GR 141434; (September, 2003) (Digest)
G.R. No. 141434, September 23, 2003
Antonio Lo, Petitioner, vs. The Hon. Court of Appeals and National Onions Growers Cooperative Marketing Association, Inc., Respondents.
FACTS
Petitioner Antonio Lo acquired two parcels of land with improvements from the Land Bank of the Philippines in an auction sale. Private respondent National Onion Growers Cooperative Marketing Association, Inc. (NOGROCOMA), an agricultural cooperative, was occupying the property under a lease contract with Land Bank valid until December 31, 1995. Upon the lease’s expiration, Lo demanded that NOGROCOMA vacate the premises. NOGROCOMA refused, contesting Lo’s acquisition in a separate action for annulment of sale and redemption.
Lo filed an ejectment case before the Metropolitan Trial Court, which ruled in his favor. The decision ordered NOGROCOMA to vacate, pay reasonable compensation for use, and pay a stipulated penalty of P5,000 for each day of delay in surrendering possession, as per the original lease contract. The Regional Trial Court affirmed this decision in toto on appeal.
ISSUE
Whether the Court of Appeals acted with authority in reducing the contractually stipulated penalty from P5,000 to P1,000 per day of delay.
RULING
Yes, the Court of Appeals acted within its authority. While courts generally respect the freedom of contract, Article 1229 of the Civil Code explicitly grants judges the power to equitably reduce a penalty if it is iniquitous or unconscionable, or if the principal obligation has been partly or irregularly complied with. The determination of whether a penalty is reasonable is addressed to the sound discretion of the court, considering factors such as the penalty’s purpose, the nature of the breach, and the parties’ circumstances.
In this case, the appellate court correctly found the P5,000 daily penalty (or P150,000 monthly) to be unconscionable. This amount was five times the monthly rental of P30,000. The reduction was justified given that NOGROCOMA’s delay stemmed from a bona fide belief in its preemptive right to purchase the property. Furthermore, considering NOGROCOMA’s nature as an agricultural cooperative with limited resources, enforcing the full penalty would be excessively oppressive and could lead to its financial ruin. The Supreme Court affirmed the appellate court’s exercise of discretion, noting that similar temperance of penalties has been applied in prior cases considering a debtor’s financial condition.