Soledad Leonor Pea Suatengco and Antonio Esteban Suatengco vs. Carmencita O.

Reyes, G.R. No. 162729, December 17, 2008

DOCTRINE: Liquidated damages, such as attorneys fees stipulated in a promissory
note, are those agreed upon by the parties to a contract to be paid in case of breach
thereof. Said fees so provided are awarded in favor of the litigant in the nature of a
penalty or liquidated damages, not a compensation for the respondents counsel.
FACTS: Congressman Reyes, herein respondent, lends petitioners estimately P1.3
Million. In the loan contract, it is stipulated that in the event of default, Suatengco
must pay the balance plus 12% interest per annum plus 5% attorneys fees for the
total award. Atty. Edmundo Reyes, son of the respondent, appeared as the attorneyin-fact of the respondent, and files a case for collection of sum of money, the 12%
interest and 20% attorneys fees. The lower and appellate courts award the same.
The petitioners countered alleging that the stipulated attorneys fees is only 5%.
ISSUE: Whether or not 20% of the outstanding balance prevails over the 5%
stipulated in the promissory note as basis for the attorneys fees.
HELD: The attorneys fees herein litigated are in the nature of liquidated damages
and not the attorneys fees recoverable as between attorney and client enunciated
and regulated by the Rules of Court. Liquidated damages are those agreed upon by
the parties to a contract to be paid in case of breach thereof. The stipulation on
attorneys fees contained in the said Promissory Note constitutes what is known as
a penal clause. A penalty clause, expressly recognized by law, is an accessory
undertaking to assume greater liability on the part of the obligor in case of breach
of an obligation. The obligor would then be bound to pay the stipulated indemnity
without the necessity of proof on the existence and on the measure of damages
caused by the breach. It is well-settled that so long as such stipulation does not
contravene law, morals, or public order, it is strictly binding upon the obligor. The
attorneys fees so provided are awarded in favor of the litigant, not his counsel. It is
improper for both the RTC and the CA to increase the award of attorneys fees
despite the express stipulation contained in the said Promissory Note since it is not
intended to be the compensation for the respondents counsel but was rather in the
nature of a penalty or liquidated damages.
Thus, the Supreme Court modified the award for the attorneys fees from 20% to 5%
of the total balance of the outstanding indebtedness but affirmed the decision of the
appellate court in all other respects.