International Hotel Corp.

vs Joaquin
Facts: On February 1, 1969, respondent
Francisco B. Joaquin, Jr. submitted a
proposal to the Board of Directors of the
International Hotel Corporation (IHC) for him
to render technical assistance in securing a
foreign loan for the construction of a hotel,
to be guaranteed by the Development Bank
of the Philippines (DBP).
after submitting the application to DBP,
Joaquin wrote to IHC to request the
payment of his fees in the amount
of P500,000.00 for the services that he had
provided and would be providing to IHC in
relation to the hotel project that were
outside the scope of the technical proposal.
Joaquin intimated his amenability to receive
shares of stock instead of cash in view of
IHCs financial situation. His request was
granted.
He narrowed the financiers to Roger Dunn
& Company and Materials Handling
Corporation. He recommended that the
Board of Directors consider Materials
Handling Corporation based on the more
beneficial terms it had offered. His
recommendation was accepted.10
Negotiations with Materials Handling
Corporation and, later on, with its principal,
Barnes International (Barnes), ensued.
While the negotiations with Barnes were
ongoing, Joaquin and Jose Valero, the
Executive Director of IHC, met with another
financier, the Weston International
Corporation (Weston), to explore possible
financing.11When Barnes failed to deliver the
needed loan, IHC informed DBP that it
would submit Weston for DBPs
consideration.12 As a result, DBP cancelled
its previous guaranty through a letter dated
December 6, 1971.13
On December 13, 1971, IHC entered into an
agreement with Weston, and communicated
this development to DBP on June 26, 1972.
However, DBP denied the application for
guaranty for failure to comply with the

conditions contained in its November 12,

1971 letter.
Due to Joaquins failure to secure the
needed loan, IHC, through its President
Bautista, canceled the 17,000 shares of
stock previously issued to Joaquin and
Suarez as payment for their services. The
latter requested a reconsideration of the
cancellation, but their request was rejected.
IHC argues that Article 1186 and Article
1234 of the Civil Code cannot be the source
of IHCs obligation to pay respondents
because: (a) it was Joaquin who had
recommended Barnes; and (b) IHCs
negotiation with Barnes had been neither
intentional nor willfully intended to prevent
Joaquin from complying with his obligations.
Held:
1. IHCs argument is meritorious.

Article 1186 of the Civil Code reads:

Article 1186. The condition shall be
deemed fulfilled when the obligor
voluntarily prevents its fulfillment.
This provision refers to the constructive
fulfillment of a suspensive
condition,32 whose application calls for
two requisites, namely: (a) the intent of
the obligor to prevent the fulfillment of
the condition, and (b) the actual
prevention of the fulfillment. Mere
intention of the debtor to prevent the
happening of the condition, or to place
ineffective obstacles to its compliance,
without actually preventing the
fulfillment, is insufficient.
In this case, Evidently, IHC only relied
on the opinion of its consultant in
deciding to transact with Materials
Handling and, later on, with Barnes. In
negotiating with Barnes, IHC had no
intention, willful or otherwise, to prevent
Joaquin and Suarez from meeting their
undertaking. Such absence of any
intention negated the basis for the CAs

reliance on Article 1186 of the Civil

Code.
2. Under Article 1234. If the obligation has
been substantially performed in good
faith, the obligor may recover as though
there had been a strict and complete
fulfillment, less damages suffered by the
obligee.

In order that there may be substantial

performance of an obligation,1. there
must have been an attempt in good faith
to perform, without any willful or
intentional departure therefrom. 2. The
deviation from the obligation must be
slight, and the 3. omission or defect
must be technical and unimportant, and
must not pervade the whole or be so
material that the object which the parties
intended to accomplish in a particular
manner is not attained. The nonperformance of a material part of a
contract will prevent the performance
from amounting to a substantial
compliance.
Here, finding the foreign financier that
DBP would guarantee was the essence
of the parties contract, so that the
failure to completely satisfy such
obligation could not be characterized as
slight and unimportant as to have
resulted in Joaquin and Suarezs
substantial performance that
consequentially benefitted IHC.
Whatever benefits IHC gained from their
services could only be minimal, and
were even probably outweighed by
whatever losses IHC suffered from the
delayed construction of its hotel.
Consequently, Article 1234 did not apply.
3. IHC is nonetheless liable to pay under
the rule on constructive fulfillment of a
mixed conditional obligation.

To secure a DBP-guaranteed foreign

loan did not solely depend on the
diligence or the sole will of the
respondents because it required the

action and discretion of third persons

an able and willing foreign financial
institution to provide the needed funds,
and the DBP Board of Governors to
guarantee the loan. Such third persons
could not be legally compelled to act in
a manner favorable to IHC. There is no
question that when the fulfillment of a
condition is dependent partly on the will
of one of the contracting parties,44 or of
the obligor, and partly on chance,
hazard or the will of a third person, the
obligation is mixed.45 The existing rule in
a mixed conditional obligation is that
when the condition was not fulfilled but
the obligor did all in his power to comply
with the obligation, the condition should
be deemed satisfied.46
Considering that the respondents were
able to secure an agreement with
Weston, and subsequently tried to
reverse the prior cancellation of the
guaranty by DBP, we rule that they
thereby constructively fulfilled their
obligation.
4. Quantum meruit should apply in the
absence of an express agreement on
the fees

Under the principle of quantum

meruit, a contractor is allowed to
recover the reasonable value of the
services rendered despite the lack of a
written contract. The measure of
recovery under the principle should
relate to the reasonable value of the
services performed.52 The principle
prevents undue enrichment based on
the equitable postulate that it is unjust
for a person to retain any benefit without
paying for it. Being predicated on equity,
the principle should only be applied if no
express contract was entered into, and
no specific statutory provision was
applicable.

MIAA VS AFIC
Facts: In September 1990, herein petitioner
Manila International Airport Authority (MIAA)
entered into a contract of lease with herein
respondent Avia Filipinas International
Corporation (AFIC), wherein MIAA allowed
AFIC to use specific portions of land as well
as facilities within the Ninoy Aquino
International Airport exclusively for the
latter's aircraft repair station and chartering
operations. The contract was for one (1)
year, beginning September 1, 1990 until
August 31, 1991, with a monthly rental
of P6,580.00.
In December 1990, MIAA issued
Administrative Order No. 1, Series of 1990,
which revised the rates of dues, charges,
fees or assessments for the use of its
properties, facilities and services within the
airport complex. The Administrative Order
was made effective on December 1, 1990.
As a consequence, the monthly rentals due
from AFIC was increased toP15,996.50.
Nonetheless, MIAA did not require AFIC to
pay the new rental fee. Thus, it continued to
pay the original fee of P6,580.00.
After the expiration of the contract, AFIC
continued to use and occupy the leased
premises giving rise to an implied lease
contract on a monthly basis. AFIC kept on
paying the original rental fee without protest
on the part of MIAA.
Three years after the expiration of the
original contract of lease, MIAA informed
AFIC, through a billing statement dated
October 6, 1994, that the monthly rental
over the subject premises was increased
to P15,966.50 beginning September 1,
1991, which is the date immediately
following the expiration of the original
contract of lease. MIAA sought recovery of
the difference between the increased rental
rate and the original rental fee amounting to
a total of P347,300.50 covering thirty-seven
(37) months between September 1, 1991
and September 31, 1994. Beginning
October 1994, AFIC paid the increased
rental fee. However, it refused to pay the

lump sum of P347,300.50 sought to be

recovered by MIAA. For the continued
refusal of AFIC to pay the said lump sum, its
employees were denied access to the
leased premises from July 1, 1997 until
March 11, 1998. This, notwithstanding, AFIC
continued paying its rentals. Subsequently,
AFIC was granted temporary access to the
leased premises.
Held:
1. Article 1374 of the Civil Code clearly
provides that [t]he various stipulations of
a contract shall be interpreted together,
attributing to the doubtful ones that
sense which may result from all of them
taken jointly. Indeed, in construing a
contract, the provisions thereof should
not be read in isolation, but in relation to
each other and in their entirety so as to
render them effective, having in mind
the intention of the parties and the
purpose to be achieved.7 In other words,
the stipulations in a contract and other
contract documents should be
interpreted together with the end in view
of giving effect to all.8
In the present case, the Court finds
nothing repugnant to law with respect to
the questioned provisions of the contract
of lease between petitioner and
respondent. It is true that Article II,
Paragraph 2.04 of the Contract of Lease
states that [a]ny subsequent
amendment to Administrative Order No.
4, Series of 1982, which will effect a
decrease or escalation of the monthly
rental or impose new and additional fees
and charges, including but not limited to
government/MIAA circulars, rules and
regulation to this effect, shall be deemed
incorporated herein and shall
automatically amend this Contract
insofar as the monthly rental is
concerned.9 However, the Court agrees
with the CA that
the abovequoted provision of the lease
contract should not be read in isolation.
Rather, it should be read together with

the provisions of Article VIII, Paragraph

8.13, which provide that
[a]ny amendment, alteration or
modification of th[e] Contract shall not
be valid and binding, unless and until
made in writing and signed by the
parties thereto.10 It is clear from the
foregoing that the intention of the parties
is to subject such amendment to the
conformity of both petitioner and
respondent. In the instant case, there is
no showing that respondent gave his
acquiescence to the said amendment or
modification of the contract.
2. Article 1235 of the Civil Code clearly
states that [w]hen the obligee accepts
the performance knowing its
incompleteness or irregularity, and
without expressing any protest or
objection, the obligation is deemed fully
complied with.
It may not be amiss to point out that
during the abovementioned period,
respondent continued to pay and
petitioner kept on receiving the original
rental fee of P6,580.00 without any
reservations or protests from the
latter.12 Neither did petitioner indicate in
the official receipts it issued that the
payments made by respondent
constitute only partial fulfillment of the
latter's obligations.
For failing to make any protest or
objection, petitioner is
already estopped from seeking recovery
of the amount claimed.

