G.R. No. 87182 - Pacific Mills, Inc. vs. Court of Appeals

From April 1980 to October 1982, petitioner Pacific Mills, Inc. purchased varying quantities of cottonlint on credit from respondent Philippine Cotton Corporation (Philcotton).
The parties agreed that failure to pay within sixty (60) days after delivery would result in the issuance of promissory notes in favor of Philcotton.
When Pacific Mills defaulted on its payment obligations, four promissory notes were executed jointly and severally by Pacific Mills and its Executive Vice-President, George U. Lim.

The four notes had a total stated principal value of P16,598,725.84 and contained provisions on regular interest (21% per annum), additional interest, penalty charges (8% per annum on delinquent amortizations), and attorney’s fees in case of judicial enforcement.

On 23 June 1983, Philcotton filed a suit covering the promissory notes dated 1 April 1982 and 1 October 1982, claiming a total amount of P7,940,229.39 plus interest, attorney’s fees, and costs.
On 11 January 1984, a second suit was filed covering the two promissory notes dated 1 December 1982 for an aggregate claim of P8,658,496.45, similarly seeking interest, attorney’s fees, and litigation expenses.
The two actions were consolidated, and writs of preliminary attachment were issued to secure the claimed amounts.

Subsequent to the issuance of the writs, the parties submitted three joint manifestations and motions to discharge certain properties of the petitioners from attachment.

In a joint manifestation dated 7 January 1985, the parties acknowledged a total principal obligation of P16,598,725.84 and petitioners undertook to deliver postdated checks totaling P1,800,000.00.
Two additional joint manifestations involved the issuance of postdated checks amounting to P600,000.00 and P200,000.00 respectively.

The combined postdated checks, totaling P2,600,000.00, were delivered to Philcotton to partially reduce the principal obligation.

Payment of the reduced principal of P13,998,725.84.
Twenty-one percent (21%) regular interest per annum on the principal as per the promissory notes.
Additional interest at the same rate plus an 8% per annum penalty after a 30-day period of default.
Attorney’s fees amounting to 25% of the total amount due, along with litigation costs.

Maintaining the principal at P13,998,725.84 with 21% regular interest computed from 7 January 1985.
Reducing the penalty charges to an aggregate of 14% per annum (combining penalty and additional interest).
Reducing the award for attorney’s fees from 25% to 10% of the principal amount recoverable.

As Philcotton is a government-owned or controlled corporation represented by the Office of the Government Corporate Counsel, no attorney’s fees should be awarded.
The Court of Appeals erred in not further reducing the penalty charges, citing partial compliance and equitable considerations.

The petitioners also argued that the joint manifestation should have altered the computation date for interest and penalties, thereby warranting a re-evaluation of the amounts due.

In a concurring opinion, the Court noted discrepancies in the computation of the total principal amount and the effect of partial payments.
Concerns were raised about the impact of accrued interests and penalties over time, especially when delays in the disposition of cases contribute to significantly increased amounts beyond the principal.
The opinion emphasized that nothing in the decision precluded adjustments for additional charges claimable by entities like the Development Bank of the Philippines.

Whether Philcotton, despite being government-owned or controlled and represented by the Office of the Government Corporate Counsel, is entitled to an award of attorney’s fees.
Whether the statutory framework (R.A. No. 6000 and P.D. No. 1415) supports the awarding of such fees to government entities involved in litigation.

Whether the Court of Appeals erred in reducing the penalty charges from the stipulated rates in the promissory notes.
Whether the computation of regular interest (21% per annum) and penalty charges should commence from the dates stated in the promissory notes or from the date of the joint manifestation (7 January 1985).

Whether partial payments and performances merit further reduction of the stipulated penalty, beyond the modifications already effected by the Court of Appeals.
The impact of alleged “equitable considerations” such as good faith and partial performance in altering the strict contractual obligations.