G.R. No. 126486 February 9, 1998 during the trial rather than P3,1081000.

during the trial rather than P3,1081000.00 The latter amount appears in petitioner's prayer supposedly as a
BARONS MARKETING CORP., petitioner, vs. COURT OF APPEALS and PHELPS DODGE PHILS., result of a typographical error.
INC. respondents.
KAPUNAN, J.: On the other hand, petitioner reiterated its claims for damages as a result of "creditor's abuse." It also
alleged that private respondent failed to prove its cause of action against it.
The instant petition raises two issues: (1) whether or not private respondent is guilty of abuse of right; and
(2) whether or not private respondent is entitled to interest and attorney's fees.
On 25 June 1996, the Court of Appeals rendered a decision modifying the decision of the trial court, thus:
WHEREFORE, from all the foregoing considerations, the Court finds Phelps Dodge Phils., Inc. to have
The facts are undisputed: On August 31, 1973, plaintiff [Phelps Dodge, Philippines, Inc. private respondent preponderantly proven its case and hereby orders Barons Marketing, Inc. to pay Phelps Dodge the following:
herein] appointed defendant [petitioner Barons Marketing, Corporation] as one of its dealers of electrical 1. P3,802,478.20 constituting the unpaid balance of defendant's purchases from plaintiff and interest
wires and cables effective September 1, 1973 (Exh. A). As such dealer, defendant was given by plaintiff 60 thereon at 12% per annum computed from the respective expiration of the 60 day credit term, vis-a-vis the
days credit for its purchases of plaintiff's electrical products. This credit term was to be reckoned from the various sales invoices and/or delivery receipts; and
date of delivery by plaintiff of its products to defendant (Exh. 1). 2. 5% of the preceding obligation for and as attorney's fees. No costs.4

