MCMP Construction Corp. vs. Monark Equipment Corp.

A party may prove the contents of a lost contract through secondary evidence once it establishes the original's existence or due execution, its loss or non-production, and the absence of bad faith; the adverse party's failure to produce its own copy after notice independently justifies secondary evidence and gives rise to the presumption that willfully suppressed evidence would be adverse if produced. Iniquitous or unconscionable stipulated interest, penalty, and attorney's fees may be equitably reduced by the courts.

MCMP Construction Corp. leased heavy equipment from Monark Equipment Corp. for various periods in 2000 under a Rental Equipment Contract. The parties' invoices stipulated credit terms, 24% per annum interest, a 1% compounded monthly collection fee, a 2% per month penalty for late payment, 25% attorney's fees, and venue in Quezon City, Makati, Pasig, or Manila. The contract and invoices governed the parties' rental arrangement and set the monetary charges later at issue.

MCMP Construction Corporation leased heavy equipment from Monark Equipment Corporation for various periods in 2000 under a Rental Equipment Contract. Monark delivered five pieces of heavy equipment to MCMP's project sites in Tanay, Rizal and Llavac, Quezon. The deliveries were evidenced by invoices and Documents Acknowledgment Receipt Nos. 04667 and 5706, received and signed by MCMP representatives Jorge Samonte on December 5, 2000 and Rose Takahashi on January 29, 2001. The invoices stated that credit sales were payable within 30 days from invoice date; that the customer agreed to pay 24% per annum interest on all amounts; a collection fee of 1% compounded monthly; a 2% per month penalty charge for late payment; 25% attorney's fees in case of suit; and venue in Quezon City, Makati, Pasig, or Manila.

Despite the lapse of the 30-day period, MCMP failed to pay the rental fees. Upon demands, it made partial payments of PhP100,000.00 on April 15, 2001 and PhP100,000.00 on August 15, 2001. Further demands went unheeded. As of April 30, 2002, MCMP owed Monark PhP1,282,481.83, broken down into principal of PhP765,380.33, interest (2%) of PhP253,226.17, 2% monthly penalty charge of PhP253,226.17, and collection fee (1%) of PhP10,649.16.

On June 18, 2002, Monark filed a suit for a Sum of Money with the RTC, docketed as Civil Case No. Q-02-47092. In its Answer filed on July 5, 2002, MCMP alleged that the complaint was premature because Monark had refused to give a detailed breakdown of its claims. MCMP further averred that it had an agreement with Monark that it would not be charged for the whole time the leased equipment was in its possession but only for the actual time the equipment was used although still on the project site; MCMP admitted that this agreement was not contained in the Contract.

During trial, Monark presented Reynaldo Peregrino, its Senior Account Manager. Peregrino testified that there were two original copies of the Contract, one retained by Monark and the other given to MCMP; that Monark's copy had been lost and diligent efforts to recover it proved futile; and that he presented a photocopy of the Contract which he personally had on file. MCMP objected to the presentation of secondary evidence, arguing that there were no diligent efforts to search for the original. MCMP did not present its own copy of the Contract notwithstanding the trial court's directive to produce it.

MCMP's own witnesses, Jorge Samonte, a Budget Supervisor, and Engr. Horacio A. Martinez, Sr., General Manager, both acknowledged the delivery of the equipment to the project sites. The RTC and the CA gave credence to Peregrino's testimony that Monark's original Contract was lost and that diligent efforts were exerted to find it, and treated that testimony as uncontroverted. These factual findings, together with MCMP's failure to produce its copy, led the courts to allow Monark's secondary evidence and to hold MCMP liable for the unpaid rentals.

• Best Evidence Rule / Secondary Evidence: Petitioner argued that the CA should have disallowed the presentation of secondary evidence to prove the existence of the Contract under the Best Evidence Rule, specifically maintaining that Monark did not diligently search for the original copy because (a) the actual custodian of the document was not presented, (b) the alleged loss was not reported to management or the police, and (c) Monark searched for the original only for purposes of the instant case.
• Delivery of Equipment: Petitioner claimed that the pieces of equipment were not actually delivered to it by Monark.
• Contract Identity: Petitioner contended that the Contract presented by Monark was not the contract that MCMP entered into.
• Prematurity / Breakdown of Claims: In its Answer, petitioner alleged that the complaint was premature because Monark refused to give a detailed breakdown of its claims.
• Unwritten Agreement on Charges: Petitioner averred that it had an agreement with Monark that it would not be charged for the whole time the leased equipment was in its possession but only for the actual time the equipment was used, although it admitted this agreement was not in the Contract.

