FIRST DIVISION

G.R. No. 167082, August 03, 2016

TERESITA I. BUENAVENTURA, Petitioner, v. METROPOLITAN BANK AND TRUST

COMPANY, Respondent.

DECISION

BERSAMIN, J.:

A duly executed contract is the law between the parties, and, as such, commands them
to comply fully and not selectively with its terms. A contract of adhesion, of itself, does
not exempt the parties from compliance with what was mutually agreed upon by them.

The Case

In this appeal, the petitioner seeks the reversal of the decision promulgated on April 23,
2004,1 whereby the Court of Appeals (CA) affirmed with modification the
judgment2 rendered on July 11, 2002 by the Regional Trial Court (RTC), Branch 61, in
Makati City. Also being appealed is the resolution 3 promulgated on February 9, 2005,
whereby the CA denied her motion for reconsideration.

Antecedents

The following factual and procedural antecedents are narrated by the CA in its assailed
decision, to wit:
ChanRoblesVirt ualawl ibrary

On January 20, 1997 and April 17, 1997, Teresita Buenaventura (or "appellant")
executed Promissory Note (or "PN") Nos. 232663 and 232711, respectively, each in the
amount of PI,500,000.00 and payable to Metropolitan Bank and Trust Company (or
"appellee"). PN No. 232663 was to mature on July 1, 1997, with interest and credit
evaluation and supervision fee (or "CESF") at the rate of 17.532% per annum, while PN
No. 232711 was to mature on April 7, 1998, with interest and CESF at the rate of
14.239% per annum. Both PNs provide for penalty of 18% per annum on the unpaid
principal from date of default until full payment of the obligation.

Despite demands, there remained unpaid on PN Nos. 232663 and 232711 the amounts
of P2,061,208.08 and PI,492,236.37, respectively, as of July 15, 1998, inclusive of
interest and penalty. Consequently, appellee filed an action against appellant for
recovery of said amounts, interest, penalty and attorney's fees before the Regional Trial
Court of Makati City (Branch 61).

In answer, appellant averred that in 1997, she received from her nephew, Rene
Imperial (Or "Imperial"), three postdated checks drawn against appellee (Tabaco
Branch), i.e., Check No. TA 1270484889PA dated January 5, 1998 in the amount of
PI,200,000.00, Check No. 1270482455PA dated March 31, 1998 in the amount of
PI,197,000.00 and Check No. TA1270482451PA dated March 31, 1998 in the amount of
P500,000.00 (or "subject checks"), as partial payments for the purchase of her
properties; that she rediscounted the subject checks with appellee (Timog Branch), for
which she was required to execute the PNs to secure payment thereof; and that she is
a mere guarantor and cannot be compelled to pay unless and until appellee shall have
exhausted all the properties of Imperial.4
On July 11, 2002, the RTC rendered its judgment,5 viz.: ChanRoblesVirtuala wlib rary

WHEREFORE, in view of the foregoing, the Court finds in favor of plaintiff

METROPOLITAN BANK AND TRUST COMPANY and against defendant TERESITA
BUENAVENTURA.

As a consequence of this judgment, defendant Buenaventura is directed to pay plaintiff

bank the amount of P3,553,444.45 plus all interest and penalties due as stipulated in
Promissory Notes Nos. 232663 and 232711 beginning July 15, 1998 until the amount is
fully paid and 10% of the total amount due as attorney's fees.

SO ORDERED.
Dissatisfied, the petitioner appealed, assigning the following as errors, namely:
chanRoblesvirtualLaw libra ry

I
THE TRIAL COURT ERRED IN HOLDING THAT THE REDISCOUNTING TRANSACTION
BETWEEN APPELLANT AND METROBANK RESULTED TO A LOAN OBLIGATION SECURED
BY THE SUBJECT CHECKS AND PROMISSORY NOTES.

A. Rediscounting transactions do not create loan obligations between the

parties.

B. By the rediscounting, Metrobank subrogated appellant as creditor of Rene

Imperial, the issuer of the checks.

C. Legal subrogation was presumed when Metrobank paid the obligation of

Mr. Imperial with the latter's knowledge and consent.

II

THE TRIAL COURT ERRED IN GRANTING METROBANK'S CLAIMS ON THE BASIS OF THE
PROMISSORY NOTES.

A. The promissory notes are null and void for being simulated and fictitious.

B. Assuming that the promissory notes are valid, these only serve as
guaranty to secure the payment of the rediscounted checks.

