3Republic of tbe .t@bilippine.

s
~upreme (!Court
:fflanila
FIRST DIVISION

MERRIE ANNE TAN, G.R No. 254510

Petitioner,
Present:
-versus-
GESMUNDO, CJ, Chairperson,
CAGUIOA,
CARANDANG,
FIRST MALAYAN LEASING
ZALAMEDA, and
AND FINANCE CORP., NEW
GAERLAN,JJ
UNITEDWARE MARKETING
CORP., and EDWARD YAO,
Promulgated:
Respondents.
JUN 16 2021

x---------------------------------------------------x
V
DECISION

CAGUIOA, J.:

This is a Petition for Review on Certiorari 1 (Petition) under Rule 45

which seeks a reversal of the October 30, 2019 Decision2 and the November
24, 2020 Resolution3 of the Court of Appeals Former Special Fourth Division
(CA) in CA-G.R. CV No. 110069, and prays for the following reliefs:

WHEREFORE, it is most respectfully prayed of the Honorable

Supreme Court that:

1. Instant petition, primarily a plea and cry for true justice, be given
due course;

2. The Decision dated October 30, 2019 and Resolution dated

November 24, 2020 of the Court of Appeals in CA-GR CV No. 110069 be
reversed and set aside;

Rollo, pp. 11-34.

2
Id. at 39-54. Penned by Associate Justice Gabriel T. Robeniol, with Associate Justices Ramon A. Cruz
and Jhosep Y. Lopez (now a Member of the Court) concurring.
3
Id. at 56-57.
Decision 2 G.R. No. 254510 ,

3. A new decision be rendered as follows:

3. I. Ordering respondent Yao to pay the entire claim of the

respondent (plaintiff-appellee) [FMLFC];

3.2. Deleting the award for penalty of 12% per annum starting
November 17, 2004 until full payment and the 10% percent attorney's fees;

3.3. Ordering respondent Yao to pay damages and attorney's fees to

respondent NUMC and the petitioner and her husband;

Granting unto petitioner such other reliefs just and equitable under
the premises. 4

Facts

The factual backdrop of the instant controversy is straightforward, and

involves the primary issue of the status and nature of the obligation of the
remaining multi-party surety on a defaulted loan payment, upon the release of
one of the sureties.

On December 8, 2000, respondent New Unitedware Marketing

Corporation (NUl'vlC) obtained a loan from respondent First Malayan Leasing
and Finance Corporation (FMLFC) in the amount of 'P5,000,000.00, as
evidenced by the terms of the Promissory Note executed on even date. The
loan was later refinanced on various dates at the instance of NUMC. 5 As
security for the loan, NUMC executed a Deed of Assigrunent on July 2, 2001
in favor of FMLFC, covering NUMC's fire insurance claim proceeds from
Philippine Charter Insurance Corporation (PCIC). Furthermore, as additional
security, petitioner Merrie Anne L. Tan (Merrie Tan), who was a member of
NUMC's Board of Directors, and Edward Yao (Yao), as President and
General Manager of NUMC, 6 executed a "Continuing Surety Undertaking"
on July 27, 2001 in favor of FMLFC. More, on November 29, 2002, one
Samson Ding (Ding), also a member of NUMC's Board of Directors, and
l\-1errie Tan's spouse, Willy Tan (now deceased) likewise executed a second
Continuing Surety Undertaking in favor ofFMLFC.

When NUMC defaulted on its payment of the loan, FMLFC declared

that as of November 17, 2004, NT.IMC owed it the remaining balance of
!'2,942,822.36 due, exclusive of 5% penalty charges and interests. 7 When
FMLFC's demands on NlJMC, as well as on Yao, Ding and Spouses Merrie
and Willy Tan (Spouses Tan) went unheeded, it filed a Complaint for Sum of
Money and Damages with Prayer for Preliminary Attachment on January 3,
2005 against NUl'vlC, Ding and Spouses Tan before Branch 62, Regional Trial
Court, Makati City (RTC) docketed as Civil Case No. 04-1384. 8

4
ld. at 33-34.
5 id. at 40.
6
ld.at19.
!d.at41.
' Id. at 16.
Decision 3 G.R. No. 254510

Then on October 21, 2005, during the pendency of the proceedings

before the RTC, Merrie Tan discovered that Ding, in behalf of another
corporation, and Yao, in behalf of NUMC, had entered into a Compromise
Agreement with PCIC, where Ding and Yao were paid the amounts of
PSS,570,930.92 and P75,867,556.73, respectively, as payments for the fire
insurance policy claim, the proceeds of which were earlier assigned by
NUMC in favor ofFMLFC. 9

Premised on the said Compromise Agreement, Merrie Tan argued that

Ding and Yao should be made exclusively liable for FMLFC's claim since
they were the ones who received the proceeds from the fire insurance claim,
which was intended to pay for the outstanding loan obligation of NUMC to
FMLFC. 10

Yao, for his part, denied that he received the proceeds of the fire
insurance claim from PCIC, and contended that the indemnity checks which
PCIC paid were merely endorsed by him in his official capacity to the bank
for encashment, but that the proceeds of the checks were delivered by the bank
to Ding and Willy Tan. Yao finally added that he already settled with FMLFC
his share of NUMC's obligation when he paid FMLFC the amount of
P980,000.00, in exchange of which the latter executed a "Receipt and
Release" in his favor. n

