice to the provisions of Article 2212, interest
permits an agreement upon a penalty apart from the monetary due and unpaid shall not earn interest. However, the contracting
interest, and if the parties stipulate this kind of agreement, the parties may by stipulation capitalize the interest due and unpaid,
penalty does not include the monetary interest, and as such, the which as added principal, shall earn new interest. According to
two are different and distinct from each other and may be the petitioner, there is no legal basis for the imposition of interest
demanded separately; The penalty charge is also called penalty or on the penalty charge for the reason that the law only allows
compensatory interest.—Penalty on delinquent loans may take imposition of interest on monetary interest but not the charging of
different forms. In Government Service Insurance System v. Court interest on penalty. He claims that since there is no law that
of Appeals, this Court has ruled that the New Civil Code permits allows imposition of interest on penalties, the penalties should not
an agreement upon a penalty apart from the monetary interest. If earn interest. But as we have already explained, penalty clauses
the parties stipulate this kind of agreement, the penalty does not can be in the form of penalty or compensatory interest. Thus, the
include the monetary interest, and as such the two are different compounding of the penalty or compensatory interest is
and distinct from each other and may be demanded separately. sanctioned by and allowed pursuant to the above-quoted provision
Quoting Equitable Banking Corp. v. Liwanag, the GSIS case went of Article 1959 of the New Civil Code.
on to state that such a stipulation about payment of an additional
Same; Same; Same; Equity; Equity cannot be considered
interest rate partakes of the nature of a penalty clause which is
where there is a contractual stipulation in the promissory note
whereby the borrower expressly agreed to the compounding of Code. In other words, we find the continued monthly accrual of
interest in case of failure on his part to pay the loan at maturity, the two percent (2%) penalty charge on the total amount due to be
and since the said stipulation has the force of law between the unconscionable inasmuch as the same appeared to have been
parties and does not appear to be inequitable or unjust, the said compounded monthly. Considering petitioner’s several partial
written stipulation should be respected.—The petitioner seeks the payments and the fact he is liable under the note for the two
elimination of the compounded interest imposed on the total percent (2%) penalty charge per month on the total amount due,
amount based allegedly on the case of National Power compounded monthly, for twenty-one (21) years since his default
Corporation v. National Merchandising Corporation, wherein we in 1980, we find it fair and equitable to reduce the penalty charge
ruled that the imposition of interest on the damages from the to a straight twelve percent (12%) per annum on the total amount
filing of the complaint is unjust where the litigation was due starting August 28, 1986, the date of the last Statement of
prolonged for twenty-five (25) years through no fault of the Account (Exhibits “C” to “C-2”). We also took into consideration
defendant. However, the ruling in the said National Power the offers of the petitioner to enter into a compromise for the
Corporation (NPC) case is not applicable to the case at bar settlement of “his debt by presenting proposed payment schemes
inasmuch as our ruling on the issue of interest in that NPC case to respondent CCP. The said offers at compromise also showed his
was based on equitable considerations and on the fact that the good faith despite difficulty in complying with his loan obligation
said case lasted for twenty-five (25) years “through no fault of the due to his financial problems. However, we are not unmindful of
defendant.” In the case at bar, however, equity cannot be the respondent’s long overdue deprivation of the use of its money
considered inasmuch as there is a contractual stipulation in the collectible from the petitioner.
promissory note whereby the petitioner expressly agreed to the Evidence; Formal Offer of Evidence; Pleadings and Practice; A
compounding of interest in case of failure on his part in pay the letter that has not been formally offered cannot be considered
loan at maturity. Inasmuch as the said stipulation on the evidence of either party.—The letter dated September 28, 1988
compounding of interest alleged to have been sent by the respondent CCP to the petitioner
is not part of the formally offered documentary evidence of either
573
party in the trial court. That letter cannot be considered evidence
pursuant to Rule 132, Section 34 of the Rules of Court which
provides that: “The court shall consider no evidence which has not
VOL. 367, OCTOBER 19, 2001 573 been formally offered x x x.” Besides, the said letter does not