AQUINTEY VS FELICIANO AND TIBONG

Facts: On May 6, 1999, petitioner
Aquintey filed before RTC Baguio, a
complaint for sum of money and damages
against respondents. Agrifina alleged that
Felicidad secured loans from her on
several occasions at monthly interest
rates of 6% to 7%. Despite demands,
spouses Tibong failed to pay their
outstanding loans of P773,000,00
exclusive of interests. However, spouses
Tiong alleged that they had executed
deeds of assignment in favor of Agrifina
amounting to P546,459 and that their
debtors had executed promissory notes in
favor of Agrifina. Spouses insisted that by
virtue of these documents, Agrifina
became the new collector of their debts.
Agrifina was able to collect the total
amount of P301,000 from Felicdads
debtors. She tried to collect the balance of
Felicidad and when the latter reneged on
her promise, Agrifina filed a complaint in
the office of the barangay for the collection
of P773,000.00. There was no settlement.
RTC favored Agrifina. Court of Appeals
affirmed the decision with modification
ordering defendant to pay the balance of
total indebtedness in the amount of
P51,341,00 plus 6% per month.
ISSUE: whether the obligation of
respondents to pay the balance of their
loans, including interest, was partially
extinguished by the execution of the
deeds of assignment in favor of
petitioner, relative to the loans of Edna
Papat-iw, Helen Cabang, Antoinette

Manuel, and Fely Cirilo in the total

amount of P371,000.00.
HELD:
1. Under Article 1231(b) of the New
Civil Code, novation is enumerated
as one of the ways by which
obligations are extinguished.
Obligations may be modified by
changing their object or principal
creditor or by substituting the person
of the debtor.63 The burden to prove
the defense that an obligation has
been extinguished by novation falls
on the debtor.
Novation which consists in
substituting a new debtor (delegado)
in the place of the original one
(delegante) may be made even
without the knowledge or against the
will of the latter but not without the
consent of the creditor. Substitution
of the person of the debtor may be
effected by delegacion, meaning, the
debtor offers, and the creditor
(delegatario), accepts a third person
who consents to the substitution and
assumes the obligation. Thus, the
consent of those three persons is
necessary.67 In this kind of novation,
it is not enough to extend the
juridical relation to a third person; it
is necessary that the old debtor be
released from the obligation, and the
third person or new debtor take his
place in the relation.68 Without such
release, there is no novation; the
third person who has assumed the
obligation of the debtor merely
becomes a co-debtor or a surety. If
there is no agreement as to
solidarity, the first and the new
debtor are considered obligated
jointly.69
In this case, the Court agreed with
the finding of the CA that petitioner
had no right to collect from
respondents the total amount
ofP301,000.00, which includes more

than P178,980.00 which respondent

Felicidad collected from her debtors.
Petitioner cannot again collect the
same amount from respondents;
otherwise, she would be enriching
herself at their expense. Neither can
petitioner collect from respondents
more than P103,500.00 which she
had already collected from Nimo,
Cantas, Rivera, Donguis, Fernandez
and Ramirez.
There is no longer a need for the
Court to still resolve the issue of
whether respondents' obligation to
pay the balance of their loan account
to petitioner was partially
extinguished by the promissory
notes executed by Juliet Tibong,
Corazon Dalisay, Rita Chomacog,
Carmelita Casuga, Merlinda Gelacio
and Antoinette Manuel because, as
admitted by petitioner, she was able
to collect the amounts under the
notes from said debtors and applied
them to respondents' accounts.
2. We find in this case that the CA
correctly found that respondents'
obligation to pay the balance of their
account with petitioner was
extinguished, pro tanto, by the
deeds of assignment of credit
executed by respondent Felicidad in
favor of petitioner.
An assignment of credit is an
agreement by virtue of which the
owner of a credit, known as the
assignor, by a legal cause, such as
sale, dation in payment, exchange or
donation, and without the consent of
the debtor, transfers his credit and
accessory rights to another, known
as the assignee, who acquires the
power to enforce it to the same
extent as the assignor could enforce
it against the debtor.73 It may be in
the form of sale, but at times it may
constitute a dation in payment.

The requisites for dacion en

pago are:
(1) there must be a performance of
the prestation in lieu of payment
(animo solvendi) which may consist
in the delivery of a corporeal thing or
a real right or a credit against the
third person;
(2) there must be some difference
between the prestation due and that
which is given in substitution (aliud
pro alio); and
(3) there must be an agreement
between the creditor and debtor that
the obligation is immediately
extinguished by reason of the
performance of a prestation different
from that due.
All the requisites for a valid dation in
payment are present in this case. As
gleaned from the deeds, respondent
Felicidad assigned to petitioner her
credits "to make good" the balance
of her obligation. Felicidad testified
that she executed the deeds to
enable her to make partial payments
of her account, since she could not
comply with petitioner's frenetic
demands to pay the account in cash.
Petitioner and respondent Felicidad
agreed to relieve the latter of her
obligation to pay the balance of her
account, and for petitioner to collect
the same from respondent's debtors.
Admittedly, some of respondents'
debtors, like Edna Papat-iw, were
not able to affix their conformity to
the deeds. In an assignment of
credit, however, the consent of the
debtor is not essential for its
perfection; the knowledge thereof or
lack of it affecting only the
efficaciousness or inefficaciousness
of any payment that might have
been made. The assignment binds
the debtor upon acquiring
knowledge of the assignment but he
is entitled, even then, to raise
against the assignee the same

defenses he could set up against the

assignor78 necessary in order that
assignment may fully produce legal
effects. Thus, the duty to pay does
not depend on the consent of the
debtor. The purpose of the notice is
only to inform that debtor from the
date of the assignment. Payment
should be made to the assignee and
not to the original creditor.
The transfer of rights takes place
upon perfection of the contract, and
ownership of the right, including all
appurtenant accessory rights, is
acquired by the assignee79 who
steps into the shoes of the original
creditor as subrogee of the
latter80 from that amount, the
ownership of the right is acquired by
the assignee. The law does not
require any formal notice to bind
the debtor to the assignee, all that
the law requires is knowledge of
the assignment. Even if the debtor
had not been notified, but came to
know of the assignment by whatever
means, the debtor is bound by it. If
the document of assignment is
public, it is evidence even against a
third person of the facts which gave
rise to its execution and of the date
of the latter. The transfer of the
credit must therefore be held valid
and effective from the moment it is
made to appear in such instrument,
and third persons must recognize it
as such, in view of the authenticity of
the document, which precludes all
suspicion of fraud with respect to the
date of the transfer or assignment of
the credit.81
Here, as gleaned from the deeds
executed by respondent Felicidad
relative to the accounts of her other
debtors, petitioner was authorized to
collect the amounts of P6,000.00
from Cabang, and P63,600.00 from
Cirilo. They obliged themselves to
pay petitioner. Respondent

Felicidad, likewise, unequivocably

declared that Cabang and Cirilo no
longer had any obligation to her.

LO VS KJS ECO-FORMWORK
Facts: Respondent KJS ECOFORMWORK System Phil., Inc. is a
corporation engaged in the sale of
steel scaffoldings, while petitioner
Sonny L. Lo, doing business under
the name and style Sans
Enterprises, is a building
contractor. On February 22, 1990,
petitioner ordered scaffolding
equipments from respondent worth
P540,425.80.[1] He paid
a downpayment in the amount of
P150,000.00. The balance was
made payable in ten monthly
installments.
Respondent delivered the
scaffoldings to petitioner.[2] Petitioner
was able to pay the first two monthly
installments. His business, however,
encountered financial difficulties and
he was unable to settle his obligation
to respondent despite oral and
written demands made against him.
On October 11, 1990, petitioner and
respondent executed a Deed of
Assignment, whereby petitioner
assigned to respondent his
receivables in the amount of
P335,462.14 from Jomero Realty
Corporation.
However, when respondent tried to
collect the said credit from Jomero
Realty Corporation, the latter
refused to honor the Deed of
Assignment because it claimed that
petitioner was also indebted to
it. On November 26, 1990,
respondent sent a letter[7] to
petitioner demanding payment of his
obligation, but petitioner refused to
pay claiming that his obligation had

been extinguished when they

executed the Deed of Assignment.
The CA reversed the decision of the
RTC and ruled that the Deed of
Assignment did not extinguish the
obligation of the petitioner to the
respondent, the Court of Appeals
held that
(1) petitioner failed to comply with
his warranty under the Deed;
(2) the object of the Deed did not
exist at the time of the transaction,
rendering it void pursuant to Article
1409 of the Civil Code; and
(3) petitioner violated the terms of
the Deed of Assignment when he
failed to execute and do all acts and
deeds as shall be necessary to
effectually enable the respondent to
recover the collectibles.
ISSUE: WON the deed of
assignment was null and void and
WON the deed of assignment
extinguished the obligation.
HELD: The deed of assignment was
invalid.
An assignment of credit is an
agreement by virtue of which the
owner of a credit, known as the
assignor, by a legal cause, such as
sale, dacion en pago, exchange or
donation, and without the consent of
the debtor, transfers his credit and
accessory rights to another, known
as the assignee, who acquires the
power to enforce it to the same
extent as the assignor could enforce
it against the debtor.[15]
Corollary thereto, in dacion en pago,
as a special mode of payment, the
debtor offers another thing to the
creditor who accepts it as equivalent
of payment of an outstanding debt.

