G.R. No.

L-7991 January 29, 1914

LEON J. LAMBERT, plaintiff-appellant,

O'Brien and DeWitt and C. W. Ney, for appellant.

MORELAND, J.:

This is an action brought to recover a penalty prescribed on a contract as punishment for the breach thereof.

Early in 1911 the firm known as John R. Edgar & Co., engaged in the retail book and stationery business, found
itself in such condition financially that its creditors, including the plaintiff and the defendant, together with many
others, agreed to take over the business, incorporate it and accept stock therein in payment of their respective
credits. This was done, the plaintiff and the defendant becoming the two largest stockholders in the new corporation
called John R. Edgar & Co., Incorporated. A few days after the incorporation was completed plaintiff and defendant
entered into the following agreement:

Whereas the undersigned are, respectively, owners of large amounts of stock in John R. Edgar and Co, Inc;
and,

Whereas it is recognized that the success of said corporation depends, now and for at least one year next
following, in the larger stockholders retaining their respective interests in the business of said corporation:

Therefore, the undersigned mutually and reciprocally agree not to sell, transfer, or otherwise dispose of any
part of their present holdings of stock in said John R. Edgar & Co. Inc., till after one year from the date
hereof.

Either party violating this agreement shall pay to the other the sum of one thousand (P1,000) pesos as
liquidated damages, unless previous consent in writing to such sale, transfer, or other disposition be
obtained.

Notwithstanding this contract the defendant Fox on October 19, 1911, sold his stock in the said corporation to E. C.
McCullough of the firm of E. C. McCullough & Co. of Manila, a strong competitor of the said John R. Edgar & Co.,
Inc.

This sale was made by the defendant against the protest of the plaintiff and with the warning that he would be held
liable under the contract hereinabove set forth and in accordance with its terms. In fact, the defendant Foz offered to
sell his shares of stock to the plaintiff for the same sum that McCullough was paying them less P1,000, the penalty
specified in the contract.

The learned trial court decided the case in favor of the defendant upon the ground that the intention of the parties as
it appeared from the contract in question was to the effect that the agreement should be good and continue only
until the corporation reached a sound financial basis, and that that event having occurred some time before the
expiration of the year mentioned in the contract, the purpose for which the contract was made and had been fulfilled
and the defendant accordingly discharged of his obligation thereunder. The complaint was dismissed upon the
merits.

It is argued here that the court erred in its construction of the contract. We are of the opinion that the contention is
sound. The intention of parties to a contract must be determined, in the first instance, from the words of the contract
itself. It is to be presumed that persons mean what they say when they speak plain English. Interpretation and
construction should by the instruments last resorted to by a court in determining what the parties agreed to. Where
the language used by the parties is plain, then construction and interpretation are unnecessary and, if used, result in
making a contract for the parties. (Lizarraga Hermanos vs. Yap Tico, 24 Phil. Rep., 504.)
In the case cited the court said with reference to the construction and interpretation of statutes: "As for us, we do not
construe or interpret this law. It does not need it. We apply it. By applying the law, we conserve both provisions for
the benefit of litigants. The first and fundamental duty of courts, in our judgment, is to apply the law. Construction
and interpretation come only after it has been demonstrated that application is impossible or inadequate without
them. They are the very last functions which a court should exercise. The majority of the law need no interpretation
or construction. They require only application, and if there were more application and less construction, there would
be more stability in the law, and more people would know what the law is."

What we said in that case is equally applicable to contracts between persons. In the case at bar the parties
expressly stipulated that the contract should last one year. No reason is shown for saying that it shall last only nine
months. Whatever the object was in specifying the year, it was their agreement that the contract should last a year
and it was their judgment and conviction that their purposes would not be subversed in any less time. What reason
can give for refusing to follow the plain words of the men who made the contract? We see none.

The appellee urges that the plaintiff cannot recover for the reason that he did not prove damages, and cites
numerous American authorities to the effect that because stipulations for liquidated damages are generally in
excess of actual damages and so work a hardship upon the party in default, courts are strongly inclined to treat all
such agreements as imposing a penalty and to allow a recovery for actual damages only. He also cites authorities
holding that a penalty, as such, will not be enforced and that the party suing, in spite of the penalty assigned, will be
put to his proof to demonstrate the damages actually suffered by reason of defendants wrongful act or omission.