contain any categorical agreement on the part of respondent CCP
Tan vs. Court of Appeals that the payment of the interest and surcharge on the loan is
deemed suspended
has the force of law between the parties and does not appear to be
574
inequitable or unjust, the said written stipulation should be
respected.
Same; Same; Same; Same; Inasmuch as the borrower has
made partial payments which showed his good faith, a reduction 574 SUPREME COURT REPORTS ANNOTATED
of the penalty charge from two percent (2%) per month on the total
amount due, compounded monthly, until paid can indeed be Tan vs. Court of Appeals
justified under Article 1229 of the New Civil Code—the Court
finds the continued monthly accrual of the 2% penalty charge on while his appeal for condonation of the interest and surcharge
the total amount due to be unconscionable inasmuch as the same was being processed.
appeared to have been compounded monthly.—There appears to
be a justification for a reduction of the penalty charge but not PETITION for review on certiorari of a decision of the
necessarily to ten percent (10%) of the unpaid balance of the loan Court of Appeals.
as suggested by petitioner. Inasmuch as petitioner has made
partial payments which showed his good faith, a reduction of the The facts are stated in the opinion of the Court.
penalty charge from two percent (2%) per month on the total      Arturo S. Santos for petitioner.
amount due, compounded monthly, until paid can indeed be           Government Corporate Counsel for private
justified under the said provision of Article 1229 of the New Civil respondent.
DE LEON, JR., J.: his loan obligation until the following year allegedly due to
1 a substantial deduction in the volume of his business and
Before us is a petition for review
2
of the Decision dated on account of the peso devaluation. No favorable response
August 31, 1993 and Resolution dated July
3
13, 1994 of the was made to said letters. Instead, respondent CCP,
Court of Appeals affirming the Decision dated May 8, 1991 through counsel, wrote a letter dated May 30, 1984 to the
of the Regional Trial Court (RTC) of Manila, Branch 27. petitioner demanding full payment, within ten (10) days
The facts are as follows: from receipt of said letter, of the petitioner’s restructured
On May 14, 1978 and July 6, 1978, petitioner Antonio loan which as of April 30, 1984 amounted to Six Million
Tan obtained two (2) loans each in the principal amount of Eighty-Eight Thousand Seven Hundred Thirty-Five Pesos
Two Million Pesos (P2,000,000.00) or in the total principal and Three Centavos (P6,088,735.03).
amount of Four Million Pesos (P4,000,000.00), from On August 29, 1984, respondent CCP filed in the RTC of
respondent Cultural Center of the Philippines (CCP, for Manila a complaint for collection of a sum of money,
brevity) evidenced by two (2) promissory notes with docketed as Civil Case No. 84-26363, against the petitioner
maturity dates on May 14, 1979 and July 6, 1979, after the latter failed to settle his said restructured loan
respectively. Petitioner defaulted but after a few partial obligation. The petitioner interposed the defense that he
payments he had the loans restructured by respondent merely accommodated a friend, Wilson Lucmen, who
CCP, and petitioner accordingly executed a promissory allegedly asked for his help to obtain a loan from
note (Exhibit “A”) on August 31, 1979 in the amount of respondent CCP. Petitioner claimed that he has not been
Three Million Four Hundred Eleven Thousand Four able to locate Wilson Lucmen. While the case was pending
Hundred Twenty-One Pesos and Thirty-Two Centavos in the trial court, the petitioner filed a Manifestation
(P3,411,421.32) payable in five (5) installments. Petitioner wherein he proposed to settle his indebtedness to
Tan failed to pay any installment on the said restructured respondent CCP by proposing to make a down payment of
loan of Three Million Four Hundred Eleven Thousand Four One Hundred Forty Thousand Pesos (P140,000.00) and to
Hundred Twenty-One Pesos and Thirty-Two Centavos issue twelve (12) checks every beginning of the year to
(P3,411,421.32), the last in- cover installment payments for one year, and every year
thereafter until the balance is fully paid. However,
________________ respondent CCP did not agree to the petitioner’s proposals
and so the trial of the case ensued.
1 Penned by Associate Justice Oscar M Herrera and concurred in by
On May 8, 1991, the trial court rendered a decision, the
Associate Justices Quirino D. Abad Santos, Jr. and Alfredo J. Lagamon;
dispositive portion of which reads:
Rollo, pp. 72-83.
2 Rollo, p. 84. WHEREFORE, judgment is hereby rendered in favor of plaintiff
3 Penned by Judge Willelmo C. Fortun; Records, pp. 295-306. and against defendant, ordering defendant to pay plaintiff, the
amount of P7,996,314.67, representing defendant’s outstanding
575
account as of August 28, 1986, with the corresponding stipulated
interest and charges thereof,
VOL. 367, OCTOBER 19, 2001 575
576
Tan vs. Court of Appeals