Hence, it may well be that the

assignment of credit, which is in the
nature of a sale of personal property,
[19] produced the effects of a dation in
payment which may extinguish the
obligation.[20]However, as in any
other contract of sale, the vendor or
assignor is bound by certain
warranties. More specifically, the first
paragraph of Article 1628 of the Civil
Code provides:
The vendor in good faith shall be
responsible for the existence and
legality of the credit at the time of the
sale, unless it should have been sold
as doubtful; but not for the solvency
of the debtor, unless it has been so
expressly stipulated or unless the
insolvency was prior to the sale and
of common knowledge.
From the above provision, petitioner,
as vendor or assignor, is bound to
warrant the existence and legality of
the credit at the time of the sale or
assignment. When Jomero claimed
that it was no longer indebted to
petitioner since the latter also had an
unpaid obligation to it, it essentially
meant that its obligation to petitioner
has been extinguished by
compensation.[21] In other words,
respondent alleged the nonexistence of the credit and asserted
its claim to petitioners warranty
under the assignment. Therefore, it
behooved on petitioner to make
good its warranty and paid the
obligation.
Indeed, by warranting the existence
of the credit, petitioner should be
deemed to have ensured the
performance thereof in case the
same is later found to be
inexistent. He should be held liable
to pay to respondent the amount of
his indebtedness.
Hence, we affirm the decision of the
Court of Appeals ordering petitioner

to pay respondent the sum of

P335,462.14 with legal interest
thereon. However, we find that the
award by the Court of Appeals of
attorneys fees is without factual
basis. No evidence or testimony was
presented to substantiate this
claim. Attorneys fees, being in the
nature of actual damages, must be
duly substantiated by competent
proof.
FORT BONIFACIO VS YLLAS
Facts: On 24 April 1998, FBDC executed a
lease contract in favor of Tirreno, Inc.
(Tirreno) over a unit at
the Entertainment Center Phase 1 of
the Bonifacio Global City in Taguig, Metro
Manila. The parties had the lease contract
notarized on the day of its
execution. Tirreno used the leased
premises for Savoia Ristorante and
La Strega Bar.
Two provisions in the lease contract are
pertinent to the present case: Section 20,
which is about the consequences in case of
default of the lessee, and Section 22, which
is about the lien on the properties of the
lease.
Tirreno began to default in its lease
payments in 1999. By July
2000, Tirreno was already in arrears
by P5,027,337.91.
FBDC and Tirreno entered into a settlement
agreement on 8 August 2000. Despite the
execution of the settlement agreement,
FBDC found need to send Tirreno a written
notice of termination dated 19 September
2000 due to Tirrenos alleged failure to
settle its outstanding obligations.
On 29 September 2000, FBDC entered and
occupied the leased premises. FBDC also
appropriated the equipment and properties
left by Tirreno pursuant to Section 22 of
their Contract of Lease as partial payment
for Tirrenos outstanding

obligations. Tirreno filed an action for

forcible entry.
On 4 March 2002, Yllas Lending
Corporation and Jose S. Lauraya, in his
official capacity as President, (respondents)
caused the sheriff of Branch 59 of the trial
court to serve an alias writ of seizure
against FBDC.
On the same day, FBDC served on the
sheriff an affidavit of title and third party
claim. FBDC found out that on 27
September 2001, respondents filed a
complaint for Foreclosure of Chattel
Mortgage with Replevin, against Tirreno,
Eloisa Poblete Todaro (Eloisa), and Antonio
D. Todaro(Antonio), in their personal and
individual capacities, and in Eloisas official
capacity as President. In their complaint,
respondents alleged that they lent a total
of P1.5 million toTirreno, Eloisa, and
Antonio. On 9 November 2000, Tirreno,
Eloisa and Antonio executed a Deed of
Chattel Mortgage in favor
of respondents as security for the loan.
ISSUE: WON the trial court erred in
dismissing FBDCs third party claim holding
that FBDC has no right of ownership over
the subject properties because Section 22
of the contract of lease is void for being a
pledge and a pactum commissorium;

HELD: Articles 2085 and 2093 of the Civil

Code enumerate the requisites essential to
a contract of pledge:
(1) the pledge is constituted to secure the
fulfillment of a principal obligation;
(2) the pledgor is the absolute owner of the
thing pledged;
(3) the persons constituting the pledge have
the free disposal of their property or have
legal authorization for the purpose; and
(4) the thing pledged is placed in the
possession of the creditor, or of a third
person by common agreement.

Article 2088 of the Civil Code prohibits the

creditor from appropriating or disposing the
things pledged, and any contrary stipulation
is void.
On the other hand, Article 1245 of the Civil
Code defines dacion en pago, or dation in
payment, as the alienation of property to
the creditor in satisfaction of a debt in
money.Dacion en pago is governed by the
law on sales. Philippine National Bank v.
Pineda held that dation in payment
requires delivery and transmission of
ownership of a thing owned by the
debtor to the creditor as an accepted
equivalent of the performance of the
obligation. There is no dation in payment
when there is no transfer of ownership in
the creditors favor, as when the possession
of the thing is merely given to the creditor by
way of security.
In this case, Section 22, as worded, gives
FBDC a means to collect payment
from Tirreno in case of termination of the
lease contract or the expiration of the lease
period and there are unpaid rentals,
charges, or damages. The existence of a
contract of pledge, however, does not arise
just because FBDC has means of collecting
past due rent from Tirreno other than direct
payment. The trial court concluded that
Section 22 constitutes a pledge because of
the presence of the first three requisites of a
pledge: Tirrenos properties in the leased
premises secure Tirrenos lease
payments; Tirreno is the absolute owner of
the said properties; and the persons
representing Tirreno have legal authority to
constitute the pledge. However, the fourth
requisite, that the thing pledged is
placed in the possession of the creditor,
is absent. There is non-compliance with the
fourth requisite even if Tirrenos personal
properties are found in FBDCs real
property. Tirrenos personal properties are
in FBDCs real property because of the
Contract of Lease, which
gives Tirreno possession of the personal
properties.

Since Section 22 is not a contract of pledge,

there is no pactum commissorium.

A provision which calls for the forfeiture of

the remaining deposit still in the possession
of the lessor, without prejudice to any other
obligation still owing, in the event of the
termination or cancellation of the agreement
by reason of the lessees violation of any of
the terms and conditions of the agreement
is a penal clause that may be validly
entered into. A penal clause is an
accessory obligation which the parties
attach to a principal obligation for the
purpose of insuring the performance thereof
by imposing on the debtor a
special prestation (generally consisting in
the payment of a sum of money) in case the
obligation is not fulfilled or is irregularly or
inadequately fulfilled.
Here, FBDCs forfeiture
of Tirrenos properties in the leased
premises may be construed as a guarantee
of payment.. By agreement between FBDC
and Tirreno, the properties are answerable
for any unpaid rent or charges at any
termination of the lease. Such agreement is
not contrary to law, morals, good customs,
or public policy. Forfeiture of the properties
is the only security that FBDC may apply in
case of Tirrenos default in its obligations.

by offering low interest rates[7] so they

accepted Equitable's proposal and signed
the bank's pre-printed promissory notes on
various dates beginning 1996. They,
however, were unaware that the documents
contained identical escalation clauses
granting Equitable authority to increase
interest rates without their consent.[8]
Equitable, in its answer, asserted that
respondents knowingly accepted all the
terms and conditions contained in the
promissory notes.[9] In fact, they
continuously availed of and benefited from
Equitable's credit facilities for five years.[10]
After trial, the RTC upheld the validity of the
promissory notes. It found that, in 2001
alone, Equitable restructured
respondents' loans amounting to
US$228,200 and P1,000,000.[11]The trial
court, however, invalidated the escalation
clause contained therein because it violated
the principle of mutuality of
contracts. Nevertheless, it took judicial
notice of the steep depreciation of the peso
during the intervening period and declared
the existence of extraordinary
deflation. Consequently, the RTC ordered
the use of the 1996 dollar exchange rate in
computing respondents' dollar-denominated
loans. Lastly, because the business
reputation of respondents was (allegedly)
severely damaged when Equitable froze
their accounts, the trial court awarded moral
and exemplary damages to them.