Petitioner Barons Marketing is now before this Court alleging that respondent court erred when it held (1)
During the period covering December 1986 to August 17, 1987, defendant purchased, on credit, from
private respondent Phelps Dodge not guilty of "creditor's abuse," and (2) petitioner liable to private
plaintiff various electrical wires and cables in the total amount of P4,102,438.30 (Exh. B to K). These wires
respondent for interest and attorney's fees.
and cables were in turn sold, pursuant to previous arrangements, by defendant to MERALCO, the former
being the accredited supplier of the electrical requirements of the latter. Under the sales invoices issued by
I. Petitioner does not deny private respondent's rights to institute an action for collection and to claim full
plaintiff to defendant for the subject purchases, it is stipulated that interest at 12% on the amount due for
payment. Indeed, petitioner's right to file an action for collection is beyond cavil. 5 Likewise, private
attorney's fees and collection (Exh. BB).1 On September 7, 1987, defendant paid plaintiff the amount of
respondent's right to reject petitioner's offer to pay in installments is guaranteed by Article 1248 of the Civil
P300,000.00 out of its total purchases as above-stated (Exh. S), thereby leaving an unpaid account on the
Code which states:
aforesaid deliveries of P3,802,478.20. On several occasions, plaintiff wrote defendant demanding payment of
its outstanding obligations due plaintiff (Exhs. L, M, N, and P). In response, defendant wrote plaintiff on
Art. 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled partially to
October 5, 1987 requesting the latter if it could pay its outstanding account in monthly installments of
receive the prestations in which the obligation consists. Neither may the debtor be required to make partial
P500,000.00 plus 1% interest per month commencing on October 15, 1987 until full payment (Exh. O and O-
payments.
4). Plaintiff, however, rejected defendant's offer and accordingly reiterated its demand for the full payment
of defendant's account (Exh. P).2 However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the
debtor may effect the payment of the former without waiting for the liquidation of the latter.
On 29 October 1987, private respondent Phelps Dodge Phils., Inc. filed a complaint before the Pasig Regional
Trial Court against petitioner Barons Marketing Corporation for the recovery of P3,802,478.20 representing Under this provision, the prestation, i.e., the object of the obligation, must be performed in one act, not in
the value of the wires and cables the former had delivered to the latter, including interest. Phelps Dodge parts.
likewise prayed that it be awarded attorney's fees at the rate of 25% of the amount demanded, exemplary
damages amounting to at least P100,000.00, the expenses of litigation and the costs of suit. Tolentino concedes that the right has its limitations: Partial Prestations. — Since the creditor cannot be
compelled to accept partial performance, unless otherwise stipulated, the creditor who refuses to accept
Petitioner, in its answer, admitted purchasing the wires and cables from private respondent but disputed the partial prestations does not incur in delay or mora accipiendi, except when there is abuse of right or if good
amount claimed by the latter. Petitioner likewise interposed a counterclaim against private respondent, faith requires acceptance.6
alleging that it suffered injury to its reputation due to Phelps Dodge's acts. Such acts were purportedly
calculated to humiliate petitioner and constituted an abuse of rights. Indeed, the law, as set forth in Article 19 of the Civil Code, prescribes a "primordial limitation on all rights" by
setting certain standards that must be observed in the exercise thereof. 7 Thus: Art. 19. Every person must, in
After hearing, the trial court on 17 June 1991 rendered its decision, the dispositive portion of which reads: the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and
WHEREFORE, from all the foregoing considerations, the Court finds Phelps Dodge Phils., Inc. to have
observe honesty and good faith.
preponderantly proven its case and hereby orders Barons Marketing, Inc. to pay Phelps Dodge the following:
1. P3,108,000.00 constituting the unpaid balance of defendant's purchases from plaintiff and interest
thereon at 12% per annum computed from the respective expiration of the 60 day credit term, vis-a-vis the Petitioner now invokes Article 19 and Article 218 of the Civil Code, claiming that private respondent abused
various sales invoices and/or delivery receipts; its rights when it rejected petitioner's offer of settlement and subsequently filed the action for collection
2. 25% of the preceding obligation for and as attorney's fees; considering: . . . that the relationship between the parties started in 1973 spanning more than 13 years
3. P10,000.00 as exemplary damages; before the complaint was filed, that the petitioner had been a good and reliable dealer enjoying a good
4. Costs of suit.3 credit standing during the period before it became delinquent in 1987, that the relationship between the
parties had been a fruitful one especially for the private respondent, that the petitioner exerted its outmost
Both parties appealed to respondent court. Private respondent claimed that the trial court should have
efforts to settle its obligations and avoid a suit, that the petitioner did not evade in the payment of its
awarded it the sum of P3,802,478.20, the amount which appeared in the body of the complaint and proven
obligation to the private respondent, and that the petitioner was just asking a small concession that it be
allowed to liquidate its obligation to eight (8) monthly installments of P500,000.00 plus 1% interest per lame and poor rationalization" as petitioner purports it to be. For if private respondent were to be required
month on the balance which proposal was supported by post-dated checks. 9 to accept petitioner's offer, there would be no reason for the latter to reject similar offers from its other
debtors. Clearly, this would be inimical to the interests of any enterprise, especially a profit-oriented one like
Expounding on its theory, petitioner states: In the ordinary course of events, a suit for collection of a sum of private respondent. It is plain to see that what we have here is a mere exercise of rights, not
money filed in court is done for the primary purpose of collecting a debt or obligation. If there is an offer by an abuse thereof Under these circumstances, we do not deem private respondent to have acted in a manner
the debtor to pay its debt or obligation supported by post-dated checks and with provision for interests, the contrary to morals, good customs or public policy as to violate the provisions of Article 21 of the Civil Code.
normal response of a creditor would be to accept the offer of compromise and not file the suit for collection.
It is of common knowledge that proceedings in our courts would normally take years before an action is Consequently, petitioner's prayer for moral and exemplary damages must thus be rejected. Petitioner's claim
finally settled. It is always wiser and more prudent to accept an offer of payment in installment rather than for moral damages is anchored on Article 2219 (10) of the Civil Code which states:
file an action in court to compel the debtor to settle his obligation in full in a single payment.
Art. 2219. Moral damages may be recovered in the following and analogous cases:
x x x           x x x          x x x . . . Why then did private respondent elect to file a suit for collection rather than
accept petitioner's offer of settlement, supported by post-dated checks, by paying monthly installments of x x x           x x x          x x x
P500,000.00 plus 1% per month commencing on October 15, 1987 until full payment? The answer is obvious.
The action of private respondent in filling a suit for collection was an abuse of right and exercised for the sole (10) Acts and actions referred to in articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.
purpose of prejudicing and injuring the petitioner.10
x x x           x x x          x x x
Petitioner prays that the Court order private respondent to pay petitioner moral and exemplary damages,
attorney's fees, as well as the costs of suit. It likewise asks that it be allowed to liquidate its obligation to Having ruled that private respondent's acts did not transgress the provisions of Article 21, petitioner cannot
private respondent, without interests, in eight equal monthly installments. be entitled to moral damages or, for that matter, exemplary damages. While the amount of exemplary
damages need not be proved, petitioner must show that he is entitled to moral, temperate or compensatory
Petitioner's theory is untenable. Both parties agree that to constitute an abuse of rights under Article 19 the damages before the court may consider the question of whether or not exemplary damages should be
defendant must act with bad faith or intent to prejudice the plaintiff. They cite the following comments of awarded.13 As we have observed above; petitioner has failed to discharge this burden.
Tolentino as their authority:
It may not be amiss to state that petitioner's contract with private respondent has the force of law between
Test of Abuse of Right. — Modern jurisprudence does not permit acts which, although not unlawful, are anti- them.14Petitioner is thus bound to fulfill what has been expressly stipulated therein. 15 In the absence of any
social. There is undoubtedly an abuse of right when it is exercised for the only purpose of prejudicing or abuse of right, private respondent cannot be allowed to perform its obligation under such contract in parts.
injuring another. When the objective of the actor is illegitimate, the illicit act cannot be concealed under the Otherwise, private respondent's right under Article 1248 will be negated, the sanctity of its contract with
guise of exercising a right. The principle does not permit acts which, without utility or legitimate purpose petitioner defiled. The principle of autonomy of contracts16 must be respected.
cause damage to another, because they violate the concept of social solidarity which considers law as
rational and just. Hence, every abnormal exercise of a right, contrary to its socio-economic purpose, is an II. Under said contract, petitioner is liable to private respondent for the unpaid balance of its purchases from
abuse that will give rise to liability. The exercise of a right must be in accordance with the purpose for which it private respondent plus 12% interest. Private respondent's sales invoices expressly provide that: . . . Interest
was established, and must not be excessive or unduly harsh; there must be no intention to injure another. at 12% per annum will be charged on all overdue account plus 25% on said amount for attorney's fees and
Ultimately, however, and in practice, courts, in the sound exercise of their discretion, will have to determine collection. . . .17
all the facts and circumstances when the exercise of a right is unjust, or when there has been an abuse of
It may also be noted that the above stipulation, insofar as it provides for the payment of "25% on said
right.11
amount for attorney's fees and collection (sic)," constitutes what is known as a penal clause.18 Petitioner is
The question, therefore, is whether private respondent intended to prejudice or injure petitioner when it thus obliged to pay such penalty in addition to the 12% annual interest, there being an express stipulation to
rejected petitioner's offer and filed the action for collection. that effect.