In this jurisdiction penalties provided in contracts of this character are enforced . It is the rule that parties who are
competent to contract may make such agreements within the limitations of the law and public policy as they desire,
and that the courts will enforce them according to their terms. (Civil Code, articles 1152, 1153, 1154, and 1155;
Fornow vs. Hoffmeister, 6 Phil. Rep., 33; Palacios vs. Municipality of Cavite, 12 Phil. Rep., 140; Gsell vs. Koch, 16
Phil. Rep., 1.) The only case recognized by the Civil Code in which the court is authorized to intervene for the
purpose of reducing a penalty stipulated in the contract is when the principal obligation has been partly or irregularly
fulfilled and the court can see that the person demanding the penalty has received the benefit of such or irregular
performance. In such case the court is authorized to reduce the penalty to the extent of the benefits received by the
party enforcing the penalty.

In this jurisdiction, there is no difference between a penalty and liquidated damages, so far as legal results are
concerned. Whatever differences exists between them as a matter of language, they are treated the same legally. In
either case the party to whom payment is to be made is entitled to recover the sum stipulated without the necessity
of proving damages. Indeed one of the primary purposes in fixing a penalty or in liquidating damages, is to avoid
such necessity.

It is also urged by the appelle in this case that the stipulation in the contract suspending the power to sell the stock
referred to therein is an illegal stipulation, is in restraint of trade and, therefore, offends public policy. We do not so
regard it. The suspension of the power to sell has a beneficial purpose, results in the protection of the corporation as
well as of the individual parties to the contract, and is reasonable as to the length of time of the suspension. We do
not here undertake to discuss the limitations to the power to suspend the right of alienation of stock, limiting
ourselves to the statement that the suspension in this particular case is legal and valid.

The judgment is reversed, the case remanded with instructions to enter a judgment in favor of the plaintiff and
against the defendant for P1,000, with interest; without costs in this instance.

Arellano, C.J., Trent and Araullo, JJ., concur.

Separate Opinions

CARSON, J., dissenting:

I concur.
I think it proper to observe, however that the doctrine touching the construction and interpretation of penalties
prescribed in ordinary civil contracts as set forth in the opinion is carried to is extreme limits and that its statement in
this form is not necessary to sustain the decision upon the facts in this case.

Without entering upon an extended discussion of the authorities, it is sufficient for my purposes to cite the opinion of
the supreme court of Spain, dated June 13, 1906, construing the provisions of article 6 of Book 4, Title 1 of the Civil
Code which treats of "contracts with a penal clause." In that case the court held:

The rules and prescriptions governing penal matters are fundamentally applicable to the penal sanctions of
civil character.

This as well as other cases which might be cited from American as well as Spanish authorities indicate that special
rules of interpretations are and should be made use of by the courts in construing penal clauses in civil contracts,
and that case may well arise wherein the broad doctrine laid down in the opinion of the court may not be applicable.
G.R. No. 162523 November 25, 2009

NORTON RESOURCES AND DEVELOPMENT CORPORATION, Petitioner,

DECISION

NACHURA, J.:

Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Civil Procedure, seeking the
reversal of the Court of Appeals (CA) Decision2 dated November 28, 2002 which set aside the Decision3 of the
Regional Trial Court (RTC) of Davao City, Branch 14, dated August 27, 1999.

The Facts

Petitioner Norton Resources and Development Corporation (petitioner) is a domestic corporation engaged in the
business of construction and development of housing subdivisions based in Davao City, while respondent All Asia
Bank Corporation (respondent), formerly known as Banco Davao-Davao City Development Bank, is a domestic
banking corporation operating in Davao City.

