G.R. No. L-14304; March 23, 1960
ANTONIA A. CABARROGUIS and MAMERTO CABARROGUIS, plaintiffs-appellees, vs. TELESFORO B. VICENTE, defendant-appellant.

FACTS

Plaintiff Antonia A. Cabarroguis sustained physical injuries, including permanent partial disability to her right forearm, from an accident involving a “jeepney” owned and operated by defendant Telesforo B. Vicente. To avoid litigation, the parties entered into a compromise agreement on July 13, 1955, wherein the defendant obligated himself to pay the plaintiff P2,500.00 as actual, compensatory, exemplary, and moral damages. The agreement stipulated that if the defendant failed to complete payment within sixty days, he would pay an additional P200.00 as liquidated damages. The defendant paid P1,500.00, leaving a balance of P1,000.00. Upon the defendant’s failure and refusal to pay the balance after demands, the plaintiffs filed suit in the Municipal Court of Davao City. The defendant defended by alleging the injury was not serious enough to warrant the agreed amount and sought reformation of the agreement due to mistake, fraud, inequitable conduct, or accident. The Municipal Court ruled for the plaintiffs, and the Court of First Instance affirmed, sentencing the defendant to pay P1,200.00 (P1,000.00 balance plus P200.00 penalty) with legal interest from the filing of the complaint. The defendant appealed to the Court of Appeals, contesting the award of interest, arguing that under Article 1226 of the Civil Code, the penalty substitutes for damages and interest. The Court of Appeals certified the case to the Supreme Court as it raised a pure question of law.

ISSUE

Whether the lower court erred in sentencing the defendant to pay interest on the judgment amount from the date of the filing of the complaint until full payment.

RULING

The Supreme Court modified the decision of the lower court. It held that, under Article 1226 of the Civil Code, in obligations with a penal clause, the penalty substitutes for the indemnity for damages and the payment of interest, unless there is a contrary stipulation, the debtor refuses to pay the penalty, or the obligor is guilty of fraud. In this case, there was no contrary stipulation or fraud. Therefore, no interest could be awarded on the principal obligation of P1,000.00, as the P200.00 penalty took the place of such interest and indemnity. However, with respect to the penalty itself, the Court ruled that the plaintiff is entitled to interest on the penalty amount of P200.00 from the time of delay. Citing Article 2210 and prior jurisprudence, the Court held that when a debtor refuses to pay a stipulated penalty, the creditor is entitled to interest on that penalty. Since there was no showing of when an extrajudicial demand was made, interest on the penalty was recoverable from the date of judicial demand, which is the filing of the complaint. The decision was affirmed with the modification that interest shall be allowed only on the penalty amount of P200.00.