RTC Ruling

On February 9, 2017, the RTC rendered its Decision which ruled for
FMLFC, with its dispositive portion reading thus:
WHEREFORE, judgment is hereby rendered in favor [of] plaintiff
FIRST MALAYAN LEASING AND FINANCE CORPORATION
ordering the defendants NEW UNITEDViARE MARKETING
CORPORATION, MERRIE ANNE L. TAN, SING JIAN ZI aka SAMSON
DING and CHEN YI MING aka WILLY TAN to pay the former, jointly
and solidarily, the following:

I. Two Million Nine Hundred Forty-Two Thousand Eight

Hundred Twenty-Two & Thirty-Six Centavos
(Php2,942,822.36) Philippine currency p[l]us interest at
the legal rate of six (6%) percent per annum as well as
penalty charge at the rate of twelve (12%) percent per
annum reckoning from November 17, 2004 until fully
paid;

2. Amount equivalent to ten (10%) percent of the total

amount due as liquidated damages;

3. Amount equivalent to ten (10%) percent of the total

amount due as and for attorney's fees; and

0
!d.at4i-42.
10 Id. at 42.
" ld.
Decision 4 G.R. No. 254510

4. Costs of litigation.
The Third-Party Complaint filed by Merrie Anne Tan and Willy Tan
is hereby DISMISSED.

SO ORDERED. 12

In ruling in favor ofFMLFC, the RTC held that Spouses Tan, Ding and
Yao are indeed solidarily liable under the "Continuing Surety Undertaking"
each had executed, a..'1d that Yao's release as executed by FMLFC did not
operate to absolve Spouses Tan and Ding as co-sureties from their solidary
liability on the loan obligation of NUMC. It held that Yao's release only
extinguished FMLFC's claim against him, but did not affect the farmer's
claim against the co-sureties. 13 It also rejected Merrie Tan's third-party claim
that Yao should be held to account for the insurance proceeds from PCIC, as
the same was not included in FMLFC's claim against them and that the docket
fees for said complaint were not paid. 14 The RTC, however, adjusted the rates
of stipulated interests which it found iniquitous and unconscionable.

Spouses Ta11 filed an Omnibus Motion for New Trial/Reconsideration

on June 28, 2017, which was similarly denied by the RTC through its Order
dated September 5,. 2017. 15 Spouses Tan thereafter appealed to the CA, with
the same docketed as CA-G.R. CV No. 110069.

CA Ruling

The CA denied Spouses Tan's appeal through its Decision dated

October 30, 2019, which dispositively read:

WHEREFORE, the appeal is DENIED. The Decision dated

February 9, 2017 and Order dated October 6, 2017 of the Regional Trial
Court of Makati City, Branch 62, in Civil Case No. 04-1384, are hereby
AFFIRJVIED with the MODIFICATIONS that:

(1) the interest rate is reduced to twelve percent (12%) per

annum from November 17, 2004 until June 30, 2013 and
six percent (6%) per annum from July I, 2013 until the
finality of this decision;

(2) the penalty charge imposed is reduced to six percent (6%)

per annum reckoned from November 14, 2004; and

(3) the total judgment award shall be subject to interest at the

rate of six percent (6%) per annum from the finality of
l½is Decision lmtil its foll satisfaction.

The rest of the RTC' s Decision stands.

12
Id. at 18.
13
Id. at 43.
i, Id.
is Id.
Decision 5 G.R. No. 254510

SO ORDERED. 16

Therein, the CA found that: (i) the release of Yao as co-surety did not
extinguish the remaining co-sureties' solidary liability; 17 (ii) the simultaneous
imposition of penalty charges, liquidated damages and attorney's fees is
proper but the reduction of the said rates is warranted; 18 and (iii) the third-
party complaint filed by Spouses Tan against Yao was correctly dismissed
since no docket fees were paid therefor. 19

First, the CA ruled that contrary to Merrie Tan's claim that the release
of Yao as surety effectively novated the solidary obligation to a divisible one,
the release of Yao only had the effect of a modificatory novation, since
FMLFC nevertheless retained its right to pursue the old obligation on the
remaining sureties. 20 It held that the loan balance over which the remaining
sureties were solidarily liable was only reduced from i"3,429,813.58 to
i"2,942,822.36, upon the deduction ofYao's payment of i"980,000.00. 21

Second, it found that the Promissory Note stipulated two penalty

clauses: (i) the late payment charge of 5% per month, and (ii) 25% of the total
amount due for attorney's fees and 25% of the total amount due as liquidated
damages. The CA reasoned that the late payment charge, liquidated damages
and attorney's fees constitute free and voluntary stipulations which are well-
22
within the parties' prerogative to secure performance and discourage breach.
It added that there was nothing improper in the stipulation of attorney's fees
23
since they are similarly imposed as a penalty for breach of an obligation.

Third, the CA held that the dismissal of Spouses Tan's third-party

complaint was merited for their failure to pay the docket fees. It reminded that
the payment of docket fees is a positive duty that the law imposes upon the
third-party plaintiff, and Spouses Tan may not blame the RTC for its own
admitted omission. 24

Spouses Tan sought a reconsideration of the CA's Decision, pending

25
the resolution of which, Willy Tan died of COVID-19 on July 21, 2020.
When the CA denied their Motion for Reconsideration in its Resolution dated
November 24, 2020, Merrie Tan resorted to this Court via the instant Petition.

In the instant Petition, Merrie Tan submits that the CA erred in holding
that her solidary obligation along with Ding and her husband, Willy Tan was
not novated to a divisible obligation by virtue of FMLFC's release of Yao

I(, Id. at 53.

