MEANING OF PAYMENT / PERFORMANCE (ART. 1232-1261, CC) SONNY LO, petitioner, vs. KJS ECO-FORMWORK SYSTEM PHIL., INC.

, respondent 2003 Oct 8 G.R. No. 149420 413 SCRA 182 FACTS: Respondent KJS ECO-FORMWORK 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. 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. 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 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. Consequently, on January 10, 1991, respondent filed an action for recovery of a sum of money against the petitioner before the Regional Trial Court of Makati, Branch 147, which was docketed as Civil Case No. 91-074. During the trial, petitioner argued that his obligation was extinguished with the execution of the Deed of Assignment of credit. Respondent, for its part, presented the testimony of its employee, Almeda Baaga, who testified that Jomero Realty refused to honor the assignment of credit because it claimed that petitioner had an outstanding indebtedness to it. On August 25, 1994, the trial court rendered a decision dismissing the complaint on the ground that the assignment of credit extinguished the obligation. Respondent appealed the decision to the Court of Appeals. On April 19, 2001, the appellate court rendered a decision reversing the appealed Decision and enters judgment ordering defendant-appellee Sonny Lo to pay the plaintiff-appellant KJS ECO-FORMWORK SYSTEM PHILIPPINES, INC. Three Hundred Thirty Five Thousand Four Hundred Sixty-Two and 14/100 (P335,462.14) with legal interest of 6% per annum from January 10, 1991 (filing of the Complaint) until fully paid and attorneys fees equivalent to 10% of the amount due and costs of the suit. In finding 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. 1

Petitioner filed a motion for reconsideration of the said decision, which was denied by the Court of Appeals. Hence, this petition for review. ISSUE: Whether or not the Court Of Appeals erred in holding that the deed of assignment did not extinguish petitioners obligation on the wrong notion that petitioner failed to comply with his warranty thereunder.

RULING: The petition is without merit. 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. 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. In order that there be a valid dation in payment, the following are the requisites: (1) There must be the 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); (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. The undertaking really partakes in one sense of the nature of sale, that is, the creditor is really buying the thing or property of the debtor, payment for which is to be charged against the debtors debt. As such, the vendor in good faith shall be responsible, for the existence and legality of the credit at the time of the sale but not for the solvency of the debtor, in specified circumstances. Hence, it may well be that the assignment of credit, which is in the nature of a sale of personal property, produced the effects of a dation in payment which may extinguish the obligation. 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. In other words, respondent alleged the non-existence 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. Furthermore, the Court found that petitioner breached his obligation under the Deed of Assignment, to wit: 2

And the ASSIGNOR further agrees and stipulates as aforesaid that the said ASSIGNOR, his heirs, executors, administrators, or assigns, shall and will at times hereafter, at the request of said ASSIGNEE, its successors or assigns, at his cost and expense, execute and do all such further acts and deeds as shall be reasonably necessary to effectually enable said ASSIGNEE to recover whatever collectibles said ASSIGNOR has in accordance with the true intent and meaning of these presents. The decision of the Court of Appeals was affirmed with modification that upon finality of the Decision, the rate of legal interest shall be 12% per annum, inasmuch as the obligation shall thereafter become equivalent to a forbearance of credit. The award of attorneys fees is DELETED for lack of evidentiary basis. REQUISITES OF PAYMENT/PERFORMANCE PHILIPPINE NATIONAL BANK, petitioner, VS. COURT OF APPEALS and LORETO TAN, respondents April 02, 1996 G.R. No. 108630 256 SCRA 44 FACTS: Private respondent Loreto Tan is the owner of a parcel of land in Bacolod City. Expropriation proceedings were instituted by the government against private respondent Tan and other property owners before a trial court in Negros Occidental. Tan filed a motion requesting issuance of an order for the release to him of the expropriation price of P32,480.00. The trial court required petitioner PNB-Bacolod Branch to release to Tan the amount of P32,480.00 deposited with it by the government. Through its Assistant Branch Manager Juan Tagamolila, PNB issued a manager's check for P32,480.00 and delivered the same to one Sonia Gonzaga without Tan's knowledge, consent or authority. Sonia Gonzaga deposited it in her account with Far East Bank and Trust Co. (FEBTC) and later on withdrew the said amount. Private respondent Tan subsequently demanded payment in the amount of P32,480.00 from petitioner, but the same was refused on the ground that petitioner had already paid and delivered the amount to Sonia Gonzaga on the strength of a Special Power of Attorney (SPA) allegedly executed in her favor by Tan. When he failed to recover the amount from PNB, private respondent filed a motion with the court to require PNB to pay the same to him. Petitioner filed an opposition contending that Sonia Gonzaga presented to it a copy of the May 22, 1978 order and a special power of attorney by virtue of which petitioner delivered the check to her. The petitioner was directed by the court to produce the said special power of attorney thereat. However, petitioner failed to do so. The court decided that there was need for the matter to be ventilated in a separate civil action and thus private respondent filed a complaint with the Regional Trial Court in Bacolod City against petitioner and Juan Tagamolila, PNB's Assistant Branch Manager, to recover the said amount. In its defense, petitioner contended that private respondent had duly authorized Sonia Gonzaga to act as his agent. Tagamolila, in his answer, stated that Sonia Gonzaga presented a Special Power of Attorney to him but borrowed it later with the promise to return it, claiming that she needed it to encash the check. The petitioner likewise filed a third-party complaint against the spouses Nilo and Sonia Gonzaga praying that they be ordered to pay private respondent the amount of 3

