ESTRELLA PALMARES, petitioner, vs. COURT OF APPEALS and M. B.

LENDING CORPORATION, respondents.

FACTS:
Pursuant to a promissory note dated March 13, 1990, private respondent
M.B. Lending Corporation extended a loan to the spouses Osmeña and Merlyn
Azarraga, together with petitioner Estrella Palmares, in the amount of P30,000.00
payable on or before May 12, 1990, with compounded interest at the rate of 6%
per annum to be computed every 30 days from the date thereof. On four occasions
after the execution of the promissory note and even after the loan matured,
petitioner and the Azarraga spouses were able to pay a total of P16,300.00, thereby
leaving a balance of P13,700.00. No payments were made after the last payment
on September 26, 1991. Consequently, on the basis of petitioner’s solidary liability
under the promissory note, respondent corporation filed a complaint against
petitioner Palmares as the lone party defendant, to the exclusion of the principal
debtors, allegedly by reason of the insolvency of the latter.
In her Amended Answer with Counterclaim, petitioner alleged that
sometime in August 1990, immediately after the loan matured, she offered to settle
the obligation with respondent corporation but the latter informed her that they
would try to collect from the spouses Azarraga and that she need not worry about
it; that there has already been a partial payment in the amount of P17,010.00; that
the interest of 6% per month compounded at the same rate per month, as well as
the penalty charges of 3% per month, are usurious and unconscionable; and that
while she agrees to be liable on the note but only upon default of the principal
debtor, respondent corporation acted in bad faith in suing her alone without
including the Azarragas when they were the only ones who benefited from the
proceeds of the loan.
During the pre-trial conference, the parties submitted the following issues
for the resolution of the trial court; (1) what the rate of interest, penalty and
damages should be; (2) whether the liability of the defendant (herein petitioner) is
primary or subsidiary; and (3) whether the defendant Estrella Palmares is only a
guarantor with a subsidiary liability and not a co-maker with primary liability.
Thereafter, the parties agreed to submit the case for decision based on the
pleadings filed and the memoranda to be submitted by them.
On November 26, 1992, the Regional Trial Court of Iloilo City, Branch 23,
rendered judgment dismissing the complaint. Respondent Court of Appeals,
however, reversed the decision of the trial court, and rendered judgment declaring
herein petitioner Palmares liable to pay respondent corporation.
Contrary to the findings of the trial court, respondent appellate court
declared that petitioner Palmares is a surety since she bound herself to be jointly
and severally or solidarily liable with the principal debtors, the Azarraga spouses,
when she signed as a co-maker. As such, petitioner is primarily liable on the note
and hence may be sued by the creditor corporation for the entire obligation.
Hence, this petition for review on certiorari.

ISSUES:
Whether or not the Court of Appeals erred in ruling that Palmares acted as
surety and is therefore solidarily liable to pay the promissory note?
Whether or not the Court of Appeals erred in strictly imposing the interests
and penalty charges on the outstanding balance of the promissory note?

