G.R. No. L-12984; July 26, 1960
WARNER, BARNES & CO., LTD., plaintiff-appellant, vs. EDMUNDO YASAY, ET AL., defendants-appellees.

FACTS

In October 1940, Edmundo Yasay purchased fertilizer on credit from Warner, Barnes & Co., Ltd. for P8,320.25, payable during the 1941-42 sugar milling season with 8% annual interest compounded quarterly. The obligation was secured by a chattel mortgage on 2,368 piculs of sugar from the 1941-42 crop. The debt remained unpaid when war broke out, and by April 30, 1942, it had increased to P9,500.49. The mortgaged sugar was lost during the war. After the war, the creditor made repeated demands for payment. On September 20, 1954, Warner, Barnes & Co., Ltd. filed a collection suit for P16,388.08 (including accrued interest) plus attorney’s fees. Yasay claimed he contracted the debt as manager of the Araneta Bros. partnership, leading to an amended complaint including the former partners. The trial court rendered judgment ordering defendants to pay the principal of P9,500.49, but only with interest from the date of the filing of the second amended complaint (April 26, 1956), plus attorney’s fees. The plaintiff appealed the disallowance of interest accrued prior to that date.

ISSUE

Whether the trial court correctly exempted the defendants from paying the stipulated interest on the principal obligation for the period prior to the filing of the second amended complaint.

RULING

No. The Supreme Court modified the trial court’s judgment. The reasons given by the lower court for exempting the defendants from pre-complaint interest were not valid.
1. The creditor’s letter (Exhibit “10”) offering to waive accrued interest was a conditional compromise offer, contingent upon settlement by a specific date or payment in installments. Since the debtors did not accept or comply with these conditions, the offer did not become binding, and the creditor retained the right to demand payment according to the original contract terms, including the stipulated interest.
2. The Moratorium Law (Executive Order No. 32) did not condone interest; it merely suspended the enforcement of payment. The accessory obligation of interest followed the principal obligation. The debtors could have renounced the moratorium’s benefits and paid, but they did not, so they remained liable for the accrued interest.
However, considering the absence of debtor bad faith, the impossibility of payment during the war years (as the creditor was a British company considered an enemy), and the court’s equitable power to moderate liability, the Supreme Court deemed it fair to eliminate the interest that accrued during the war years. Consequently, the defendants were ordered to pay the principal of P9,500.49 plus 8% annual interest from and after August 6, 1945 (the date following the liberation of the Philippines) until fully paid. The attorney’s fees were also reduced to 10% of the total judgment.