P32,480.00. However, for failure of petitioner to have the summons served on the Gonzagas despite opportunities given to it, the third-party complaint was dismissed. The trial court rendered judgment ordering petitioner and Tagamolila to pay private respondent jointly and severally the amount of P32,480.00 with legal interest, damages and attorney's fees. Both petitioner and Tagamolila appealed the case to the Court of Appeals. However, the appellate court dismissed Tagamolila's appeal for failure to pay the docket fee within the reglementary period. The appellate court subsequently affirmed the trial courts decision. ISSUE: Whether or not payment was made to Loreto Tan. RULING: There is no question that no payment had ever been made to private respondent as the check was never delivered to him. When the court ordered petitioner to pay private respondent the amount of P32,480.00, it had the obligation to deliver the same to him. Under Art. 1233 of the Civil Code, a debt shall not be understood to have been paid unless the thing or service in which the obligation consists has been completely delivered or rendered, as the case may be. The burden of proof of such payment lies with the debtor. In the instant case, neither the SPA nor the check issued by petitioner was ever presented in court. The testimonies of petitioner's own witnesses regarding the check were conflicting. Tagamolila testified that the check was issued to the order of "Sonia Gonzaga as attorney-in-fact of Loreto Tan," while Elvira Tibon, assistant cashier of PNB, stated that the check was issued to the order of "Loreto Tan." Furthermore, contrary to petitioner's contention that all that is needed to be proved is the existence of the SPA, it is also necessary for evidence to be presented regarding the nature and extent of the alleged powers and authority granted to Sonia Gonzaga; more specifically, to determine whether the document indeed authorized her to receive payment intended for private respondent. Considering that the contents of the SPA are also in issue here, the best evidence rule applies. Hence, only the original document, which has not been presented at all, is the best evidence of the fact as to whether or not private respondent indeed authorized Sonia Gonzaga to receive the check from petitioner. In the absence of such document, petitioner's arguments regarding due payment must fail. Decision affirmed with the modification that the award by the trial court of P5,000.00 as attorney's fees is reinstated. OBLIGATIONS TO PAY MONEY: EFFECTS OF INFLATION 1. 2. 3. 4. 5. 6. CITIBANK VS. SABENIANO, 504 S 378 TELENGTON BROS VS. US LINES, 583 S 458 CF SHARP VS. NORTHWEST AIRLINES, 381 S 314 PADILLA VS. PAREDES, 328 SCRA 434 TIBAJIA VS. CA, 223 S 163 DBP VS CA, 494 S 25

CITIBANK vs. SABENIANO G.R.No. 156132, October 16, 2006 FACTS: Petitioner Citibank is a banking corporation duly authorized under the laws of the USA to do commercial banking activities n the Philippines. Sabeniano was a client of both Petitioners Citibank and FNCB Finance. Respondent filed a complaint against petitioners claiming to have substantial deposits, the proceeds of which were supposedly deposited automatically and directly to respondents account with the petitioner Citibank and that allegedly petitioner refused to despite repeated demands. Petitioner alleged that respondent obtained several loans from the former and in default, Citibank exercised its right to set-off respondents outstanding loans with her deposits and money. RTC declared the act illegal, null and void and ordered the petitioner to refund the amount plus interest, ordering Sabeniano, on the other hand to pay Citibank her indebtedness. CA affirmed the decision entirely in favor of the respondent. ISSUE: Whether petitioner may exercise its right to set-off respondents loans with her deposits and money in Citibank-Geneva RULING: Petition is partly granted with modification. 1. Citibank is ordered to return to respondent the principal amount of P318,897.34 and P203,150.00 plus 14.5% per annum 2. The remittance of US $149,632.99 from respondents Citibank-Geneva account is declared illegal, null and void, thus Citibank is ordered to refund said amount in Philippine currency or its equivalent using exchange rate at the time of payment. 3. Citibank to pay respondent moral damages of P300,000, exemplary damages for P250,000, attorneys fees of P200,000. 4. Respondent to pay petitioner the balance of her outstanding loans of P1,069,847.40 inclusive off interest.

