SOCIAL SECURITY SYSTEM, PETITIONER, VS. MOONWALK DEVELOPMENT & HOUSING CORPORATION, ROSITA U. ALBERTO, ROSITA U. ALBERTO, JMA HOUSE, INC., MILAGROS SANCHEZ SANTIAGO, IN HER CAPA…

Before Us is a petition
for review on certiorari of a decision^[1] of the then Intermediate Appellate
Court affirming in toto the decision of the former Court of First Instance of Rizal, Seventh Judicial District, Branch XXIX, Pasay City.

The facts as found by the
Appellate Court are as follows:

“On February 20, 1980, the Social Security System, SSS for
brevity, filed a complaint in the Court of First Instance of Rizal against
Moonwalk Development & Housing Corporation, Moonwalk for short, alleging
that the former had committed an error in failing to compute the 12% interest
due on delayed payments on the loan of Moonwalk — resulting in a chain of
errors in the application of payments made by Moonwalk and, in an unpaid
balance on the principal loan agreement in the amount of P7,053.77 and, also in
not reflecting in its statement or account an unpaid balance on the said
penalties for delayed payments in the amount of P7,517,178.21 as of October 10,
1979.

Moonwalk answered denying SSS’ claims and asserting that SSS had
the opportunity to ascertain the truth but failed to do so.

The trial court set the case
for pre-trial at which pre-trial conference, the court issued an order giving
both parties thirty (30) days within which to submit a stipulation of facts.

The Order of October 6, 1980 dismissing the complaint followed the
submission by the parties on September 19, 1980 of the following stipulation of
Facts:

“1. On October 6,
1971, plaintiff approved the application of defendant Moonwalk for an interim
loan in the amount of THIRTY MILLION PESOS (P30,000,000.00) for the purpose of
developing and constructing a housing project in the provinces of Rizal and
Cavite;

“2. Out of the approved loan of THIRTY
MILLION PESOS (P30,000,000.00), the sum of P9,595,000.00 was released to
defendant Moonwalk as of November 28, 1973;

“3. A third Amended
Deed of First Mortgage was executed on December 18, 1973. Annex ‘D’ providing for restructuring of the
payment of the released amount of P9,595,000.00.

“4. Defendants Rosita
U. Alberto and Rosita U. Alberto, mother and daughter respectively, under
paragraph 5 of the aforesaid Third Amended Deed of First Mortgage substituted
Associated Construction and Surveys Corporation, Philippine Model Homes
Development Corporation, Mariano Z. Velarde and Eusebio T. Ramos, as solidary
obligors;

“5. On July 23, 1974,
after considering additional releases in the amount of P2,659,700.00, made to
defendant Moonwalk, defendant Moonwalk delivered to the plaintiff a promissory
note for TWELVE MILLION TWO HUNDRED FIFTY FOUR THOUSAND SEVEN HUNDRED PESOS
(P12,254,700.00) Annex ‘E’, signed by Eusebio T. Ramos, and the said Rosita U.
Alberto and Rosita U. Alberto;

“6. Moonwalk made a
total payment of P23,657,901.84 to SSS for the loan principal of P12,254,700.00
released to it. The last payment made
by Moonwalk in the amount of P15,004,905.74 were based on the Statement of
Account, Annex “F” prepared by plaintiff SSS for defendant;

“7. After settlement of the account
stated in Annex ‘F’ plaintiff issued to defendant Moonwalk the Release of Mortgage
for Moonwalk’s mortgaged properties in Cavite and Rizal, Annexes ‘G’ and ‘H’ on
October 9, 1979 and October 11, 1979 respectively.

“8. In letters to
defendant Moonwalk, dated November 28, 1979 and followed up by another letter
dated December 17, 1979, plaintiff alleged that it committed an honest mistake
in releasing defendant.

“9. In a letter dated
December 21, 1979, defendant’s counsel told plaintiff that it had completely
paid its obligations to SSS;

“10. The genuineness
and due execution of the documents marked as Annex (sic) ‘A’ to ‘O’ inclusive,
of the Complaint and the letter dated December 21, 1979 of the defendant’s counsel to the plaintiff are
admitted.