On April 13, 1982, petitioner applied for and was granted a loan by respondent in the amount of Three Million Eight
Hundred Thousand Pesos (₱3,800,000.00) as evidenced by a Loan Agreement.4 The loan was intended for the
construction of 160 housing units on a 3.9 hectare property located in Matina Aplaya, Davao City which was
subdivided by petitioner per Subdivision Sketch Plan.5 To speed up the processing of all documents necessary for
the release of the funds, petitioner allegedly offered respondent a service/commitment fee of ₱320,000.00 for the
construction of 160 housing units, or at ₱2,000.00 per unit. The offer having been accepted, both parties executed a
Memorandum of Agreement6 (MOA) on the same date.

As guarantor, the Home Financing Corporation (HFC), a government entity tasked to encourage lending institutions
to participate in the government's housing programs, extended security coverage obligating itself to pay the said
loan upon default of petitioner. Out of the loan proceeds in the amount of ₱3,800,000.00, respondent deducted in
advance the amount of ₱320,000.00 as commitment/service fee.

Unfortunately, petitioner was only able to construct 35 out of the 160 housing units proposed to be constructed
under the contract. In addition, petitioner defaulted in the payment of its loan obligation. Thus, respondent made a
call on the unconditional cash guarantee of HFC. In order to recover from HFC, respondent assigned to HFC its
interest over the mortgage by virtue of a Deed of Assignment7 on August 28, 1983 coupled with the delivery of the
Transfer Certificate of Title.

As of August 2, 1983, the outstanding obligation of petitioner amounted to ₱3,240,757.99. HFC paid only
₱2,990,757.99, withholding the amount of ₱250,000.00. Upon payment, HFC executed a Deed of Release of
Mortgage8 on February 14, 1984, thereby canceling the mortgage of all properties listed in the Deed of Assignment.
Respondent made several demands from HFC for the payment of the amount of ₱250,000.00 but HFC continued to
withhold the same upon the request of petitioner. Thus, respondent filed an action to recover the ₱250,000.00 with
the RTC, Branch 15, of Davao City, docketed as Civil Case No. 17048.9 On April 13, 1987, said RTC rendered a
Decision10 in favor of respondent, the dispositive portion thereof reads as follows:

IN VIEW WHEREOF, judgment is hereby rendered as follows:

1. The defendant shall return to the plaintiff the ₱250,000.00 with legal interest to be computed from April
12, 1984 until fully paid.

2. The defendant shall pay the plaintiff fifty thousand pesos (₱50,000.00) as attorney’s fees and ₱7,174.82
as collection expenses.

3. The defendant shall pay the costs of this suit.

HFC appealed to the CA which, in turn, sustained the decision of the RTC. The CA decision became final and
executory.

However, on February 22, 1993, petitioner filed a Complaint12 for Sum of Money, Damages and Attorney’s Fees
against respondent with the RTC, docketed as Civil Case No. 21-880-93. Petitioner alleged that the ₱320,000.00
commitment/service fee mentioned in the MOA was to be paid on a per-unit basis at ₱2,000.00 per unit. Inasmuch
as only 35 housing units were constructed, petitioner posited that it was only liable to pay ₱70,000.00 and not the
whole amount of ₱320,000.00, which was deducted in advance from the proceeds of the loan. As such, petitioner
demanded the return of ₱250,000.00, representing the commitment fee for the 125 housing units left unconstructed
and unduly collected by respondent.

In its Answer,13 respondent denied that the ₱320,000.00 commitment/service fee provided in the MOA was broken
down into ₱2,000.00 per housing unit for 160 units. Moreover, respondent averred that petitioner’s action was
already barred by res judicata considering that the present controversy had already been settled in a previous
judgment rendered by RTC, Branch 15, of Davao City in Civil Case No. 17048.

The RTC's Ruling

After trial on the merits, the RTC rendered a Decision14 on August 27, 1999 in favor of petitioner. It held that the
amount of ₱320,000.00, as commitment/service fee provided in the MOA, was based on the 160 proposed housing
units at ₱2,000.00 per unit. Since petitioner was able to

construct only 35 units, there was overpayment to respondent in the amount of ₱250,000.00. Thus, the RTC
disposed of the case in this wise:

THE FOREGOING CONSIDERED, judgment is hereby rendered for the plaintiff and against the defendant ordering
the said defendant:

1. To pay the plaintiff the amount of TWO HUNDRED FIFTY THOUSAND PESOS (₱250,000.00) with
interest at the legal rate reckoned from February 22, 1993, the date of the filing of the plaintiff’s complaint
until the same shall have been fully paid and satisfied;

2. To pay the plaintiff the sum of THIRTY THOUSAND PESOS (₱30,000.00) representing litigation
expenses;

3. To pay the plaintiff the sum of SIXTY TWO THOUSAND FIVE HUNDRED PESOS (₱62,500.00) as and
for attorney’s fees; and

4. To pay the costs.

SO ORDERED.15

Aggrieved, respondent appealed to the CA.16

The CA's Ruling

On November 28, 2002, the CA reversed the ruling of the RTC. The CA held that from the literal import of the MOA,
nothing was mentioned about the arrangement that the payment of the commitment/service fee of ₱320,000.00 was
on a per unit basis valued at ₱2,000.00 per housing unit and dependent upon the actual construction or completion
of said units. The CA opined that the MOA duly contained all the terms agreed upon by the parties.

Undaunted, petitioner filed a Motion for Reconsideration17 which was, however, denied by the CA in its
Resolution18 dated February 13, 2004.
Hence, this Petition which raised the following issues:

1. WHETHER OR NOT THE MEMORANDU[M] OF AGREEMENT (MOA) REFLECTS THE TRUE

2. WHETHER OR NOT HEREIN PETITIONER IS ENTITLED TO RECOVER THE AMOUNT OF TWO

3. WHETHER OR NOT VICTOR FACUNDO AS THE VICE PRESIDENT AND GENERAL MANAGER AT
THE TIME THE AFOREMENTIONED MOA WAS EXECUTED, WAS AUTHORIZED TO ENTER INTO [AN]
AGREEMENT AND TO NEGOTIATE THE TERMS AND CONDITIONS THEREOF TO THEIR
CLIENTELE.19

Our Ruling

The instant Petition is bereft of merit.

Our ruling in Benguet Corporation, et al. v. Cesar Cabildo20 is instructive:

The cardinal rule in the interpretation of contracts is embodied in the first paragraph of Article 1370 of the Civil Code:
"[i]f the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal
meaning of its stipulations shall control." This provision is akin to the "plain meaning rule" applied by Pennsylvania
courts, which assumes that the intent of the parties to an instrument is "embodied in the writing itself, and when the
words are clear and unambiguous the intent is to be discovered only from the express language of the agreement."
It also resembles the "four corners" rule, a principle which allows courts in some cases to search beneath the
semantic surface for clues to meaning. A court's purpose in examining a contract is to interpret the intent of the
contracting parties, as objectively manifested by them. The process of interpreting a contract requires the court to
make a preliminary inquiry as to whether the contract before it is ambiguous. A contract provision is ambiguous if it
is susceptible of two reasonable alternative interpretations. Where the written terms of the contract are not
ambiguous and can only be read one way, the court will interpret the contract as a matter of law. If the contract is
determined to be ambiguous, then the interpretation of the contract is left to the court, to resolve the ambiguity in the
light of the intrinsic evidence.

In our jurisdiction, the rule is thoroughly discussed in Bautista v. Court of Appeals:

The rule is that where the language of a contract is plain and unambiguous, its meaning should be determined
without reference to extrinsic facts or aids. The intention of the parties must be gathered from that language, and
from that language alone. Stated differently, where the language of a written contract is clear and unambiguous, the
contract must be taken to mean that which, on its face, it purports to mean, unless some good reason can be
assigned to show that the words should be understood in a different sense. Courts cannot make for the parties
better or more equitable agreements than they themselves have been satisfied to make, or rewrite contracts
because they operate harshly or inequitably as to one of the parties, or alter them for the benefit of one party and to
the detriment of the other, or by construction, relieve one of the parties from the terms which he voluntarily
consented to, or impose on him those which he did not.21

Moreover, Section 9, Rule 130 of the Revised Rules of Court clearly provides:

SEC. 9. Evidence of written agreements. — 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, between the parties and their successors in
interest, no evidence of such terms other than the contents of the written agreement.

