Rizal Commercial Banking Corporation vs. Court of Appeals

A clear and unambiguous acceleration clause in a contract of adhesion is binding and requires only application, not construction; but a bank cannot mechanically invoke it where the alleged default arose from an inadvertent unsigned check, since delay under Article 170 of the Civil Code must be malicious or negligent, and bad faith in contractual and human relations can make the bank liable for damages.

Private respondent Atty. Felipe Lustre bought a Toyota Corolla from Toyota Shaw, Inc. on an installment basis, secured by a promissory note and a chattel mortgage that contained an acceleration clause and a 25% liquidated damages stipulation. Toyota Shaw assigned all its rights and interests in the chattel mortgage to petitioner RCBC. The contract was a standard form prepared by the bank, and the dispute required the SC to construe the acceleration clause against the bank under the Civil Code’s rules on contracts of adhesion.

Atty. Felipe Lustre purchased a Toyota Corolla from Toyota Shaw, Inc. for a down payment of P164,620.00, with the balance payable in 24 equal monthly installments. Lustre issued 24 postdated checks for P14,976.00 each; the first was dated April 10, 1991, and subsequent checks were dated every 10th day of each succeeding month. To secure the balance, Lustre executed a promissory note and a contract of chattel mortgage over the vehicle in favor of Toyota Shaw, Inc. Paragraph 11 of the chattel mortgage provided that if the mortgagor defaulted in the payment of any installment, the whole unpaid amount would become due, and the mortgagor would be liable for 25% of the principal due as liquidated damages. On March 14, 1991, Toyota Shaw assigned all its rights and interests in the chattel mortgage to RCBC.

All checks dated April 10, 1991 to January 10, 1993 were encashed and debited by RCBC from Lustre’s account, except RCBC Check No. 279805, representing the payment for August 10, 1991, which was unsigned. The amount represented by that check had previously been debited from Lustre’s account but was later recalled and recredited to him. Because of the recall, the last two checks, dated February 10, 1993 and March 10, 1993, were no longer presented for payment; this was purportedly in conformity with RCBC’s procedure that once a client’s account was forwarded to its account representative, all remaining outstanding checks as of that date were no longer presented for payment.

On the theory that Lustre defaulted because the check for August 10, 1991 was unsigned, RCBC sent a letter dated January 21, 1993 demanding payment of the balance of the debt, including liquidated damages. Lustre refused to pay, and RCBC filed an action for replevin and damages before the Pasay City RTC. Lustre, in his Answer, interposed a counterclaim for damages.

During trial, Toyota salesperson Jorge Geronimo testified that he had verified whether Lustre signed all the checks and had returned three or four unsigned checks to him for signing. RCBC did not object to the unsigned check when the checks were delivered to it. RCBC’s witness Francisco Bulatao, who was in charge of preparing the list and trial balances of bank customers, testified that the amount covered by the unsigned check had been deducted from Lustre’s account and later recredited. The demand letter contained no explanation of how Lustre incurred arrearages of P66,255.70, and Lustre made a protest notation on it. All other checks issued by Lustre dated after August 10, 1991 and before the demand letter were duly encashed.

The RTC found that Lustre had shared transactions with a bank for over twenty years and that the filing of the case put him to shame and embarrassment; it noted that he was a lawyer, married to another member of the bar, with children who were professionals, and known in the community of golfers.

• Default and Acceleration: Petitioner argued that private respondent’s check representing the fifth installment was “not encashed,” so the August 1991 installment was unpaid; under paragraph 11 of the chattel mortgage, petitioner was justified in treating the entire balance of the obligation as due and demandable.
• Delay: Petitioner imputed delay to private respondent after he refused to pay the balance despite demand.

• Contract of Adhesion and Acceleration Clause: Whether paragraph 11 of the chattel mortgage, containing the acceleration clause, is clear and binding despite being in a contract of adhesion, or should be construed against RCBC under Article 1377 of the Civil Code.
• Default and Delay: Whether private respondent was in default or delay in paying the August 1991 installment because of the unsigned check, justifying acceleration and liquidated damages.
• Damages: Whether RCBC is liable for moral and exemplary damages and attorney’s fees for its conduct, and whether the amounts awarded should be reduced.

