THIRD DIVISION

[G.R. No. 126486. February 9, 1998.]

BARONS MARKETING CORP. , petitioner, vs. COURT OF

APPEALS and PHELPS DODGE PHILS., INC., respondents.

Vero B. Librojo for petitioner.

Ponce Enrile Reyes & Manalastas for private respondent.

SYNOPSIS

On August 31, 1973, private respondent Phelps Dodge Phils., Inc.

appointed petitioner Barons Marketing Corporation as one of its dealers of
electrical wires and cables. During the period covering December 1986 to
August 1987, petitioner purchased on credit from respondent various electrical
wires and cables in the total amount of P4,102,438.30. On September 7, 1987,
petitioner paid respondent the amount of P300,000.00 out of its total purchases
above-stated. On several occasions, respondent wrote petitioner demanding
payment of its outstanding obligations due respondent. In response, petitioner
wrote respondent requesting the latter if it could pay its outstanding account in
monthly installments of P500,000.00 plus 1% interest per month. Respondent,
however, rejected petitioner's offer and reiterated its demand for full payment
of petitioner's account. Respondent then filed a complaint before the Pasig
Regional Trial Court against petitioner for the recovery of P3,802,478.20
representing the value of the wires and cables the former had delivered to the
latter, including interest. After hearing, the trial court rendered its decision
ordering petitioner to pay respondent: 1) P3,108,000.00 constituting the unpaid
balance, plus interest; 2) 25% of the preceding obligation for and as attorney's
fees; 3) P10,000.00 as exemplary damages; and 4) the costs of suit. Both
parties appealed to the Court of Appeals. The appellate court modified the
decision of the trial court ordering petitioner to pay respondent P3,802,478.20,
the amount which appeared in the body of the complaint and proven during the
trial rather than P3,108,000.00, the latter amount appearing in petitioner's
prayer supposedly as a result of a typographical error, as well as 5% of the
amount awarded for and as attorney's fees. Petitioner now invokes Articles 19
and 21 of the Civil Code, claiming that private respondent abused its rights
when it rejected petitioner's offer of settlement and subsequently filed the
action for collection. CHaDIT

The Supreme Court found petitioner's theory untenable. The Court held
that to constitute an abuse of rights under Article 19 the defendant must act
with bad faith or intent to prejudice the plaintiff. In the case at bar, petitioner
has failed to prove bad faith on the part of private respondent. Petitioner's
allegation that private respondent was motivated by a desire to terminate its
agency relationship with petitioner so that private respondent itself may deal
directly with Meralco is not supported by the evidence. At most, such
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 supposition is considered by the Court merely speculative. The Court having
ruled that private respondent's acts did not transgress the provisions of Article
21, petitioner cannot be entitled to moral damages or for that matter,
exemplary damages. The Court, however, found the amount of attorney's fees
and collection fees of 25% of the principal to be manifestly exorbitant, and,
accordingly, reduced it to 10%.

SYLLABUS

1. CIVIL LAW; HUMAN RELATIONS; GOOD FAITH IS ALWAYS PRESUMED

AND THE BURDEN OF PROVING BAD FAITH RESTS UPON THE PARTY ALLEGING
THE SAME; IN CASE AT BAR, PETITIONER FAILED TO PROVE BAD FAITH ON THE
PART OF THE PRIVATE RESPONDENT. — We hold in the negative. It is an
elementary rule in this jurisdiction that good faith is presumed and that the
burden of proving bad faith rests upon the party alleging the same. In the case
at bar, petitioner has failed to prove bad faith on the part of private respondent.
Petitioner's allegation that private respondent was motivated by a desire to
terminate its agency relationship with petitioner so that private respondent
itself may deal directly with Meralco is simply not supported by the evidence. At
most, such supposition is merely speculative. Moreover, we find that private
respondent was driven by very legitimate reasons for rejecting petitioner's offer
and instituting the action for collection before the trial court. As pointed out by
private respondent, the corporation had its own "cash position to protect in
order for it to pay its own obligations." This is not such "a lame and poor
rationalization" as petitioner purports it to be. For if private respondent were to
be required to accept petitioner's offer, there would be no reason for the latter
to reject similar offers from its other debtors. Clearly, this would be inimical to
the interests of any enterprise, especially a profit-oriented one like private
respondent. It is plain to see that what we have here is a mere exercise of
rights, not an abuse thereof. Under these circumstances, we do not deem
private respondent to have acted in a manner contrary to morals, good
customs or public policy as to violate the provisions of Article 21 of the Civil
Code.