However, a party may present evidence to modify, explain or add to the terms of the written agreement if he puts in
issue in his pleading:

(a) An intrinsic ambiguity, mistake, or imperfection in the written agreement;

(c) The validity of the written agreement; or

(d) The existence of other terms agreed to by the parties or their successors in interest after the execution of
the written agreement.

The "parol evidence rule" forbids any addition to or contradiction of the terms of a written instrument by testimony or
other evidence purporting to show that, at or before the execution of the parties' written agreement, other or different
terms were agreed upon by the parties, varying the purport of the written contract. When an agreement has been
reduced to writing, the parties cannot be permitted to adduce evidence to prove alleged practices which, to all
purposes, would alter the terms of the written agreement. Whatever is not found in the writing is understood to have
been waived and abandoned.22 None of the above-cited exceptions finds application in this case, more particularly
the alleged failure of the MOA to express the true intent and agreement of the parties concerning the
commitment/service fee of ₱320,000.00.

In this case, paragraph 4 of the MOA plainly states:

4. That the CLIENT offers and agrees to pay a commitment and service fee of THREE HUNDRED TWENTY
THOUSAND PESOS (₱320,000.00), which shall be paid in two (2) equal installments, on the same dates as the first
and second partial releases of the proceeds of the loan.23

As such, we agree with the findings of the CA when it aptly and judiciously held, to wit:

Unmistakably, the testimonies of Antonio Soriano and Victor Facundo jibed in material points especially when they
testified that the ₱320,000.00 commitment/service fee mentioned in Paragraph 4 of Exhibit "B" is not to be paid in
lump sum but on a per unit basis valued at ₱2,000.00 per housing unit. But a careful scrutiny of such testimonies
discloses that they are not in accord with the documentary evidence on record. It must be stressed that both Antonio
Soriano and Victor Facundo testified that the ₱320,000.00 commitment/service fee was arrived at by multiplying
₱2,000.00, the cost per housing unit; by 160, the total number of housing units proposed to be constructed by the
[petitioner] as evidenced by a certain subdivision survey plan of [petitioner] marked as Exhibit "C."

xxxx

Looking closely at Exhibit "C," noticeable are the date of survey of the subdivision which is May 15-31, 1982 and the
date of its approval which is June 25, 1982, which dates are unmistakably later than the execution of the Loan
Agreement (Exhibit "A") and Exhibit "B" which was on April 13, 1982. With these dates, we cannot lose sight of the
fact that it was impossible for Victor Facundo to have considered Exhibit "C" as one of the documents presented by
[petitioner] to support its proposal that the commitment/service fee be paid on a per unit basis at ₱2,000.00 a unit. x
x x.

xxxx

To stress, there is not even a slim possibility that said blue print (referring to Exhibit "C") was submitted to
[respondent] bank during the negotiation of the terms of Exhibit "B" and was made the basis for the computation of
₱320,000.00 commitment/service fee. As seen on its face, Exhibit "C" was approved in a much later date than the
execution of Exhibit "B" which was on April 13, 1982. In addition, as viewed from the foregoing testimony, no less
than Victor Facundo himself admitted that there were only 127 proposed housing units instead of 160. Considering
these factual milieus, there is sufficient justification to discredit the stance of [petitioner] that Exhibit "B" was not
reflective of the true intention or agreement of the parties. Paragraph 4 of Exhibit "B" is clear and explicit in its terms,
leaving no room for different interpretation. Considering the absence of any credible and competent evidence of the
alleged true and real intention of the parties, the terms of Paragraph 4 of Exhibit "B" remains as it was written.
Therefore, the payment of ₱320,000.00 commitment/service fee mentioned in Exhibit "B" must be paid in lump sum
and not on a per unit basis. Consequently, we rule that [petitioner] is not entitled to the return of ₱250,000.00.24 1avvphi1