17 Id. at 46-48.
" Id. at 48-51.
19 Id. at 51-52.
20 Jd. at 48.
21 Id.
22 Id. at 50.
23 Id.
24 Id. at 52.
25 See Certificate of Death, id. at 58.
Decision 6 G.R. No. 254510

upon the latter's payment of his share alone. 26 She likewise argues that the CA
erred in ordering the payment of the rate of 6% per annum legal interest and
the rate of 12% per annum penalty charge, and that it also erred in ordering
the simultaneous payment of 10% of the total amount for liquidated damages
and 10% of the total amount for attorney's fees. Finally, she prays that the
Court reverses the CA's affirmation of the RTC's dismissal of her third-party
complaint against Yao. 27

Merrie Tan first argues that when FMLFC released Yao from the
solidary surety obligation upon the latter's partial payment of the entire loan
obligation, it effectively converted the solidary obligation to a divisible one,
where the co-sureties are no longer liable for the whole obligation but only
for their respective shares therein. 28 She avers that otherwise, it would be the
height of injustice if Yao was only held liable for the amount of i"980,000.00
while respondent NUMC, Ding and herself are still held liable for the total
outstanding loan obligation of i"2,942,822.36. She adds that FMLFC is
already estopped from claiming that the obligation of the sureties is still
solidary, when it already accepted Yao's partial payment and released him by
virtue of the same, with Yao' s payment effectively being far below the amount
of the total loan obligation. 29

On the matter of the simultaneous imposition of penalty and liquidated

damages, she avers that since both are of a similar nature, the award of one
precludes the award of the other. 30

With respect to the dismissal of her third-party complaint against Yao,

Merrie Tan submits that instead of dismissing her complaint, the RTC should
have instead ordered her and her husband to pay the docket fee pursuant to
Section 7, Rule 141 of the Rules ofCourt. 31

Finally, with respect to Yao's liability, Merrie Tan maintains that as a

signatory to the Deed of Assignment of the fire insurance claim proceeds, Yao
is primarily liable to ensure that the claim of FMLFC is settled through the
payment ofNUMC's fire insurance claim proceeds. She asserts that Yao's
failure to ensure payment of said claim by FMLFC indicates gross negligence
and breach of duties and obligations of Yao as the President and General
Manager of NUMC. 32 She adds that NUMC was not made aware of the
settlement with PCIC, and that the same was only discovered when FMLFC
filed a garnishment case against PCIC, and PCIC intimated that it had already
earlier paid NUMC's claim in full through Yao. 33

26
Id. at 20.
27
Id. at 2 I.
28
Id.at2I-22.
29
Id.
30
Id. at 26.
31 Id. at 28. Merrie Tan erroneously stated Rule 140 in the Petition.
32 Id. at 30-31.
33 Id. at 32.
 Decision 7 G.R. No. 254510

Issue

The threshold issue for the Court's resolution is whether the CA erred
in affirming the RTC in the following findings: (i) the solidary obligation
insofar as Spouses Tan and Ding were concerned was not novated by
FMLFC's release of Yao; (ii) the penalty charges, liquidated damages and
attorney's fees were properly imposed; and (iii) the third-party complaint of
Spouses Tan against Yao was correctly dismissed.

The Court's Ruling

The Court finds the Petition partly meritorious.

Specifically, the Court rules that the CA correctly held that the
obligation of the Spouses Tan and Ding remain solidary despite the release of
Yao from the smne, but it erred in affirming the RTC's simultaneous
imposition of the penalty charge and the liquidated damages, its imposed rate
of attorney's fees, and its dismissal of Merrie Tan's third-party complaint
against Yao with prejudice.

Preliminarily, the Court notes the importance of the autonomous

characteristic of contracts, pursuant to which the parties are free to establish
such stipulations, clauses and other terms and conditions as they may agree
upon to be convenient, with the only parameter that they are not contrary to
law, morals, good customs, public order or public policy. 34 It is further
remembered that when the terms of an agreement have been reduced to
writing, it is considered as containing all the terms agreed upon and there can
be no evidence on such terms other than the contents of the written
agreement. 35 Finally, when the terms of the contract are clear and leave no
doubt upon the intention of the contracting parties, the stipulations of the
parties are controlling. 36

These principles bear upon the merits of the instant Petition,

specifically on the Continuing Surety Undertaking which Merrie Tan
executed in favor of FMLFC, and the Receipt and Release executed by
FMLFC in favor of Yao.

In the main, the Court recalls the essentially solidary nature and the
extent of a surety's liability. Article 2047 of the Civil Code provides with
clarity:

ARTICLE 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.

34 Industrial Personnel and Ji1anagement Services. Inc. v. Country Bankers Insurance Corp., G.R. No.
194126, October 17, 2018 883 SCRA, 404, 415, citing CIVIL CODE, Art. 1306.
35 RULES OF COURT, Rule 130, Sec. 9.
36 CIVIL CODE, Art. 1370.
Decision 8 G.R. No. 254510

If a person binds himself solidarily with the principal debtor, the

provisions of Section 4, Chapter 3, Title I ofthis Book shall be observed. In
such case the contract is called a suretyship.

The above statutory definition of a suretyship provides that in a surety

agreement, the surety undertakes to be bound solidarily with the principal
debtor, with their liabilities so interwoven as to be inseparable. Accordingly,
Articles 1207 up to 1222 of the Civil Code on joint and solidary obligations
govern suretyship.