• Contract of Adhesion and Acceleration Clause: Yes. The acceleration clause is clear and leaves no room for construction; a contract of adhesion is binding, and Article 1377 applies only to obscure or ambiguous stipulations.
• Default and Delay: No. Even assuming delay, private respondent cannot be held liable for damages because delay under Article 170 requires malice or negligence; the unsigned check was a mere inadvertent omission, and RCBC’s mechanical invocation of paragraph 11 was unwarranted.
• Damages: Yes. RCBC’s mercenary conduct and failure to act in good faith made it liable for moral and exemplary damages and attorney’s fees; the SC reduced the awards to P100,000.00, P75,000.00, and P30,000.00.

• Contract of Adhesion and Acceleration Clause: The SC rejected the lower courts’ application of Article 1377. A contract of adhesion is just as binding as an ordinary contract; it is not invalid per se, and the adherent is free to reject it or give consent. While ambiguities in a contract of adhesion are construed against the party that prepared it, that rule applies only if the stipulations are obscure or ambiguous. If the terms are clear and leave no doubt on the intention of the parties, the literal meaning controls and there is no need for construction. Paragraph 11 states that if the mortgagor fails to pay any installment, the whole unpaid amount becomes immediately due and payable and the mortgagor agrees to pay 25% of the principal due and unpaid as liquidated damages. The SC held that these terms leave no room for construction and all that is required is application.
• Default and Delay: Article 170 of the Civil Code makes those guilty of delay in the performance of their obligations liable for damages, but the delay must be malicious or negligent. Assuming Lustre was guilty of delay in paying the value of the unsigned check, he cannot be held liable for damages because there was no imputation, much less evidence, that he acted with malice or negligence; the omission was mere inadvertence. Toyota salesperson Jorge Geronimo testified that he verified whether Lustre had signed all the checks and returned three or four unsigned checks to him for signing. RCBC did not object to the unsigned check when the checks were delivered. RCBC had debited the value of the unsigned check from Lustre’s account only to recredit it later; it encashed checks subsequently dated, then abruptly refused to encash the last two; and more than a year after the unsigned check, it demanded payment under paragraph 11. The demand letter contained no explanation of the arrearages of P66,255.70, and Lustre made a protest notation. In view of the lack of malice or negligence, RCBC’s blind and mechanical invocation of paragraph 11 was unwarranted.
• Damages: RCBC’s conduct was mercenary. Good faith in compliance with contractual obligations under Article 1159 and in human relations under Article 19 required RCBC to call Lustre and ask him to sign the check. Its failure made it liable for damages. Moral damages were proper for the mental anguish, serious anxiety, besmirched reputation, wounded feelings, and social humiliation suffered by Lustre under Article 2217; the RTC found that Lustre had shared transactions with a bank for over twenty years and that the filing of the case put him to shame and embarrassment. Exemplary damages were warranted under Article 2229 to deter others from emulating RCBC’s callous example, and attorney’s fees were warranted under Article 2208(1) because exemplary damages were awarded. The SC found the amounts excessive and reduced moral damages from P200,000.00 to P100,000.00, exemplary damages from P100,000.00 to P75,000.00, and attorney’s fees from P50,000.00 to P30,000.00.

• Contract of Adhesion — A contract of adhesion is just as binding as an ordinary contract and is not invalid per se; the adherent is free to reject it, and if he adheres, he gives consent. Ambiguities are construed against the party that prepared it only if the stipulations are obscure or ambiguous; if clear, the literal meaning controls. The SC applied this to uphold the clear acceleration clause despite the contract being a standard form prepared by RCBC.
• Acceleration Clause — A stipulation that failure to pay any installment makes the whole unpaid amount immediately due and payable, with liquidated damages. If the terms are clear, no construction is needed. The SC held paragraph 11 clear, but did not allow RCBC to invoke it mechanically because the alleged default arose from an inadvertent unsigned check and the bank acted without good faith.
• Delay (Mora) and Damages — Under Article 170 of the Civil Code, an obligor guilty of delay in performance is liable for damages, but the delay must be malicious or negligent. The SC held that even assuming delay, Lustre could not be held liable for damages because the unsigned check was a mere inadvertent omission, with no malice or negligence.
• Good Faith in Contracts and Human Relations — Article 1159 requires good faith in the performance of contractual obligations, and Article 19 requires every person to act with justice, give everyone his due, and observe honesty and good faith. The SC held that RCBC should have called Lustre to sign the check; its failure to do so and its sudden refusal to encash later checks made it liable for damages.
• Moral and Exemplary Damages; Attorney’s Fees — Moral damages are recoverable for mental anguish, serious anxiety, besmirched reputation, wounded feelings, and social humiliation under Article 2217; exemplary damages may be awarded to deter others under Article 2229; attorney’s fees are warranted when exemplary damages are awarded under Article 2208(1). The SC affirmed liability but reduced the amounts to P100,000.00 moral, P75,000.00 exemplary, and P30,000.00 attorney’s fees.