576 SUPREME COURT REPORTS ANNOTATED

stallment falling due on December 31, 1980. In a letter
dated January 26, 1982, petitioner requested and proposed Tan vs. Court of Appeals
to respondent CCP a mode of paying the restructured loan,
i.e., (a) twenty percent (20%) of the principal amount of the until fully paid, plus attorney’s fees in an amount equivalent to
loan upon the respondent giving its conformity to his 25% of said outstanding account, plus P50,000.00, as exemplary
proposal; and (b) the balance on the principal obligation damages, plus costs.
payable in thirty-six (36) equal monthly installments until Defendant’s counterclaims are ordered dismissed, for lack of
fully paid. On October 20, 1983, petitioner again sent a merit. 4

letter to respondent CCP requesting for a moratorium on SO ORDERED.

The trial court gave five (5) reasons in ruling in favor of payment cannot be deemed as a partial or irregular performance
respondent CCP. First, it gave little weight to the of the contract, not a single centavo appears to have been paid by
petitioner’s contention that the loan was merely for the the defendant.
accommodation of Wilson Lucmen for the reason that the
defense propounded was not credible in itself. Second, However, the appellate court modified the decision of the
assuming, arguendo, that the petitioner did not personally trial court by deleting the award for exemplary damages
benefit from the said loan, he should have filed a third and reducing the amount of awarded attorney’s fees to five
party complaint against Wilson Lucmen, the alleged percent (5%), by ratiocinating as follows:
accommodated party but he did not. Third, for three (3)
Given the circumstances of the case, plus the fact that plaintiff
times the petitioner offered to settle his loan obligation
was represented by a government lawyer, We believe the award of
with respondent CCP. Fourth, petitioner may not avoid his
25% as attorney’s fees and P500,000.00 as exemplary damages is
liability to pay his obligation under the promissory note
out of proportion to the actual damage caused by the non-
(Exh. “A”) which he must comply with in good faith
performance of the contract and is excessive, unconscionable and
pursuant to Article 1159 of the New Civil Code. Fifth,
iniquitous.
petitioner is estopped from denying his liability or loan
obligation to the private respondent. In a Resolution dated July 13, 1994, the appellate court
The petitioner appealed the decision of the trial court to denied the petitioner’s motion for reconsideration of the
the Court of Appeals insofar as it charged interest, said decision.
surcharges, attorney’s fees and exemplary damages against Hence, this petition anchored on the following assigned
the petitioner. In his appeal, the petitioner asked for the errors:
reduction of the penalties and charges on his loan
obligation. He abandoned his alleged defense in the trial I
court that he merely accommodated his friend, Wilson
THE HONORABLE COURT OF APPEALS COMMITTED A
Lucmen, in obtaining the loan, and instead admitted the
MISTAKE IN GIVING ITS IMPRIMATUR TO THE DECISION
validity of the same. On August 31, 1993, the appellate
OF THE TRIAL COURT WHICH COMPOUNDED INTEREST
court rendered a decision, the dispositive portion of which
ON SURCHARGES.
reads:
II
WHEREFORE, with the foregoing modification, the judgment
appealed from is hereby
5
AFFIRMED. THE HONORABLE COURT OF APPEALS ERRED IN NOT
SO ORDERED. SUSPENDING IMPOSITION OF INTEREST FOR THE PERIOD
OF TIME THAT PRIVATE RESPONDENT HAS FAILED TO
_______________ ASSIST PETITIONER IN APPLYING FOR RELIEF OF
LIABILITY THROUGH THE COMMISSION ON AUDIT AND
4 Records, pp. 295-306.
THE OFFICE OF THE PRESIDENT.
5 Rollo, pp. 72-83.
III
577
THE HONORABLE COURT OF APPEALS ERRED IN NOT
VOL. 367, OCTOBER 19, 2001 577 DELETING AWARD OF ATTORNEY’S FEES AND IN
REDUCING PENALTIES.
Tan vs. Court of Appeals
578
In affirming the decision of the trial court imposing
surcharges and interest, the appellate court held that: 578 SUPREME COURT REPORTS ANNOTATED
We are unable to accept appellant’s (petitioner’s) claim for Tan vs. Court of Appeals
