G.R. No. 41917 - Government of the Philippine Islands vs. Lim y Chumbuque

The defendants, Dolores Lim y Chumbqueue, Antonia Lim y Chumbqueue, and Josefa Lim y Chumbqueue, secured two loans from the plaintiff, the Government of the Philippine Islands.
The first loan of P10,000 was obtained on July 28, 1930, and the second loan of P3,000 was obtained on October 28, 1930.
Both loans were secured by mortgages which included promissory notes stipulating repayment terms and additional charges.

The defendants undertook to pay the principal, interest, taxes, insurance premiums, repair expenses, and stipulated penalties.
The repayment period was fixed at five years for the first loan and four years and nine months for the second loan, along with the additional financial obligations.
Interest was to be paid at rates specified in the loans, including a further interest rate for delays on the principal and any unpaid interest amounts.

The defendants failed to pay the stipulated interest and other amounts, leading to the acceleration of the obligations.
On December 19, 1933, the amounts and interest became debt due, prompting the Government to file an action to foreclose the mortgages.
The foreclosure judgment sentenced the defendants to pay a cumulative amount (on the first cause of action, P13,278.04 plus interest on the principal of P10,000 and additional interest on unpaid quarterly interest and penalties; and on the second cause of action, P3,944.91 with similar interest computations).

The promissory notes incorporated a stipulation wherein the defendants voluntarily undertook to pay the sum of P1,300 representing court costs, collection expenses, and attorney’s fees.
The defendants questioned the imposition of this penalty on the ground that:

The Government had its own salaried counsel and did not employ private counsel in the case.
Enforcing the penalty clause would result in double compensation, as no actual payment had been made on the principal amount.

However, the trial established that the penal clause was valid, having been voluntarily entered into, and was intended to cover costs whether incurred or not.

Is the stipulation requiring the defendants to pay an additional sum of P1,300 for court costs, collection expenses, and attorney’s fees a valid penal clause under the relevant laws and principles?
Does this penalty clause contravene public policy by potentially resulting in double compensation, particularly in light of the Government’s access to a salaried counsel?

To what extent can the relief court exercise discretion under article 1154 of the Civil Code to reduce or modify the imposed penalty?
Does the non-payment on the principal obligate a strict enforcement of the penalty stipulated in the promissory notes?