OBLIGATIONS TO PAY MONEY: EFFECTS OF INFLATION

TELENGTAN BROTHERS and SONS vs. UNITED STATES LINES G.R.No. 132284,February 28,2006 FACTS: Petitioner is a domestic corporation while US Lines is a foreign corporation engaged in overseas shipping. It was made applicable that consignees who fail to take delivery of their containerized cargo within the 10-day free period are liable to pay demurrage charges. On June 22, 1981, US Lines filed a suit against petitioner seeking 5

payment of demurrage charges plus interest and damages. Petitioner incurred P94,000 which the latter refused to pay despite repeated demands. Petitioner disclaims liability alleging that it has never entered into a contract nor signed an agreement to be bound by it. RTC ruled that petitioner is liable to respondent and all be computed as of the date of payment in accordance with Article 1250 of the Civil Code. CA affirmed the decision. ISSUE: Whether the re-computation of the judgment award in accordance with Article 1250 of the Civil Code proper RULING: The Supreme Court found as erroneous the trial courts decision as affirmed y the Court of Appeals. The Court holds that there has been an extraordinary inflation within the meaning of Article 1250 of the Civil Code. There is no reason for ordering the payment of an obligation in an amount different from what has been agreed upon because of the purported supervention of an extraordinary inflation. The assailed decision is affirmed with modification that the order for recomputation as of the date of payment in accordance with the provisions of Article 1250 of New Civil Code is deleted.

OBLIGATIONS TO PAY MONEY: EFFECTS OF INFLATION

CF SHARP VS. NORTHWEST AIRLINES 381 SCRA 314 FACTS: On May 9, 1974, respondent, through its Japan Branch, entered an International Passenger Sales Agency Agreement with petitioner, authorizing the latter to sell its air transport tickets. Petitioner, however, failed to remit the proceeds of the ticket sales, for which reason the respondent filed a collection suit against petitioner before the Tokyo District Court. The said court ordered petitioner to pay respondent including damages for the delay. Unable to execute the decision in Japan, respondent filed a case to enforce said judgment with the regional trial court of Manila which dismissed the case. This was affirmed by the Court of Appeals, and was subsequently partly affirmed by the Supreme Court. CF Sharp was then ordered to pay Northwest so that the RTC issued a writ of execution of decision ruling that Sharp is to pay Northwest the sum of 83,158,195 yen at the exchange rate prevailing on the date of the foreign judgment plus 6% per annum until fully paid, 6% damages and 6% interest. An appeal, the Court of Appeals reduced the interest and it ruled that the basis of the conversion of petitioners liability in its peso equivalent should be the prevailing rate at the time of payment and not the rate on the date of the foreign judgment. ISSUE: Whether or not the basis for the payment of the amount due is the value of the currency at the time of the establishment of the obligation. 6

RULING: NO, the rule that the value of currency at the time of the establishment of the obligation shall be the basis of payment finds application only when there is an official pronouncement or declaration of the existence of an extraordinary inflation or deflation. Hence, petitioners contention that Article 1250 of the Civil Code which provides that in case of an extra ordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary shall apply in this case is untenable.