The agreement or contract between the parties is the formal expression of the parties' rights, duties and obligations.
It is the best evidence of the intention of the parties. Thus, 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 of such terms other
than the contents of the written agreement between the parties and their successors in interest. 25 Time and again,
we have stressed the rule that a contract is the law between the parties, and courts have no choice but to enforce
such contract so long as it is not contrary to law, morals, good customs or public policy. Otherwise, courts would be
interfering with the freedom of contract of the parties. Simply put, courts cannot stipulate for the parties or amend
the latter's agreement, for to do so would be to alter the real intention of the contracting parties when the contrary
function of courts is to give force and effect to the intention of the parties.26

Finally, as correctly observed by respondent, petitioner's claim that the MOA is a contract of adhesion was never
raised by petitioner before the lower courts. Settled is the rule that points of law, theories, issues, and arguments not
adequately brought to the attention of the trial court need not be, and ordinarily will not be, considered by a
reviewing court. They cannot be raised for the first time on appeal. To allow this would be offensive to the basic
rules of fair play, justice and due process.27

A contract of adhesion is defined as one in which one of the parties imposes a ready-made form of contract, which
the other party may accept or reject, but which the latter cannot modify. One party prepares the stipulation in the
contract, while the other party merely affixes his signature or his "adhesion" thereto, giving no room for negotiation
and depriving the latter of the opportunity to bargain on equal footing.28 It must be borne in mind, however, that
contracts of adhesion are not invalid per se. Contracts of adhesion, where one party imposes a ready-made form of
contract on the other, 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.29

All told, we find no reason to disturb, much less, to reverse the assailed CA Decision.

WHEREFORE, the instant Petition is DENIED and the assailed Court of Appeals Decision is AFFIRMED. Costs
against petitioner.

SO ORDERED.

ANTONIO EDUARDO B. NACHURA

WE CONCUR:

RENATO C. CORONA
Associate Justice
Chairperson

MINITA V. CHICO-NAZARIO PRESBITERO J. VELASCO, JR.

DIOSDADO M. PERALTA
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the
writer of the opinion of the Court’s Division.

RENATO C. CORONA
Associate Justice
Chairperson, Third Division

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, 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.

REYNATO S. PUNO
Chief Justice

Footnotes

* Formerly known as Banco Davao-Davao City Development Bank.

1 Rollo, pp. 11-20.

2Penned by Associate Justice Bienvenido L. Reyes, with Associate Justices Romeo A. Brawner (deceased)
and Danilo B. Pine, concurring; rollo, pp. 27-39.

3 Records, pp. 221-231.

4 Exhibit "1," id. at 148-151.

5 Exhibit "C," id. at 134.

6 Exhibit "2," id. at 152-154.

7 Records, pp. 185-188.

8 Id. at 189-190.

9 CA rollo, pp. 58-63.

10 Id. at 64-79.

11 Id. at 79.

12 Records, pp. 1-4.

13 Id. at 19-22.

14 Supra note 3.

15 Id. at 231.

16 Records, p. 232.

17 CA rollo, pp. 125-129.

18 Id. at 138-139.

19 Supra note 1, at 14.

20G.R. No. 151402, August 22, 2008, citing Abad v. Goldloop Properties, Inc., 521 SCRA 131, 143-145
(2007).
21 Citations omitted.

22Heirs of the Deceased Carmen Cruz-Zamora v. Multiwood International, Inc., G.R. No. 146428, January
19, 2009.

23 Supra note 6, at 153.

24 Supra note 2, at 35-39.

25Gamboa, Rodriguez, Rivera & Co., Inc. v. Court of Appeals, G.R. No. 117456, May 6, 2005, 458 SCRA
68, 73.

26 Heirs of San Andres v. Rodriguez, 388 Phil. 571, 586 (2000).

27Stronghold Insurance Company, Inc. v. Tokyu Construction Company, Ltd., G.R. Nos. 158820-21, June 5,
2009, citing Eastern Assurance and Surety Corporation v. Con-Field Construction and Development
Corporation, 552 SCRA 271, 279-280 (2008).

28Radio Communications of the Philippines, Inc. v. Verchez, G.R. No. 164349, January 31, 2006, 481 SCRA
384, 401, citing Philippine Commercial International Bank v. Court of Appeals, 325 Phil. 588, 597 (1996).

29Premiere Development Bank v. Central Surety & Insurance Company, Inc., G.R. No. 176246, February
13, 2009.