“Manila for Pasay City, September 2, 1980.””^[2]

On October 6, 1990, the
trial court issued an order dismissing the complaint on the ground that the
obligation was already extinguished by the payment by Moonwalk of its
indebtedness to SSS and by the latter’s act of cancelling the real estate
mortgages executed in its favor by defendant Moonwalk. The Motion for Reconsideration filed by SSS
with the trial court was likewise dismissed by the latter.

These orders were
appealed to the Intermediate Appellate Court. Respondent Court reduced the errors assigned by the SSS into this
issue: “x x x are defendants?appellees,
namely, Moonwalk Development and Housing Corporation, Rosita U. Alberto, Rosita
U. Alberto, JMA House, Inc. still liable for the unpaid penalties as claimed by
plaintiff-appellant or is their obligation extinguished?”^[3] As We have stated earlier, the respondent
Court held that Moonwalk’s obligation was extinguished and affirmed the trial
court.

Hence, this Petition
wherein SSS raises the following grounds for review:

“First, in concluding that the penalties due from
Moonwalk are “deemed waived and/or barred,” the appellate court
disregarded the basic tenet that waiver of a right must be express, made in a
clear and unequivocal manner. There is
no evidence in the case at bar to show that SSS made a clear, positive waiver
of the penalties, made with full knowledge of the circumstances.

Second, it misconstrued the ruling that SSS funds are trust
funds, and SSS, being a mere trustee, cannot perform acts affecting the same,
including condonation of penalties, that would diminish property rights of the
owners and beneficiaries thereof. (United Christian Missionary Society v. Social Security Commission, 30
SCRA 982, 988 [1969])

Third, it ignored the fact that penalty at the rate of 12%
p.a. is not inequitable.

Fourth, it ignored the principle that equity will cancel a
release on the ground of mistake of fact.”^[4]

The same problem which
confronted the respondent court is presented before Us: Is the penalty demandable even after the
extinguishment of the principal obligation?

The former Intermediate
Appellate Court, through Justice Eduardo P. Caguioa, held in the negative. It reasoned, thus:

“2. As we have
explained under No. 1, contrary to what the plaintiff-appellant states in its
Brief, what is sought to be recovered in this case is not the 12% interest on
the loan but the 12% penalty for failure to pay on time the amortization. What is sought to be enforced therefore is the penal clause of the contract
entered into between the parties.

Now, what is a penal clause. A penal clause has been defined as

“an accessory obligation which the
parties attach to a principal obligation for the purpose of insuring the
performance thereof by imposing on the debtor a special prestation (generally
consisting in the payment of a sum of money) in case the obligation is not
fulfilled or is irregularly or inadequately fulfilled” (3 Castan 8th Ed.
p. 118)

Now an accessory obligation has been
defined as that attached to a principal obligation in order to complete the
same or take its place in the case of breach (4 Puig Peña Part 1 p. 76). Note therefore that an accessory obligation
is dependent for its existence on the existence of a principal obligation. A principal obligation may exist without an
accessory obligation but an accessory obligation cannot exist without a
principal obligation. For example, the
contract of mortgage is an accessory obligation to enforce the performance of
the main obligation of indebtedness. An
indebtedness can exist without the mortgage but a mortgage cannot exist without
the indebtedness, which is the principal obligation. In the present case, the principal obligation is the loan between
the parties. The accessory obligation
of a penal clause is to enforce the main obligation of payment of the
loan. If therefore the principal
obligation does not exist the penalty being accessory cannot exist.

Now then when is the penalty demandable? A penalty is demandable in case of non performance or late
performance of the main obligation. In
other words in order that the penalty may arise there must be a breach of the
obligation either by total or partial non fulfillment or there is non
fulfillment in point of time which is called mora or delay. The debtor therefore violates the obligation
in point of time if there is mora or delay. Now, there is no mora or delay unless there is a demand. It is noteworthy that in the present case
during all the period when the principal obligation was still subsisting,
although there were late amortizations there was no demand made by the
creditor, plaintiff-appellant for the payment of the penalty. Therefore up to the time of the letter of
plaintiff-appellant there was no demand for the payment of the penalty, hence
the debtor was not in mora in the payment of the penalty.

