RODOLFO B. SANTIAGO, ETC. PLAINTIFF AND APPELLEE, VS. AMADO DIMAYUGA, ETC., DEFENDANT AND APPELLANT.

Santiago versus Dimayuga

The Case

This is an action for the recovery of various sums of money, brought by Rodolfo Santiago, the plaintiff, against Amado Dimayuga, the defendant. The complaint rests on six causes of action: the first five are founded on promissory notes executed on different dates for the payment, on an instalment basis, of the balance of the cost of automobiles the defendant purchased from the plaintiff; the sixth is founded on sales invoices covering the cost of materials and repairs the plaintiff made on the defendant's motor vehicles on various occasions. The case matters because it fixes the rule on stipulated attorney's fees: such a stipulation is valid and enforceable as the law between the parties, but the courts may equitably reduce the stipulated amount, and the character of the suit as a judicial proceeding to enforce collection is determined by the complaint itself.

Procedural History

The plaintiff sued in the trial court for the sums due, plus interests, attorney's fees, and costs. After the defendant filed his answer, the parties and their counsel filed a joint petition in the nature of a partial amicable settlement, in which the defendant admitted his liability for the principal amounts alleged in the first five causes of action, aggregating 42,789.23 pesos, payment of which was partially assumed by a third person. The trial court approved that partial settlement and released the defendant's attached properties. The parties then submitted a stipulation of facts in which the defendant admitted his liability for the cost of materials and repairs alleged in the sixth cause of action, without interest, as well as his liability for accrued interests on the first five causes of action, leaving to the court's discretion the amount of attorney's fees and costs of suit. The trial court rendered judgment ordering the defendant to pay the cost of repairs, the interests, and an amount equal to twenty percent of 42,789.23 pesos as attorney's fees, plus the costs of suit. The defendant appealed to the Court of Appeals, assigning as errors that the trial court should have found the stipulation on attorney's fees inapplicable and that twenty percent was not a reasonable award. The Court of Appeals, by resolution, certified the case to the Supreme Court for disposition on the ground that the appeal involves purely questions of law.

Facts

The defendant purchased automobiles from the plaintiff and executed five promissory notes for the balance of the purchase price, payable in instalments. Each note carried the same stipulation on attorney's fees. The defendant also incurred costs for materials and repairs on his motor vehicles, covered by sales invoices, which he did not pay.

When the defendant failed to pay, the plaintiff commenced suit for collection of the various sums, accompanied by an attachment on the defendant's automobiles. After the answer was filed, the defendant admitted liability for the principal amounts on the first five causes of action, and later admitted liability for the cost of repairs and for the accrued interests, leaving only the attorney's fees and costs to the court.

The trial court found that the notes stipulated a sum equivalent to thirty three and one third percent as attorney's fees, plus expenses of collection and costs, but held that, considering the facts and circumstances, twenty percent was reasonable. The defendant appealed, contending that the stipulation did not apply because the case was not a judicial proceeding to enforce collection but one to settle a disagreement over the application of payments, and that twenty percent was in any event excessive.

Issues

• Whether or not the stipulation in the promissory notes awarding attorney's fees in the event of judicial proceedings to enforce collection applies to this action.
• Whether or not the trial court erred in fixing twenty percent of the amount involved as reasonable attorney's fees.

Applicable Provisions

Article 1229 of the Civil Code provides:

Article 1229. 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 courts if it is iniquitous or unconscionable.

This provision is the basis for the Court's holding that the trial court properly reduced the stipulated attorney's fees from thirty three and one third percent to twenty percent, since several instalment payments had already been made before the action was commenced.

Ruling

On the first issue, the Court held that the stipulation applies. The defendant sought to remove the case from the stipulation by claiming that it was not a judicial proceeding to enforce collection but one to settle a disagreement on the application of payments. The Court rejected this, holding that the complaint is plainly for collection or recovery of various sums of money, and that the purpose of an action and the law governing it are determined by the complaint itself, its allegations, and the prayer for relief. The Court added that were it not for the suit, accompanied by an attachment on the defendant's automobiles, it was not far fetched to surmise that the defendant would probably, as before, neglect or refuse to pay the instalments as they fell due.

On the second issue, the Court held that the reduction was justified. It first laid down that a stipulation regarding the payment of attorney's fees is neither illegal nor immoral and is enforceable as the law between the parties. Under the Civil Code, attorney's fees are an element of recoverable damages, whether stipulated in writing or not stipulated at all in certain cases, and are in the concept of actual damages, except that when stipulated and therefore in the form of liquidated damages, no proof of pecuniary loss is required. Applying Article 1229, the Court held that the provision fully justifies the reduction from thirty three and one third percent to twenty percent of the principal obligation due and admitted, it appearing that several instalment payments had already been made on the five notes before the action was commenced. The Court further held that where a contract does not expressly stipulate that a fixed sum by way of attorney's fees shall be paid in case of collection even if the same is subsequently settled by compromise, it is just and fair to reduce the amount of counsel fees, in the court's exercise of its discretionary power, where the case is partially or fully settled out of court.

Doctrine

A stipulation or agreement regarding the payment of attorney's fees is neither illegal nor immoral and is enforceable as the law between the parties. Attorney's fees are an element of recoverable damages; when stipulated, they take the form of liquidated damages, so that no proof of pecuniary loss is required. Under Article 1229 of the Civil Code, the judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor, and may reduce it even without performance if it is iniquitous or unconscionable. The nature of an action, and the law that governs it, is determined by the complaint itself, its allegations, and the prayer for relief, so a suit for recovery of sums of money is a judicial proceeding to enforce collection even if the defendant characterizes it otherwise. Where the case is partially or fully settled out of court and the contract does not expressly fix a sum payable even upon compromise, the court may in its discretion reduce the counsel fees.

Disposition

The Supreme Court affirmed the decision of the trial court, with costs against the defendant as appellant; the plaintiff prevailed.

Remember This

The single line to memorize: a stipulation on attorney's fees is valid and enforceable as the law between the parties, but the courts may equitably reduce it under Article 1229 where the obligation has been partly performed or the amount is unconscionable. Examiners use this case on the reduction of stipulated attorney's fees and on the rule that the complaint itself, its allegations and prayer, determines whether a suit is a judicial proceeding to enforce collection.