modification on the basis of alleged partial or irregular
performance, there being none. Appellant’s offer or tender of
Significantly, the petitioner does not question his liability
for his restructured loan under the promissory note marked For value received, I/We jointly and severally promise to pay to
Exhibit “A”. The first question to be resolved in the case at the CULTURAL CENTER OF THE PHILIPPINES at its office in
bar is whether there are contractual and legal bases for the Manila, the sum of THREE MILLION FOUR HUNDRED
imposition of the penalty, interest on the penalty and ELEVEN THOUSAND FOUR HUNDRED + PESOS
attorney’s fees. (P3,411,421.32) Philippine Currency, x x x.
The petitioner imputes error on the part of the appellate x x x      x x x      x x x
court in not totally eliminating the award of attorney’s fees With interest at the rate of FOURTEEN per cent (14%) per
and in not reducing the penalties considering that the annum from the date hereof until paid PLUS THREE PERCENT
petitioner, contrary to the appellate court’s findings, has (3%) SERVICE CHARGE.
allegedly made partial payments on the loan. And if In case of non-payment of this note at maturity/on demand or
penalty is to be awarded, the petitioner is asking for the upon default of payment of any portion of it when due, I/We
non-imposition of interest on the surcharges inasmuch as jointly and severally agree to pay additional penalty charges at
the compounding of interest on surcharges is not provided the rate of TWO per cent (2%) per month on the total amount due
in the promissory note marked Exhibit “A”. The petitioner until paid, payable and computed monthly. Default of payment of
takes exception to the computation of the private this note or any portion thereof when due shall render all other
respondent whereby the interest, surcharge and the installments and all existing promissory notes made by us in
principal were added together and that on the total sum favor of the CULTURAL CENTER OF THE PHILIPPINES
interest was imposed. Petitioner also claims that there is immediately due and demandable. (Italics supplied)
no basis in law for the charging of interest on the x x x      x x x      x x x
surcharges for the reason that the New Civil Code is devoid
of any provision allowing the imposition of interest on The stipulated fourteen percent (14%) per annum interest
surcharges. charge until full payment of the loan constitutes the
We find no merit in the petitioner’s contention. Article monetary interest on the note and 7
is allowed under Article
1226 of the New Civil Code provides that: 1956 of the New Civil Code. On the other hand, the
stipulated two percent (2%) per month penalty is in the
In obligations with a penal clause, the penalty shall substitute the form of penalty charge which is separate and distinct from
indemnity for damages and the payment of interests in case of the monetary interest on the principal of the loan.
noncompliance, if there is no stipulation to the contrary. Penalty on delinquent loans may take different forms. In8
Nevertheless, damages shall be paid if the obligor refuses to pay Government Service Insurance System v. Court of Appeals,
the penalty or is guilty of fraud in the fulfillment of the obligation. this Court has ruled that the New Civil Code permits an
The penalty may be enforced only when it is demandable in agreement upon a penalty apart from the monetary
accordance with the provisions of this Code. interest. If the parties stipulate this kind of agreement, the
penalty does not include the monetary interest, and as such
In the case at bar, the promissory note (Exhibit “A”) the two are different and distinct from each other and may
expressly provides for the imposition of both interest and be demanded separately. Quoting Equitable Banking Corp.
penalties in case of default on the part of the petitioner in 9
v. Liwanag, the GSIS case went on to state that such a
the payment
6
of the subject restructured loan. The stipulation about payment of an additional interest rate
pertinent portion of the promissory note (Exhibit “A”) partakes
imposing interest and penalties provides that:

________________
_______________
7 Article 1956. “No interest shall be due unless it has been expressly
6 Records, p. 47.
stipulated in writing.”
579
8 145 SCRA 311, 321 (1986).
9 32 SCRA 293 (1970).

VOL. 367, OCTOBER 19, 2001 579 580

Tan vs. Court of Appeals

580 SUPREME COURT REPORTS ANNOTATED VOL. 367, OCTOBER 19, 2001 581
Tan vs. Court of Appeals Tan vs. Court of Appeals

10
of the nature of a penalty clause which is sanctioned by interest at the maximum rate allowed by law.” Therefore,
law, more particularly under Article 2209 of the New Civil any penalty interest not paid, when due, shall earn 11
the
Code which provides that: legal interest of twelve percent (12%) per annum, in the
absence of express stipulation on the specific rate of
If the obligation consists in the payment of a sum of money, and interest, as in the case at bar.
the debtor incurs in delay, the indemnity for damages, there being Second, Article 2212 of the New Civil Code provides that
no stipulation to the contrary, shall be the payment of the interest “Interest due shall earn legal interest from the time it is
agreed upon, and m the absence of stipulation, the legal interest, judicially demanded, although the obligation may be silent
which is six per cent per annum. upon this point.” In the instant case, interest likewise
began to run on the penalty interest upon the filing of the
The penalty charge of two percent (2%) per month in the
complaint in court by respondent CCP on August 29, 1984.
case at bar began to accrue from the time of default by the
Hence, the courts a quo did not err in ruling that the
petitioner. There is no doubt that the petitioner is liable for
petitioner is bound to pay the interest on the total amount
both the stipulated monetary interest and the stipulated
of the principal, the monetary interest and the penalty
penalty charge. The penalty charge is also called penalty or
interest.
compensatory interest. Having clarified the same, the next
The petitioner seeks the elimination of the compounded
issue to be resolved is whether interest may accrue on the
interest imposed on the total amount based allegedly on
penalty or compensatory interest without violating the
the case of National Power Corporation v. National
provisions of Article 1959 of the New Civil Code, which 12
Merchandising Corporation, wherein we ruled that the
provides that:
imposition of interest on the damages from the filing of the
Without prejudice to the provisions of Article 2212, interest due complaint is unjust where the litigation was prolonged for
and unpaid shall not earn interest. However, the contracting twenty-five (25) years through no fault of the defendant.
parties may by stipulation capitalize the interest due and unpaid, However, the ruling in the said National Power
which as added principal, shall earn new interest. Corporation (NPC) case is not applicable to the case at bar
inasmuch as our ruling on the issue of interest in that NPC
According to the petitioner, there is no legal basis for the case was based on equitable considerations and on the fact
imposition of interest on the penalty charge for the reason that the said case lasted for twenty-five (25) years “through
that the law only allows imposition of interest on monetary no fault of the defendant.” In the case at bar, however,
interest but not the charging of interest on penalty. He equity cannot be considered inasmuch as there is a
claims that since there is no law that allows imposition of contractual stipulation in the promissory note whereby the
interest on penalties, the penalties should not earn petitioner expressly agreed to the compounding of interest
interest. But as we have already explained, penalty clauses in
can be in the form of penalty or compensatory interest.
Thus, the compounding of the penalty or compensatory ________________
interest is sanctioned by and allowed pursuant to the
above-quoted provision of Article 1959 of the New Civil 10 Records, p. 47.
Code considering that: 11 Central Bank Circular 416 series of 1974—“By virtue of the
First, there is an express stipulation in the promissory authority granted to it under Section 1 of Act 2855, as amended, otherwise
note (Exhibit “A”) permitting the compounding of interest. known as the ‘Usury Law’ the Monetary Board in its Resolution No. 1622
The fifth paragraph of the said promissory note provides dated July 29, 1974, has prescribed that the rate of interest for the loan,
that: “Any interest which may be due if not paid shall be or forbearance of any money, goods, or credits and the rate allowed in
added to the total amount when due and shall become part judgments, in the absence of express contract as to such rate of interest,
thereof, the whole amount to bear shall be twelve (12%) per cent per annum. This circular shall take effect
immediately.”
581
12 117 SCRA 789 (1982).
 582 13 RTC Records, p. 125.
14 RTC Records, p. 123.
15 52 Phil. 346 (1928).
582 SUPREME COURT REPORTS ANNOTATED
Tan vs. Court of Appeals 583