• Best Evidence Rule / Secondary Evidence: Whether the CA erred in allowing Monark to present secondary evidence to prove the contents of the Rental Equipment Contract despite MCMP's objections under the Best Evidence Rule.
• Delivery of Equipment: Whether the heavy equipment was actually delivered by Monark to MCMP.
• Contract Identity: Whether the Contract presented by Monark was the contract entered into by MCMP.
• Unconscionable Interest, Penalty, and Attorney's Fees: Whether the stipulated 24% per annum interest, 1% compounded monthly collection fee, 2% per month penalty charge, and 25% attorney's fees are excessive and unconscionable and should be equitably reduced.
• Liability for Unpaid Rentals: Whether MCMP is liable for the unpaid rental fees and the monetary awards.

• Best Evidence Rule / Secondary Evidence: No. The CA correctly allowed secondary evidence because Monark proved the existence or due execution of the original, its loss, and the absence of bad faith; MCMP's failure to produce its own copy after notice also justified secondary evidence under Section 6, Rule 130, and triggered the adverse presumption under Section 3(e), Rule 131.
• Delivery of Equipment: Yes. Delivery was established by MCMP's own witnesses, Jorge Samonte and Engr. Horacio A. Martinez, Sr., who acknowledged delivery of the equipment to the project sites.
• Contract Identity: No. MCMP's claim that Monark's Contract was not its contract failed because MCMP did not present its own copy despite the trial court's directive and offered no explanation for its failure.
• Unconscionable Interest, Penalty, and Attorney's Fees: Yes. The stipulated 24% per annum interest, 3% monthly penalty and collection charge, and 25% attorney's fees were exorbitant and unconscionable; they were reduced to 12% per annum, 6% per annum, and 5%, respectively.
• Liability for Unpaid Rentals: Yes. MCMP failed to pay the rental fees despite demands, and its partial payments did not extinguish the obligation; the petition was denied with modification of the monetary awards.

• Best Evidence Rule / Secondary Evidence: The Best Evidence Rule under Section 3, Rule 130 requires production of the original document when its contents are the subject of inquiry, subject to exceptions including loss or destruction without bad faith and the original being in the adverse party's custody or control. Sections 5 and 6, Rule 130 allow secondary evidence when the original is unavailable or when the adverse party fails to produce it after reasonable notice. In Country Bankers Insurance Corporation vs. Lagman, the Court laid down the requisites: (1) existence or due execution of the original; (2) loss and destruction of the original or reason for non-production; and (3) absence of bad faith on the offeror's part, with proof taken in the order of existence, execution, loss, and contents. Both the RTC and CA credited Peregrino's uncontroverted testimony that Monark's original Contract was lost and that diligent efforts were exerted to find it. MCMP did not present its own copy despite the trial court's directive. Normal business practice dictated that MCMP should have retained a copy; its unexplained failure to produce it justified secondary evidence under Section 6, Rule 130 and gave rise to the disputable presumption under Section 3(e), Rule 131 that evidence willfully suppressed would be adverse if produced. MCMP's claim that Monark's Contract was not its contract did not overcome these points because MCMP failed to produce its own copy.
• Delivery of Equipment: MCMP's denial of delivery was contradicted by its own witnesses. Jorge Samonte, a Budget Supervisor, and Engr. Horacio A. Martinez, Sr., General Manager, both acknowledged the delivery of the equipment to the project sites. The Court thus found MCMP's contention false.
• Contract Identity: The Court rejected MCMP's assertion that the Contract presented by Monark was not the contract it entered into. MCMP failed to present its own copy despite the trial court's request, and it did not explain that failure. This failure not only justified Monark's secondary evidence but also supported the adverse presumption that the suppressed evidence would be unfavorable to MCMP.
• Unconscionable Interest, Penalty, and Attorney's Fees: The trial court imposed 24% per annum interest, a 1% monthly compounded collection fee, a 2% monthly penalty charge, and 25% attorney's fees. The effective interest rate was 60% per annum, which the Court deemed exorbitant and unconscionable. In Macalinao vs. Bank of the Philippine Islands, a 36% interest rate was reduced as excessive and unconscionable; the Court quoted Chua vs. Timan that stipulated interest rates of 3% per month and higher are excessive, iniquitous, unconscionable, and exorbitant, and void for being contrary to morals, if not law. Since the stipulation on interest was void, it was as if there was no express contract, and courts may reduce the interest rate as reason and equity demand. Article 1229 of the Civil Code allows equitable reduction of a penalty when the principal obligation has been partly or irregularly complied with, or even if there has been no performance, if the penalty is iniquitous or unconscionable. Pentacapital Investment Corporation vs. Mahinay reduced a 25% interest rate to 12%, a 3% monthly penalty to 1% monthly or 12% per annum, and attorney's fees from 25% to 10%. Article 2227 of the Civil Code allows liquidated damages, including attorney's fees, to be equitably reduced if iniquitous or unconscionable. Applying these principles, the Court reduced the 24% per annum interest to 12% per annum, with interest to accrue 30 days after receipt of the second set of invoices on January 21, 2001, or March 1, 2001; reduced the penalty and collection charge of 3% per month, or 36% per annum, to 6% per annum; and reduced attorney's fees from 25% to 5% of the total amount due.
• Liability for Unpaid Rentals: The Court denied the petition for lack of merit. MCMP failed to pay the rental fees despite the lapse of the 30-day period and despite demands; its partial payments of PhP100,000.00 on April 15, 2001 and PhP100,000.00 on August 15, 2001 did not extinguish the obligation. The RTC's award of unpaid rental fees was upheld, subject to the reduced interest, penalty/collection charge, and attorney's fees in the modified dispositive portion.