EQUITABLE PCI BANK VS NG SHEUNG

NGOR

HELD:

Facts: On October 7, 2001, respondents Ng

Sheung Ngor,[4] Ken Appliance Division, Inc.
and Benjamin E. Go filed an action for
annulment and/or reformation of documents
and contracts[5] against petitioner Equitable
PCI Bank (Equitable) and its employees,
Aimee Yu and Bejan Lionel Apas, in the
Regional Trial Court (RTC), Branch 16 of
Cebu City.[6]

1. EQUITABLE WAS NOT GUILTY OF

FORUM SHOPPING

They claimed that Equitable induced them

to avail of its peso and dollar credit facilities

Forum shopping exists when two or

more actions involving the same
transactions, essential facts and
circumstances are filed and those
actions raise identical issues, subject
matter and causes of action.[45] The test
is whether, in two or more pending
cases, there is identity of parties, rights
or causes of actions and reliefs.[46]

Equitable's petition for relief in the RTC

and its petition for certiorari in the CA
did not have identical causes of action.
The petition for relief from the denial of
its notice of appeal was based on the
RTCs judgment or final order preventing
it from taking an appeal by fraud,
accident, mistake or excusable
negligence.[47] On the other hand, its
petition for certiorari in the CA, a special
civil action, sought to correct the grave
abuse of discretion amounting to lack of
jurisdiction committed by the RTC.
In a petition for relief, the judgment or
final order is rendered by a court with
competent jurisdiction. In a petition for
certiorari, the order is rendered by a
court without or in excess of its
jurisdiction.
Moreover, Equitable substantially complied
with the rule on non-forum shopping when it
moved to withdraw its petition for relief in
the RTC on the same day (in fact just four
hours and forty minutes after) it filed the
petition for certiorari in the CA.
2. ESCALATION CLAUSE VIOLATED THE
PRINCIPLE OF
MUTUALITY OF CONTRACTS
Escalation clauses are not void per se.
However, one which grants the creditor an
unbridled right to adjust the interest
independently and upwardly, completely
depriving the debtor of the right to assent to
an important modification in the agreement
is void. Clauses of that nature violate the
principle of mutuality of contracts. Article
1308 of the Civil Code holds that a contract
must bind both contracting parties; its
validity or compliance cannot be left to the
will of one of them.
For this reason, we have consistently held
that a valid escalation clause provides:
1. that the rate of interest will only be
increased if the applicable maximum
rate of interest is increased by law or
by the Monetary Board; and

2. that the stipulated rate of interest

will be reduced if the applicable
maximum rate of interest is reduced
by law or by the Monetary Board
(de-escalation clause).
Equitable dictated the interest rates if the
term (or period for repayment) of the loan
was extended. Respondents had no choice
but to accept them. This was a violation of
Article 1308 of the Civil Code. Furthermore,
the assailed escalation clause did not
contain the necessary provisions for validity,
that is, it neither provided that the rate of
interest would be increased only if allowed
by law or the Monetary Board, nor allowed
de-escalation. For these reasons, the
escalation clause was void.

3. THERE WAS NO EXTRAORDINARY

DEFLATION
Extraordinary inflation exists when there
is an unusual decrease in the
purchasing power of currency (that is,
beyond the common fluctuation in the
value of currency) and such decrease
could not be reasonably foreseen or
was manifestly beyond the
contemplation of the parties at the time
of the obligation. Extraordinary deflation,
on the other hand, involves an inverse
situation.
Article 1250 of the Civil Code provides:
Article 1250. In case an extraordinary
inflation or deflation of the currency
stipulated should intervene, the value of
the currency at the time of the
establishment of the obligation shall be
the basis of payment, unless there is an
agreement to the contrary.
For extraordinary inflation (or
deflation) to affect an obligation, the
following requisites must be proven:

1. that there was an official

declaration of extraordinary
inflation or deflation from the
Bangko Sentral ng Pilipinas
(BSP);
2. that the obligation was
contractual in nature; and
3. that the parties expressly
agreed to consider the effects
of the extraordinary inflation
or deflation.
In this case, despite the devaluation
of the peso, the BSP never declared
a situation of extraordinary inflation.
Moreover, although the obligation in
this instance arose out of a contract,
the parties did not agree to
recognize the effects of
extraordinary inflation (or deflation).
The RTC never mentioned that there
was a such stipulation either in the
promissory note or loan agreement.
Therefore, respondents should pay
their dollar-denominated loans at the
exchange rate fixed by the BSP on
the date of maturity.

ALMEDA AND ALMEDA VS BATHALA

MARKETING INDUSTRIES
Facts: Sometime in May 1997, respondent
Bathala Marketing Industries, Inc., as
lessee, represented by its president Ramon
H. Garcia, renewed its Contract of
Lease[4] with Ponciano L. Almeda
(Ponciano), as lessor, husband of petitioner
Eufemia and father of petitioner Romel
Almeda. Under the said contract, Ponciano
agreed to lease a portion of the Almeda
Compound, located at 2208 Pasong Tamo
Street, Makati City, consisting of 7,348.25
square meters, for a monthly rental
of P1,107,348.69, for a term of four (4)
years from May 1, 1997 unless sooner
terminated as provided in the contract.
[5]
The contract of lease contained the

following pertinent provisions which gave

rise to the instant case:
SIXTH It is expressly understood by the parties
hereto that the rental rate stipulated is based on
the present rate of assessment on the property,
and that in case the assessment should
hereafter be increased or any new tax, charge
or burden be imposed by authorities on the lot
and building where the leased premises are
located, LESSEE shall pay, when the rental
herein provided becomes due, the additional
rental or charge corresponding to the portion
hereby leased; provided, however, that in the
event that the present assessment or tax on
said property should be reduced, LESSEE shall
be entitled to reduction in the stipulated rental,
likewise in proportion to the portion leased by
him;
SEVENTH In case an extraordinary inflation or
devaluation of Philippine Currency should
supervene, the value of Philippine peso at the
time of the establishment of the obligation shall
be the basis of payment;

On January 26, 1998, respondent received

another letter from petitioners informing the
former that its monthly rental should be
increased by 73% pursuant to condition No.
7 of the contract and Article 1250 of the Civil
Code. Respondent opposed petitioners
demand and insisted that there was no
extraordinary inflation to warrant the
application of Article 1250 in light of the
pronouncement of this Court in various
cases.
Petitioners contend that Article 1250 of the
Civil Code does not apply to this case
because the contract stipulation speaks of
extraordinary inflation or devaluation while
the Code speaks of extraordinary inflation or
deflation. They insist that the doctrine
pronounced in Del Rosario v. The Shell
Company, Phils. Limited[20] should apply.
ISSUE: whether the amount of rentals due
the petitioners should be adjusted by reason
of extraordinary inflation or devaluation.
HELD: Article 1250 of the Civil Code states:

In case an extraordinary inflation or

deflation of the currency stipulated should
supervene, the value of the currency at the
time of the establishment of the obligation
shall be the basis of payment, unless there
is an agreement to the contrary.
Inflation has been defined as the sharp
increase of money or credit, or both, without
a corresponding increase in business
transaction. There is inflation when there is
an increase in the volume of money and
credit relative to available goods, resulting
in a substantial and continuing rise in the
general price level.
E]xtraordinary inflation exists when there
is a decrease or increase in the purchasing
power of the Philippine currency which is
unusual or beyond the common fluctuation
in the value of said currency, and such
increase or decrease could not have been
reasonably foreseen or was manifestly
beyond the contemplation of the parties at
the time of the establishment of the
obligation.[24]
The factual circumstances obtaining in the
present case do not make out a case of
extraordinary inflation or devaluation as
would justify the application of Article 1250
of the Civil Code. We would like to stress
that the erosion of the value of the
Philippine peso in the past three or four
decades, starting in the mid-sixties, is
characteristic of most currencies. And while
the Court may take judicial notice of the
decline in the purchasing power of the
Philippine currency in that span of time,
such downward trend of the peso cannot be
considered as the extraordinary
phenomenon contemplated by Article 1250
of the Civil Code.
Furthermore, absent an official
pronouncement or declaration by competent
authorities of the existence of extraordinary
inflation during a given period, the effects of
extraordinary inflation are not to be applied.

TELENGTAN BROTHERS AND SONS INC

VS US LINES INC. AND CA
Facts: On June 22, 1981, respondent U.S.
Lines filed a suit against petitioner
Telengtan seeking payment of demurrage
charges plus interest and damages.
Docketed as Civil Case No. R-81-1196 of
the Regional Trial Court of Manila and
raffled to Branch 38 thereof, the complaint
alleged that between the years 1979 and
1980, goods belonging to petitioner loaded
on containers aboard its (respondents)
vessels arrived in Manila from U.S. ports.
After the 10-day free period, petitioner still
failed to withdraw its goods from the
containers wherein the goods had been
shipped. Continuing, respondent U.S. Lines
alleged that petitioner incurred on all those
shipments a demurrage in the total amount
of P94,000.00 which the latter refused to
pay despite repeated demands.
The CA made a computation of the
judgement of award as of the date of the
payment in accordance with Article 1250. In
calling for the application of the
aforementioned provision, respondent urged
that judicial notice be taken of the
succeeding devaluations of the peso vis-vis the US dollar since the time the
proceedings began in 1981. According to
respondent, the computation of the amount
thus due from the petitioner should factor in
such peso devaluations.
ISSUE: WON the CA erred in affirming the
trial courts order for the recomputation of
the judgment award in accordance with
Article 1250 of the Civil Code contrary to
existing jurisprudence and without any
evidence at all to support it.
HELD: YES.
Article 1250 of the Civil Code states:

In case an extraordinary inflation or

deflation of the currency stipulated should
supervene, the value of the currency at the
time of the establishment of the obligation
shall be the basis of payment, unless there
is an agreement to the contrary.
Extraordinary inflation or deflation, as
the case may be, exists when there is an
unusual increase or decrease in the
purchasing power of the Philippine peso
which is beyond the common fluctuation in
the value of said currency, and such
increase or decrease could not have been
reasonably foreseen or was manifestly
beyond the contemplation of the parties at
the time of the establishment of the
obligation.19 Extraordinary inflation can
never be assumed; he who alleges the
existence of such phenomenon must prove
the same.20
In this case, there has been no
extraordinary inflation within the meaning of
Article 1250 of the Civil Code. Accordingly,
there is no plausible reason for ordering the
payment of an obligation in an amount
different from what has been agreed upon
because of the purported supervention of
extraordinary inflation.
As it were, respondent was unable to prove
the occurrence of extraordinary inflation
since it filed its complaint in 1981. Indeed,
the record is bereft of any evidence,
documentary or testimonial, that inflation,
nay, an extraordinary one, existed. Even if
the price index of goods and services may
have risen during the intervening
period,21 this increase, without more, cannot
be considered as resulting to "extraordinary
inflation" as to justify the application of
Article 1250. The erosion of the value of the
Philippine peso in the past three or four
decades, starting in the mid-sixties, is, as
the Court observed in Singson vs. Caltex
(Phil), Inc., 22 characteristics of most
currencies. And while the Court may take
judicial notice of the decline in the
purchasing power of the Philippine currency
in that span of time, such downward trend of

the peso cannot be considered as the

extraordinary phenomenon contemplated by
Article 1250 of the Civil Code.
Furthermore, absent an official
pronouncement or declaration by competent
authorities of the existence of extraordinary
inflation during a given period, as here, the
effects of extraordinary inflation, if that be
the case, are not to be applied.
Lest it be overlooked, Article 1250 of the
Code, as couched, clearly provides that the
value of the peso at the time of the
establishment of the obligation shall control
and be the basis of payment of the
contractual obligation, unless there is
"agreement to the contrary." It is only when
there is a contrary agreement that
extraordinary inflation will make the value of
the currency at the time of payment, not at
the time of the establishment of obligation,
the basis for payment.

ABALOS VS MACATANGAY
Facts:
Spouses Arturo and Esther Abalos are the
registered owners of a parcel of land with
improvements located at Azucena St.,
Makati City consisting of about three
hundred twenty-seven (327) square meters,
covered by Transfer Certificate of Title
(TCT) No. 145316 of the Registry of Deeds
of Makati.
Armed with a Special Power of Attorney
dated June 2, 1988, purportedly issued by
his wife, Arturo executed a Receipt and
Memorandum of Agreement (RMOA) dated
October 17, 1989, in favor of respondent,
binding himself to sell to respondent the
subject property and not to offer the same to
any other party within thirty (30) days from
date. Arturo acknowledged receipt of a
check from respondent in the amount of
Five Thousand Pesos (P5,000.00),
representing earnest money for the subject
property, the amount of which would be

deducted from the purchase price of One

Million Three Hundred Three Hundred
Thousand Pesos (P1,300,000.00).Further,
the RMOA stated that full payment would be
effected as soon as possession of the
property shall have been turned over to
respondent.

perfected contract of option does not result

in the perfection or consummation.

ISSUE: whether petitioner may be

compelled to convey the property to
respondent under the terms of the RMOA
and the Contract to Sell.

Perusing the RMOA, it signifies a unilateral

offer of Arturo to sell the property to
respondent for a price certain within a
period of thirty days. The RMOA does not
impose upon respondent an obligation to
buy petitioners property, as in fact it does
not even bear his signature thereon. It is
quite clear that after the lapse of the thirtyday period, without respondent having
exercised his option, Arturo is free to sell the
property to another. This shows that the
intent of Arturo is merely to grant
respondent the privilege to buy the property
within the period therein stated. There is
nothing in the RMOA which indicates that
Arturo agreed therein to transfer ownership
of the land which is an essential element in
a contract of sale. Unfortunately, the option
is not binding upon the promissory since it is
not supported by a consideration distinct
from the price
-------------------------------------As a rule, the holder of the option, after
accepting the promise and before he
exercises his option, is not bound to buy. He
is free either to buy or not to buy
later. InSanchez v. Rigos[13] we ruled that in
an accepted unilateral promise to sell, the
promissor is not bound by his promise and
may, accordingly, withdraw it, since there
may be no valid contract without a cause or
consideration. Pending notice of its
withdrawal, his accepted promise partakes
of the nature of an offer to sell which, if
acceded or consented to, results in a
perfected contract of sale.

HELD:
A perfected contract of option is an
accepted unilateral promise which specifies
the thing to be sold and the price to be paid,
when coupled with a valuable consideration
distinct and separate from the price. An
option merely grants a privilege to buy or
sell within an agreed time and at a
determined price. It is separate and distinct
from that which the parties may enter into
upon the consummation of the option.[9] A

Even conceding for the nonce that

respondent had accepted the offer within
the period stated and, as a consequence, a
bilateral contract of purchase and sale was
perfected, the outcome would be the
same. To benefit from such situation,
respondent would have to pay or at least
make a valid tender of payment of the price
for only then could he exact compliance with
the undertaking of the other party.[14] This
respondent failed to do. By his own

On November 16, 1989, respondent sent a

letter to Arturo and Esther informing them of
his readiness and willingness to pay the full
amount of the purchase price. The letter
contained a demand upon the spouses to
comply with their obligation to turn over
possession of the property to him.
In a letter dated December 7, 1989,
respondent informed the spouses that he
had set aside the amount of One Million
Two Hundred Ninety Thousand Pesos
(P1,290,000.00) as evidenced by Citibank
Check No. 278107 as full payment of the
purchase price. He reiterated his demand
upon them to comply with their obligation to
turn over possession of the property. Arturo
and Esther failed to deliver the property
which prompted respondent to cause the
annotation of another adverse claim on TCT
No. 145316. On January 12, 1990,
respondent filed a complaint for specific
performance with damages against
petitioners. Arturo filed his answer to the
complaint while his wife was declared in
default.

admission, he merely informed respondent

spouses of his readiness and willingness to
pay. The fact that he had set aside a check
in the amount of One Million Two Hundred
Ninety Thousand Pesos (P1,290,000.00)
representing the balance of the purchase
price could not help his cause. Settled is
the rule that tender of payment must be
made in legal tender. A check is not legal
tender, and therefore cannot constitute a
valid tender of payment.[15] Not having
made a valid tender of payment,
respondents action for specific performance
must fail.
With regard to the payment of Five
Thousand Pesos (P5,000.00), the Court is
of the view that the amount is not earnest
money as the term is understood in Article
1482 which signifies proof of the perfection
of the contract of sale, but merely a
guarantee that respondent is really
interested to buy the property. It is not the
giving of earnest money, but the proof of the
concurrence of all the essential elements of
the contract of sale which establishes the
existence of a perfected sale.[16] No
reservation of ownership on the part of
Arturo is necessary since, as previously
stated, he has never agreed to transfer
ownership of the property to respondent.

SOCO VS MILITANTE
Facts: It appears from the evidence that the
plaintiff-appellee-Soco, for short-and the
'defendant-appellant-Francisco, for brevityentered into a contract of lease on January
17, 1973, whereby Soco leased her
commercial building and lot situated at
Manalili Street, Cebu City, to Francisco for a
monthly rental of P 800.00 for a period of 10
years renewable for another 10 years at the
option of the lessee. The terms of the
contract are embodied in the Contract of
Lease. It can readily be discerned from
Exhibit "A" that paragraphs 10 and 11
appear to have been cancelled while in
Exhibit "2" only paragraph 10 has been

cancelled. Claiming that paragraph 11 of the

Contract of Lease was in fact not part of the
contract because it was cancelled, Soco
filed Civil Case No. R-16261 in the Court of
First Instance of Cebu seeking the
annulment and/or reformation of the
Contract of Lease. ...
Sometime before the filing of Civil Case No.
R-16261 Francisco noticed that Soco did
not anymore send her collector for the
payment of rentals and at times there were
payments made but no receipts were
issued. This situation prompted Francisco to
write Soco the letter dated February 7, 1975
(Exhibit "3") which the latter received as
shown in Exhibit "3-A". After writing this
letter, Francisco sent his payment for rentals
by checks issued by the Commercial Bank
and Trust Company. Obviously, these
payments in checks were received because
Soco admitted that prior to May, 1977,
defendant had been religiously paying the
rental. ....
1. The factual background setting of this
case clearly indicates that soon after Soco
learned that Francisco sub-leased a portion
of the building to NACIDA, at a monthly
rental of more than P3,000.00 which is
definitely very much higher than what
Francisco was paying to Soco under the
Contract of Lease, the latter felt that she
was on the losing end of the lease
agreement so she tried to look for ways and
means to terminate the contract. ...
In view of this alleged non-payment of rental
of the leased premises beginning May,
1977, Soco through her lawyer sent a letter
dated November 23, 1978 (Exhibit "B") to
Francisco serving notice to the latter 'to
vacate the premises leased.' In answer to
this letter, Francisco through his lawyer
informed Soco and her lawyer that all
payments of rental due her were in fact paid
by Commercial Bank and Trust Company
through the Clerk of Court of the City Court
of Cebu (Exhibit " 1 "). Despite this
explanation, Soco filed this instant case of
Illegal Detainer on January 8, 1979. ...
2. Pursuant to his letter dated February 7,
1975(Exhibit"3") and for reasons stated