However, on October 1, 1979, plaintiff?appellant issued its
statement of account (Exhibit F) showing the total obligation of Moonwalk as
P15,004,905.74, and forthwith demanded payment from defendant-appellee. Because of the demand for payment, Moonwalk made
several payments on September 29, October 9 and 19, 1979 respectively, all in
all totalling P15,004,905.74 which was a complete payment of its obligation as
stated in Exhibit F. Because of this
payment the obligation of Moonwalk was considered extinguished, and pursuant to
said extinguishment, the real estate mortgages given by Moonwalk were released
on October 9, 1979 and October 10, 1979 (Exhibits G and H). For all purposes therefore the principal
obligation of defendant-appellee was deemed extinguished as well as the
accessory obligation of real estate mortgage; and that is the reason for the
release of all the Real Estate Mortgages on October 9 and 10, 1979
respectively.

Now, besides the Real Estate Mortgages, the penal clause which is
also an accessory obligation, must also be deemed extinguished considering that
the principal obligation was considered extinguished, and the penal clause
being an accessory obligation cannot exist without a principal obligation. That being the case, the demand for payment
of the penal clause made by plaintiff-appellant
in its demand letter dated November 28, 1979 and its follow up letter
dated December 17, 1979 (which parenthetically are the only demands for payment
of the penalties) are therefore ineffective as there was nothing to
demand. It would be otherwise, if the
demand for the payment of the penalty was made prior to the extinguishment of
the obligation because then the obligation of Moonwalk would consist of: 1) the
principal obligation 2) the interest of 12% on the principal obligation and 3)
the penalty of 12% for late payment for after demand, Moonwalk would be in mora
and therefore liable for the penalty.

Let it be emphasized that at the time of the demand made in the
letters of November 28, 1979 and December 17, 1979 as far as the penalty is
concerned, the defendant-appellee was not in default since there was no mora
prior to the demand. That being the
case, therefore, the demand made after the extinguishment of the principal obligation
which carried with it the extinguishment of the penal clause being merely an
accessory obligation, was an exercise in futility.

3. At the time of the
payment made of the full obligation on October 10, 1979 together with the 12%
interest by defendant-appellee Moonwalk; its obligation was extinguished. It being extinguished, there was no more
need for the penal clause. Now, it is
to be noted that penalty at anytime can be modified by the Court. Even substantial performance under Art. 1234 authorizes the Court
to consider it as complete performance minus damages. Now, Art. 1229 Civil Code of the Philippines provides:

“ART. 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.”

If the penalty can be reduced after the principal obligation has
been partly or irregularly complied with by the debtor, which is nonetheless a
breach of the obligation, with more reason the penal clause is not demandable
when full obligation has been complied with since in that case there is no
breach of the obligation. In the
present case, there has been as yet no demand for payment of the penalty at the
time of the extinguishment of the obligation, hence there was likewise an
extinguishment of the penalty.

Let Us emphasize that the obligation of defendant-appellee was
fully complied with by the debtor, that is, the amount loaned together with the
12% interest has been fully paid by the appellee. That being so, there is no basis for demanding the penal clause
since he obligation has been extinguished. Here there has been a waiver of the penal clause as it was not demanded
before the full obligation was fully paid and extinguished. Again, emphasis must be made on the fact
that plaintiff-appellant has not lost anything under the contract since it got
back in full the amount loan (sic) as well as the interest thereof. The same thing would have happened if the
obligation was paid on time, for then the penal clause, under the terms of the
contract would not apply. Payment of
the penalty does not mean gain or loss of plaintiff-appellant since it is
merely for the purpose of enforcing the performance of the main
obligation. Since the obligation has
been fully complied with and extinguished, the penal clause has lost its raison
d’ entre.”^[5]

We find no reason to
depart from the appellate court’s decision. We, however, advance the following reasons for the denial of this
petition.

Article 1226 of the Civil Code provides:

“Art. 1226. In
obligations with a penal clause, the penalty shall substitute the indemnity for
damages and the payment of interests in case of noncompliance, if there is no
stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the
penalty or is guilty of fraud in
the fulfillment of the obligation.

The penalty may be enforced only when it is demandable in accordance
with the provisions of this Code.” (Underscoring Ours.)