2. ID.; ID.; DAMAGES; PETITIONER IS NOT ENTITLED TO MORAL

DAMAGES OR EXEMPLARY DAMAGES; REASONS. — Having ruled that private
respondent's acts did not transgress the provisions of Article 21, petitioner
cannot be entitled to moral damages or, for that matter, exemplary damages.
While the amount of exemplary damages need not be proved, petitioner must
show that he is entitled to moral, temperate or compensatory damages before
the court may consider the question of whether or not exemplary damages
should be awarded. As we have observed above, petitioner has failed to
discharge this burden.
3. ID.; CONTRACTS; IN THE ABSENCE OF ANY ABUSE OF RIGHT,
PRIVATE RESPONDENT CANNOT BE ALLOWED TO PERFORM ITS OBLIGATIONS
UNDER SUCH CONTRACT IN PARTS; THE PRINCIPLE OF AUTONOMY OF
CONTRACTS MUST BE RESPECTED. — It may not be amiss to state that
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 petitioner's contract with private respondent has the force of law between
them. Petitioner is thus bound to fulfill what has been expressly stipulated
therein. In the absence of any abuse of right, private respondent cannot be
allowed to perform its obligation under such contract in parts. Otherwise,
private respondent's right under Article 1248 will be negated, the sanctity of its
contract with petitioner defiled. The principle of autonomy of contracts must be
respected.
4. ID.; ID.; DAMAGES; COLLECTION AND ATTORNEY'S FEES REDUCED
BY THE COURT FOR BEING EXORBITANT. — Under Article 1229 of the Civil Code
courts are empowered to reduce such penalty if the same is "iniquitous or
unconscionable." It is true that we have upheld the reasonableness of penalties
in the form of attorney's fees consisting of twenty-five percent (25%) of the
principal debt plus interest. In the case at bar, however, the interest alone runs
to some four and a half million pesos (P4.5M), even exceeding the principal
debt amounting to almost four million pesos (P4.0M). Twenty five percent
(25%) of the principal and interest amounts to roughly two million pesos (P2M).
In real terms, therefore, the attorney's fees and collection fees are manifestly
exorbitant. Accordingly, we reduce the same to ten percent (10%) of the
principal.
5. ID.; ID.; ID.; POWER OF THE COURT TO REVIEW MATTERS EVEN
THEY ARE NOT ASSIGNED AS ERRORS. — Private respondent argues that
petitioner failed to question the award of attorney's fees on appeal before
respondent court and raised the issue only in its motion for reconsideration.
Consequently, petitioner should be deemed to have waived its right to question
such award. Private respondent's attempts to dissuade us from reducing the
penalty are futile. The Court is clothed with ample authority to review matters,
even if they are not assigned as errors in their appeal, if it finds that their
consideration is necessary in arriving at a just decision of the case. cIECaS

DECISION

KAPUNAN, J : p

The instant petition raises two issues: (1) whether or not private
respondent is guilty of abuse of right; and (2) whether or not private
respondent is entitled to interest and attorney's fees. prcd

The facts are undisputed:

On August 31, 1973, plaintiff [Phelps Dodge, Philippines, Inc.
private respondent herein] appointed defendant [petitioner Barons
Marketing, Corporation] as one of its dealers of electrical wires and
cables effective September 1, 1973 (Exh. A). As such dealer, defendant
was given by plaintiff 60 days credit for its purchases of plaintiff's
electrical products. This credit term was to be reckoned from the date
of delivery by plaintiff of its products to defendant (Exh. 1).

