No. L-17247. April 28, 1962.

C.N.Hodges, petitioner, vs. Elpidio Javellana and the Hon. Court of Appeals, respondents.

Facts: Javellana had three outstanding debts with Hodges:

1. P16,000, made on June 11, 1936, payable in a year’s time; based on a promissory note
2. P17,500, made on Jan 6, 1937, payable in 72 monthly installments of P240 each (6 years’ time); from a sale of machinery
3. P8,000 made on April 27, 1939, payable in monthly installments of P100 each; for the sale of ice plant and soft drink machineries, and other equipment
Aside from the regular interest, the contracts stipulated that unpaid interest shall be added to the capital and bear interest at like rate.

In Sept 1953 Hodges filed a case for recovery:

1. the first loan with a balance of P8,060.20, as of Sept 1940, when last payment was made; with interest, P35,118.27
2. the second amounted to P15,120 as of Aug 1940, when payment was last made; with interest, P38,107.44
3. the third, with a balance of P4,000 as of June 1941 when last payment was made, with interest, P9,654.33

The trial court ruled in favor of Hodges but the Court of Appeals reduced the amounts to P9, 575.52, P18,199.44 and P4,372, respectively. These represent the amounts due under the first two causes of action as of Apr 1942, when the mortgaged properties corresponding to the loans were destroyed; and the sum due under the third loan as of Apr 1952, when the mortgage property involved in the loan was destroyed.
In his appeal, Hodges argued that Javellana should be required to pay the regular interest, as well as the compounded interest, since these were both stipulated in the valid contracts.

ISSUE: WON Javella should pay the compounded interest on the loans.

HELD: Yes, but because of the circumstances of the case (the payments stopped during the war, when Hodges was out of the country, and the properties were destroyed during the war) the court may moderate the interest claimed.

RATIO: The Supreme Court found nothing wrong with the regular interest accruing after liberation, but said that the provisions on compounded interest partake of the nature of a penal clause. It applied Article 1229 of the Civil Code, which allows the court to equitably reduce the penalty when the principal obligation has been partly or irregularly complied with.

DECISION: Javellana exempted from paying compounded interest; instead ordered to pay 12% per annum, beginning from liberation.


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