In Philippine Charter Insurance Corporation v. Petroleum Distributors

& Service Corporation, 37 the Court fleshed out the operation of a suretyship
undertaking in this wise:

A contract of suretyship is an agreement whereby a party, called the

surety, guarantees the performance by another party, called the principal or
obligor, of an obligation or undertaking in favor of another party, called the
obligee. Although the contract of a surety is secondary only to a valid
principal obligation, the surety becomes liable for the debt or duty of
another although it possesses no direct or personal interest over the
obligations nor does it receive any benefit therefrom. This was explained in
the case of Stronghold Insurance Company, Inc. v. Republic-Asahi Glass
Corporation, where it was written:

The surety's obligation is not an original and direct

one for the performance of his own act, but merely accessory
or collateral to the obligation contracted by the principal.
Nevertheless, although the contract of a surety is in
essence secondary only to a valid principal obligation, his
liability to the creditor or promisee of the principal is
said to be direct, primary and absolute; in other words,
he is directly and eqnally bound with the principal.

xxxx

Thus, suretyship arises upon the solidary binding of a person

deemed the surety with the principal debtor for the purpose of fulfilling an
obligation. A surety is considered in law as being the same party as the
debtor in relation to whatever is adjudged touching the obligation of
the latter, and their liabilities are interwoven as to be inseparable. 38

It has also been noted by eminent civilist former CA Justice Eduardo P.

Caguioa that although the suretyship itself is a contract that is ancillary to the
main financial accommodation contract between the principal and the
creditor, what sets the surety apart from a mere guaranty is that in a suretyship,
the surety is principally liable, as opposed to a guarantor who is only
secondarily liable. 39 So much so that with a suretyship agreement securing the
loan transaction, a creditor may go directly against the surety even without a
prior demand on the principal debtor, although the latter may be solvent or

37 686 Phil. 154 (2012).

38 Id. at 166-167. Emp~asis supplied.
39 EDUARDO P. CAGUIOA, COMMENTS AND CASES ON CIVIL LAW CIVIL CODE OF THE PHILIPPINES, Vol.
VI (First ed. 1970), p. 306.
Decision 9 G.R. No. 254510

otherwise able to pay. 40 A surety's liability stands irrespective of the principal

debtor's ability to perform his obligations under the contract which is subject
of the suretyship. 41

In the instant controversy, Merrie Tan, along with Yao executed a

"Continuing Surety Undertaking," which has been described in Lim v.
Security Bank Corp. 42 as a continuing suretyship:

Comprehensive or continuing surety agreements are, in fact, quite

commonplace in present day financial and commercial practice. A bank or
financing company which anticipates entering into a series of credit
transactions with a particular company, normally requires the projected
principal debtor to execute a continuing surety agreement along with its
sureties. By executing such an agreement, the principal places itself in a
position to enter into the projected series of transactions with its creditor;
with such suretyship agreement, there would be no need to execute a
separate surety contract or bond for each financing or credit accommodation
extended to the principal debtor. 43

Continuing suretyships have been observed by the Court to be usual in

the commercial practice, where the principal places itself in a position to enter
into projected series of transactions with its creditor, with no more need to
execute a separate surety contract for each financial accommodation, since the
continuing suretyship covers the subsequent ones as well. 44 These continuing
suretyships have the effect of encouraging the creditor to extend further
accommodations without the fears and uncertainties that unsecured credits
carry.

Under the "Continuing Surety Undertaking" of the instant case,

FMLFC may seek to recover from NUMC, or from Merrie Tan or Ding,
consistent with Article 1216 of the Civil Code which provides:

Article 1216. The creditor may proceed against any one of the
solidary debtors or some or all of them simultaneously. The demand
made against one of them shall not be an obstacle to those which may
subsequently be directed against the others, so long as the debt has not been
fully collected. (Emphasis supplied)

In fact, the Receipt and Release executed by FMLFC in favor of Yao

categorically provides for the reservation of its option to proceed against the
remaining co-sureties Spouses Tan and Ding, to wit:

Subject to the condition precedent that the above-mentioned check

shall be duly honored by the drawee bank upon presentment and in
consideration of said payment, Malayan Leasing agrees to (a) release Mr.
Yao from his obligations as such surety, and (b) not to file any case or action

40 Trade and investment Development Corporation of the Philippines v. PhWppine Veterans Bank., G.R.
No. 233850, July J, 2019, 907 SCRA 66, 81.
41 The 1vfercantile Insurance Co., inc. v. DMCI-La;ng Construction, Inc., G.R. No. 205007, September 16,
2019, accessed at <https://dibrary.judiciary.gov.ph/thebookshel£'showdocs/l/65762>.
42 729 Phil. 345 (2014).
43 Id. at 352-353.
44 Totanes v. China Banking Corporation, G.R. No. 179880, January 19, 2009, 576 SCRA 323, 329-330.
Decision 10 G.R. No. 254510

against Mr. Yao, whether civil, criminal or otherwise, arising under or in

connection with the remaining obligations of New Unitedware under the
above-mentioned Promissory Note and related documents.

This is without prejudice to the right of Malayan Leasing to

exercise any and all rights and remedies which it may have, either by
contract or under applicable law, against New Unitedware, and/or its
officers, directors, stockholders and/or sureties (excluding Mr. Yao). 45

Clearly, as spelled out in the Receipt and Release, and consistent with
its right as a creditor of solidary obligors under Article 1216, FMLFC
proceeded against Yao, later released him from the suretyship upon payment
of f>980,000.00, and expressly reserved its right to proceed against NUMC
and/or its remaining co-sureties.