III

THE TRIAL COURT ERRED IN NOT RULING THAT APPELLANT IS ENTITLED TO HER
COUNTERCLAIMS FOR EXEMPLARY DAMAGES, ATTTORNEY'S FEES, LITIGATION
EXPENSES AND COSTS OF SUIT.6 chanrobleslaw
On April 23, 2004, the CA promulgated the assailed decision affirming the decision of
the RTC with modification,7 as follows:

chanRoblesvirtualLaw libra ry WHEREFORE, the appealed decision is AFFIRMED with

MODIFICATION of the second paragraph of its dispositive portion, which should now
read: ChanRoblesVirtua lawli brary

"As a consequence of this judgment, defendant Buenaventura is directed to pay plaintiff

bank the amount of P3,553,444.45 plus interest and penalty therein at 14.239% per
annum and 18% per annum, respectively, from July 15, 1998 until fully paid and 10%
of said amount as attorney's fees."
SO ORDERED.8
On May 21, 2004, the petitioner moved for the reconsideration of the decision, but the
CA denied her motion for that purpose on February 9, 2005.9 chanrobleslaw

Hence, this appeal by the petitioner.

Issues

The petitioner ascribes the following errors to the CA, to wit:

chanRoblesvirtualLaw libra ry

I
THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER IS LIABLE UNDER THE
PROMISSORY NOTES.

A. The promissory notes executed by petitioner are null and void for being
simulated and fictitious.

B. Even assuming that the promissory notes are valid, these are intended as
mere guaranty to secure Rene Imperial's payment of the rediscounted
checks. Hence, being a mere guarantor, the action against petitioner
under the said promissory notes is premature.

C. Metrobank is deemed to have subrogated petitioner as creditor of Mr.

Imperial (the issuer of the checks). Hence, Metrobank's recourse as
creditor, is against Mr. Imperial.

II

THE COURT OF APPEALS ERRED IN NOT RULING THAT PETITIONER IS ENTITLED TO

HER COUNTER-CLAIM FOR EXEMPLARY DAMAGES, ATTORNEY'S FEES, LITIGATION
EXPENSES AND COSTS OF SUIT.10
Ruling

The appeal lacks merit.

First of all, the petitioner claims that the promissory notes she executed were contracts
of adhesion because her only participation in their execution was affixing her
signature,11 and that the terms of the promissory notes should consequently be strictly
construed against the respondent as the party responsible for their preparation. 12 In
contrast, the respondent counters that the terms and conditions of the promissory
notes were clear and unambiguous; hence, there was no room or need for
interpretation thereof.13 chanrobleslaw

The respondent is correct.

The promissory notes were written as follows: ChanRoblesVirt ualawl ibrary

FOR VALUE RECEIVED, I/we jointly and severally promise to pay Metropolitan Bank and
Trust Company, at its office x x x the principal sum of PESOS xxx, Philippine currency,
together with interest and credit evaluation and supervision fee (CESF) thereon at the
effective rate of xxx per centum xxx per annum, inclusive, from date hereof and until
fully paid.14
What the petitioner advocates is for the Court to now read into the promissory notes
terms and conditions that would contradict their clear and unambiguous terms in the
guise of such promissory notes being contracts of adhesion. This cannot be permitted,
for, even assuming that the promissory notes were contracts of adhesion, such
circumstance alone did not necessarily entitle her to bar their literal enforcement
against her if their terms were unequivocal. It is preposterous on her part to disparage
the promissory notes for being contracts of adhesion, for she thereby seems to forget
that the validity and enforceability of contracts of adhesion were the same as those of
other valid contracts. The Court has made this plain in Avon Cosmetics, Inc. v.
Luna,15 stating:ChanRoblesVirtua lawlib rary

A contract of adhesion is so-called because its terms are prepared by only one party
while the other party merely affixes his signature signifying his adhesion thereto. Such
contract is just as binding as ordinary contracts.

It is true that we have, on occasion, struck down such contracts as void when the
weaker party is imposed upon in dealing with the dominant bargaining party and is
reduced to the alternative of taking it or leaving it, completely deprived of the
opportunity to bargain on equal footing. Nevertheless, contracts of adhesion are not
invalid per se and they are not entirely prohibited. The one who adheres to the contract
is in reality free to reject it entirely, if he adheres, he gives his consent.

