C. N. HODGES, PETITIONER, VS. ELPIDIO JAVELLANA AND THE HON. COURT OF APPEALS, RESPONDENTS.

Appeal by certiorari, taken by petitioner C. N. Hodges, from a decision of
the Court of Appeals, the dispositive part of which is as follows:

“IN VIEW OF THE FOREGOING, the defendant is required to pay the plaintiff the
amount of P9,575.52 under the first cause of action; the amount of P18,199.44
under the second cause of action and the amount of P4,372.00 under the third
cause of action; with interests at 6% per annum from the filing of this claim;
attorney’s fees at the rate of 5% of the total indebtedness, with the exclusion
of the interests, and with these modifications, the decision appealed from is
hereby affirmed, without further costs.”

The main facts are not disputed. This is an ordinary action for the recovery
of several sums of money under three (3) causes of action. The first is based
upon a promisory note of respondent Elpidio Javellana in favor of petitioner,
dated June 11, 1936, for P16,000, payable on or before June 11, 1937, with
interest at the rate of one (1%) per cent per month until paid, and guaranteed
by a real estate mortgage. The second is predicated upon a sale of ice
machineries, made by petitioner to respondent on January 6, 1937, for the
aggregate price of P17,500.00, on account of which P220 was then paid, the
balance to be paid in 72 monthly instalments of P240 each, with interest at the
rate above mentioned, and guaranteed by a chattel mortgage on said ice
machineries. The third arose from a sale of ice plant machinery, soft drink
machinery, ice drop equipment and furniture and fixtures, made on April 27,
1939, by petitioner to respondent, at a total cost of P8,000, of which P2,000
was paid on said date, the balance to be paid in monthly instalments of P100
each, with interest at the rate adverted to above, and guaranteed by a deed of
chattel mortgage on said machineries, equipment, furniture and fixtures, as well
as on respondent’s right on a certificate of public convenience to operate an
ice plant. The deeds evidencing said three (3) transactions provided, also, that
unpaid interest shall be added to the capital and bear interest at like
rate.

According to the complaint, filed on June 6, 1953, as amended on September
18, 1953: (1) the balance of the obligation covered by the first cause of action
amounted, on September 22, 1940, when the last payment on account of said
obligation was made, to P8,060.20, which, including interest up to September 18,
1953, aggregated P35,118.27; (2) the balance of the obligation upon which the
second cause of action is based amounted, on August 5, 1940, when the last
payment on account of said obligation was effected, to P15,120, which, including
interest up to April 6, 1953, aggregated P38,107.44; and (3) the balance of the
obligation to which the third cause of action referred amounted, on June 26,
1941, when the last payment on account of said obligation was effected, to
P4,000.00, which including interest up to April 6, 1953, aggregated P9,654.33.
Petitioner prayed, therefore, for judgment in the sums of P35,118.27, P38,107.44
and P9,653.33, with interest thereon at the rate adverted to above, plus’ 10% of
the first and last amounts, by way of attorney’s fees and costs, in addition to
a decree of foreclosure of the corresponding mortgages, in case of default in
the payment of said amounts.

Defendant filed an answer admitting some allegations of the complaint,
denying other obligations thereof and setting up several affirmative defenses,
all of which were overruled by the Court of First Instance of Iloilo, which
rendered judgment as prayed by the petitioner. Respondent appealed to the Court
of Appeals, claiming that:

1. “The trial court erred in admitting and in considering Exhibit F.
2. “The trial court erred in not holding that the first and second causes of
   action of the plaintiff had already prescribed.
3. “The trial court erred in compounding the interest claimed in the amended
   complaint.
4. “The trial court erred in not dismissing the complaint with costs against
   the plaintiff, except the third cause of action.”