• “It bears stressing that a contract of adhesion is just as binding as ordinary contracts.” — The SC rejects the lower courts’ strict construction under Article 1377 and holds that adhesion contracts are binding.
• “While ambiguities in a contract of adhesion are to be construed against the party that prepared the same, this rule applies only if the stipulations in such contract are obscure or ambiguous. If the terms thereof are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control.” — The SC states the rule for construing adhesion contracts and applies it to paragraph 11.
• “The above terms leave no room for construction. All that is required is the application thereof.” — The SC holds that paragraph 11’s acceleration clause is clear and needs only application.
• “In view of the lack of malice or negligence on the part of private respondent, petitioner’s blind and mechanical invocation of paragraph 11 of the contract of chattel mortgage was unwarranted.” — The SC holds that RCBC could not treat the unsigned check as a default justifying acceleration.

• Serra vs. Court of Appeals, 229 SCRA 60 (1994) — Cited for the rule that a contract of adhesion is just as binding as an ordinary contract and that the adherent gives consent if he adheres.
• Philippine Airlines, Inc. vs. Court of Appeals, 255 SCRA 48 (1996) — Cited for the rule that contracts of adhesion are not invalid per se.
• Telengtan Brothers & Sons, Inc. vs. Court of Appeals, 236 SCRA 617 (1994) — Cited for the same rule that contracts of adhesion are not invalid per se.
• Philippine American General Insurance Co., Inc. vs. Sweet Lines, Inc., 212 SCRA 194 (1992) — Cited for the rule that contracts of adhesion are not entirely prohibited.
• Angeles vs. Calasanz, 135 SCRA 323 (1985) — Cited for the rule that ambiguities in a contract of adhesion are construed against the party that prepared it.
• Salvatierra vs. Court of Appeals, 261 SCRA 45 (1996) — Cited for the rule that if the terms of a contract are clear, the literal meaning controls.
• Leveriza vs. Intermediate Appellate Court, 157 SCRA 283 (1988) — Cited for the rule that when the terms are clear, there is no need for construction.
• Papa vs. Alonzo, 198 SCRA 564 (1991) — Cited for the rule that the literal meaning of clear stipulations shall control.

• Article 1377, Civil Code — The SC held it inapplicable because paragraph 11 was clear; the rule that obscure stipulations are construed against the party who caused the obscurity applies only when there is obscurity.
• Article 1370, Civil Code — Applied: since the terms of paragraph 11 were clear and left no doubt on the parties’ intention, their literal meaning controlled.
• Article 170, Civil Code — Applied: those guilty of delay in performance are liable for damages, but the delay must be malicious or negligent; Lustre’s unsigned check was inadvertent, so no damages.
• Article 1159, Civil Code — Applied: RCBC was required to act in good faith in complying with its contractual obligations.
• Article 19, Civil Code — Applied: RCBC failed to act with justice, give Lustre his due, and observe honesty and good faith when it mechanically invoked the acceleration clause instead of asking him to sign the check.
• Article 21, Civil Code — Applied in relation to Article 19 as basis for damages for RCBC’s bad faith.
• Article 2217, Civil Code — Applied: moral damages were proper for Lustre’s mental anguish, serious anxiety, besmirched reputation, wounded feelings, and social humiliation.
• Article 2229, Civil Code — Applied: exemplary damages were warranted to deter others from emulating RCBC’s callous example.
• Article 2208(1), Civil Code — Applied: attorney’s fees were warranted because exemplary damages were awarded.