We hold in the negative. It is an elementary rule in this jurisdiction that good faith is presumed and that the Petitioner nevertheless urges this Court to reduce the attorney's fees for being "grossly excessive,"
burden of proving bad faith rests upon the party alleging the same. 12 In the case at bar, petitioner has failed "considering the nature of the case which is a mere action for collection of a sum of money." It may be
to prove bad faith on the part of private respondent. Petitioner's allegation that private respondent was pointed out however that the above penalty is supposed to answer not only for attorney's fees but for
motivated by a desire to terminate its agency relationship with petitioner so that private respondent itself collection fees as well. Moreover:
may deal directly with Meralco is simply not supported by the evidence. At most, such supposition is merely
. . . the attorneys' fees here provided is not, strictly speaking, the attorneys' fees recoverable as between
speculative.
attorney and client spoken of and regulated by the Rules of Court. Rather, the attorneys' fees here are in the
Moreover, we find that private respondent was driven by very legitimate reasons for rejecting petitioner's nature of liquidated damages and the stipulation therefor is aptly called a penal clause. It has been said that
offer and instituting the action for collection before the trial court. As pointed out by private respondent, the so long as such stipulation does not contravene law, morals, or public order, it is strictly binding upon
corporation had its own "cash position to protect in order for it to pay its own obligations." This is not such "a defendant. The attorneys' fees so provided are awarded in favor of the litigant, not his counsel. It is the
litigant, not counsel, who is the judgment creditor entitled to enforce the judgment by execution. 19
Nonetheless, courts are empowered to reduce such penalty if the same is "iniquitous or unconscionable."
Article 1229 of the Civil Code states thus: Art. 1229. The judge shall equitably reduce the penalty when the
principal obligation has been partly or been irregularly complied with by the debtor. Even if there has no
performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable. (Emphasis
supplied.)

The sentiments of the law are echoed in Article 2227 of the same Code: Art. 2227. Liquidated damages,
whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or
unconscionable.

It is true that we have upheld the reasonableness of penalties in the form of attorney's fees consisting of
twenty-five percent (25%) of the principal debt plus interest.20 In the case at bar, however, the interest alone
runs to some four and a half million pesos (P4.5M), even exceeding the principal debt amounting to almost
four million pesos (P4.0M). Twenty five percent (25%) of the principal and interest amounts to roughly two
million pesos (P2M). In real terms, therefore, the attorney's fees and collection fees are manifestly
exorbitant. Accordingly, we reduce the same to ten percent (10%) of the principal.

Private respondent, however, argues that petitioner failed to question the award of attorney's fees on appeal
before respondent court and raised the issue only in its motion for reconsideration. Consequently, petitioner
should be deemed to have waived its right to question such award.

Private respondent's attempts to dissuade us from reducing the penalty are futile. The Court is clothed with
ample authority to review matters, even if they are not assigned as errors in their appeal, if it finds that their
consideration is necessary in arriving at a just decision of the case. 21

WHEREFORE, the decision of the Court of Appeals is hereby MODIFIED in that the attorney's and collection
fees are reduced to ten percent (10%) of the principal but is AFFIRMED in all other respects. SO ORDERED.