After appropriate proceedings, the Court of Appeals rendered a decision
rejecting the first and second assignments of error. In connection with the
third assignment of error said court held:

“The court below allowed the plaintiff to recover interest on the different
sums as originally agreed upon. We do not believe this to be fair. The very
document marked as Exh. F shows that the properties for which the defendant was
indebted to the plaintiff were all destroyed in 1942 as a result of the war.
Because of the war Hodges himself had to flee this country which means that he
could not have done any business at all with the money that Javellana should
have paid to him on account of his indebtedness. Under such circumstances, it
seems revolting to conscience that he should be permitted to recover any
interests before the filing of this action.”

Hence, the Court of Appeals reduced the award in favor of petitioner to the
amounts stated at the beginning of this decision, representing the amounts due
under the first and the second causes of action as of April 16, 1942, when the
corresponding mortgaged properties were destroyed, and the sum due under the
third cause of action as of April 5, 1942, date of destruction of the mortgaged
property involved therein. Petitioner herein maintains that the Court of Appeals
erred in fully relieving respondent of the obligation to pay interest because:
(a) in his assignments of error before said court, respondent merely
assailed the collection of compounded interest; and (b) the regular
interest, as well as the compounded interest, having been stipulated in valid
contracts between the parties, said court should have required respondent to pay
both.

With respect to the first ground, it should be noted that, although
respondent had not specifically impugned petitioner’s right to collect the
regular interest, this issue was embraced in respondent’s claim in the Court of
Appeals to the effect that petitioner was entitled to recover nothing at
all under the first and second causes of action—that is to say, neither his
capital, nor ordinary interest nor compounded interest.

At any rate, as regards the second ground, we must distinguish between the
interest due during the occupation of the Philippines by the Japanese, and the
interest accruing after liberation. Insofar as the period of occupation of the
Philippines is concerned, the action taken by the Court of Appeals is in line
with our decision in Warner Barnes & Co. Ltd. vs. Yasay, 108 Phil. 29; 60
Off. Gaz. 3109; in which we declared.

“Considering, however, that no bad faith is imputed to the debtors: that
payment could not be made during the war years, even if the debtor had so
desired, because the creditor was a British company and an enemy
vis-a-vis the belligerent occupant off the Islands at the time; that the
creditor was indirectly benefited by the debtor’s inaction, thereby avoiding
payment in military script; and that both under Article 1172 of the new Civil
Code and Article 1103 of the old Code, the Courts have power to regulate or
moderate the liability arising from negligence of a debtor, we think it
equitable to reduce the interest by eliminating that which accrued during the
war years, as well as to limit the attorney’s fees to 10% of the total amount of
the judgment, this case presenting no unusual difficulty.”

With reference to the regular interest accruing after liberation, we find no
legal authority to disregard the pertinent stipulations in the contracts between
the parties. The provisions thereof relative to the compounding of interest
partake, however, of the nature of a penal clause (Laureano vs. Kilayco, 32
Phil., 198), pertinent to which is Article 1154 of the Civil Code of Spain,
which provides:

“The judge shall equitably mitigate the penalty if the principal obligation
should have been partly or irregularly performed by the
debtor.”

As far as the present case is concerned, this legal provision is
substantially identical to Article 1229 of the Civil Code of the Philippines,
reading:

“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”.

In the light of the circumstances surrounding the case at bar, we hold that
although respondent was properly exempted from the payment of compounded
interest, he should pay the stipulated interest of 12% per annum, but only since
liberation (Treasurer of the Philippines vs. Rodis, 40. Phil., 852; Lambert vs.
Fox, 26 Phil., 588; Insular Gov’t. vs. Bignham, 13 Phil., 588; Gov’t. of the
P.I. vs. Amechazurra, 10 Phil., 637).

Wherefore, with the only modification that the sums of P9,575.52, P18,199.44
and P4,372 appearing in the dispositive part of the decision of the Court of
Appeals shall bear interest, although only from and after the liberation of the
Island of Panay, at the rate of 12% per annum, which shall not be compounded,
said decision is hereby affirmed in all other respects, without special
pronouncement as to costs. It is so ordered.

Bengzon, C. J., Padilla, Bautista Angelo, Reyes, J. B. L., and
Paredes, JJ., concur.