OBLIGATIONS TO PAY MONEY ALBERT R. PADILLA VS. SPOUSES FLORESCO PAREDES and ADELINA PAREDES, and THE HONORABLE COURT OF APPEALS G.R. No. 124874 March 17, 2000 328 SCRA 434 FACTS: On October 20, 1988, petitioner Albert R. Padilla and private respondents Floresco and Adelina Paredes entered into a contract to sell involving a parcel of land in San Juan, La Union. At that time, the land was untitled although private respondents were paying taxes thereon. Under the contract, petitioner undertook to secure title to the property in private respondents' names. Of the P312,840.00 purchase price, petitioner was to pay a downpayment of P50,000.00 upon signing of the contract, and the balance was to be paid within ten days from the issuance of a court order directing issuance of a decree of registration for the property. On December 27, 1989, the court ordered the issuance of a decree of land registration for the subject property. The property was titled in the name of private respondent Adelina Paredes. Private respondents then demanded payment of the balance of the purchase price. Petitioner then made several payments to private respondents, some even before the court issued an order for the issuance of a decree of registration and they also offered to pay the land through a check. Still, petitioner failed to pay the full purchase price even after the expiration of the period set. In a letter dated February 14, 1990, private respondents, through counsel, demanded payment of the remaining balance, with interest and attorney's fees, within five days from receipt of the letter. Otherwise, private respondents stated they would consider the contract rescinded. On February 28, 1990, petitioner made a payment of P100,000.00 to private respondents, still insufficient to cover the full purchase price. Shortly thereafter, in a letter dated April 17, 1990 private respondents offered to sell to petitioner one-half of the property for all the payments the latter had made, instead of rescinding the contract. If petitioner did not agree with the proposal, private respondents said they would take steps to enforce the automatic rescission of the contract. Petitioner did not accept private respondents' proposal. Instead, in a letter dated May 2, 1990, he offered to pay 7

the balance in full for the entire property, plus interest and attorney's fees. Private respondents refused the offer. On May 14, 1990, petitioner instituted an action for specific performance against private respondents, alleging that he had already substantially complied with his obligation under the contract to sell. He also averred that he had already spent P190,000.00 in obtaining title to the property, subdividing it, and improving its right-ofway. The lower court decided in favor of the petitioners stating that the breach committed was only casual and slight but the Court of Appeals reversed the ruling and favored respondents rescission of the contract to sell. ISSUE: Whether or not the payment made by petitioner is one which is contemplated on the contract. RULING: Petitioners offer to pay is clearly not the payment contemplated in the contract. While he might have tendered payment through a check, this is not considered payment until the check is encashed. Besides, a mere tender of payment is not sufficient. Consignation is essential to extinguish petitioner's obligation to pay the purchase price. The Supreme Court also affirmed the decision of the Court of Appeals where the respondents have the right to rescind the contract on the ground that there is failure on the part of the petitioners to pay the balance within ten days upon the conveyance of the Court of the Title of Land to respondents. Thus, private respondents are under no obligation, and may not be compelled, to convey title to petitioner and receive the full purchase price.

OBLIGATIONS TO PAY MONEY SPOUSES TIBAJIA v. COURT OF APPEALS and EDEN TAN G. R. No. 100290, June 4, 1993 FACTS: A suit of collection of sum of money was filed by Eden Tan against the spouses. A writ of attachment was issued, the Deputy Sheriff filed a return stating that a deposit made by Tibajia in the amount of P442,750 in another case, had been garnished by him. RTC ruled in favor of Eden Tan and ordered the spouses to pay her an amount in excess of P3,000,000. Court of Appeals modified the decision by reducing the amount for damages. Tibajia Spouses delivered to Sheriff Bolima the total money judgment of P398483.70. Tan refused to accept the payment and insisted that the garnished funds be withdrawn to satisfy the judgment obligation. ISSUE: Whether or not payment by means of check is considered payment in legal tender RULING: The ruling applies the statutory provisions which lay down the rule that a check is not legal tender and that a creditor may validly refuse payment by check, whether it be a 8

managers check, cashiers or personal check. The decision of the court of Appeals is affirmed. OBLIGATIONS TO PAY MONEY DEVELOPMENT BANK OF THE PHILIPPINES v. COURT OF APEEALS G.R.No. 138703,June 30, 2006 FACTS: In March 1968, DBP granted to private respondents an industrial loan in the amount of P2,500,000 P500,000 n cash and P2,000,000 in DBP Progress Bank. It was evidenced by a promissory note and secured by a mortgage executed by respondents over their present and future properties. Another loan was granted by DBP in the for of a 5-year revolving guarantee to P1,700,000. In 1975, the outstanding accounts wth DBP was restructured in view of failure to pay. Amounting to P4,655,992.35 were consolidated into a single account. On the other hand, all accrued interest and charges due amounting to P3,074,672.21 were denominated as Notes Taken for Interests and evidenced by a separate promissory note. For failure to comply with its obligation, DBP initiated foreclosure proceedings upon its computation that respondents loans were arrears by P62,954,473.68. Respondents contended that the collection was unconscionable if not unlawful or usurious . RTC, as affirmed by the CA, ruled in favor of the respondents. ISSUE: Whether the prestation to collect by the DBP is unconscionable or usurious RULING: It cannot be determined whether DBP in fact applied an interest rate higher than what is prescribed under the law. Assuming it did exceed 12% in addition to the other penalties stipulated in the note, this should be stricken out for being usurious. The petition is partly granted. Decision of the court of Appeals is reversed and set aside. The case is remanded o the trial court for the determination of the total amount of the respondents obligation based on the promissory notes, according to the interest rate agreed upon by the parties on the interest rate of 12% per annum, whichever is lower. INSTRUMENTS/EVIDENCES OF CREDIT METROBANK v. CABLZO G.R. No. 154469 December 6, 2006 FACTS: Respondent Cabilzo was one of the Metrobanks client who maintained a current account. On November 12, 199, Cabilzo issued a Metrobank check payable to cash in the amount of P1,000 and was paid to a certain Mr. Marquez. The check was oresented to Westmont Bank or payment and in turn indorsed to etrobank for appropriate clearing. It was discovered that the amount withdrawn wa P91,000, thus, the check was altered. Cabilzo re-credit the amount of P91,000 to his account but Metrobank refused to comply despite demands. RTC ordered Metrobank to pay the sum of P90,000 to Cabilzo. Court of Appeals affirmed the decision with modification. 9

