Government of the Philippine Islands v. Lim
REITERATIONFacts
The Antecedents: The defendants obtained loans from the plaintiff, the Government of the Philippine Islands, in the amounts of P10,000 on July 28, 1930, and P3,000 on October 28, 1930. They executed promissory notes and mortgage deeds, binding themselves jointly and severally to repay these amounts, along with stipulated interest, taxes, insurance premiums, repair expenses, and penalties. The first loan was payable within five years, and the second within four years and nine months. Procedural History: The defendants failed to pay the stipulated interest, causing the obligations and mortgages to become due and demandable. On December 19, 1933, the defendants were indebted for the principal amounts and accrued interest as detailed in the judgment. The plaintiff initiated an action to foreclose the mortgages. The Court of First Instance of Manila rendered a judgment sentencing the defendants, jointly and severally, to pay the plaintiff specific amounts with stipulated interests and penalties. The judgment also stipulated that if the amounts were not paid within three months, the mortgaged property would be sold at public auction. The Petition: The defendants appealed the judgment, but they did not deny their indebtedness, their obligation to pay interest and other advanced amounts, nor the plaintiff's right to foreclose the mortgages. The sole assignment of error pertained to the plaintiff's right to recover P1,300, representing 10% of the principal indebtedness of P13,000, for costs, expenses of collection, and attorney's fees. They argued that this penalty was unjustified as the Government had salaried counsel and did not employ private counsel, and that its affirmance would constitute double compensation.
Issue(s)
Whether the plaintiff is entitled to recover the sum of P1,300 representing 10% of the principal indebtedness for costs, expenses of collection, and attorney's fees. Whether the stipulation for attorney's fees and expenses of collection constitutes a valid and enforceable penal clause.
Ruling
The appealed judgment is affirmed in toto, with the costs of this instance to the defendants.
Ratio Decidendi
On the issue of recovering attorney's fees and expenses of collection: The Court held that the defendants voluntarily undertook in the promissory notes and mortgage deeds to pay the sum of P1,300 as court costs, expenses of collection, and attorney's fees, whether incurred or not. This stipulation was deemed a valid and permissible penal clause, not contrary to law, morals, or public order, and therefore strictly binding upon the defendants. The Court cited Articles 1091, 1152, and 1258 of the Civil Code, along with several previous Supreme Court decisions, to support the enforceability of such clauses. The defendants' contention that the Government, having salaried counsel, should not recover these fees was rejected as the stipulation was a contractual undertaking. On the validity and enforceability of the penal clause: The Court affirmed that the stipulation for P1,300 as attorney's fees and expenses of collection is a valid penal clause. It was not found to be excessive or exorbitant. Furthermore, since the defendants had not made any payment upon their principal obligations, the discretion conferred by Article 1154 of the Civil Code, which allows for the reduction of penalties, could not be exercised to reduce the stipulated amount. The Court reiterated that such clauses are binding when voluntarily agreed upon and not contrary to law or public policy.
Main Doctrine
A stipulation for attorney's fees and expenses of collection, voluntarily undertaken in promissory notes and mortgage deeds, constitutes a valid and permissible penal clause, binding upon the parties, and is not subject to reduction by the court unless it is excessive or exorbitant, or payments have been made on the principal obligation.