case of failure on his part to pay the loan at maturity. VOL. 367, OCTOBER 19, 2001 583
Inasmuch as the said stipulation on the compounding of
Tan vs. Court of Appeals
interest has the force of law between the parties and does
not appear to be inequitable or unjust, the said written
stipulation should be respected. There appears to be a justification for a reduction of the
The private respondent’s Statement of Account (marked penalty charge but not necessarily to ten percent (10%) of
13
Exhibits “C” to “C-2”) shows the following breakdown of the unpaid balance of the loan as suggested by petitioner.
the petitioner’s indebtedness as of August 28, 1986: Inasmuch as petitioner has made partial payments which
showed his good faith, a reduction of the penalty charge
     Principal P2,838,454.68      from two percent (2%) per month on the total amount due,
compounded monthly, until paid can indeed be justified
     Interest P 576,167.89     
under the said provision of Article 1229 of the New Civil
     Surcharge P4,581,692.10      Code.
P7,996,314.67      In other words, we find the continued monthly accrual of
the two percent (2%) penalty charge on the total amount
The said statement of account also shows that the above due to be unconscionable inasmuch as the same appeared
amounts stated therein are net of the partial payments to have been compounded monthly.
amounting to a total of Four Hundred Fifty-Two Thousand Considering petitioner’s several partial payments and
Five Hundred Sixty-One Pesos and Forty-Three Centavos the fact he is liable under the note for the two percent (2%)
(P452,561.43) which were made during the period from penalty charge per month on the total amount due,
14
May 13, 1983 to September 30, 1983. The petitioner now compounded monthly, for twenty-one (21) years since his
seeks the reduction of the penalty due to the said partial default in 1980, we find it fair and equitable to reduce the
payments. The principal amount of the promissory note penalty charge to a straight twelve percent (12%) per
(Exhibit “A”) was Three Million Four Hundred Eleven annum on the total amount due starting August 28, 1986,
Thousand Four Hundred Twenty-One Pesos and Thirty- the date of the last Statement of Account (Exhibits “C” to
Two Centavos (P3,411,421.32) when the loan was ‘‘C-2’’). We also took into consideration the offers of the
restructured on August 31, 1979. As of August 28, 1986, petitioner to enter into a compromise for the settlement of
the principal amount of the said restructured loan has been his debt by presenting proposed payment schemes to
reduced to Two Million Eight Hundred Thirty-Eight respondent CCP. The said offers at compromise also
Thousand Four Hundred Fifty-Four Pesos and Sixty-Eight showed his good faith despite difficulty in complying with
Centavos (P2,838,454.68). Thus, petitioner contends that his loan obligation due to his financial problems. However,
reduction of the penalty is justifiable pursuant to Article we are not unmindful of the respondent’s long overdue
1229 of the New Civil Code which provides that: “The judge deprivation of the use of its money collectible from the
shall equitably reduce the penalty when the principal petitioner.
obligation has been partly or irregularly complied with by The petitioner also imputes error on the part of the
the debtor. Even if there has been no performance, the appellate court for not declaring the suspension of the
penalty may also be reduced by the courts if it is iniquitous running of the interest during that period when the
or unconscionable.” Petitioner insists that the penalty respondent allegedly failed to assist the petitioner in
should be reduced to ten percent (10%) of the unpaid debt applying for relief from liability. In this connection,
16
the
in accordance with Bachrach Motor Company v. Espiritu.
15
petitioner referred to the private respondent’s letter dated
September 28, 1988 addressed to petitioner which partially
reads:
______________
________________ the payment of the interest and surcharge on the loan is
deemed suspended while his appeal for condonation of the
16 CA Rollo, p. 67.
interest and surcharge was being processed.
584
585