Therefore, Merrie Tan's submissions that (i) FMLFC is estopped from

treating her and the remaining co-sureties as solidary obligors since it
accepted partial payment ofNUMC's outstanding loan obligation from Yao;
and (ii) that said acceptance and subsequent release amounted to a novation
which converted the suretyship into a divisible obligation are both misplaced.

On the contrary, FMLFC was well within its rights as a creditor to

proceed against either NUMC or any one or more or all of the co-sureties for
the collection of NUMC's outstanding loan. That it chose to first proceed
against Yao and not against the other co-sureties did not operate as an estoppel
on it from subsequently proceeding against the remaining co-sureties. More,
that it agreed to release Yao upon the latter's payment of a partial amount of
the total loan obligation of NUMC also did not operate to bar it from
proceeding against the remaining co-sureties to ensure the full satisfaction of
the debt. The liability of Merrie Tan remains solidary with NUMC, regardless
of partial payment by Yao, precisely because the kind of security she
undertook was one of suretyship. However, as the CA correctly determined,
the outstanding loan obligation for which Merrie Tan, NUMC and Ding
remain solidarity liable for has been effectively reduced by Yao's partial
satisfaction of the same.

To be sure, the Court has so far acknowledged instances when a surety

is discharged from liability as a result of an act or omission of the creditor that
may be declared negligent or otherwise constitutive of a material alteration of
the contract. 46 In Philippine National Bank v. Manila Surety & Fidelity Co.,
Inc., 47 the surety was considered released since the creditor therein was found
negligent in allowing the assigned funds to be exhausted without notifying the
surety, thereby devriving the latter of any possibility of availing of a recourse
against that security. Similarly, in the case of Philippine National Bank v.
Luzon Surety Co., Jnc., 48 the Court recognized that material alteration can be

45 Rollo, pp. 47-48. Emphasis supplied.

46 Sec Carodan v. China Banking Corpormiun, 781 Phil. 750, 766 (2016).
40
122Phil. 106(1965).
43
G.R. No. L-29587, November 28, 1975, 68 SCRA 207.
Decision 11 G.R. No. 254510

a ground for release. 49 In Palmares v. Court ofAppeals, 50 the Court mentioned

that an extension of the time of payment for a definite period without the
consent or reservation of the rights of the surety would release the latter. 51

However, as far as the facts of the suretyship involving Spouses Tan

and Ding are concerned, none of the foregoing scenarios obtain. Therefore,
contrary to Merrie Tan's chief assertion, they are not released from the
solidary obligation to pay FMLFC for NUMC's remaining obligation.

In addition, and most unlike Merrie Tan's submission, these are not the.
height of injustice, but only the very nature of a suretyship agreement. To be
sure, in case Merrie Tan fully pays for NUMC's outstanding obligation to
FMLFC, she is not without recourse. For the moment the surety fully answers
to the creditor for the obligation created by the principal debtor, such
obligation is extinguished. At the same time, the surety may seek
reimbursement from the principal debtor for the amount paid, for the surety
does in fact become subrogated to all the rights and remedies of the creditor. 52
This remedy of Merrie Tan as against her co-surety Yao is clearly provided
for in Article 1217 of the Civil Code, to wit:

Article 1217. Payment made by one of the solidary debtors

extinguishes the obligation. If two or more solidary debtors offer to pay,
the creditor may choose which offer to accept.

He who made the payment may claim from his co-debtors only the
share which corresponds to each, with the interest for the payment already
made. If the payment is made before the debt is due, no interest for the
intervening period may be demanded.

When one of the solidary debtors cannot, because of his insolvency,

reimburse his share to the debtor paying the obligation, such share shall be
borne by all his co-debtors, in proportion to the debt of each.

More, the intent of the law to ensure that the obligation of one surety to
his co-sureties survives even in the event of a partial or total condonation or
remission of the debt owed is likewise clearly provided for in Article 1219 of
the Civil Code, which states, viz.:

The remission made by the creditor of the share which affects one
of the solidary debtors does not release the latter from his responsibility
towards the co-debtors, in case the debt had been totally paid by anyone of
them before the remission was effected.

With respect to Merrie Tan's submission that the penalty charge,

liquidated damages and attorney's fees were improperly imposed, the Court
is inclined to agree. The nature of a penalty charge and liquidated damages
are similar, and they may not be simultaneously imposed in the instant case

49 !d.at2!4.
50 G.R. No. 126490, March 31, 1998, 288 SCRA 422.
51 Id. at 442.
52 Escafzo, et al. v. Ortigas, Jr., G.R. No. 151953, June 29, 2007, 526 SCRA 26, 43.
Decision 12 G.R. No. 254510

without violating the fundamental concepts ofiniquity and excessiveness, and

notwithstanding the contractual autonomy of the parties herein.

To be sure, the characteristic autonomy of the contract as the law

between agreeing parties is acknowledged, as exemplified by the Promissory
Note executed by NUMC in favor ofFMLFC, which provided for the penalty
charge, liquidated damages and attorney's fees in order to encourage
performance of the obligation and deter nonpayment of the same.

However, although the Court is not at liberty to ignore the expressed

freedom ofFMLFC and NUMC to agree to such terms and conditions as they
saw fit and convenient, the Court is nevertheless well within its powers to
determine the real intention of the parties in their stipulations in the penalty
clause, and to further make a finding as to whether said impositions are
iniquitous or unconscionably redundant.

