The Government of the Philippine Islands v. Dolores Lim y Chumbuque

Summary

The Government of the Philippine Islands foreclosed mortgages after defendants defaulted on loans totaling P13,000 obtained in 1930. The sole issue on appeal was the validity of a P1,300 penalty clause for attorney's fees and collection costs. Defendants argued the penalty was unjustified since the government used salaried counsel, not private attorneys. The Supreme Court affirmed the trial court's judgment, ruling that the penalty clause was a valid penal clause under the Civil Code that was voluntarily agreed upon by the defendants. The Court held that such stipulations are binding when not contrary to law, morals, or public order, and found the penalty neither excessive nor exorbitant. This case establishes the enforceability of contractual penalty clauses in loan agreements, even when the creditor is the government acting in a proprietary capacity.