584 SUPREME COURT REPORTS ANNOTATED

VOL. 367, OCTOBER 19, 2001 585
Tan vs. Court of Appeals
Tan vs. Court of Appeals

Dear Mr. Tan:

Second, the private respondent correctly asserted that it
x x x      x x x      x x x was the primary responsibility of petitioner to inform the
With reference to your appeal for condonation of interest and Commission on Audit and the Office of the President of his
surcharge, we wish to inform you that the center will assist you in application for condonation of interest and surcharge. It
applying for relief of liability through the Commission on Audit was incumbent upon the petitioner to bring his
and Office of the President x x x. administrative appeal for condonation of interest and
While your application is being processed and awaiting penalty charges to the attention of the said government
approval, the center will be accepting your proposed payment offices.
scheme with the downpayment of P160,000.00 and monthly On the issue of attorney’s fees, the appellate court ruled
remittances of P60,000.00 x x x. correctly and justly in reducing the trial court’s award of
x x x      x x x      x x x twenty-five percent (25%) attorney’s fees to five percent
(5%) of the total amount due.
The petitioner alleges that his obligation to pay the interest WHEREFORE, the assailed Decision of the Court of
and surcharge should have been suspended because the Appeals is hereby AFFIRMED with MODIFICATION in
obligation to pay such interest and surcharge has become that the penalty charge of two percent (2%) per month on
conditional, that is, dependent on a future and uncertain the total amount due, compounded monthly, is hereby
event which consists of whether the petitioner’s request for reduced to a straight twelve percent (12%) per annum
condonation of interest and surcharge would be starting from August 28, 1986. With costs against the
recommended by the Commission on Audit and the Office petitioner.
of the President to the House of Representatives for SO ORDERED.
approval as required under Section 36 of Presidential
Decree No. 1445. Since the condition has not happened           Bellosillo (Chairman), Mendoza, Quisumbing and
allegedly due to the private respondent’s reneging on its Buena, JJ., concur.
promise, his liability to pay the interest and surcharge on
Judgment affirmed with modification.
the loan has not arisen. This is the petitioner’s contention.
It is our view, however, that the running of the interest Notes.—The courts shall reduce equitably liquidated
and surcharge was not suspended by the private damages, whether intended as an indemnity or a penalty if
respondent’s promise to assist the petitioners in applying they are iniquitous or unconscionable. (Medel vs. Court of
for relief therefrom through the Commission on Audit and Appeals, 299 SCRA 481 [1998])
the Office of the President. Stipulations contained on standard form used by a bank
First, the letter dated September 28, 1988 alleged to regarding “penalty charges of 24% per annum based on
have been sent by the respondent CCP to the petitioner is loan amortization in arrears for sixty (60) days or less” and
not part of the formally offered documentary evidence of “penalty charges of 36% per annum based on loan
either party in the trial court. That letter cannot be amortization in arrears for more than sixty (60) days” have
considered evidence pursuant to Rule 132, Section 34 of the no application to loans which are payable in lump sum.
Rules of Court which provides that: “The court shall (Quezon Development Bank vs. Court of Appeals, 300 SCRA
consider no evidence which has not been formally offered x 206 [1998])
x x.” Besides, the said letter does not contain any
categorical agreement on the part of respondent CCP that
 Neither the law nor the courts will excuse a party from
an unwise or undesirable contract he or she entered into
with all the
586

586 SUPREME COURT REPORTS ANNOTATED

People vs. Concorcio

required formalities and with full awareness of its

consequence. (Mortel vs. KASSCO, Inc., 348 SCRA 391
[2000])

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