G.R. No. 126486 February 9, 1998
BARONS MARKETING CORP., petitioner, vs. COURT OF APPEALS and PHELPS DODGE PHILS., INC., respondents.

FACTS

On August 31, 1973, private respondent Phelps Dodge Phils., Inc. appointed petitioner Barons Marketing Corporation as a dealer of electrical wires and cables, granting a 60-day credit term. From December 1986 to August 17, 1987, petitioner purchased various electrical wires and cables on credit from private respondent in the total amount of P4,102,438.30. The sales invoices stipulated interest at 12% per annum on overdue accounts plus 25% of the amount for attorney’s fees and collection. Petitioner paid P300,000.00 on September 7, 1987, leaving an unpaid balance of P3,802,478.20. Private respondent made several demands for payment. Petitioner offered to pay its outstanding account in monthly installments of P500,000.00 plus 1% interest per month, but private respondent rejected the offer and demanded full payment. On October 29, 1987, private respondent filed a complaint for collection before the Pasig Regional Trial Court. Petitioner, in its answer, admitted the purchases but disputed the amount and interposed a counterclaim for damages, alleging that private respondent’s acts constituted an abuse of rights. The trial court ordered petitioner to pay P3,108,000.00 as the unpaid balance with 12% interest, 25% of the obligation as attorney’s fees, P10,000.00 as exemplary damages, and costs. Both parties appealed. The Court of Appeals modified the decision, ordering petitioner to pay P3,802,478.20 with 12% interest and 5% of the obligation as attorney’s fees.

ISSUE

1. Whether or not private respondent is guilty of abuse of right for rejecting petitioner’s offer of installment payment and filing the collection suit.
2. Whether or not private respondent is entitled to interest and attorney’s fees.

RULING

1. No, private respondent is not guilty of abuse of right. The Court held that private respondent’s right to institute an action for collection and to claim full payment is beyond cavil. Under Article 1248 of the Civil Code, the creditor cannot be compelled to accept partial payments unless stipulated. While the exercise of rights is limited by Article 19, which requires every person to act with justice, give everyone his due, and observe honesty and good faith, the test for abuse of right requires that the defendant must act with bad faith or intent to prejudice the plaintiff. Good faith is presumed, and the burden of proving bad faith rests on the party alleging it. Petitioner failed to prove bad faith on the part of private respondent. The allegation that private respondent was motivated by a desire to terminate the agency to deal directly with MERALCO was speculative and unsupported by evidence. Private respondent had legitimate reasons, such as protecting its own cash position to pay its obligations, for rejecting the offer and filing the suit. Therefore, private respondent’s actions did not constitute an abuse of right.
2. Yes, private respondent is entitled to interest and attorney’s fees, but the attorney’s fees are reduced. The Court affirmed the award of interest at 12% per annum as stipulated in the sales invoices, which constituted the law between the parties. However, the Court reduced the award of attorney’s fees. The sales invoices stipulated “25% on said amount for attorney’s fees and collection.” The Court found that with the interest running to about P4.5 million, 25% of the principal and interest (roughly P2 million) was manifestly exorbitant. Applying Article 2227 of the Civil Code, which allows the equitable reduction of liquidated damages if iniquitous or unconscionable, the Court reduced the attorney’s fees to ten percent (10%) of the principal obligation. The Court held it had authority to review matters not assigned as errors if necessary for a just decision. Thus, the Court of Appeals decision was modified regarding the attorney’s fees but affirmed in all other respects.