therein, Francisco paid his monthly rentals

to Soco by issuing checks of the
Commercial Bank and Trust Company
where he had a checking account. On May
13, 1975, Francisco wrote the VicePresident of Comtrust, Cebu Branch
(Exhibit "4") requesting the latter to issue
checks to Soco in the amount of P 840.00
every 10th of the month, obviously for
payment of his monthly rentals. This request
of Francisco was complied with by Comtrust
in its letter dated June 4, 1975 (Exhibit "5").
Obviously, these payments by checks
through Comtrust were received by Soco
from June, 1975 to April, 1977 because
Soco admitted that an rentals due her were
paid except the rentals beginning May,
1977. While Soco alleged in her direct
examination that 'since May, 1977 he
(meaning Francisco) stopped paying the
monthly rentals' (TSN, Palicte, p. 6, Hearing
of October 24, 1979), yet on cross
examination she admitted that before the
filing of her complaint in the instant case,
she knew that payments for monthly rentals
were deposited with the Clerk of Court
except rentals for the months of May, June,
July and August, 1977. ...
Pressing her point, Soco alleged that 'we
personally demanded from Engr. Francisco
for the months of May, June, July and
August, but Engr. Francisco did not pay for
the reason that he had no funds available at
that time.' (TSN-Palicte, p. 28, Hearing
October 24, 1979). This allegation of Soco
is denied by Francisco because per his
instructions, the Commercial Bank and Trust
Company, Cebu Branch, in fact, issued
checks in favor of Soco representing
payments for monthly rentals for the months
of May, June, July and August, 1977 as
shown in Debit Memorandum issued by
Comtrust These payments are further
bolstered by the certification issued by
Comtrust dated October 29, 1979 (Exhibit
"13"). Indeed the Court is convinced that
payments for rentals for the months of May,
June, July and August, 1977 were made by
Francisco to Soco thru Comtrust and
deposited with the Clerk of Court of the City

Court of Cebu. There is no need to

determine whether payments by
consignation were made from September,
1977 up to the filing of the complaint in
January, 1979 because as earlier stated
Soco admitted that the rentals for these
months were deposited with the Clerk of
Court. ...
Taking into account the factual background
setting of this case, the Court holds that
there was in fact a tender of payment of the
rentals made by Francisco to Soco through
Comtrust and since these payments were
not accepted by Soco evidently because of
her intention to evict Francisco, by all
means, culminating in the filing of Civil Case
R-16261, Francisco was impelled to deposit
the rentals with the Clerk of Court of the City
Court of Cebu. Soco was notified of this
deposit by virtue of the letter of Atty. Pampio
Abarientos dated June 9, 1977 (Exhibit
"10") and the letter of Atty. Pampio
Abarientos dated July 6. 1977 (Exhibit " 12")
as well as in the answer of Francisco in Civil
Case R-16261 (Exhibit "14") particularly
paragraph 7 of the Special and Affirmative
Defenses. She was further notified of these
payments by consignation in the letter of
Atty. Menchavez dated November 28, 1978
(Exhibit " 1 "). There was therefore
substantial compliance of the requisites of
consignation, hence his payments were
valid and effective. Consequently, Francisco
cannot be ejected from the leased premises
for non-payment of rentals. ...
ISSUE: whether the lessee failed to pay the
monthly rentals beginning May, 1977 up to
the time the complaint for eviction was filed
on January 8, 1979. This issue in turn
revolves on whether the consignation of the
rentals was valid or not to discharge
effectively the lessee's obligation to pay the
same
HELD: In order that consignation may be
effective, the debtor must first comply with
certain requirements prescribed by law. The
debtor must show (1) that there was a debt
due; (2) that the consignation of the
obligation had been made because the

creditor to whom tender of payment was

made refused to accept it, or because he
was absent or incapacitated, or because
several persons claimed to be entitled to
receive the amount due (Art. 1176, Civil
Code); (3) that previous notice of the
consignation had been given to the person
interested in the performance of the
obligation (Art. 1177, Civil Code); (4) that
the amount due was placed at the disposal
of the court (Art. 1178, Civil Code); and (5)
that after the consignation had been made
the person interested was notified thereof
(Art. 1178, Civil Code). Failure in any of
these requirements is enough ground to
render a consignation ineffective.
Here, respondent lessee has utterly failed to
prove the following requisites of a valid
consignation: First, tender of payment of the
monthly rentals to the lessor except that
indicated in the June 9, l977 Letter, Exhibit
10. In the original records of the case, We
note that the certification, Exhibit 11 of
Filemon Soon, messenger of the FAR
Corporation, certifying that the letter of
Soledad Soco sent last May 10 by
Commercial Bank and Trust Co. was
marked RTS (return to sender) for the
reason that the addressee refused to
receive it, was rejected by the court for
being immaterial, irrelevant and impertinent
per its Order dated November 20, 1980.
(See p. 117, CFI Records).
Second, respondent lessee also failed to
prove the first notice to the lessor prior to
consignation, except the payment referred
to in Exhibit 10.
In this connection, the purpose of the notice
is in order to give the creditor an opportunity
to reconsider his unjustified refusal and to
accept payment thereby avoiding
consignation and the subsequent litigation.
This previous notice is essential to the
validity of the consignation and its lack
invalidates the same. (Cabanos vs. Calo,
104 Phil. 1058; Limkako vs. Teodoro, 74
Phil. 313).
There is no factual basis for the lower
court's finding that the lessee had tendered

payment of the monthly rentals, thru his

bank, citing the lessee's letter (Exh. 4)
requesting the bank to issue checks in favor
of Soco in the amount of P840.00 every
10th of each month and to deduct the full
amount and service fee from his current
account, as well as Exhibit 5, letter of the
Vice President agreeing with the request.
But scrutinizing carefully Exhibit 4, this is
what the lessee also wrote: "Please
immediately notify us everytime you have
the check ready so we may send somebody
over to get it. " And this is exactly what the
bank agreed: "Please be advised that we
are in conformity to the above arrangement
with the understanding that you shall send
somebody over to pick up the cashier's
check from us." (Exhibit 4, see p. 230,
Original Records; Exhibit 5, p. 231, Original
Records)
Evidently, from this arrangement, it was the
lessee's duty to send someone to get the
cashier's check from the bank and logically,
the lessee has the obligation to make and
tender the check to the lessor. This the
lessee failed to do, which is fatal to his
defense.
Third, respondent lessee likewise failed to
prove the second notice, that is after
consignation has been made, to the lessor
except the consignation referred to in
Exhibit 12 which are the cashier's check
Nos. 478439 and 47907 CBTC dated May
11, 1977 and June 15, 1977 under Official
Receipt No. 04369 dated July 6, 1977.
Recapitulating the testimony of the Bank
Comptroller, it is clear that the bank did not
send notice to Soco that the checks will be
deposited in consignation with the Clerk of
Court (the first notice) and also, the bank
did not send notice to Soco that the checks
were in fact deposited (the second notice)
because no instructions were given by its
depositor, the lessee, to this effect, and this
lack of notices started from September,
1977 to the time of the trial, that is June 3,
1980.
The reason for the notification to the
persons interested in the fulfillment of the
obligation after consignation had been

made, which is separate and distinct from

the notification which is made prior to the
consignation, is stated in Cabanos vs. Calo,
G.R. No. L-10927, October 30, 1958, 104
Phil. 1058. thus: "There should be notice to
the creditor prior and after consignation as
required by the Civil Code. The reason for
this is obvious, namely, to enable the
creditor to withdraw the goods or money
deposited. Indeed, it would be unjust to
make him suffer the risk for any
deterioration, depreciation or loss of such
goods or money by reason of lack of
knowledge of the consignation."
And the fourth requisite that respondent
lessee failed to prove is the actual deposit
or consignation of the monthly rentals
except the two cashier's checks referred to
in Exhibit 12. As indicated earlier, not a
single copy of the official receipts issued by
the Clerk of Court was presented at the trial
of the case to prove the actual deposit or
consignation.

the property within six months from

February 21, 1991, for P1,310,430 plus an
interest of 4.5 percent a month.[5] It was
further agreed that should the spouses fail
to pay the monthly interest or to exercise
the right to repurchase within the stipulated
period, the conveyance would be deemed
an absolute sale.[6]
On July 30, 1991, Myrna Ramos tendered
to Sarao the amount of P1,633,034.20 in
the form of two managers checks, which the
latter refused to accept for being allegedly
insufficient.[7] Having refused acceptance of
the said checks covering the redemption
price, on August 13, 1991 she came to
Court to consign the checks (Exhs. L-4 and
L-5). Subsequently, she proceeded to the
Register of Deeds to cause the annotation
of lis pendens on TCT No. 151784 (Exh. B1-A). Hence, she filed the x x x civil case
against Sarao.