In Fi/invest Land Inc. v. Court ofAppeals, 53 the Court has held that by
definition, a penal clause in a contract is an accessory undertaking to assume
greater liability in case of breach, and is attached to an obligation in order to
insure performance and serve a dual function: (1) to provide for liquidated
damages, and (2) to strengthen the coercive force of the obligation by the
threat of greater responsibility in the event of breach. 54 Article 1226 of the
Civil Code states to this effect:

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 dernandable m

accordance with the provisions of this Code. (Emphasis supplied)

To be sure, the Court recognized the nuanced approach that must be

taken when both liquidated damages and the penalty charge are imposed in
the contract, as in the early case of Laureano v. Kilayco, 55 which instructed
that a distinction between a penalty clause imposed essentially as penalty in
case of breach and a penalty clause imposed as indemnity for damages should
be made in cases where there has been neither partial nor irregular compliance
with the terms of the contract. 56

More specifically instructive is the case of D.M Ragasa Enterprises,

Inc. v. Banco De Oro, Inc. 57 (D.M Ragasa), where the Court elaborated on
the nature, source and purposes of a penalty under a contract in order to
deduce the tiue nature of a penalty clause, viz.:

53 G.R. No. 138980, September 20, 2005, 470 SCRA 260.

54
Id. at 269.
55
32 Phil. 194 (1915).
56 See id. at 200.
57 G.R. No. I 90512, fone 20, 2018, 867 SCRA 71.
Decision 13 G.R. No. 254510

A penal clause is an accessory obligation which the parties attach to

a principal obligation for the purpose of insuring the performance thereof
by imposing on the debtor a special prestation (generally consisting in the
payment of a sum of money) in case the obligation is not fulfilled or is
irregularly or inadequately fulfilled. Quite common in lease contracts, this
clause functions to strengthen the coercive force of the obligation and to
provide, in effect, for what would be the liquidated damages resulting from
a breach.

A penal clause has a three-fold purpose: (1) a coercive purpose or

one of guarantee - this is to urge the debtor to the fulfillment of the main
obligation under pain of paying the penalty; (2) to serve as liquidated
damages - this is to evaluate in advance the damages that may be
occasioned by the non-compliance of the obligation; and (3) a strictly penal
purpose - this is to punish the debtor for non-fulfillment of the main
obligation. While the first purpose is always present, the second purpose is
presumed and the third purpose must be expressly agreed upon.

Stated otherwise, the purposes of penalty or penal clause are: (I)

fancion coercitiva o de guarantia or to insure the performance of the
obligation; (2) fimcion liquidatoria or to liquidate the amount of damages
to be awarded to the injured party in case of breach of the principal
obligation; and (3)fancion estrictamente penal or to punish the obligor in
case of breach of the principal obligation, in certain exceptional cases. The
second is evidently compensatory and the third is punitive in character,
while the first is the general purpose regardless of whether the penalty is
compensatory or punitive.

Evidently, the penal clause may be considered either reparation,

compensation or substitute for damages, on one hand, or as a
punishment in case of breach of the obligation, on the other. When
considered as reparation or compensation, the question as to the
appropriate amount of damages is resolved once and for all because the
stipulated indemnity represents a legitimate estimate made by the
contracting parties of the damages caused by the nonfulfillment or
breach of the obligation. Proof of actual damages is, consequently, not
necessary in order that the stipulated penalty may be demanded. When
considered as a punishment, the question of damages is not yet resolved
inasmuch as the right to damages, besides the penalty, still subsists. Thus,
if the injured party desires to recover the damages actually suffered by him
in addition to the penalty, he must prove such damages.

Penal clause may be classified into: (1) according to source: (a) legal
(when it is provided by law) and (b) conventional (when it is provided for
by stipulation of the parties); (2) according to demandability: (a) subsidiary
(when only the penalty may be enforced) and (b) complementary (when
both the principal obligation and the penalty may be enforced); and (3)
according to purpose: (a) cumulative (when damages may be collected in
addition to penalty) and (b) reparatory (when the penalty substitutes
indemnity for damages). 58

'.Vithin the framework of the Court's operative definition ofa penalty

clause as explained in D.M Ragasa, but unlike the Court's appreciation in
that case that the penal clause therein was punitive in nature, in this case, the

58 Id. at 95-97. Emphasis supplied.

Decision 14 G.R. No. 254510

Court discerns as it so holds that the "late payment charge" clause in the
Promissory Note in the instant case is not punitive, but compensatory, in that
it serves the purpose of "funcion liquidatoria or to liquidate the amount of
damages to be awarded to the injured party in case of breach of the principal
obligation." 59 To recall, the clause in the Promissory Note in the question
provides:

Likewise, I/we hereby jointly and severally promise to pay a late

payment charge on any overdue sum under this note at the rate of five
percent (5%) per month.

It is furtl1er agreed that if upon such default, attorney's services are

availed of, an additional sum equal to twenty five percent (25%) of the total
sum due thereon, xx x, shall be paid to the holder hereof for attorney's fees
plus an additional sum equivalent to twenty five percent (25%) of the
total sum due x x x, for liquidated damages aside from expenses of
collection and the legal costs provided in the Rules of Court. 60

As may be gleaned from the above clause, and seen from the Court's
discussion of a penalty clause in D.M Ragasa, although it clearly provides for
the penalty charge at the rate of 5% per month as distinct from the imposition
of the 25% liquidated damages, it nevertheless appears that the "late payment
charge," as stipulated, was imposed not as an addition to but in lieu of
indemnity for damages and payment of interests in case of default in payment,
as squarely described in Article 1226 of the Civil Code. Consistent with the
operative definitions in D.M Ragasa, the above-quoted "late payment
charge" is clearly reparatory and thereby particularly stipulates the amount of
compensatory damages to be paid by a defaulting party in case of breach.

