G.R. No. L-7991 January 29, 1914 defendant accordingly discharged of his obligation thereunder.
defendant accordingly discharged of his obligation thereunder. The complaint was dismissed
LEON J. LAMBERT, plaintiff-appellant,
vs.
T. J. FOX, defendant-appellee.
MORELAND, J.:
This is an action brought to recover a penalty prescribed on a contract as punishment for the
breach thereof.
Early in 1911 the firm known as John R. Edgar & Co., engaged in the retail book and stationery
business, found itself in such condition financially that its creditors, including the plaintiff and
the defendant, together with many others, agreed to take over the business, incorporate it and
accept stock therein in payment of their respective credits. This was done, the plaintiff and the
defendant becoming the two largest stockholders in the new corporation called John R. Edgar &
Co., Incorporated. A few days after the incorporation was completed plaintiff and defendant
entered into the following agreement:
Whereas the undersigned are, respectively, owners of large amounts of stock in John R.
Edgar and Co, Inc; and,
Whereas it is recognized that the success of said corporation depends, now and for at
least one year next following, in the larger stockholders retaining their respective
interests in the business of said corporation:
Therefore, the undersigned mutually and reciprocally agree not to sell, transfer, or
otherwise dispose of any part of their present holdings of stock in said John R. Edgar &
Co. Inc., till after one year from the date hereof.
Either party violating this agreement shall pay to the other the sum of one thousand
(P1,000) pesos as liquidated damages, unless previous consent in writing to such sale,
transfer, or other disposition be obtained.
Notwithstanding this contract the defendant Fox on October 19, 1911, sold his stock in the said
corporation to E. C. McCullough of the firm of E. C. McCullough & Co. of Manila, a strong
competitor of the said John R. Edgar & Co., Inc.
This sale was made by the defendant against the protest of the plaintiff and with the warning that
he would be held liable under the contract hereinabove set forth and in accordance with its
terms. In fact, the defendant Foz offered to sell his shares of stock to the plaintiff for the same
sum that McCullough was paying them less P1,000, the penalty specified in the contract.
The learned trial court decided the case in favor of the defendant upon the ground that the
intention of the parties as it appeared from the contract in question was to the effect that the
agreement should be good and continue only until the corporation reached a sound financial
basis, and that that event having occurred some time before the expiration of the year mentioned
in the contract, the purpose for which the contract was made and had been fulfilled and the
upon the merits.
It is argued here that the court erred in its construction of the contract. We are of the opinion
that the contention is sound. The intention of parties to a contract must be determined, in the
first instance, from the words of the contract itself. It is to be presumed that persons mean what
they say when they speak plain English. Interpretation and construction should by the
instruments last resorted to by a court in determining what the parties agreed to. Where the
language used by the parties is plain, then construction and interpretation are unnecessary and,
if used, result in making a contract for the parties. (Lizarraga Hermanos vs. Yap Tico, 24 Phil.
Rep., 504.)
In the case cited the court said with reference to the construction and interpretation of statutes:
"As for us, we do not construe or interpret this law. It does not need it. We apply it. By applying
the law, we conserve both provisions for the benefit of litigants. The first and fundamental duty
of courts, in our judgment, is to apply the law. Construction and interpretation come only after it
has been demonstrated that application is impossible or inadequate without them. They are the
very last functions which a court should exercise. The majority of the law need no interpretation
or construction. They require only application, and if there were more application and less
construction, there would be more stability in the law, and more people would know what the
law is."
What we said in that case is equally applicable to contracts between persons. In the case at bar
the parties expressly stipulated that the contract should last one year. No reason is shown for
saying that it shall last only nine months. Whatever the object was in specifying the year, it was
their agreement that the contract should last a year and it was their judgment and conviction that
their purposes would not be subversed in any less time. What reason can give for refusing to
follow the plain words of the men who made the contract? We see none.
The appellee urges that the plaintiff cannot recover for the reason that he did not prove damages,
and cites numerous American authorities to the effect that because stipulations for liquidated
damages are generally in excess of actual damages and so work a hardship upon the party in
default, courts are strongly inclined to treat all such agreements as imposing a penalty and to
allow a recovery for actual damages only. He also cites authorities holding that a penalty, as such,
will not be enforced and that the party suing, in spite of the penalty assigned, will be put to his
proof to demonstrate the damages actually suffered by reason of defendants wrongful act or
omission.
In this jurisdiction penalties provided in contracts of this character are enforced . It is the rule
that parties who are competent to contract may make such agreements within the limitations of
the law and public policy as they desire, and that the courts will enforce them according to their
terms. (Civil Code, articles 1152, 1153, 1154, and 1155; Fornow vs. Hoffmeister, 6 Phil. Rep., 33;
Palacios vs. Municipality of Cavite, 12 Phil. Rep., 140; Gsell vs. Koch, 16 Phil. Rep., 1.) The only
case recognized by the Civil Code in which the court is authorized to intervene for the purpose of
reducing a penalty stipulated in the contract is when the principal obligation has been partly or
irregularly fulfilled and the court can see that the person demanding the penalty has received the
benefit of such or irregular performance. In such case the court is authorized to reduce the
penalty to the extent of the benefits received by the party enforcing the penalty.