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 During the period covering December 1986 to August 17, 1987,
defendant purchased, on credit, from plaintiff various electrical wires
and cables in the total amount of P4,102,438.30 (Exh. B to K). These
wires and cables were in turn sold, pursuant to previous arrangements,
by defendant to MERALCO, the former being the accredited supplier of
the electrical requirements of the latter. Under the sales invoices
issued by plaintiff to defendant for the subject purchases, it is
stipulated that interest at 12% on the amount due for attorney's fees
and collection (Exh. BB). 1 On September 7, 1987, defendant paid
plaintiff the amount of P300,000.00 out of its total purchases as above-
stated (Exh. S), thereby leaving an unpaid account on the aforesaid
deliveries of P3,802,478.20. On several occasions, plaintiff wrote
defendant demanding payment of its outstanding obligations due
plaintiff (Exhs. L, M, N, and P). In response, defendant wrote plaintiff on
October 5, 1987 requesting the latter if it could pay its outstanding
account in monthly installments of P500,000.00 plus 1% interest per
month commencing on October 15, 1987 until full payment (Exh. O
and O-4). Plaintiff, however, rejected defendant's offer and accordingly
reiterated its demand for the full payment of defendant's account (Exh.
P). 2

On 29 October 1987, private respondent Phelps Dodge Phils., Inc. filed a

complaint before the Pasig Regional Trial Court against petitioner Barons
Marketing Corporation for the recovery of P3,802,478.20 representing the value
of the wires and cables the former had delivered to the latter, including
interest. Phelps Dodge likewise prayed that it be awarded attorney's fees at the
rate of 25% of the amount demanded, exemplary damages amounting to at
least P100,000.00, the expenses of litigation and the costs of suit.

Petitioner, in its answer, admitted purchasing the wires and cables from
private respondent but disputed the amount claimed by the latter. Petitioner
likewise interposed a counterclaim against private respondent, alleging that it
suffered injury to its reputation due to Phelps Dodge's acts. Such acts were
purportedly calculated to humiliate petitioner and constituted an abuse of
rights.

After hearing, the trial court on 17 June 1991 rendered its decision, the
dispositive portion of which reads:
WHEREFORE, from all the foregoing considerations, the Court
finds Phelps Dodge Phils., Inc. to have preponderantly proven its case
and hereby orders Barons Marketing, Inc. to pay Phelps Dodge the
following:
1. P3,108,000.00 constituting the unpaid balance of
defendant's purchases from plaintiff and interest thereon at 12% per
annum computed from the respective expiration of the 60 day credit
term, vis-a-vis the various sales invoices and/or delivery receipts;
2. 25% of the preceding obligation for and as attorney's fees;

3. P10,000.00 as exemplary damages;

4. Costs of suit. 3
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 Both parties appealed to respondent court. Private respondent claimed
that the trial court should have awarded it the sum of P3,802,478.20, the
amount which appeared in the body of the complaint and proven during the
trial rather than P3,108,000.00. The latter amount appears in petitioner's
prayer supposedly as a result of a typographical error.

On the other hand, petitioner reiterated its claims for damages as a result
of "creditor's abuse." It also alleged that private respondent failed to prove its
cause of action against it. cdll

On 25 June 1996, the Court of Appeals rendered a decision modifying the

decision of the trial court, thus:
WHEREFORE, from all the foregoing considerations, the Court
finds Phelps Dodge Phils., Inc. to have preponderantly proven its case
and hereby orders Barons Marketing, Inc. to pay Phelps Dodge the
following:
1. P3,802 ,478 .20 constituting the unpaid balance of
defendant's purchases from plaintiff and interest thereon at 12% per
annum computed from the respective expiration of the 60 day credit
term, vis-a-vis the various sales invoices and/or delivery receipts; and
2. 5% of the preceding obligation for and as attorney's fees.
No costs. 4

Petitioner Barons Marketing is now before this Court alleging that

respondent court erred when it held (1) private respondent Phelps Dodge not
guilty of "creditor's abuse," and (2) petitioner liable to private respondent for
interest and attorney's fees.
I