xxxx

Accordingly, a contract duly executed is the law between the parties, and they are
obliged to comply fully and not selectively with its terms. A contract of adhesion is no
exception.
As a rule, indeed, the contract of adhesion is no different from any other contract. Its
interpretation still aligns with the literal meaning of its terms and conditions absent any
ambiguity, or with the intention of the parties.16 The terms and conditions of the
promissory notes involved herein, being clear and beyond doubt, should then be
enforced accordingly. In this regard, we approve of the observation by the CA,
citing Cruz v. Court of Appeals, 17 that the intention of the parties should be
"deciphered not from the unilateral post facto assertions of one of the parties, but from
the language used in the contract."18 As fittingly declared in The Insular Life Assurance
Company, Ltd. vs. Court of Appeals and Sun Brothers & Company,19 "[w]hen the
language of the contract is explicit leaving no doubt as to the intention of the drafters
thereof, the courts may not read into it any other intention that would contradict its
plain import." Accordingly, no court, even this Court, can "make new contracts for the
parties or ignore those already made by them, simply to avoid seeming hardships.
Neither abstract justice nor the rule of liberal construction justifies the creation of a
contract for the parties which they did not make themselves or the imposition upon one
party to a contract of an obligation not assumed."20 chanrobleslaw

Secondly, the petitioner submits that the promissory notes were null and void for being
simulated and fictitious; hence, the CA erred in enforcing them against her.

The submission contradicts the records and the law pertinent to simulated contracts.

Based on Article 134521 of the Civil Code, simulation of contracts is of two kinds,
namely: (1) absolute; and (2) relative. Simulation is absolute when there is color of
contract but without any substance, the parties not intending to be bound thereby. 22 It
is relative when the parties come to an agreement that they hide or conceal in the
guise of another contract.23 chanrobleslaw

The effects of simulated contracts are dealt with in Article 1346 of the Civil Code, to
wit:ChanRoblesVirtua lawl ibrary

Art. 1346. An absolutely simulated or fictitious contract is void. A relative simulation,

when it does not prejudice a third person and is not intended for any purpose contrary
to law, morals, good customs, public order or public policy binds the parties to their real
agreement.
The burden of showing that a contract is simulated rests on the party impugning the
contract. This is because of the presumed validity of the contract that has been duly
executed.24 The proof required to overcome the presumption of validity must be
convincing and preponderant. Without such proof, therefore, the petitioner's allegation
that she had been made to believe that the promissory notes would be guaranties for
the rediscounted checks, not evidence of her primary and direct liability under loan
agreements,25 could not stand. cralawred

Moreover, the issue of simulation of contract was not brought up in the RTC. It was
raised for the first time only in the CA.26 Such belatedness forbids the consideration of
simulation of contracts as an issue. Indeed, the appellate courts, including this Court,
should adhere to the rule that issues not raised below should not be raised for the first
time on appeal. Basic considerations of due process and fairness impel this adherence,
for it would be violative of the right to be heard as well as unfair to the parties and to
the administration of justice if the points of law, theories, issues and arguments not
brought to the attention of the lower courts should be considered and passed upon by
the reviewing courts for the first time.

Thirdly, the petitioner insists that the promissory notes, even if valid, were meant as
guaranties to secure payment of the checks by the issuer, Rene Imperial; hence, her
liability was that of a guarantor, and would take effect only upon exhaustion of all
properties and after resort to all legal remedies against Imperial.27 chanrobleslaw

The insistence of the petitioner is bereft of merit.

The CA rejected this insistence, expounding as follows: ChanRoblesVi rtualaw library

A guaranty is not presumed; it must be expressed (Art. 2055, New Civil Code). The PNs
provide, in clear language, that appellant is primarily liable thereunder. On the other
hand, said PNs do not state that Imperial, who is not even privy thereto, is the one
primarily liable and that appellant is merely a guarantor. Parenthetically, the disclosure
statement (Exh. "D") executed by appellant states that PN No. 232711 is "secured by
postdated checks". In other words, it does not appear that the PNs were executed as
guaranty for the payment of the subject checks.

Nevertheless, appellant insists that she did not obtain a short-term loan from appellee
but rediscounted the subject checks, with the PNs as guaranty. The contention is
untenable.

In Great Asian Sales Center Corporation vs. Court of Appeals (381 SCRA 557), which
was cited in support of appellant's claim, the Supreme Court explained the meaning of
"discounting line", thus:ChanRoblesVirtua lawl ibrary

"In the financing industry, the term 'discounting line' means a credit facility with a
financing company or bank which allows a business entity to sell, on a continuing basis,
its accounts receivable at a discount. The term 'discount' means the sale of a receivable
at less than its face value. The purpose of a discounting line is to enable a business
entity to generate instant cash out of its receivables which are still to mature at future
dates. The financing company or bank which buys the receivables makes its profit out
of the difference between the face value of the receivable and the discounted price."
A guarantor may bind himself for less, but not for more than the principal debtor, both
as regards the amount and the onerous nature of the conditions (Art. 2054, id).
Curiously, the face amounts of the PNs (totaling P3,000,000.00) are more than those of
the subject checks (totaling P2,897,000.00). And unlike the subject checks, the PNs
provide for interest, CESF and penalty.