ISSUE: Whether holding Metrobank, as drawee bank, liable for the alternations on the subject check bearing the authentic signature of the drawer thereof RULING: The degree of diligence in the exercise of his tasks and the performance of his duties have been faithfully complied with by Cabilzo. It is obvious that Metrobank was remiss in the duty and violated that fiduciary relationship with its clients as it appeared that there are material alterations on the check that are visble to the naked eye but the bank failed to detect such. Petition is denied. Court of Appeals decision is affirmed with modification that exemplary damages in the amount of P50,000 be awarded. OBLIGATIONS TO PAY MONEY: EFFECTS OF INFLATION 1. ALMEDA VS. BATHALA MKTNG., 542 S 470 2. PCI VS. NG SHEUNG NGOR, 541 S 223

EUFEMIA and ROMEL ALMEDA v. BATHALA MARKETING G.R.No. 150806, January 28, 2008 FACTS: In May 1997, Bathala Marketng, renewed its Contract of Lease with Ponciano Almeda. Under the contract, Ponciano agreed to lease a porton of Almeda Compound for a monthly rental of P1,107,348.69 for four years. On January 26, 1998, petitioner informed respondent that its monthly rental be increased by 73% pursuant to the condition No. 7 of the contract and Article 1250. Respondent refused the demand and insisted that there was no extraordinary inflation to warrant such application. Respondent refused to pay the VAT and adjusted rentals as demanded by the petitioners but continually paid the stipulated amount. RTC ruled in favor of the respondent and declared that plaintiff is not liable for the payment of VAT and the adjustment rental, there being no extraordinary inflation or devaluation. CA affirmed the decision deleting the amounts representing 10% VAT and rental adjustment. ISSUE: Whether the amount of rentals due the petitioners should be adjusted by reason of extraordinary inflation or devaluation RULING: Petitioners are stopped from shifting to respondent the burden of paying the VAT. 6th Condition states that respondent can only be held liable for new taxes imposed after the effectivity of the contract of lease, after 1977, VAT cannot be considered a new tax. Neither can petitioners legitimately demand rental adjustment because of extraordinary inflation or devaluation. Absent an official pronouncement or declaration by competent authorities of its existence, its effects are not to be applied. Petition is denied. CA decision is affirmed. OBLIGATIONS TO PAY MONEY: EFFECTS OF INFLATION 10

EQUITABLE PCI BANK, YU and APASv. NG SHEUNG NGOR G.R.NO. 171545, December 19, 2007 FACTS: On October 7, 2001, respondents Ngor and Go filed an action for amendment and/or reformation of documents and contracts against Equitable and its employees. They claimed that they were induced by the bank to avail of its peso and dollar credit facilities by offering low interests so they accepted and signed Equitables proposal. They alleged that they were unaware that the documents contained escalation clauses granting Equitable authority to increase interest without their consent. These were rebutted by the bank. RTC ordered the use of the 1996 dollar exchange rate in computing respondents dollar-denominated loans. CA granted the Banks application for injunction but the properties were sold to public auction. ISSUE: Whether or not there was an extraordinary deflation RULING: Extraordinary inflation exists when there is an unusual decrease in the purchasing power of currency and such decrease could not be reasonably foreseen or was beyond the contemplation of the parties at the time of the obligation. Deflation is an inverse situation. Despite the devaluation of the peso, BSP never declared a situation of extraordinary inflation. Respondents should pay their dollar denominated loans at the exchange rate fixed by the BSP on the date of maturity. Decision of lower courts are reversed and set aside.