• Best Evidence Rule — When the subject of inquiry is the contents of a document, no evidence is admissible other than the original document itself, except in the cases enumerated in Section 3, Rule 130: (a) when the original has been lost or destroyed, or cannot be produced in court, without bad faith on the part of the offeror; (b) when the original is in the custody or under the control of the party against whom the evidence is offered, and the latter fails to produce it after reasonable notice; (c) when the original consists of numerous accounts or other documents which cannot be examined in court without great loss of time and the fact sought to be established is only the general result of the whole; and (d) when the original is a public record in the custody of a public officer or is recorded in a public office. The Court applied the lost-document and adverse-party-custody exceptions to allow Monark's photocopy of the lost Contract and to consider MCMP's failure to produce its own copy.
• Requisites for Secondary Evidence of a Lost Document — Before secondary evidence may be admitted to prove the contents of an original, the offeror must prove: (1) the existence or due execution of the original; (2) the loss and destruction of the original or the reason for its non-production in court; and (3) the absence of bad faith on the offeror's part. The correct order of proof is existence, execution, loss, and contents. Monark satisfied these requisites through Peregrino's credited and uncontroverted testimony.
• Adverse Presumption from Willful Suppression of Evidence — Under Section 3(e), Rule 131, evidence willfully suppressed would be adverse if produced. The Court applied this presumption to MCMP's failure to present its own copy of the Contract despite the trial court's directive, treating that failure as supporting Monark's secondary evidence.
• Equitable Reduction of Iniquitous or Unconscionable Interest, Penalty, and Liquidated Damages — Stipulated interest rates of 3% per month and higher are excessive, iniquitous, unconscionable, and exorbitant, and are void for being contrary to morals, if not law; since the stipulation is void, it is as if there was no express contract, and courts may reduce the interest rate as reason and equity demand. Article 1229 of the Civil Code allows equitable reduction of a penalty when the principal obligation has been partly or irregularly complied with, or even if there has been no performance, if the penalty is iniquitous or unconscionable. Article 2227 allows liquidated damages, including attorney's fees, to be equitably reduced if iniquitous or unconscionable. The Court applied these rules to reduce the 24% per annum interest to 12%, the 3% monthly penalty and collection charge to 6% per annum, and the 25% attorney's fees to 5%.