In this jurisdiction, there is no difference between a penalty and liquidated damages, so far as
legal results are concerned. Whatever differences exists between them as a matter of language,
they are treated the same legally. In either case the party to whom payment is to be made is
entitled to recover the sum stipulated without the necessity of proving damages. Indeed one of
the primary purposes in fixing a penalty or in liquidating damages, is to avoid such necessity.

It is also urged by the appelle in this case that the stipulation in the contract suspending the
power to sell the stock referred to therein is an illegal stipulation, is in restraint of trade and,
therefore, offends public policy. We do not so regard it. The suspension of the power to sell has a
beneficial purpose, results in the protection of the corporation as well as of the individual parties
to the contract, and is reasonable as to the length of time of the suspension. We do not here
undertake to discuss the limitations to the power to suspend the right of alienation of stock,
limiting ourselves to the statement that the suspension in this particular case is legal and valid.

The judgment is reversed, the case remanded with instructions to enter a judgment in favor of
the plaintiff and against the defendant for P1,000, with interest; without costs in this instance.
G.R. No. L-18857 December 11, 1967
THE CAPITAL INSURANCE and SURETY CO., INC., plaintiff-appellant,
vs.
ESTEBAN M. SADANG and MARIA LACHICA, defendants-appellees.
MAKALINTAL, J.:
The following statement of facts, reproduced from the brief for plaintiff-appellant, the Capital
Insurance Surety Co., Inc., is admitted as correct by defendants-appellees:
Plaintiff Capital Insurance & Surety Co., Inc., subscribed on June 21, 1954 to a bond
(Exhibit A) in the amount of P42,000.00 in behalf of Mateo Pinto and in favor of the
Macondray Farms, Inc., the purpose of which was to guarantee the payment of rentals
of the fishpond and other obligations of Mateo Pinto as contained in the lease
agreement marked as Exhibit A-1.lawphil.net
To protect the interest of plaintiff Capital Insurance & Surety Co., Inc. from any liability
that may arise from the above-mentioned bond, Mateo Pinto and the defendants in this
case, Esteban M. Sadang and Maria Lachica, executed an idemnity agreement (Exhibit
B) and a deed of real of real estate mortage (Exhibit C) on the property of the defendants
located in the Province of Nueva Vizcaya and covered by Transfer Certificate of Title
No. 2216 issued by the Register of Deeds of Nueva Vizcaya.
Mateo Pinto failed to pay the rentals of the leased fishpond to Macondray Farms, Inc.,
in the total amount of P24,668.83.1
Because of the failure of Mateo Pinto to pay the said amount of P24,668.83 to
Macondray Farms, Inc., plaintiff in the instant case as surety had to pay, as it did pay
Macondray Farms, Inc., the amount of P24,668.83 on May 14, 1956 to settle the
obligation of Mateo Pinto with the said Macondray Farms, Inc.
Notwithstanding repeated demands, Mateo Pinto and his indemnitors including herein
defendants failed to reimburse the Capital Insurance & Surety Co., Inc., the the said
amount of P24,688.83.
Because of such failure to make reimbursement, the Capital Insurance & Surety Co., Inc.,
filed Civil Case No. 30061 against Mateo Pinto and his indemnitors including the
defendants in this instant case for the collection of the above-mentioned amount.
On the strength of the agreement of the parties Civil Case No. 30061 (Exhibit E) wherein
it is agreed among others, that if after the sale of all the said properties, the judment
shall not have been fully satisfied, then plaintiff may file as separate civil action against
the defendants-spouses, Esteban M. Sadang and Maria Lachica, the other indemnitors,
but at the same time dismissed the case against the herein defendants without
prejudice (Exhibit F-1).
Two executions were issued by the court for the enforcement of the above-mentioned
decision in Civil Case No. 30061 and after applying the proceeds of the sale of the
properties in public auction there is still a deficiency in the amount of P14,456.44
which, in view of the failure of the herein dependants to pay in spite of plaintiff's
repeated demands, had to become the subject of this instant case.
It is the contention of plaintiff that by virtue of the indemnity agreement (Exhibit B) and
the estate mortgage (exhibit C) of the herein defendants, they are liable for the said
deficiency of P14,456.44, plus interest, plus attorney's feest and costs of the suit.itc-
alf On the other hand, defendants contend that their liability under the mortgage
contract (Exhibit C) is limited to the first P20,000.00 that might be incurred under the
bond and that since Mateo Pinto actually paid Macondray Farms, Inc., the amount of
P19,700.00, they are liable to pay only amount of P300.00 which remain after deducting
what was paid by Mateo Pinto to Macondray Farms, Inc. from the first liability of
P20,000.00.
After due hearing, the trial court rendered judgment on April 20, 1961 (pp. 93-101,
Record on Appeal) ordering defendants to pay to plaintiff only, the amount of P300.00
and without costs.
To point on which the parties disagree is the interpretation of the following stipulation in the
mortgage contract executed by defendants-appellees:
This mortgage is constituted to indemnify the mortgagee for any damage, cost,
expenses and charges of whatever kind and nature that it may incur or sustain as a
consequence of having acted as surety on the bond referred to above, and or its
substitution, modification, alteration, change and/or renewals. That liability secured by
the above properties is limited to the first P20,000.00 that might be incurred under the
bond issued in favor of the Macondray Farms, Inc.
Appellant lays stress on the general statement of appellees' liability as it appears in the contract,
to wit; "to indemnify the mortgagee for any damage, cost, expenses and charges of whatever kind
and nature that it may incur or sustain as a consequence of having acted as surety or the bond. .
. ." Similar stress is laid on the fact that because the principal debtor, Mateo Pinto, paid to
Macondray Farms, Inc., the sum of P19,700.00 before he became in default, no liability ever
attached to appellant under its bond for that amount, and hence it should not be considered as
part of, or applied to, "the first P20,000.00 that might be incurred under the bond . . .," which
defined the limit of appellees' obligation.
At first blush the argument seems logical. But the real intention of the parties is revealed by the
testimony of appellee Esteban Sadang concerning the circumstances which led to the inclusion
of the particular stipulation aforequoted. We quote from the record:lawphil.net
Q. In the course of your testimony in the last hearing you mentioned that there have
been two contracts of mortgage prepared in connection with this property belonging
to you and situated in Nueva Vizcaya and you also stated that the first draft or first copy
of the Deed of contract was not signed by You.itc-alf Will you please state to the Court
 the reason for not signing the first deed of mortgage that was presented to you for
signature?
A. When Mr. Pinto brought me to the Capital Insurance Company I was permitted to
see the written document prepared by Atty. Achacoso with Atty. Nera as his companion
and in the presence of one, the mestizo who was supposed to be the manager of the
Bonding Department. At that time, I was made to understand that if I would consent to
be one of the bondsmen I would only answer to the first P20,000.00 of the total
P42,000.00 bond which the Capital Insurance was supposed to underwrite to Mateo
Pinto in favor of Macondray Farms and I told Atty.lawphil.net Achacoso in the presence
of the mestizo the then Manager of the Bonding Department that I was only supposed
to answer to the first P20,000.00 of the total bond indebtedness of P42,000.00. That the
moment the first P20,000.00 is paid the bonding company automatically releases my
responsibility to them.
responsibility to them." The trial court found the said testimony to be uncontradicted. If the
mortgage contract as actually drafted seems to be vague or ambiguous, the doubt must be
resolved against appellant, whose lawyer prepared the document, and in accordance with the
real intention of the parties as explained by defendants-appellees.
The trial court correctly held said defendants-appellants liable only for the sum of P300.00.
However, it failed to provide for the stipulated interest thereon at the rate of 12% per annum,
which if not paid would be liquidated and added to the capital, quarterly, and to order foreclosure
of the mortgaged properties in case of non-payment.
WHEREFORE, the judgment appealed from is affirmed, with the modification indicated above
concerning interest, the same to begin from the date of the filing of the complaint. In case of non-
payment of the sum thus adjudged, including interest, the mortgaged properties will be sold as
provided in Rule 68. No costs in this instance.