Moreover, the maturity date (July 1, 1997) of PN No. 232663 is ahead of the dates
(January 5, 1998 and March 31, 1998) of the subject checks. In other words, appellant,
as "guarantor", was supposed to make good her "guaranty", i.e. PNs in question,
even before the "principal" obligations, i.e. subject checks, became due. It is also noted
that the rediscounting of the subject checks (in January 1997) occurred
months ahead of the execution of PN No. 232711 (on April 17, 1997) even as the PNs
were supposedly a precondition to said rediscounting.

xxxx

Stated differently, appellant is primarily liable under the subject checks. She is a
principal debtor and not a guarantor. Consequently, the benefit of excussion may not
be interposed as a defense in an action to enforce appellant's warranty as indorser of
the subject checks.

Moreover, it is absurd that appellant (as maker of the PNs) may act as guarantor of her
own obligations (as indorser of the subject checks). Thus, Art. 2047 of the New Civil
Code provides that "(b)y 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."28 (Emphasis supplied)
The CA was correct. A contract of guaranty is one where a person, the guarantor, binds
himself or herself to another, the creditor, to fulfill the obligation of the principal debtor
in case of failure of the latter to do so.29 It cannot be presumed, but must be express
and in writing to be enforceable,30 especially as it is considered a special promise to
answer for the debt, default or miscarriage of another.31 It being clear that the
promissory notes were entirely silent about the supposed guaranty in favor of Imperial,
we must read the promissory notes literally due to the absence of any ambiguities
about their language and meaning. In other words, the petitioner could not validly insist
on the guaranty. In addition, the disclosure statements 32 and the statements of loan
release33 undeniably identified her, and no other, as the borrower in the transactions.
Under such established circumstances, she was directly and personally liable for the
obligations under the promissory notes.

Fourth, the petitioner argues that the respondent was immediately . subrogated as the
creditor of the accounts by its purchase of the checks from her through its
rediscounting facility;34 and that legal subrogation should be presumed because the
petitioner, a third person not interested in the obligation, paid the debt with the express
or tacit approval of the debtor.35 chanrobleslaw

The argument is barren of factual and legal support.

Legal subrogration finds no application because there is no evidence showing that

Imperial, the issuer of the checks, had consented to the subrogation, expressly or
impliedly.36 This circumstance was pointed out by the RTC itself.37 Also, as the CA
emphatically observed,38 the argument was off-tangent because the suit was not for the
recovery of money by virtue of the checks of Imperial but for the enforcement of her
obligation as the maker of the promissory notes.

Fifth, the petitioner posits that she was made to believe by the manager of the
respondent's Timog Avenue, Quezon City Branch that the promissory notes would be
mere guaranties for the rediscounted checks;39 that despite the finding of the RTC and
the CA that she was a seasoned businesswoman presumed to have read and
understood all the documents given to her for signature, she remained a layman faced
with and puzzled by complex banking terms; and that her acceding to signing the
promissory notes should not be taken against her as to conclude her.40 chanrobleslaw

The petitioner's position is unworthy of serious consideration.

After having determined that the terms and conditions of the promissory notes were
clear and unambiguous, and thus should be given their literal meaning and not be
interpreted differently, we insist and hold that she should be bound by such terms and
conditions. Verily, the promissory notes as contracts should bind both contracting
parties; hence, the validity or compliance therewith should not be left to the will of the
petitioner.41 Otherwise, she would contravene and violate the principles of mutuality
and of the obligatory force of contracts. A respected commentator on civil law has
written in this respect:
ChanRoblesVi rtualaw library

The binding effect of the contract on both parties is based on the principles (1) that
obligations arising from contracts have the force of law between the contracting
parties; and (2) that there must be mutuality between the parties based on their
essential equality, to which is repugnant to have one party bound by the contract
leaving the other free therefrom.
xxxx

Just as nobody can be forced to enter into a contract, in the same manner once a
contract is entered into, no party can renounce it unilaterally or without the consent of
the other. It is a general principle of law that no one may be permitted to change his
mind or disavow and go back upon his own acts, or to proceed contrary thereto, to the
prejudice of the other party.

If, after a perfect and binding contract has been executed between the parties, it occurs
to one of them to allege some defect therein as a reason for annulling it, the alleged
defect must be conclusively proven, since the validity and fulfillment of contracts cannot
be left to the will of one of the contracting parties. The fact that a party may not have
fully understood the legal effect of the contract is no ground for setting it aside. 42
And, lastly, there is need to revise the monetary awards by the CA. Although no issue is
raised by the petitioner concerning the monetary awards, the Court feels bound to
make this revision as a matter of law in order to arrive at a just resolution of the
controversy.

