URBANO DE VENECIA AND CRISANTA M. DE VENECIA, PLAINTIFFS-APPELLANTS, VS. AQUILINO DEL ROSARIO AND MARIA DE LA PEÑA ALIAS M. DEL ROSARIO, DEFENDANTS-APPELLEES.

De Venecia versus Del Rosario

The Case

This is a civil case for the collection of a sum of money, brought by the spouses Urbano de Venecia and Crisanta M. de Venecia against Aquilino del Rosario and Maria de la Peña, also known as M. del Rosario. The debt itself was never in dispute. The defendants admitted it and confessed judgment. What the case is really about is the life of a penal clause: when a debtor defaults, does the agreed penalty replace the interest, or may the creditor recover both? The Supreme Court answers that question by reading the parties' own stipulation, and the case matters to a reviewee because it is a clean illustration of the exception written into the Civil Code's rule on penalties.

Procedural History

The case began in the Court of First Instance of Pangasinan. The parties submitted a compromise agreement, and on December 12, 1959, the trial court rendered judgment approving that agreement and enjoining the parties to comply with its terms.

Only the first two installments were paid, so the plaintiffs moved for execution. A writ of execution was issued but expired unserved. An alias writ was then issued, and its validity was challenged. The Supreme Court upheld that alias writ, ordering that execution be directed first against the mortgaged lands before levying on the defendants' other properties. On remand, the lower court issued a second alias writ of execution on December 4, 1963.

The plaintiffs claimed this writ did not conform to the judgment and moved to amend it, asking that interest run until the debt was fully paid. The trial court granted the amendment in part but refused to let interest run until full payment, declaring that the penalty takes the place of the interest. The plaintiffs' two motions for reconsideration were denied. Because there was no dispute as to the facts, the plaintiffs appealed directly to the Supreme Court.

Facts

In the compromise agreement, the defendants admitted owing the plaintiffs 6,475.26 pesos and confessed judgment for that amount. They covenanted to pay 1,000 pesos on or about January 20, 1959, and 475.26 pesos on or about March 20, 1959. The remaining balance of 5,000 pesos was to be paid within one year at 12 percent interest from March 20, 1959, in equal monthly installments with corresponding interest as computed.

To secure the obligation, the defendants ceded and conveyed by way of security three parcels of real property. The agreement also provided that upon default in two installments, the whole balance would become immediately due and payable, and the plaintiffs could secure immediate execution. The defendants waived whatever right a mortgagor may have short of foreclosure proceedings.

Crucially, the agreement inserted a penal clause: if the defendants failed to perform their obligation, an additional 10 percent would be charged, in addition to the interest agreed upon, to cover the plaintiffs' damages. Only the first two installments were paid. When the plaintiffs sought execution, the dispute arose over whether the 12 percent interest stopped at the date of default, replaced by the penalty, or continued to run until the debt was fully paid.

Issues

• Whether or not the alias writ of execution should be amended to allow the 12 percent interest to run until the whole debt is fully paid, notwithstanding the penal clause.
• Whether or not the penalty substitutes the payment of interest in this case, given the parties' stipulation that the penalty is charged in addition to the interest agreed upon.
• Whether or not amending the writ of execution amounts to an improper amendment of the judgment of December 12, 1959.

Applicable Provisions

Article 1226 of the Civil Code of the Philippines provides:

In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of non-compliance, if there is no stipulation to the contrary.

This is the governing rule, and its final clause, the reservation of a contrary stipulation, is the hinge on which the entire case turns.

Ruling

On the first issue, the Court held that the amendment of the writ should be granted. The writ exists to comply with the judgment, and if the writ does not conform to the judgment, the Court may order its amendment so that the judgment may be properly satisfied.

On the second issue, the Court held that the penalty does not substitute the interest in this case. Paragraph 2(c) of the judgment provides for payment within one year at 12 percent interest from March 20, 1959. Paragraph 4 provides that a penalty clause is inserted to the effect that, if the defendants fail to perform, an additional 10 percent shall be charged, in addition to the interest agreed upon, to cover damages. The Court read that phrase, in addition to the interest agreed upon, as the very exception sanctioned by the Civil Code. The intent of the parties was clearly to allow recovery of both the penalty and the interest, the latter to run as agreed, that is, until full payment of the debt. The cases where the penalty takes the place of the interest are those where no stipulation to the contrary is provided for, and this was not such a case.

On the third issue, the Court rejected the argument that the amendment would amend the judgment. The writ merely implements the judgment, and correcting it to conform to the judgment is not altering the judgment itself.

Doctrine

Under Article 1226 of the Civil Code, the general rule is that in obligations with a penal clause, the penalty substitutes the indemnity for damages and the payment of interest in case of non-compliance. But that rule yields where there is a stipulation to the contrary. When the parties expressly agree that the penalty is charged in addition to the interest, the creditor may recover both the penalty and the interest, and the interest continues to run until the debt is fully paid. A writ of execution that does not conform to the judgment it implements may be amended, because amendment of the writ is not amendment of the judgment.

Disposition

The Supreme Court reversed the appealed orders and granted the amendment of the alias writ of execution to include recovery of 12 percent interest per annum from March 20, 1959 until the whole debt is fully paid, plus 500 pesos representing 10 percent of the same amount as penalty, with no costs.

Remember This

Memorize the rule this way: the penalty replaces the interest only if there is no stipulation to the contrary, so an express agreement to charge the penalty in addition to the interest lets both be recovered. Examiners use this case to test the exception in Article 1226 and the distinction between amending a writ of execution and amending the judgment it implements.