Since this indemnifying function is already what liquidated damages

are for, and since the indemnification is already served by the imposition of
the penalty of the "late payment charge," the Court cannot now countenance
the separate and simultaneous burdens of a penalty charge and liquidated
damages on the part of the principal debtor or the surety, without agreeing to
a carrying out of injustice by way of the unconscionable redundancy of
penalties.

Furthermore, with respect to the amount of damages, the Court also

reminds that since the penal clause is compensatory in purpose, the
appropriate amount of damages is resolved without need of proof since the
stipulated indemnity represents a legitimate estimate made by the parties of
the damages caused by the breach. Once more on this point, the Court, in D.M
Ragasa, teaches:

As defined, liquidated damages are those agreed upon by the parties

to a contract, to be paid in case of breach thereof. The amount of the
liquidated damages is purely contractual between the parties; and the courts
will intervene only to equitably reduce the liquidated damages, whether

59
Id. at 96.
60 Rollo, p. SO. Emphasis supplied.
Decision 15 G.R. No. 254510

intended as an indemnity or a penalty, if they are iniquitous or

unconscionable, pursuant to Articles 2227 and 1229 of the Civil Code.

Also, proof of actual damages suffered by the creditor is not

necessary in order that the penalty may be demanded. 61

The Court however notes that if under Article 1229 of the Civil Code ,62
it may reduce rates of interests and penalties which it discerns to be
iniquitous, then with more reason can the Court remove redundant charges
that serve the same end with respect to ensuring compliance of an undertaking
under pains of costs.

The Court further reduces the stipulated attorney's fees for being
unconscionable, for whether there is an agreement, the courts can fix a
reasonable compensation which lawyers may receive for their professional
services, as such falls within the regulatory prerogative of the courts. 63 On this
score, Section 24, Rule 138 of the Rules of Court enables such reduction
despite stipulation in cases ofunconscionability, viz.:

Sec. 24. Compensation of attorneys; agreement as to fees. - An

attorney shall be entitled to have and recover from his client no more than
a reasonable compensation for his services, with a view to the importance
of the subject-matter of the controversy, the extent of the services rendered,
and professional standing of the attorney. No court shall be bound by the
opinion of attorneys as expert witnesses as to the proper compensation but
may disregard such testimony and base its conclusion on its professional
knowledge. A written contract for services shall control the amount to
be paid therefor unless found by the court to be unconscionable or
unreasonable. (Emphasis supplied)

In determining the reasonableness of the attorney's fees that may be

awarded in a given case, illustrative are the guideposts that the Court provided
in Rayos v. Hernandez: 64

Stipulated attorney's fees are unconscionable whenever the amount

is by far so disproportionate compared to the value of the services rendered
as to amount to fraud perpetrated upon the client. This means to say that the
amount of the fee contracted for, standing alone and unexplained would be
sufficient to show that an unfair advantage had been taken of the client, or
that a legal fraud had been perpetrated on him.

The decree of unconscionability or unreasonableness of a stipulated

an1ount in a contingent fee contract, will not, however, preclude recovery.
It merely justifies the fixing by the court of a reasonable compensation for
the lawyer's services.

Generally, the amount of attorney's fees due is that stipulated in the

retainer agreement which is conclusive as to the amount of the lawyer's

61 Jd. at 97. Emphasis supplied.

02 Article ]229. The judge shall equitably reduce the penalty when the principal obligation has been partly
or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also
be reduced by the comts ifit is iniquitous or unconscionable.
63 Riguer v. Mateo, 811 Phil. 538, 548 (2017).
64 G.R. No. 169079, February 12, 2007, 515 SCRA 517.
Decision 16 G.R. No. 254510

compensation. A stipulation on a lawyer's compensation in a written

contract for professional services ordinarily controls the amount of fees
that the contracting lawyer may be allowed, unless the court finds such
stipulated amount unreasonable or unconscionable. In the absence
thereof, the amount of attorney's fees is fixed on the basis of quantum
meruit, i.e., the reasonable worth of the attorney's services. Courts may
ascertain also if the attorney's fees are found to be excessive, what is
reasonable under the circumstances. In no case, however, mnst a lawyer be
allowed to recover more than what is reasonable, pursuant to Section 24,
Rule 138 of the Rules of Court.

We have identified the circumstances to be considered in

determining the reasonableness ofa claim for attorney's fees as follows:(!)
the amount and character of the service rendered; (2) labor, time, and
trouble involved; (3) the nature and importance of the litigation or business
in which the services were rendered; (4) the responsibility imposed; ( 5) the
amount of money or the value of the property affected by the controversy
or involved in the employment; (6) the skill and experience called for in the
performance of the services; (7) the professional character and social
standing of the attorney; (8) the results secured; (9) whether the fee is
absolute or contingent, it being recognized that an attorney may properly
charge a much larger fee when it is contingent than when it is not; and (] 0)
the financial capacity and economic status of the client have to be taken into
account in fixing the reasonableness of the fee. 65

Given the foregoing, the Court finds it fitting and so holds the further
reduction of the attorney's fees as awarded, from I 0% of the total outstanding
obligation, to the amount of Pl 00,000.00.