Involved here are two loans of the petitioner from the respondent, specifically: (1) the
principal amount of PI,500,000.00 covered by Promissory Note No. 232663 to be paid
on or before July 1, 1997 with interest and credit evaluation and supervision fee (CESF)
at the rate of 17.532% per annum and penalty charge of 18% per annum based on the
unpaid principal to be computed from the date of default until full payment of the
obligation; and (2) the principal amount of PI,500,000.00 covered by Promissory Note
No. 232711 to be paid on or before April 7, 1998 with interest and CESF at the rate of
14.239% per annum and penalty charge of 18% per annum based on the unpaid
principal to be computed from the date of default until full payment of the obligation.

The RTC adjudged the petitioner liable to pay to the respondent the total of
P3,553,444.45 representing her outstanding obligation, including accrued interests and
penalty charges under the promissory notes, plus attorney's fees.43 On appeal, the CA
ruled that she was liable to the respondent for the sum of P3,553,444.45 with interest
and penalties at 14.239% per annum and 18% per annum, respectively, from July 15,
1998 until fully paid.44
chanrobleslaw

The bases of the amounts being claimed from the petitioner were apparently the
two statements of past due interest and penalty charges as of July 15, 1998, one
corresponding to Promissory Note No. 232711,45 and the other to Promissory Note No.
232663,46 Respondent's witness Patrick N. Miranda, testifying on the obligation and the
computation thereof,47 attested as follows:ChanRoblesVirtua lawl ibrary

1. What is the amount of her loan obligation?

-Under Promissory Note No. 232663, her loan obligation is Pl,492,236.37

inclusive of interest and penalty charges as of July 15, 1998. Under Promissory
Note No. 232711, her loan obligation is P2,061,208.08, inclusive of interest and
penalty charges as of July 15, 1998. Thus, the total is P3,553,444.45 as of July
15, 1998. Two (2) Statements of Account were prepared to show the
computation and penalty charges.
2. Do you have these Statements of Account?
48
-Yes, sir. (Copies are hereto attached as Exhibits "H" and "I".)

Promissory Note No. 23271149

PRINCIPAL AMOUNT P1,500,000.00

PAST DUE INTEREST - 334 days @34.991%

fr. Aug. 15, 1997 to July 15, 1998 P486,958.08

PENALTY CHARGES - 99 days @18.0%

fr. April 07, 1998 to July 15, 1998 P74,250.00

TOTAL OUTSTANDING LOAN

AS OF JULY 15, 1998 P2,061,208.08

Promissory Note No. 23266350

PRINCIPAL AMOUNT P1,200,000.00

PAST DUE INTEREST - 191 days @27.901%

fr. [J]an. 05, 1998 to [J]uly 15, 1998 P177,636.37

PENALTY CHARGES - 191 days @18.0%

fr. [J]an. 05, 1998 to [J]uly 15, 1998 P114,600.00

 TOTAL OUTSTANDING LOAN

AS OF JULY 15, 1998 P1,492,236.37

The total of P3,553,444.45 was the final sum of the computations contained in
the statements of past due interest and penalty charges as of July 15, 1998, and was
inclusive of interest at the rate of 34.991% (on the principal of P1,500,000.00) and
27.901% (on the principal of P1,200,00.00). Yet, such interest rates were different
from the interest rates stipulated in the promissory notes, namely: 14.239% for
promissory Note No. 232711 and 17.532% for Promissory Note No. 232663. As a
result, the P3,553,444.45 claimed by the respondent as the petitioner's aggregate
oustanding loan obligatopn included interest of almost double the rates stipulated by
the parties.

We hold that the respondent had no legal basis for imposing rates far higher than those
agreed upon and stipulated in the promissory notes. It did not suitably justify the
imposition of the increased rates of 34.991% and 27.901%, as borne out by
the statements of past due interest and penalty charges as of July 15, 1998, although it
certainly was its burden to show the legal and factual support for the imposition. We
need not remind that the burden of proof is the duty of any party to present evidence
to establish its claim or defense by the amount of evidence required by law, which in
civil cases is preponderance of evidence.51 Consequently, we have to strike down the
imposition.

Parenthetically, we observe that the stipulation in the promissory notes on the

automatic increase of the interest rate to the prevailing rate 52 did not justify the
increase of the interest rates because the respondent did not adduce evidence about
the prevailing rates at the time material to this case.