We, therefore, find and rule that the lessee

has failed to prove tender of payment
except that in Exh. 10; he has failed to
prove the first notice to the lessor prior to
consignation except that given in Exh. 10;
he has failed to prove the second notice
after consignation except the two made in
Exh. 12; and he has failed to pay the rentals
for the months of July and August, 1977 as
of the time the complaint was filed for the
eviction of the lessee. We hold that the
evidence is clear, competent and convincing
showing that the lessee has violated the
terms of the lease contract and he may,
therefore, be judicially ejected.

On August 8, 1991, Myrna filed a Complaint

for the redemption of the property and moral
damages plus attorneys fees.[8] The suit was
docketed as Civil Case No. 91-2188 and
raffled to Branch 145 of the Regional Trial
Court (RTC) of Makati City. On August 13,
1991, she deposited with the RTC two
checks that Sarao refused to accept.[9]
On December 21, 1991, Sarao filed against
the Ramos spouses a Petition for
consolidation of ownership in pacto de retro
sale docketed as Civil Case No. 91-3434
and raffled to Branch 61 of the RTC of
Makati City.[10] Civil Case Nos. 91-2188 and
91-3434 were later consolidated and jointly
tried before Branch 145 of the said Makati
RTC.

RAMOS VS SARAO

ISSUE: Was there a proper tender of

payment and consignation?

Facts:On February 21, 1991, Spouses

Jonas Ramos and Myrna Ramos executed
a contract over their conjugal house and lot
in favor of Susana S. Sarao for and in
consideration of P1,310,430.[4] Entitled
DEED OF SALE UNDER PACTO DE
RETRO, the contract, inter alia, granted the
Ramos spouses the option to repurchase

HELD:
Tender of payment is the manifestation by
debtors of their desire to comply with or to
pay their obligation.[50] If the creditor refuses
the tender of payment without just cause,
the debtors are discharged from the
obligation by the consignation of the sum

due.[51] Consignation is made by depositing

the proper amount to the judicial authority,
before whom the tender of payment and the
announcement of the consignation shall be
proved.[52] All interested parties are to be
notified of the consignation.[53] Compliance
with these requisites is mandatory.[54]
Note that the principal loan was P1,310,430
plus 4.5 per cent monthly interest
compounded for six months. Expressing her
desire to pay in the fifth month, petitioner
averred that the total amount due
was P1,633,034.19, based on the
computation of Sarao herself.[56] The
amount of P2,911,579.22 that the latter
demanded from her to settle the loan
obligation was plainly exorbitant, since this
sum included other items not covered by the
agreement. The property had been used
solely as securety for the P1,310,430 loan;
it was therefore improper to include in that
amount payments for gasoline and
miscellaneous expenses, taxes, attorneys
fees, and other alleged loans. When Sarao
unjustly refused the tender of payment in
the amount of P1,633,034.20, petitioner
correctly filed suit and consigned the
amount in order to be released from the
latters obligation.
The two lower courts cited Article 1257 of
the Civil Code to justify their ruling that
petitioner had failed to notify Respondent
Sarao of the consignation. This provision of
law states that the obligor may be released,
provided the consignation is first announced
to the parties interested in the fulfillment of
the obligation.
The facts show that the notice requirement
was complied with. In her August 1, 1991
letter, petitioner said that should the
respondent fail to accept payment, the
former would consign the amount.[57] This
statement was an unequivocal
announcement of consignation.
Concededly, sending to the creditor a tender
of payment and notice of consignation --

which was precisely what petitioner did -may be done in the same act.[58]
Because petitioners consignation of the
amount of P1,633,034.20 was valid, it
produced the effect of payment.[59] The
consignation, however, has a retroactive
effect, and the payment is deemed to have
been made at the time of the deposit of the
thing in court or when it was placed at the
disposal of the judicial authority.[60]The
rationale for consignation is to avoid making
the performance of an obligation more
onerous to the debtor by reason of causes
not imputable to him.
CITIBANK VS SABENIANO
HELD: The liquidation of respondent's
outstanding loans were valid in so far as
petitioner Citibank used respondent's
savings account with the bank and her
money market placements with
petitioner FNCB Finance; but illegal and
void in so far as petitioner Citibank used
respondent's dollar accounts with
Citibank-Geneva.
Savings Account with petitioner Citibank
Compensation is a recognized mode of
extinguishing obligations. Relevant
provisions of the Civil Code provides
Art. 1278. Compensation shall take place
when two persons, in their own right, are
creditors and debtors of each other.
Art. 1279. In order that compensation may
be proper, it is necessary;
(1) That each one of the obligors be bound
principally, and that he be at the same time
a principal creditor of the other;
(2) That both debts consist in a sum of
money, or if the things due are consumable,
they be of the same kind, and also of the
same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any
retention or controversy, commenced by

third persons and communicated in due

time to the debtor.

indicated the principal amounts

as P86,000.00 andP60,000.00.

There is little controversy when it comes to

the right of petitioner Citibank to
compensate respondent's outstanding loans
with her deposit account. As already found
by this Court, petitioner Citibank was the
creditor of respondent for her outstanding
loans. At the same time, respondent was
the creditor of petitioner Citibank, as far as
her deposit account was concerned, since
bank deposits, whether fixed, savings, or
current, should be considered as simple
loan or mutuum by the depositor to the
banking institution.122 Both debts consist in
sums of money. By June 1979, all of
respondent's PNs in the second set had
matured and became demandable, while
respondent's savings account was
demandable anytime. Neither was there any
retention or controversy over the PNs and
the deposit account commenced by a third
person and communicated in due time to
the debtor concerned. Compensation takes
place by operation of law,123 therefore, even
in the absence of an expressed authority
from respondent, petitioner Citibank had the
right to effect, on 25 June 1979, the partial
compensation or off-set of respondent's
outstanding loans with her deposit account,
amounting to P31,079.14.

For failure of the respondents to pay their

outstanding loans with petitioner, the latter
proceeded with the extrajudicial foreclosure
of the real estate mortgages.6 Thereafter, a
Certificate of Sale7 covering all the
mortgaged properties was issued by Deputy
Sheriff Wilfredo P. Borces in favor of
petitioner as the lone bidder forP117,000.00
during the auction sale conducted on
November 24, 1981. Said certificate of sale
was registered with the Office of the
Register of Deeds on February 4, 1982.
On November 24, 1982, petitioner instituted
Civil Case No. R-22608 for deficiency
judgment, claiming that after applying the
proceeds of foreclosure sale to the total
unpaid obligations of respondents
(P200,397.78), respondents were still
indebted to petitioner for the sum
of P83,397.68.8 Respondents filed their
Answer With Counterclaim on December
27, 1982.9
On February 10, 1983, respondents filed
Civil Case No. CEB-112 for the recovery of
the sums of P2,584.27 debited from their
savings account passbook and the
equivalent amount of $4,220.00 telegraphic
transfer, and in addition, $55,258.85
representing the damage suffered by the
respondents from letters of credit left unnegotiated because of petitioners refusal to
pay the $4,220.00 demanded by the
respondents.10
The cases were consolidated before Branch
13, RTC of Cebu City.

TRADERS ROYAL BANK VS

CASTANARES
Facts: Respondent-spouses Norberto and
Milagros Castaares are engaged in the
business of exporting shell crafts and other
handicrafts. Between 1977 and 1978,
respondents obtained from petitioner
Traders Royal Bank various loans and
credit accommodations. Respondents
executed two real estate mortgages (REMs)
dated April 18, 1977 and January 25, 1978
covering their properties (TCT Nos. T38346, T-37536, T-37535, T-37192 and T37191). As evidenced by Promissory Note
No. BD-77-113 dated May 10, 1977,
petitioner released only the amount
of P35,000.00 although the mortgage deeds

Finally, petitioner reiterates that it had the

right by way of set-off the telegraphic
transfer in the sum of $4,220.00 against the
unpaid loan account of respondents. Citing
Bank of the Philippine Islands v. Court of
Appeals,23petitioner asserts that they are
bound principally as both creditors and
debtors of each other, the debts consisting
of a sum of money, both due, liquidated and
demandable, and are not claimed by a third
person. Hence, the RTC did not err in
holding that petitioner validly applied the

amount of P30,930.20 (peso equivalent of

$4,220.00) to the loan account of the
respondents.
ISSUE: WON petitioner had A basis in
withholding and subsequently applying in
payment of respondents overdue account
in the telegraphic transfer in the amount of
u.s.$4,220.00
HELD: Yes.
Agreements for compensation of debts or
any obligations when the parties are
mutually creditors and debtors are allowed
under Art. 1282 of the Civil Code even
though not all the legal requisites for legal
compensation are present.
Voluntary or conventional compensation is
not limited to obligations which are not yet
due.31 The only requirements for
conventional compensation are (1) that
each of the parties can fully dispose of the
credit he seeks to compensate, and (2) that
they agree to the extinguishment of their
mutual credits.32
Consequently, no error was committed by
the trial court in holding that petitioner
validly applied, by way of compensation, the
$4,220.00 telegraphic transfer remitted by
respondents foreign client through the
petitioner.