RULING:
It is argued that the Court of Appeals gravely erred in awarding the amount
of P2,745,483.39 in favor of private respondent when, in truth and in fact, the
outstanding balance of the loan is only P13,700.00. Where the interest charged on
the loan is exorbitant, iniquitous or unconscionable, and the obligation has been
partially complied with, the court may equitably reduce the penalty on grounds of
substantial justice. More importantly, respondent corporation never refuted
petitioner’s allegation that immediately after the loan matured, she informed said
respondent of her desire to settle the obligation.
The court should, therefore, mitigate the damages to be paid since petitioner
has shown a sincere desire for a compromise. After a judicious evaluation of the
arguments of the parties, we are constrained to dismiss the petition for lack of
merit, but to except therefrom the issue anent the propriety of the monetary award
adjudged to herein respondent corporation.
The Civil Code pertinently provides:
Art. 2047. By guaranty, a person called the guarantor binds himself to the
creditor to fulfill the obligation of the principal debtor in case the latter should fail
to do so. If a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such
case the contract is called a suretyship.
 It is a cardinal rule in the interpretation of contracts that if the terms of a
contract are clear and leave no doubt upon the intention of the contracting parties,
the literal meaning of its stipulation shall control. In the case at bar, petitioner
expressly bound herself to be jointly and severally or solidarily liable with the
principal maker of the note. The terms of the contract are clear, explicit and
unequivocal that petitioner’s liability is that of a surety.
Having entered into the contract with full knowledge of its terms and
conditions, petitioner is estopped to assert that she did so under a misapprehension
or in ignorance of their legal effect, or as to the legal effect of the undertaking. The
rule that ignorance of the contents of an instrument does not ordinarily affect the
liability of one who signs it also applies to contracts of suretyship. And the
mistake of a surety as to the legal effect of her obligation is ordinarily no reason
for relieving her of liability.
In this regard, we need only to reiterate the rule that a surety is bound
equally and absolutely with the principal, and as such is deemed an original
promisor and debtor from the beginning. This is because in suretyship there is but
one contract, and the surety is bound by the same agreement which binds the
principal.28 In essence, the contract of a surety starts with the agreement, which is
precisely the situation obtaining in this case before the Court.
The alleged failure of respondent corporation to prove the fact of demand
on the principal debtors, by not attaching copies thereof to its pleadings, is
likewise immaterial. In the absence of a statutory or contractual requirement, it is
not necessary that payment or performance of his obligation be first demanded of
the principal, especially where demand would have been useless; nor is it a
requisite, before proceeding against the sureties, that the principal be called on to
account. The underlying principle therefore is that a suretyship is a direct contract
to pay the debt of another. A surety is liable as much as his principal is liable, and
absolutely liable as soon as default is made, without any demand upon the
principal whatsoever or any notice of default. As an original promisor and debtor
from the beginning, he is held ordinarily to know every default of his principal.
As a final issue, petitioner claims that assuming that her liability is solidary,
the interests and penalty charges on the outstanding balance of the loan cannot be
imposed for being illegal and unconscionable. Petitioner additionally theorizes that
respondent corporation intentionally delayed the collection of the loan in order that
the interests and penalty charges would accumulate.
The purported offer to pay made by petitioner cannot be deemed sufficient
and substantial in order to effectively discharge her from liability. There are a
number of circumstances which conjointly inveigh against her aforesaid theory.
 Petitioner cannot compel respondent corporation to accept the amount she
is willing to pay because the moment the latter accepts the performance, knowing
its incompleteness or irregularity, and without expressing any protest or objection,
then the obligation shall be deemed fully complied with. Precisely, this is what
respondent corporation wanted to avoid when it continually refused to settle with
petitioner at less than what was actually due under their contract.
This notwithstanding, however, we find and so hold that the penalty charge
of 3% per month and attorney’s fees equivalent to 25% of the total amount due are
highly inequitable and unreasonable. It must be remembered that from the
principal loan of P30,000.00, the amount of P16,300.00 had already been paid
even before the filing of the present case. Article 1229 of the Civil Code provides
that the court shall equitably reduce the penalty when the principal obligation has
been partly or irregularly complied with by the debtor. And, even if there has been
no performance, the penalty may also be reduced if it is iniquitous or leonine.
With respect to the award of attorney’s fees, this Court has previously ruled
that even with an agreement thereon between the parties, the court may
nevertheless reduce such attorney’s fees fixed in the contract when the amount
thereof appears to be unconscionable or unreasonable. To that end, it is not even
necessary to show, as in other contracts, that it is contrary to morals or public
policy. The grant of attorney’s fees equivalent to 25% of the total amount due is,
in our opinion, unreasonable and immoderate, considering the minimal unpaid
amount involved and the extent of the work involved in this simple action for
collection of a sum of money. We, therefore, hold that the amount of P10,000.00
as and for attorney’s fee would be sufficient in this case.
WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject
to the MODIFICATION that the penalty interest of 3% per month is hereby
deleted and the award of attorney’s fees is reduced to P10,000.00.