A
penal clause is an accessory undertaking to assume greater liability in case of
breach.^[6] It has a double function: (1) to provide for liquidated damages, and
(2) to strengthen the coercive force of the obligation by the threat of greater
responsibility in the event of breach.^[7] From the foregoing, it is clear that a penal
clause is intended to prevent the obligor from defaulting in the performance of
his obligation. Thus, if there should
be default, the penalty may be enforced. One commentator of the Civil Code wrote:

“Now when is the penalty deemed demandable in accordance with
the provisions of the Civil Code? We
must make a distinction between a positive and a negative obligation. With regard to obligations which are
positive (to give and to do), the penalty is demandable when the debtor is in mora;
hence, the necessity of demand by the debtor unless the same is excused. x x x”^[8]

When
does delay arise? Under the Civil Code,
delay begins from the time the obligee judicially or extrajudicially demands
from the obligor the performance of the obligation.

“Art. 1169. Those
obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their
obligation.”

There
are only three instances when demand is not necessary to render the obligor in
default. These are the following:

“(1)    When the
obligation or the law expressly
so declares;

(2)     When from the nature
and the circumstances of the obligation it appears that the designation of the
time when the thing is to be delivered or the service is to be rendered was a
controlling motive for the establishment of the contract; or

(3)     When the demand would
be useless, as when the obligor has rendered it beyond his power to
perform.”^[9]

This
case does not fall within any of the established exceptions. Hence, despite the provision in the
promissory note that “(a) II amortization payments shall be made every
first five (5) days of the calendar month until the principal and interest on
the loan or any portion thereof actually released has been fully paid,”^[10] petitioner is not excused from making a demand. It has been established that at the time of payment of the full
obligation, private respondent Moonwalk has long been delinquent in meeting its
monthly arrears and in paying the full amount of the loan itself as the
obligation matured sometime in January, 1977. But mere delinquency in payment does not necessarily mean delay in the
legal concept. To be in default “x
x x is different from mere delay in the grammatical sense, because it involves
the beginning of a special condition
or status which has its own peculiar effects or results.”^[11] In order that the debtor may be in default
it is necessary that the following requisites be present: (1) that the obligation be demandable and
already liquidated; (2) that the debtor delays performance; and (3) that the
creditor requires the performance judicially and extrajudicially.^[12] Default generally begins from the moment the
creditor demands the performance of the obligation.^[13]

Nowhere in this case did
it appear that SSS demanded from Moonwalk the payment of its monthly
amortizations. Neither did it show that
petitioner demanded the payment of the stipulated penalty upon the failure of
Moonwalk to meet its monthly amortization. What the complaint itself showed was that SSS tried to enforce the
obligation sometime in September, 1977 by foreclosing the real estate mortgages
executed by Moonwalk in favor of SSS. But this foreclosure did not push through upon Moonwalk’s requests and
promises to pay in full. The next
demand for payment happened on October 1, 1979 when SSS issued a Statement of
Account to Moonwalk. And in accordance
with said statement, Moonwalk paid its
loan in full. What is clear, therefore,
is that Moonwalk was never in default because SSS never compelled
performance. Though it tried to
foreclose the mortgages, SSS itself desisted from doing so upon the entreaties of Moonwalk. If the Statement of Account could properly
be considered as demand for payment, the demand was complied with on time. Hence, no delay occurred and there was,
therefore, no occasion when the penalty became demandable and
enforceable. Since there was no default
in the performance of the main obligation — payment of the loan — SSS was
never entitled to recover any penalty, not at the time it made the Statement of
Account and certainly, not after the
extinguishment of the principal obligation because then, all the more that SSS
had no reason to ask for the penalties. Thus, there could never be any occasion for waiver or even mistake in
the application for payment because there was nothing for SSS to waive as its
right to enforce the penalty did not arise.