FABRIGAS VS SAN FRANCISCO DEL

MONTE
Facts: On April 23, 1983, herein petitioner
spouses Isaias and Marcelina Fabrigas
(Spouses Fabrigas or petitioners) and
respondent San Francisco Del Monte, Inc.
(Del Monte) entered into an agreement,
denominated as Contract to Sell No. 2482V, whereby the latter agreed to sell to
Spouses Fabrigas a parcel of residential
land situated in Barrio Almanza, Las Pias,
Manila for and in consideration of the
amount of P109,200.00. Said property,

which is known as Lot No. 9, Block No. 3 of

Subdivision Plan (LRC) Psd-50064, is
covered by Transfer Certificate of Title No.
4980 (161653) T-1083 registered in the
name of respondent Del Monte. The
agreement stipulated that Spouses Fabrigas
shall pay P30,000.00 as downpayment and
the balance within ten (10) years in monthly
successive installments of P1,285.69.
[2]
Among the clauses in the contract is an
automatic cancellation clause in case of
default.
After paying P30,000.00, Spouses Fabrigas
took possession of the property but failed to
make any installment payments on the
balance of the purchase price. After
receiving the final demand letter, petitioner
still unable to pay, respondent considered
the contract to sell cancelled.
When Marcelina started remitting the
amount, a few days thereafter, petitioner
Marcelina and Del Monte entered into
another agreement denominated
as Contract to Sell No. 2491-V, covering the
same property but under restructured terms
of payment. Under the second contract, the
parties agreed on a new purchase price
of P131,642.58, the amount of P26,328.52
as downpayment and the balance to be paid
in monthly installments of P2,984.60 each.
No other payments were made by
petitioners except the amount of P10,000.00
which petitioners tendered sometime in
October 1987 but which Del Monte refused
to accept, the latter claiming that the
payment was intended for the satisfaction
of Contract to Sell No. 2482-V which had
already been previously cancelled. On
March 24, 1988, Del Monte sent a letter
demanding the payment of accrued
installments under Contract to Sell No.
2491-V in the amount of P165,759.60
less P48,128.52, representing the payments
made under the restructured contract, or the
net amount of P117,631.08. Del Monte
allowed petitioners a grace period of thirty
(30) days within which to pay the amount
asked to avoid rescission of the contract.

For failure to pay, Del Monte notified

petitioners on March 30, 1989 that Contract
to Sell No. 2482-V had been cancelled and
demanded that petitioners vacate the
property.[12]
On September 28, 1990, Del Monte
instituted an action for Recovery of
Possession with Damages against Spouses
Fabrigas before the RTC, Branch 63 of
Makati City. The complaint alleged that
Spouses Fabrigas owed Del Monte the
principal amount ofP206,223.80 plus
interest of 24% per annum. In their answer,
Spouses Fabrigas claimed, among others,
that Del Monte unilaterally cancelled the first
contract and forced petitioner Marcelina to
execute the second contract, which
materially and unjustly altered the terms and
conditions of the original contract.
Issues: Was Contract to Sell No. 2482V extinguished through rescission or was it
novated by the subsequent Contract to Sell
No. 2491-V? If Contract to Sell No. 2482V was rescinded, should the manner of
rescission comply with the requirements of
Republic Act No. (R.A.) 6552? If Contract to
Sell No. 2482-V was subsequently novated
by Contract to Sell No. 2491-V, are
petitioners liable for breach under the
subsequent agreement?
HELD:
1. The automatic cancellation clause is
void under Section 7 in relation to
Section 4 of R.A. 6552 Maceda
Law.
2. Novation, in its broad concept, may
either be extinctive or modificatory. It
is extinctive when an old obligation
is terminated by the creation of a
new obligation that takes the place
of the former; it is merely
modificatory when the old obligation
subsists to the extent it remains
compatible with the amendatory
agreement. An extinctive novation
results either by changing the object
or principal conditions (objective or

real), or by substituting the person of

the debtor or subrogating a third
person in the rights of the creditor
(subjective or personal). Under this
mode, novation would have dual
functionsone to extinguish an
existing obligation, the other to
substitute a new one in its
placerequiring a conflux of four
essential requisites: (1) a previous
valid obligation; (2) an agreement of
all parties concerned to a new
contract; (3) the extinguishment of
the old obligation; and (4) the birth of
a valid new obligation.[21]
Notwithstanding the improper
rescission, the facts of the case
show that Contract to Sell No. 2482V was subsequently novated by
Contract to Sell No. 2491-V. The
execution of Contract to Sell No.
2491-V accompanied an upward
change in the contract price, which
constitutes a change in the object or
principal conditions of the contract.
In entering into Contract to Sell No.
2491-V, the parties were impelled by
causes different from those
obtaining under Contract to Sell No.
2482-V. On the part of petitioners,
they agreed to the terms and
conditions of Contract to Sell No.
2491-V not only to acquire
ownership over the subject property
but also to avoid the consequences
of their default under Contract No.
2482-V. On Del Montes end, the
upward change in price was the
consideration for entering
into Contract to Sell No. 2491-V.
In order that an obligation may be
extinguished by another which
substitutes the same, it is imperative
that it be so declared in unequivocal
terms, or that the old and the new
obligations be on every point
incompatible with each other.[22] The
test of incompatibility is whether or

not the two obligations can stand

together, each one having its
independent existence. If they
cannot, they are incompatible and
the latter obligation novates the first.
[23]

Here The execution of Contract to

Sell No. 2491-Vcreated new
obligations in lieu of those
under Contract to Sell No. 2482-V,
which are already considered
extinguished upon the execution of
the second contract. The two
contracts do not have independent
existence for to hold otherwise
would present an absurd situation
where the parties would be liable
under each contract having only one
subject matter.
Contract to Sell No. 2491-V is valid
and binding. There is nothing to
prevent respondent Del Monte from
enforcing its contractual stipulations
and pursuing the proper court action
to hold petitioners liable for their
breach thereof.
MONTELIBANO VS BACOLODMURCIA MILLING CO., INC.
Facts: Alfredo Montelibano,
Alejandro Montelibano, and the
Limited co-partnership Gonzaga and
Company, had been and are sugar
planters adhered to the defendantappellee's sugar central mill under
identical milling contracts. Originally
executed in 1919, said contracts
were stipulated to be in force for 30
years starting with the 1920-21 crop,
and provided that the resulting
product should be divided in the ratio
of 45% for the mill and 55% for the
planters. Sometime in 1936, it was
proposed to execute amended
milling contracts, increasing the
planters' share to 60% of the
manufactured sugar and resulting
molasses, besides other
concessions, but extending the

operation of the milling contract from

the original 30 years to 45 years. To
this effect, a printed Amended Milling
Contract form was drawn up. On
August 20, 1936, the Board of
Directors of the appellee BacolodMurcia Milling Co., Inc., adopted a
resolution (Acts No. 11, Acuerdo No.
1) granting further concessions to
the planters over and above those
contained in the printed Amended
Milling Contract. The bone of
contention is paragraph 9 of this
resolution.
Appellants signed and executed the
printed Amended Milling Contract on
September 10, 1936, but a copy of
the resolution of August 10, 1936,
signed by the Central's General
Manager, was not attached to the
printed contract until April 17, 1937.
In 1953, the appellants initiated the
present action, contending that three
Negros sugar centrals (La Carlota,
Binalbagan-Isabela and San Carlos),
with a total annual production
exceeding one-third of the
production of all the sugar central
mills in the province, had already
granted increased participation (of
62.5%) to their planters, and that
under paragraph 9 of the resolution
of August 20, 1936, heretofore
quoted, the appellee had become
obligated to grant similar
concessions to the plaintiffs
(appellants herein). The appellee
Bacolod-Murcia Milling Co., inc.,
resisted the claim, and defended by
urging that the stipulations contained
in the resolution were made without
consideration; that the resolution in
question was, therefore, null and
void ab initio, being in effect a
donation that was ultra vires and
beyond the powers of the corporate
directors to adopt.
After trial, the court below rendered
judgment upholding the stand of the

defendant Milling company, and

dismissed the complaint. Thereupon,
plaintiffs duly appealed to this Court.
Held: We agree with appellants that
the appealed decisions can not
stand. It must be remembered that
the controverted resolution was
adopted by appellee corporation as
a supplement to, or further
amendment of, the proposed milling
contract, and that it was approved
on August 20, 1936, twenty-one
days prior to the signing by
appellants on September 10, of the
Amended Milling Contract itself; so
that when the Milling Contract was
executed, the concessions granted
by the disputed resolution had been
already incorporated into its terms.
No reason appears of record why, in
the face of such concessions, the
appellants should reject them or
consider them as separate and apart
from the main amended milling
contract.
That the resolution formed an
integral part of the amended milling
contract, signed on September 10,
and not a separate bargain, is
further shown by the fact that a copy
of the resolution was simply
attached to the printed contract
without special negotiations or
agreement between the parties.

---------------------------` The same considerations apply to

the "void innovation" theory of
appellees. There can be no novation
unless two distinct and successive
binding contracts take place, with
the later designed to replace the
preceding convention. Modifications
introduced before a bargain
becomes obligatory can in no sense
constitute novation in law.
Stress is placed on the fact that the
text of the Resolution of August 20,
1936 was not attached to the printed
contract until April 17, 1937. But,
except in the case of statutory forms
or solemn agreements (and it is not
claimed that this is one), it is the
assent and concurrence (the
"meeting of the minds") of the
parties, and not the setting down of
its terms, that constitutes a binding
contract. And the fact that the
addendum is only signed by the
General Manager of the milling
company emphasizes that the
addition was made solely in order
that the memorial of the terms of the
agreement should be full and
complete.