INTEGRITY OF PRESTATION / SUBSTANTIAL PAYMENT SIMPLICIO PALANCA VS. ULYSSIS GUIDES joined by her husband LORENZO GUIDES February 28, 2005 452 SCRA 461 FACTS: On August 23, 1983, Simplicio Palanca executed a Contract to Sell a parcel of land on installment with a certain Josefa Jopson for P11, 250.00. Jopson paid the petitioner in the amount of P1, 650 as her down payment, leaving a balance of P9, 600.00. Sometime in December 1983, Jopson assigned and transferred all her rights and interests over the property in question in favor of the respondent Ulyssis Guides. In the deed of transfer, respondent undertook to assume the balance of Jopsons account and to pay the same in accordance with the terms and conditions of the Contract to Sell. After reimbursing Jopson P1,650.00, respondent acquired possession of the lot and paid petitioner the stipulated amortizations which were in turn acknowledged by petitioner through receipts issued in the name of respondent. Believing that she had fully paid the purchase price of the lot, respondent verified the status of the lot with the Register of Deeds, only to find out that title thereto was not in the name of the petitioner as it was covered by Transfer Certificate of Title No. 105742 issued on 26 September 1978 in the name of a certain Carissa T. de Leon. Respondent went to petitioners office to secure the title to the lot, but petitioner 11

informed her that she could not as she still had unpaid accounts. Thereafter, respondent, through a lawyer, sent a letter to petitioner demanding compliance with his obligation and the release of the title in her name. As petitioner did not heed her demands, respondent, joined by her husband, filed a Complaint for specific performance with damages. Petitioner sought the dismissal of the complaint on the ground of respondents alleged failure to comply with the mandatory requirement of Presidential Decree (P.D.) No. 1508. Respondent alleged that she paid petitioner P14,880.00, which not only fully settled her obligation to him, but in fact overpaid it by P3,620.00. In addition, she claimed that petitioner charged her devaluation charges and illegal interest. At the pre-trial in 1989, both parties admitted that Jopson assigned her rights over the property in favor of respondent and respondent paid petitioner the subsequent monthly amortizations on installments. Petitioner likewise acknowledged the payments made by respondent as stated in the statement of accounts initiated by its manager, Oscar Rivera. On November 1996, the trial court rendered its decision ordering the petitioner to execute in favor of the respondent a Deed of Sale. The petitioner appealed to the Court of Appeals; however, it affirmed the decision of the lower court. ISSUE: Whether or not the petitioner has a right to claim for unpaid charges as stipulated in the contract from the private respondent. RULING: The Supreme Court held that primarily preventing petitioner from recovering the amounts claimed from respondent is the effective waiver of these charges. Assuming that said charges are due, petitioner waived the same when he accepted respondents payments without qualification, without any specific demand for the individual charges he now seeks to recover. The same goes true for the alleged forfeiture of the down payment made by Jopson. From its own Statements of Accounts and Payments Made, petitioner credited to respondents account the P1,650.00 down payment paid by Jopson at the commencement of the contract. There is no indication that he informed respondent of the alleged forfeiture, much more demanded the payment again of the amount previously paid by Jopson. Art. 1235 of the Civil Code which provides that When the obligee accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, the obligation is deemed fully complied with, is in point. Thus, when petitioner accepted respondents installment payments despite the alleged charges incurred by the latter, and without any showing that he protested the irregularity of such payment, nor demanded the payment of the alleged charges, respondents liability, if any for said charges, is deemed fully satisfied. The petition is denied.