Petitioner does not deny private respondent's rights to institute an action

for collection and to claim full payment. Indeed, petitioner's right to file an
action for collection is beyond cavil. 5 Likewise, private respondent's right to
reject petitioner's offer to pay in installments is guaranteed by Article 1248 of
the Civil Code which states:
ART. 1248. Unless there is an express stipulation to that
effect, the creditor cannot be compelled partially to receive the
prestations in which the obligation consists . Neither may the debtor be
required to make partial payments.
However, when the debt is in part liquidated and in part
unliquidated, the creditor may demand and the debtor may effect the
payment of the former without waiting for the liquidation of the latter.

Under this provision, the prestation, i.e., the object of the obligation, must be
performed in one act, not in parts.

Tolentino concedes that the right has its limitations:

Partial Prestations . — Since the creditor cannot be compelled to
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 accept partial performance, unless otherwise stipulated, the creditor
who refuses to accept partial prestations does not incur in delay or
mora accipiendi, except when there is abuse of right or if good faith
requires acceptance. 6
Indeed, the law, as set forth in Article 19 of the Civil Code, prescribes a
"primordial limitation on all rights" by setting certain standards that must be
observed in the exercise thereof. 7 Thus:
ART. 19. Every person must, in the exercise of his rights and
in the performance of his duties, act with justice, give everyone his
due, and observe honesty and good faith.

Petitioner now invokes Article 19 and Article 21 8 of the Civil Code,

claiming that private respondent abused its rights when it rejected petitioner's
offer of settlement and subsequently filed the action for collection considering:
. . . that the relationship between the parties started in 1973
spanning more than 13 years before the complaint was filed, that the
petitioner had been a good and reliable dealer enjoying a good credit
standing during the period before it became delinquent in 1987, that
the relationship between the parties had been a fruitful one especially
for the private respondent, that the petitioner exerted its outmost
efforts to settle its obligations and avoid a suit, that the petitioner did
not evade in the payment of its obligation to the private respondent,
and that the petitioner was just asking a small concession that it be
allowed to liquidate its obligation to eight (8) monthly installments of
P500,000.00 plus 1% interest per month on the balance which proposal
was supported by post-dated checks. 9

Expounding on its theory, petitioner states:

In the ordinary course of events, a suit for collection of a sum of
money filed in court is done for the primary purpose of collecting a
debt or obligation. If there is an offer by the debtor to pay its debt or
obligation supported by post-dated checks and with provision for
interests, the normal response of a creditor would be to accept the
offer of compromise and not file the suit for collection. It is of common
knowledge that proceedings in our courts would normally take years
before an action is finally settled. It is always wiser and more prudent
to accept an offer of payment in installment rather than file an action
in court to compel the debtor to settle his obligation in full in a single
payment.
xxx xxx xxx
. . . Why then did private respondent elect to file a suit for
collection rather than accept petitioner's offer of settlement, supported
by post-dated checks, by paying monthly installments of P500,000.00
plus 1% per month commencing on October 15, 1987 until full
payment? The answer is obvious. The action of private respondent in
filling a suit for collection was an abuse of right and exercised for the
sole purpose of prejudicing and injuring the petitioner. 10

Petitioner prays that the Court order private respondent to pay petitioner
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 moral and exemplary damages, attorney's fees, as well as the costs of suit. It
likewise asks that it be allowed to liquidate its obligation to private respondent,
without interests, in eight equal monthly installments.
Petitioner's theory is untenable. prLL

Both parties agree that to constitute an abuse of rights under Article 19

the defendant must act with bad faith or intent to prejudice the plaintiff. They
cite the following comments of Tolentino as their authority:
Test of Abuse of Right . — Modern jurisprudence does not permit
acts which, although not unlawful, are anti-social. There is undoubtedly
an abuse of right when it is exercised for the only purpose of
prejudicing or injuring another. When the objective of the actor is
illegitimate, the illicit act cannot be concealed under the guise of
exercising a right. The principle does not permit acts which, without
utility or legitimate purpose cause damage to another, because they
violate the concept of social solidarity which considers law as rational
and just. Hence, every abnormal exercise of a right, contrary to its
socio-economic purpose, is an abuse that will give rise to liability. The
exercise of a right must be in accordance with the purpose for which it
was established, and must not be excessive or unduly harsh; there
must be no intention to injure another. Ultimately, however, and in
practice, courts, in the sound exercise of their discretion, will have to
determine all the facts and circumstances when the exercise of a right
is unjust, or when there has been an abuse of right. 11