On May 16, 2013, the Monetary Board of the Bangko Sentral ng Pilipinas, in the
exercise of its statutory authority to review and fix interest rates, issued Circular No.
799, Series of 2013 to lower to 6% per annum the rate of interest for loan or
forbearance of any money, goods or credits, and the rate allowed in judgment.53 The
revised rate applies only in the absence of stipulation in loan contracts. Hence, the
contractual stipulations on the rates of interest contained in the promissory notes
remained applicable.

Considering that, as mentioned, the P3,553,444.45 was an aggregate inclusive of the

interest {i.e., at the rates of 34.991% and 27.901% per annum); and that the penalty
charges contravened the express provisions of the promissory notes, the RTC and the
CA both erred on a matter of law, and we should correct their error as a matter of law
in the interest of justice.

It is further held that the CA could not validly apply the lower interest rate of
14.239% per annum to the whole amount of P3,553,444.45 in contravention of the
stipulation of the parties. In Mallari v. Prudential Bank,54 the Court declared that the
interest rate of "3% per month and higher are excessive, unconscionable and
exorbitant, hence, the stipulation was void for being contrary to morals." Even so, the
Court did not consider as unconscionable the interest rate of 23% per annum agreed
upon by the parties. Upholding the 23% per annum interest rate agreed upon, the
Court instead opined that "the borrowers cannot renege on their obligation to comply
with what is incumbent upon them under the contract of loan as the said contract is the
law between the parties and they are bound by its stipulations."55 Consequently, the
respondent could not impose the flat interest rate of 14.239% per annum on the
petitioner's loan obligation. Verily, the obligatory force of the stipulations between the
parties called for the imposition of the interest rates stipulated in the promissory notes.

To accord with the prevailing jurisprudence, the Court pronounces that the respondent
was entitled to recover the principal amount of P1,500,000.00 subject to the stipulated
interest of 14.239%per annum from date of default until full payment;56 and the
principal amount of P1,200,000.00 subject to the stipulated interest of 17.532%per
annum from date of default until full payment.57 chanrobleslaw

The next matter to be considered and determined is the date of default.

According to Article 1169 of the Civil Code, there is delay or default from the time the
obligee judicially or extrajudically demands from the obligor the fulfillment of his or her
obligation. The records reveal that the respondent did not establish when the petitioner
defaulted in her obligation to pay based on the two promissory notes. As such, its claim
for payment computed from July 15, 1998 until full payment of the obligation had no
moorings other than July 15, 1998 being the date reflected in the statements of past
due interest and penalty charges as of July 15, 1998. Nonetheless, its counsel, through
the letter dated July 7, 1998,58 made a final demand in writing for the petitioner to
settle her total obligation within five days from receipt. As the registry return receipt
indicated,59 the final demand letter was received for the petitioner by one Elisa dela
Cruz on July 28, 1998. Hence, the petitioner had five days from such receipt, or until
August 2, 1998, within which to comply. The reckoning date of default is, therefore,
August 3, 1998.

As to the penalty charge, the same was warranted for being expressly stipulated in the
promissory notes, to wit: ChanRoblesVirtua lawli brary

I/we further agree to pay the Bank, in addition to the agreed interest rate, a penalty
charge of eighteen per centum (18%) per annum based on any unpaid principal to be
computed from date of default until full payment of the obligation.60
Verily, a penal clause is an accessory undertaking attached to a principal obligation. It
has for its purposes, firstly, to provide for liquidated damages; and, secondly, to
strengthen the coercive force of the obligation by the threat of greater responsibility in
the event of breach of obligation.61 Under Article 1226 of the Civil Code,62 a penal
clause is a substitute indemnity for damages and the payment of interests in case of
noncompliance, unless there is a stipulation to the contrary. In Tan v. Court of
Appeals[63] the Court has elaborated on the nature of a penalty clause in the
following:ChanRoblesVirt ualawl ibrary

Penalty on delinquent loans may take different forms. In Government Service Insurance
System v. Court of Appeals, this Court has ruled that the New Civil Code permits an
agreement upon a penalty apart from the monetary interest. If the parties stipulate this
kind of agreement, the penalty does not include the monetary interest, and as such the
two are different and distinct from each other and may be demanded separately.
Quoting Equitable Banking Corp. v. Liwanag, the GSIS case went on to state that such
a stipulation about payment of an additional interest rate partakes of the nature of a
penalty clause which is sanctioned by law, more particularly under Article 2229 of the
New Civil Code which provides that: ChanRoblesVi rtualawl ibrary