WHO MAY DEMAND PAYMENT 1. 2. 3. PCIB VS. CA, 481 S 127 LAGON VS. HOOVEN COMALCO, 349 SCRA 363 BPI VS. CA, 232 SCRA 302

PCIB v. COURT OF APPEALS G.R. NO. 121989 January 31, 2006

12

FACTS: PCIB and MBC were joint bidders in a foreclosure sale held of assorted mining machinery and equipment previously mortgaged to them by Philippine Iron Mines. Atlas agreed to purchase some of these properties and the sale was evidenced by a Deed of Sale with a downpayment of P12,000,000 and the balance of P18,000,000 payable in 6 monthly installments. In compliance with the contract, Atlas issued HongKong and shanghai Bank check amounting to P12,000,000. Atlas paid to NAMAWU the amount of P4,298,307.77 in compliance with the writ of garnishment issued against Atlas to satisfy the judgment in favor of NAMAWU. Atlas alleged that there was overpayment, hence the suit against PCIB to obtain reimbursement. PCIB contended that Atlas still owed P908,398.75 because NAAWU had been partially paid in the amount of P601,260.00. RTC ruled against Atlas to pay P908,398.75 to PCIB. CA reversed the decision. ISSUE: Whether atlas had complied with its obligation to PCIB RULING: While the original amount sought to be garnished was P4,298,307,77, the partial payment of P601,260 naturally reduced it to P3,697,047.77 Atlas overpaid NAMAWU, thus the remedy if Atlas would be to proceed against NAAWU nut not against PCIB in relation to article 1236 of the Civil Code The petition is partly granted.CA decision is reversed and set aside and in lieu thereof Atlas is ordered to pay PCIB the sum of P146,058.96, with the legal interest commencing from the time of first demand on August 22, 1985.

WHO MAY DEMAND PAYMENT, CREDITORS RIGHT OF PAYMENT (Art. 1240, CC) JOSE V. LAGON, petitioner, vs. HOOVEN COMALCO INDUSTRIES, INC., respondent G.R. No. 135657 January 17, 2001 349 SCRA 363 FACTS: Petitioner Jose V. Lagon is a businessman and owner of a commercial building in Tacurong, Sultan Kudarat. Respondent HOOVEN on the other is a domestic corporation known to be the biggest manufacturer and installer of aluminum materials in the country with branch office at E. Quirino Avenue, Davao City. Sometime in April 1981 Lagon and HOOVEN entered into two (2) contracts, both denominated Proposal, whereby for a total consideration of P104, 870.00 HOOVEN agreed to sell and install various aluminum materials in Lagons commercial building in Tacurong, Sultan Kudarat. Upon execution of the contracts, Lagon paid HOOVEN P48,000.00 in advance. Lagon, in his answer, denied liability and averred that HOOVEN was the party guilty of breach of contract by failing to deliver and install some of the materials specified in the proposals; that as a consequence he was compelled to procure the undelivered materials from other sources; that as regards the materials duly delivered and installed by HOOVEN, they were fully paid. He counterclaimed for actual, moral, 13

exemplary, temperate and nominal damages, as well as for attorneys fees and expenses of litigation. ISSUE: Whether or not all the materials specified in the contracts had been delivered and installed by respondent in petitioners commercial building in Tacurong, Sultan Kudarat. RULING: Firstly, the quantity of materials and the amounts sated in the delivery receipts do not tally with those in the invoices covering them, notwithstanding that, according to HOOVEN OIC Alberto Villanueva, the invoices were based merely on the delivery receipts. Secondly, the total value of the materials as reflected in all the invoices is P117, 329.00 while under the delivery receipts it is only P112, 870.50, or a difference of P4,458.00 Even more strange is the fact that HOOVEN instituted the present action for collection of sum of money against Lagon only on 24 February 1987, or more than five (5) years after the supposed completion of the project. Indeed, it is contrary to common experience that a creditor would take its own sweet time in collecting its credit, more so in this case when the amount involved is not miniscule but substantial. All the delivery receipts did not appear to have been signed by petitioner or his duly authorized representative acknowledging receipt of the materials listed therein. A closer examination of the receipts clearly showed that the deliveries were made to a certain Jose Rubin, claimed to be petitioners driver, Armando Lagon, and a certain bookkeeper. Unfortunately for HOOVEN, the identities of these persons were never been established, and there is no way of determining now whether they were indeed authorized representatives of petitioner. WHEREFORE, the assailed Decision of the Court of Appeals dated 28 April 1997 is MODIFIED. Petitioner Jose V. Lagon is ordered to pay respondent Hooven Comalco Industries, Inc., P6, 377.66 representing the value of the unpaid materials admittedly delivered to him. On the other hand, respondent is ordered to pay petitioner P50,000.00 as moral damages, P30,000.00 as attorneys fees and P46,554.50 as actual damages and litigation expenses. WHO MAY DEMAND PAYMENT, CREDITORS RIGHT OF PAYMENT (Art. 1240, CC) BANK OF THE PHILIPPINE ISLANDS VS. COURT OF APPEALS 232 SCRA302 G.R. NO. 104612 MAY 10, 1994 FACTS: Private respondents Eastern Plywood Corporation and Benigno Lim as officer of the corporation, had an AND/OR joint account with Commercial Bank and Trust Co (CBTC), the predecessor-in-interest of petitioner Bank of the Philippine Islands. Lim withdraw funds from such account and used it to open a joint checking account (an AND account) with Mariano Velasco. When Velasco died in 1977, said joint checking account had P662,522.87. By virtue of an Indemnity Undertaking executed by Lim and as President and General Manager of Eastern withdrew one half of this amount and deposited it to one of the accounts of Eastern with CBTC. 14