• "Before a party is allowed to adduce secondary evidence to prove the contents of the original, the offeror must prove the following: (1) the existence or due execution of the original; (2) the loss and destruction of the original or the reason for its non-production in court; and (3) on the part of the offeror, the absence of bad faith to which the unavailability of the original can be attributed. The correct order of proof is as follows: existence, execution, loss, and contents." — This passage, quoted from Country Bankers Insurance Corporation vs. Lagman, states the requisites for admitting secondary evidence of a lost document and is the controlling formulation applied to Monark's photocopy.
• "Normal business practice dictates that MCMP should have asked for and retained a copy of their agreement. Thus, MCMP’s failure to present the same and even explain its failure, not only justifies the presentation by Monark of secondary evidence in accordance with Section 6 of Rule 130 of the Rules of Court, but it also gives rise to the disputable presumption adverse to MCMP under Section 3 (e) of Rule 131 of the Rules of Court that 'evidence willfully suppressed would be adverse if produced.'" — This passage explains why MCMP's unexplained failure to produce its own contract copy independently justified secondary evidence and triggered the adverse presumption.
• "Following the above principles previously laid down by the Court, the interest and penalty charges imposed upon MCMP must also be considered as iniquitous, unconscionable and, therefore, void. As such, the rates may validly be reduced. Thus, the interest rate of 24% per annum is hereby reduced to 12% per annum." — This passage states the ratio for equitably reducing the stipulated interest and penalty charges as unconscionable.

• Country Bankers Insurance Corporation vs. Lagman, G.R. No. 165487, July 13, 2011, 653 SCRA 765, 777 — The Court cited this as the controlling precedent setting the requisites for admitting secondary evidence to prove the contents of a lost original document.
• Macalinao vs. Bank of the Philippine Islands, G.R. No. 175490, September 17, 2009, 600 SCRA 67, 76-78 — Cited for the rule that a 36% interest rate is excessive and unconscionable and may be equitably reduced; the Court relied on it to reduce the stipulated interest in this case.
• Pentacapital Investment Corporation vs. Mahinay, G.R. No. 171736, July 5, 2010, 623 SCRA 284, 305-306 — Cited as the more recent precedent reducing a 25% interest rate to 12%, a 3% monthly penalty to 1% monthly or 12% per annum, and attorney's fees from 25% to 10%; the Court followed its approach in reducing the charges against MCMP.
• Chua vs. Timan — Cited within Macalinao vs. Bank of the Philippine Islands for the principle that stipulated interest rates of 3% per month and higher are excessive, iniquitous, unconscionable, and exorbitant, and void for being contrary to morals, if not law.

• Section 3, Rule 130, Rules of Court — States the Best Evidence Rule and its exceptions, including loss or destruction of the original without bad faith and the original being in the adverse party's custody or control. The Court applied the lost-document and adverse-party-custody exceptions to allow secondary evidence of the Contract.
• Section 5, Rule 130, Rules of Court — Provides that when the original document has been lost, destroyed, or cannot be produced in court, the offeror may prove its contents by a copy, by a recital in an authentic document, or by the testimony of witnesses, in that order, upon proof of execution or existence and the cause of unavailability without bad faith. This supported Monark's use of a photocopy.
• Section 6, Rule 130, Rules of Court — Provides that if the original is in the adverse party's custody or control, the adverse party must have reasonable notice to produce it; if after notice and satisfactory proof of existence the adverse party fails to produce it, secondary evidence may be presented as in the case of loss. The Court applied this to MCMP's failure to produce its own copy after the trial court's directive.
• Section 3(e), Rule 131, Rules of Court — Establishes the disputable presumption that evidence willfully suppressed would be adverse if produced. The Court applied this to MCMP's unexplained failure to present its copy of the Contract.
• Article 1229, Civil Code — Provides that the judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor, and even if there has been no performance, if the penalty is iniquitous or unconscionable. The Court applied this to reduce the penalty and collection charge.
• Article 2227, Civil Code — Provides that liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable. The Court applied this to reduce the stipulated attorney's fees.

Martin S. Villarama, Jr.; Bienvenido L. Reyes; Estela M. Perlas-Bernabe; and Francis H. Jardeleza. Perlas-Bernabe was an acting member per Special Order No. 1866 dated November 4, 2014. No separate concurring opinions are summarized in the text.