The question, therefore, is whether private respondent intended to

prejudice or injure petitioner when it rejected petitioner's offer and filed the
action for collection.
We hold in the negative. It is an elementary rule in this jurisdiction that
good faith is presumed and that the burden of proving bad faith rests upon the
party alleging the same. 12 In the case at bar, petitioner has failed to prove bad
faith on the part of private respondent. Petitioner's allegation that private
respondent was motivated by a desire to terminate its agency relationship with
petitioner so that private respondent itself may deal directly with Meralco is
simply not supported by the evidence. At most, such supposition is merely
speculative.
Moreover, we find that private respondent was driven by very legitimate
reasons for rejecting petitioner's offer and instituting the action for collection
before the trial court. As pointed out by private respondent, the corporation had
its own "cash position to protect in order for it to pay its own obligations." This
is not such "a lame and poor rationalization" as petitioner purports it to be. For
if private respondent were to be required to accept petitioner's offer, there
would be no reason for the latter to reject similar offers from its other debtors.
Clearly, this would be inimical to the interests of any enterprise, especially a
profit-oriented one like private respondent. It is plain to see that what we have
here is a mere exercise of rights, not an abuse thereof. Under these
circumstances, we do not deem private respondent to have acted in a manner
contrary to morals, good customs or public policy as to violate the provisions of
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 Article 21 of the Civil Code.
Consequently, petitioner's prayer for moral and exemplary damages must
thus be rejected. Petitioner's claim for moral damages is anchored on Article
2219 (10) of the Civil Code which states:
ART. 2219. Moral damages may be recovered in the following
and analogous cases:
xxx xxx xxx
(10) Acts and actions referred to in articles 21, 26, 27, 28,
29, 30, 32, 34, and 35.
xxx xxx xxx

Having ruled that private respondent's acts did not transgress the provisions
of Article 21, petitioner cannot be entitled to moral damages or, for that
matter, exemplary damages. While the amount of exemplary damages need
not be proved, petitioner must show that he is entitled to moral, temperate
or compensatory damages before the court may consider the question of
whether or not exemplary damages should be awarded. 13 As we have
observed above, petitioner has failed to discharge this burden.

It may not be amiss to state that petitioner's contract with private

respondent has the force of law between them. 14 Petitioner is thus bound to
fulfill what has been expressly stipulated therein. 15 In the absence of any
abuse of right, private respondent cannot be allowed to perform its obligation
under such contract in parts. Otherwise, private respondent's right under Article
1248 will be negated, the sanctity of its contract with petitioner defiled. The
principle of autonomy of contracts 16 must be respected.
II
Under said contract, petitioner is liable to private respondent for the
unpaid balance of its purchases from private respondent plus 12% interest.
Private respondent's sales invoices expressly provide that:
. . . Interest at 12% per annum will be charged on all overdue
account plus 25% on said amount for attorney's fees and collection. . .
. 17

It may also be noted that the above stipulation, insofar as it provides for
the payment of "25% on said amount for attorney's fees and collection (sic),"
constitutes what is known as a penal clause. 18 Petitioner is thus obliged to pay
such penalty in addition to the 12% annual interest, there being an express
stipulation to that effect. dctai

Petitioner nevertheless urges this Court to reduce the attorney's fees for
being "grossly excessive," "considering the nature of the case which is a mere
action for collection of a sum of money." It may be pointed out however that
the above penalty is supposed to answer not only for attorney's fees but for
collection fees as well. Moreover:

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 . . . the attorneys' fees here provided is not, strictly speaking, the
attorneys' fees recoverable as between attorney and client spoken of
and regulated by the Rules of Court. Rather, the attorneys' fees here
are in the nature of liquidated damages and the stipulation therefor is
aptly called a penal clause. It has been said that so long as such
stipulation does not contravene law, morals, or public order, it is
strictly binding upon defendant. The attorneys' fees so provided are
awarded in favor of the litigant, not his counsel. It is the litigant, not
counsel, who is the judgment creditor entitled to enforce the judgment
by execution. 19

Nonetheless, courts are empowered to reduce such penalty if the same is

"iniquitous or unconscionable." Article 1229 of the Civil Code states thus:
ART. 1229. The judge shall equitably reduce the penalty
when the principal obligation has been partly or irregularly complied
with by the debtor. Even if there has been no performance, the penalty
may also be reduced by the courts if it is iniquitous or unconscionable.
(Emphasis supplied.)

The sentiments of the law are echoed in Article 2227 of the same Code:
ART. 2227. Liquidated damages, whether intended as an
indemnity or a penalty, shall be equitably reduced if they are iniquitous
or unconscionable.

It is true that we have upheld the reasonableness of penalties in the form

of attorney's fees consisting of twenty-five percent (25%) of the principal debt
plus interest. 20 In the case at bar, however, the interest alone runs to some
four and a half million pesos (P4.5M), even exceeding the principal debt
amounting to almost four million pesos (P4.0M). Twenty five percent (25%) of
the principal and interest amounts to roughly two million pesos (P2M). In real
terms, therefore, the attorney's fees and collection fees are manifestly
exorbitant. Accordingly, we reduce the same to ten percent (10%) of the
principal.
Private respondent, however, argues that petitioner failed to question the
award of attorney's fees on appeal before respondent court and raised the
issue only in its motion for reconsideration. Consequently, petitioner should be
deemed to have waived its right to question such award. LexLib

Private respondent's attempts to dissuade us from reducing the penalty

are futile. The Court is clothed with ample authority to review matters, even if
they are not assigned as errors in their appeal, if it finds that their
consideration is necessary in arriving at a just decision of the case. 21
WHEREFORE, the decision of the Court of Appeals is hereby MODIFIED in
that the attorney's and collection fees are reduced to ten percent (10%) of the
principal but is AFFIRMED in all other respects.

SO ORDERED.
Narvasa, C .J ., Romero, Francisco and Purisima, JJ ., concur.

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 Footnotes
1. More accurately, the invoices state:
. . . Interest at 12% per annum will be charged on all overdue account
plus 25% on said amount for attorney's fees and collection. . . .
2. Rollo , p. 51.
3. Id., at 54.
4. Id., at 43; underscoring in the original.
5. See Melendez v. Lavarias, 9 SCRA 548 (1963).
6. IV Tolentino, Commentaries and Jurisprudence on the Civil Code of the
Philippines, 1990 ed., p. 298; emphasis supplied.
7. Globe Mackay Cable and Radio Corp. v. Court of Appeals, 176 SCRA 778
(1989).
8. ART. 21. Any person who willfully causes loss or injury to another in a
manner that is contrary to morals, good customs or public policy shall
compensate the latter for the damage.

9. Rollo , p. 137.
10. Id., at 18-20.
11. I Tolentino, pp. 61-62; emphasis supplied.
12. Ford Philippines v. Court of Appeals, G.R. No. 99039, February 3, 1997.
13. ART. 2234, Civil Code.

14. ART. 1158, Civil Code.

15. ART. 1315, Civil Code.
16. ART. 1306, Civil Code.
17. Exhibit "BB;" emphasis supplied.

18. See Luneta Motor Co. v. Mora, 73 Phil. 80 (1941).

19. Polytrade Corporation v. Blanco, 30 SCRA 187 (1969).
20. See Polytrade v. Blanco, supra, note 1.
21. Korean Airlines Co., Ltd. v. Court of Appeals, 234 SCRA 717 (1994); see
also: Asset Privatization Trust v. CA, 214 SCRA 400 (1994).

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