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 the absence of stipulation, the legal
interest, which is six per cent per annum.
The penalty charge of two percent (2%) per month in the case at bar began to accrue
from the time of default by the petitioner. There is no doubt that the petitioner is liable
for both the stipulated monetary interest and the stipulated penalty charge. The penalty
charge is also called penalty or compensatory interest.
The Court has explained the rate of compensatory interest on monetary awards
adjudged in decisions of the Court in Planters Development Bank v.
Lopez,64 citing Nacar v. Gallery Frames [65] to wit: ChanRoblesVirtuala wlib rary

With respect to the computation of compensatory interest, Section 1 of Bangko Sentral

ng Pilipinas (BSP) Circular No. 799, Series of 2013, which took effect on July 1, 2013,
provides:ChanRoblesVirtuala wlib rary

Section 1. The rate of interest for the loan or forbearance of any money, goods or
credits and the rate allowed in judgments, in the absence of an express contract as to
such rate of interest, shall be six percent (6%) per annum.
This provision amends Section 2 of Central Bank (CB) Circular No. 905-82, Series of
1982, which took effect on January 1, 1983. Notably, we recently upheld the
constitutionality of CB Circular No. 905-82 in Advocates for Truth in Lending, Inc., et al.
v. Bangko Sentral ng Pilipinas Monetary Board, etc. Section 2 of CB Circular No. 905-82
provides:ChanRoblesVirtuala wlib rary

Section 2. The rate of interest for the loan or forbearance of any money, goods or
credits and the rate allowed in judgments, in the absence of express contract as to such
rate of interest, shall continue to be twelve percent (12%) per annum.
Pursuant to these changes, this Court modified the guidelines in Eastern Shipping Lines,
Inc. v. Court of Appeals in the case of Dario Nacar v. Gallery Frames, et al.(Nacar). In
Nacar, we established the following guidelines: ChanRoblesVirtua lawl ibrary

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts,

delicts or quasi-delicts is breached, the contravenor can be held liable for
damages. The provisions under Title XVIII on "Damages" of the Civil Code
govern in determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual

and compensatory damages, the rate of interest, as well as the accrual
thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum

of money, i.e., a loan or forbearance of money, the interest due should
be that which may have been stipulated in writing. Furthermore, the
interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be
6% per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169
of the Civil Code, (emphasis and underscore supplied)
 2. When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be imposed at
the discretion of the court at the rate of 6% per annum. No interest, however,
shall be adjudged on unliquidated claims or damages, except when or until the
demand can be established with reasonable certainty. Accordingly, where the
demand is established with reasonable certainty, the interest shall begin to run
from the time the claim is made judicially or extrajudicially (Art. 1169, Civil
Code), but when such certainty cannot be so reasonably established at the time
the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may
be deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount finally
adjudged.

3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 6% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.

And, in addition to the above, judgments that have become final and executory prior to
July 1, 2013, shall not be disturbed and shall continue to be implemented applying the
rate of interest fixed therein.
To accord with the foregoing rulings, the 17.532% and 14.239% annual interest rates
shall also respectively earn a penalty charge of 18% per annum reckoned on the unpaid
principals computed from the date of default (August 3, 1998) until fully paid. This is in
line with the express agreement between the parties to impose such penalty charge.

Article 2212 of the Civil Code requires that interest due shall earn legal interest from
the time it is judicially demanded, although the obligation may be silent upon this point.
Accordingly, the interest due shall itself earn legal interest of 6% per annum from the
date of finality of the judgment until its full satisfaction, the interim period being
deemed to be an equivalent to a forbearance of credit.66 chanrobleslaw

WHEREFORE, the Court AFFIRMS the decision promulgated on April 23, 2004 with
the MODIFICATION that the petitioner shall pay to the respondent: (1) the principal
sum of PI,500,000.00 under Promissory Note No. 232711, plus interest at the rate of
14.239% per annum commencing on August 3, 1998 until fully paid; (2) the principal
sum of PI,200,000.00 under Promissory Note No. 232663, plus interest at the rate of
17.532% per annum commencing on August 3, 1998 until fully paid; (3) penalty
interest on the unpaid principal amounts at the rate of 18% per annum commencing on
August 3, 1998 until fully paid; (4) legal interest of 6% per annum on the interests
commencing from the finality of this judgment until fully paid; (5) attorney's fees
equivalent to 10% of the total amount due to the respondent; and (6) costs of suit.

SO ORDERED. chanRoblesvirtualLawl ibrary

Sereno, C.J., Leonardo-De Castro, Perlas-Bernabe, and Caguioa, JJ., concur.