SSS, however, in buttressing
its claim that it never waived the penalties, argued that the funds it held
were trust funds and as trustee, the petitioner could not perform acts
affecting the funds that would diminish property rights of the owners and
beneficiaries thereof. To support its
claim, SSS cited the case of United Christian Missionary Society v.
Social Security Commission.^[14]

We looked into the case
and found out that it is not applicable to the present case as it dealt not
with the right of the SSS to collect penalties which were provided for in contracts which it entered into but with its right to collect premiums
and its duty to collect the penalty for delayed payment or non-payment of
premiums. The Supreme Court, in that
case, stated:

“No discretion or alternative is granted respondent Commission
in the enforcement of the law’s
mandate that the employer who fails to comply with his legal obligation to
remit the premiums to the System within the prescribed period shall pay a penalty
of three (3%) per month. The prescribed
penalty is evidently of a punitive character, provided by the legislature to
assure that employers do not take lightly the State’s exercise of the police
power in the implementation of the Republic’s declared policy “to develop,
establish gradually and perfect a social security system which shall be
suitable to the needs of the people throughout the Philippines and (to) provide
protection to employers against the hazards of disability, sickness, old age and
death. x x x.”

Thus, We agree with the
decision of the respondent Court on the matter which We quote, to wit:

“Note that the above case refers to the condonation of the
penalty for the non remittance of the premium which is provided for by Section
22(a) of the Social Security Act x x x. In other words, what was sought to be condoned was the penalty provided
for by law for non remittance of premium for coverage under the Social Security
Act.

The case at bar does not refer to any penalty provided for by law
nor does it refer to the non remittance of premium. The case at bar refers to a contract of loan entered into between
plaintiff and defendant Moonwalk Development and Housing Corporation. Note, therefore, that no provision of law is
involved in this case, nor is there any penalty imposed by law nor a case about
non?remittance of premium required by law. The present case refers to a contract of loan payable in
installments not provided for by law but by agreement of the parties. Therefore, the ratio decidendi of the case
of United Christian Missionary Society vs. Social Security Commission which
plaintiff-appellant relies is not applicable in this case; clearly, the Social
Security Commission, which is a creature of the Social Security Act cannot
condone a mandatory provision of law providing for the payment of premiums and
for penalties for non remittance. The
life of the Social Security Act is in the premiums because these are the funds
from which the Social Security Act gets the money for its purposes and the non-­remittance
of the premiums is penalized not by the Social Security Commission but by law.

x x x                                                                          x
x x

It is admitted that when a government created corporation enters
into a contract with private party concerning a loan, it descends to the level
of a private person. Hence, the rules
on contract applicable to private parties are applicable to it. The argument therefore that the Social
Security Commission cannot waive or condone the penalties which was applied in
the United Christian Missionary Society cannot apply this case. First, because what was not paid were
installments on a loan but premiums required by law to be paid by the parties
covered by the Social Security Act. Secondly, what is sought to be condoned or waived are penalties not
imposed by law for failure to remit premiums required by law, but a
penalty for non payment provided for by the agreement of the parties in the
contract between them. x x x”^[15]

WHEREFORE, in view of the foregoing, the petition is
DISMISSED and the decision of the respondent Court is AFFIRMED.

SO ORDERED.

Narvasa, C.J., (Chairman), Padilla, Regalado, and Nocon, JJ., concur.

^[1]
AC-G.R. CV No. 68692, “Social Security System vs. Moonwalk
Development & Housing Corporation, et al.”, penned by Associate
Justice Eduardo P. Caguioa, Associate Justices Abdulwahid A. Bidin and
Floreliana C. Bartolome, concurring with dissenting opinion of Presiding
Justice Ramon G. Gaviola, Jr. and Associate Justice Ma. Rosario Quetulio-Losa,
concurring.

^[2]
Annex “A” of Petition, pp. 1-3; Rollo, pp. 44-46.

^[3]
Decision, p. 13; Rollo, p. 56.

^[4]
Petition, p. 12; Rollo, p. 27.

^[5]
Rollo, pp. 62-66.

^[6]
4 TOLENTINO, CIVIL CODE OF THE PHILIPPINES 259 (1991 ed.).

^[7]
lbid.

^[8]
4 E.P. CAGUIOA, COMMENTS AND CASES ON CIVIL LAW 280 (1983 ed.).

^[9]
CIVIL CODE, Art. 1169.

^[10]
Annex “C” of the Petition, Record on Appeal, p. 10.

^[11]
Supra, note 6.

^[12]
Ibid.

^[13]
Ibid.

^[14]
30 SCRA 982, 987 (1969).

^[15]
Supra, note 3, pp. 17-18.