Q. Showing to you again this Exhibit C for the plaintiff, is this the second draft or
second contract that was prepared by Mr. Achacoso after you have made that interview
in clarifying in so far as liability with the bond is concerned?

(Witness looking at Exhibit C)

A. Yes, this last letter was the one inserted, "That the liability secured by the above
properties is limited to the first P20,000.00 that might be incurred under the bond
issued in favor of the Macondray Farms, Inc."

Q. In the first draft of the contract of mortgage that was sought to be signed by you
do you mean then that this last three lines of the second paragraph of page 2 of Exhibit
3 did not exist?

A. It did not and so I insisted it should be specifically mentioned that I was

answerable only to the first P20,000.00.

Q. Who made you understand that?

A. Atty. Achaeoso in fact Atty. Nera was present including that mestizo.

Q. What did Mr. Achacoso explain to you as to the extend of the liability of the
property on the last three lines of the second page of Exhibit C?

A. He emphatically informed me that when that liability will be paid may free me to
some connected liability with the other bondsmen and he said, it is very clear. So I
consented to sign with my wife.

The foregoing testimony is clear enough. Esteban Sadang agreed to be an indemnitor only on
condition that he would answer for the "first P20,000.00 of the total P42,000.00 bond," and that
"the moment the first P20,000.00 is paid the bonding company automatically releases my