Endnotes:
1
Rollo, pp. 174-182; penned by Associate Justice Edgardo P. Cruz (retired), with the
concurrence of Associate Justice Delilah Vidallon-Magtolis (retired) and Associate Justice
Noel G. Tijam.
2
CA rollo, pp. 62-69; penned by Judge Marissa Macaraig-Guillen
3
Rollo, p. 193.
4
Rollo, pp. 174-175.
5
CA rollo, p. 69.
6
Id. at 23-24.
7
Supra note 1.
8
Id. at 181.
9
CA rollo, p. 194.
10
Rollo, pp. 13-14.
11
Id. at 16.
12
Id. at 17.
13
Id. at 211-212.
14
Id. at 37.
15
G.R. No. 153674, December 20, 2006, 511 SCRA 376, 396-397.
16
The Civil Code says: ChanRoblesVirtua lawli brary

Art. 1370. 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.

If the words appear to be contrary to the evident intention of the parties, the latter
shall prevail over the former.
17
G.R. No. 126713, July 27, 1998, 293 SCRA 239, 252.
18
Rollo, p. 177.
19
G.R. No. 126850, April 28, 2004, 428 SCRA 79, 92.
20
Id.
21
Art. 1345. Simulation of a contract may be absolute or relative. The former takes
place when the parties do not intend to be bound at all; the latter, when the parties
conceal their true agreement.
22
IV Tolentino, Civil Code of the Philippines, 1991, p. 516.
23
Id.
24
Ramos v. Heirs ofHonorio Ramos, Sr., G.R. No. 140848, April 25, 2002, 381 SCRA
594, 602.
25
cralawred Rollo, p. 18.
26
CA rollo, pp. 44-55.
27
Rollo, pp. 22-24.
28
Rollo, pp. 177-180.
29
Art. 2047, Civil Code, provides: ChanRoblesVirtuala wlib rary

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 solidarity 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. (1822a)
30
Art. 2055, Civil Code, declares that: "A guaranty is not presumed; it must be express
and cannot extend to more than what is stipulated therein."
31
Art. 1403, Civil Code, requires that a special promise to answer for the debt,
default or miscarriage of another, among others, must be in writing to be
enforceable unless ratified; see also Aglibot v. Santia, G.R. No. 185945, December 5,
2012, 687 SCRA 283, 294-295.
32
Rollo, pp. 38, 40.
33
Records, pp. 126-127.
34
Rollo, p. 26.
35
Id. at 27.

According to Art. 1302, Civil Code, there is legal subrogation when: (1) a creditor pays
another creditor who is preferred, even without the debtor's knowledge; (2) a third
person, not interested in the obligation, pays with the express or tacit
approval of the debtor; or (3) even without the knowledge of the debtor, a person
interested in the fulfillment of the obligation pays, without prejudice to the effects of
confusion as to the latter's share.
37
Rollo, p. 65.
38
Id. at 180.
39
Id. at 18.
40
Id. at 20.
41
Art. 1308, Civil Code.
42
IV Tolentino, op. cit., at 424-425.
43
Rollo, p. 67.
44
Id. at 181.
45
Record, p. 104.
46
Id. at 105.
47
Id. at 95.
48
Id. at 96.
49
Supra note 44.
50
Id. at 105.
51
United Merchants Corporation v. Country Bankers Insurance Corporation, G.R. No.
198588, July 11, 2012, 676 SCRA 382, 395.
52
Paragraph 5 of the Promissory Note, last sentence, reads:

In case of default, I/we agree that as additional compensation, the interest rate sffall
chanRoblesvirtualLaw libra ry

automatically be raised to the prevailing rate, the increased rate to be applied from the
date of default. (Records, pp. 5, 7).
53
Section 1. The rate of interest for the loan or forbearance of any money, goods or
credits and the rate allowed in judgments, in the absence of an express contract as to
such rate of interest, shall be six percent (6%) per annum.
54
G.R. No. 197861, June 5, 2013, 697 SCRA 555, 564.
55
Id., citing Villanueva v. Court of Appeals, G.R. No. 163433, August 22, 2011, 655
SCRA 707, 716- 717.
56
Records, p. 98.
57
Id. at 99.
58
Id. at 108.
59
Id. at 109.
60
Rollo, pp. 37 and 39.
61
IV Tolentino, op. cit., at 259.
62
Art. 1226. In obligations with a penal clause, the penalty shall substitute the
indemnity for damages and the payment of interests in case of noncompliance, if there
is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor
refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation.

The penalty may be enforced only when it is demandable in accordance with the
provisions of this code.
63
G.R. No. 116285, October 19, 2001, 367 SCRA 571, 579-580.
64
G.R. No. 186332, October 23, 2013, 708 SCRA 481, 501-503.
65
G.R. No. 189871, August 13, 2013, 703 SCRA 439, 455-457.
66
Planters Development Bank v. Lopez, supra note 64.