Finally, concerning the dismissal of the third-party complaint filed by

Merrie Tan against Yao on the ground of failure to pay the docket fees, the
Court is inclined to qualify said dismissal as one which must be without
prejudice to a refiling of the same, with the appropriate payment oflegal fees.
Apropos is the Court's counsel in the case of Heirs ofReinoso, Sr. v. Court of
Appeals66 (Heirs of Reinoso, Sr.) where the exceptions to the general rule of
dismissal upon non-payment of docket fees were outlined, thus:

The rule is that payment in full of the docket fees within the
prescribed period is mandatory. In Manchester v. Court ofAppeals, it was
held that a court acquires jurisdiction over any case only upon the payment
of the prescribed docket fee. The strict application of this rule was,
however, relaxed two (2) years after in the case of Sun Insurance Office,
Ltd. v. Asuncion, wherein the Court decreed that where the initiatory
pleading is not accompanied by the payment of the docket fee, the court
may allow payment of the fee within a reasonable period of time, but in
no case beyond the applicable prescriptive or reglementary period. This
ruling was made on the premise that the plaintiff had demonstrated his
willingness to abide by the rules by paying the additional docket fees
required. Thus, in the more recent case of United Overseas Bank v. Ros,
the Court explained that where the party does not deliberately intend to
defraud the court in payment of docket fees, and manifests its

65
Id. at 530-53 I.
66
669 Phil. 272 (201 !).

(
Decision 17 G.R. No. 254510

willingness to abide by the rules by paying additional docket fees when

required by the court, the liberal doctrine enunciated in Sun Insurance
Office, Ltd., and not the strict regulations set in Manchester, will apply.
It has been on record that the Court, jn several instances, allowed the
relaxation of the rule on non-payment of docket fees in order to afford the
parties the opportunity to fully ventilate their cases on the merits. In the case
of La Salette College v. Pilotin, the Court stated:

Notwithstanding the mandatory nature of the

requirement of payment of appellate docket fees, we also
recognize that its strict application is qualified by the
following: first, failure to pay those fees within the
reglementary period allows only discretionary, not
automatic, dismissal; second, such power should be used by
the court in conjunction with its exercise of sound discretion
in accordance with the tenets of justice and fair play, as well
as with a great deal of circumspection in consideration of all
attendant circumstances.

While there is a crying need to unclog court dockets on the one hand,
there is, on the other, a greater demand for resolving genuine disputes fairly
and equitably, for it is far better to dispose of a case on the merit which is a
primordial end, rather than on a technicality that may result in injustice. 67

In the instant case, the records show that at the level of the RTC, the
third-party complaint of Merrie Tan against Yao was admitted in its Order
dated June 6, 2007, and that Yao, for his part, filed his Compulsory
Counterclaim thereto, without any mention of the non-payment of docket
fees. 68 The records further show that Merrie Tan, et al. were only notified of
their non-payment of docket fees through the assailed CA Decision, after
which they immediately paid the filing fees to the Clerk of Court of the RTC,
and thereafter submitted proof of such payment along with the Motion for
Reconsideration they filed before the CA. 69

It appears therefore that Merrie Tan's deportment upon notice of non-

payment of the docket fees is one which falls squarely within the Court's
description in Heirs of Reinoso, Sr. as one who has demonstrated willingness
to abide by the rules and pay the necessary legal fees, and has otherwise shown
no ill will or intent to defraud the court.

For this reason, the Court finds that it was ar1 available option for the
RTC to have simply accepted the docket fees that were belatedly paid and
allowed the third-party complaint against Yao due course. Nevertheless, since
it is evidently too late in the day to order a remand of the instant case solely
for the purpose of giving due course to the third-party complaint against Yao
which was already twice dismissed, the Court here discerns that the dismissal
of said third-party complaint should have been made without prejudice to a
refiling, in oider to keep open the recourse of Merrie Tan against Yao as her
co-surety. In this regard Merrie Tan can seek recourse with the appropriate

67 Id. at 280-28 L Citations omitted; emphasis supplied.

68 Rollo, p. 27.
69 Id. at 28.
Decision 18 G.R. No. 254510

RTC to seek a refund of the filing fees she had paid for the third-party
complaint.

WHEREFORE, premises considered, the Petition is hereby PARTLY

GRANTED.

The Decision dated October 30, 2019 and Resolution dated November
24, 2020 of the Court of Appeals in CA-G.R. CV No. 110069 are hereby
AFFIRMED with MODIFICATION. New Unitedware Marketing
Corporation, Merrie Anne L. Tan and Sing Jian Zi a.k.a. Samson Ding are
ORDERED to jointly and severally PAY the First Malayan Leasing and
Finance Corporation the following:

(!)Two Million Nine Hundred Forty-Two Thousand Eight

Hundred Twenty-Two & Thirty-Six Centavos
(P2,942,822.36), subject to:

(a)the interest rate of twelve percent (12%) per

annum from November 17, 2004 until June 30,
2013 and six percent (6%) per annum from July
1, 2013 until the finality of this Decision; and

(b) the penalty charge of six percent ( 6%) per annum

reckoned from November 14, 2004; and

(2)attomey's fees in the amount of Pl00,000.00.

The total judgment award shall be subject to interest at the rate of six
percent ( 6%) per annum from the finality of this Decision until its full
satisfaction.

Finally, the third-party complaint filed by Merrie Anne Tan and Willy
Tan against Edward Yao is hereby DISMISSED without prejudice.

SO ORDERED.

NS. CAGUIOA
 Decision 19 G.R. No. 254510

WE CONCUR:

:; 5 ~
SAMUEL H. GAERLAN
Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, I certify that

the conclusions in the above Decision had been reached in consultation before
the case was assigned to the writer of the opinion of the Court's Division.