Eastern obtained a loan of P73,000.00 from CBTC which was not secured. However, Eastern and CBTC executed a Holdout Agreement providing that the loan was secured by the Holdout of the C/A No. 2310-001-42 referring to the joint checking account of Velasco and Lim. Meanwhile, a judicial settlement of the estate of Velasco ordered the withdrawal of the balance of the account of Velasco and Lim. Asserting that the Holdout Agreement provides for the security of the loan obtained by Eastern and that it is the duty of CBTC to debit the account of respondents to set off the amount of P73,000 covered by the promissory note, BPI filed the instant petition for recovery. Private respondents Eastern and Lim, however, assert that the amount deposited in the joint account of Velasco and Lim came from Eastern and therefore rightfully belong to Eastern and/or Lim. Since the Holdout Agreement covers the loan of P73,000, then petitioner can only hold that amount against the joint checking account and must return the rest. ISSUE: Whether BPI can demand the payment of the loan despite the existence of the Holdout Agreement and whether BPI is still liable to the private respondents on the account subject of the withdrawal by the heirs of Velasco. RULING: Yes, for both issues. Regarding the first, the Holdout Agreement conferred on CBTC the power, not the duty, to set off the loan from the account subject of the Agreement. When BPI demanded payment of the loan from Eastern, it exercised its right to collect payment based on the promissory note, and disregarded its option under the Holdout Agreement. Therefore, its demand was in the correct order. Regarding the second issue, BPI was the debtor and Eastern was the creditor with respect to the joint checking account. Therefore, BPI was obliged to return the amount of the said account only to the creditor. When it allowed the withdrawal of the balance of the account by the heirs of Velasco, it made the payment to the wrong party. The law provides that payment made by the debtor to the wrong party does not extinguish its obligation to the creditor who is without fault or negligence. Therefore, BPI was still liable to the true creditor, Eastern.

PAYMENT WHO MUST PAY: DEBTOR AUDION ELECTRIC CO., INC., VS. NATIONAL LABOR RELATIONS COMMISSION and NICOLAS MADOLID 1999 Jun 17 G.R. No. 106648 FACTS: From the position paper and affidavit corroborated by oral testimony, it appears that complainant was employed by respondent Audion Electric Company on June 30, 1976 as fabricator and continuously rendered service assigned in different offices or projects as helper electrician, stockman and timekeeper. He has rendered thirteen (13) years of continuous, loyal and dedicated service with a clean record. On August 3, complainant was surprised to receive a letter informing him that he will be considered terminated after the turnover of materials, including respondents tools and equipments not later than August 15, 1989.

15

Complainant claims that he was dismissed without justifiable cause and due process and that his dismissal was done in bad faith which renders the dismissal illegal. For this reason, he claims that he is entitled to reinstatement with full backwages. He also claims that he is entitled to moral and exemplary damages. He includes payment of his overtime pay, project allowance, minimum wage increase adjustment, proportionate 13th month pay and attorneys fees. ISSUES: Whether or not the respondent NLRC committed grave abuse of discretion amounting to lack or excess of jurisdiction when it ruled that private respondent was a regular employee and not a project employee; Whether or not petitioner was denied due process when all the money claims of private respondent, i.e. overtime pay, project allowances, salary differential, proportionate 13th month pay, moral and exemplary damages as well as attorneys fees, were granted. RULING: Respondents assigning complainant to its various projects did not make complainant a project worker. As found by the Labor Arbiter, it appears that complainant was employed by respondent as fabricator and or projects as helper electrician, stockman and timekeeper. Simply put, complainant was a regular nonproject worker. Private respondents employment status was established by the Certification of Employment dated April 10, 1989 issued by petitioner which certified that private respondent is a bonafide employee of the petitioner from June 30, 1976 up to the time the certification was issued on April 10, 1989. The same certificate of employment showed that private respondents exposure to their field of operation was as fabricator, helper/electrician, stockman/timekeeper. This proves that private respondent was regularly and continuously employed by petitioner in various job assignments from 1976 to 1989, for a total of 13 years. The alleged gap in employment service cited by petitioner does not defeat private respondents regular status as he was rehired for many more projects without interruption and performed functions which are vital, necessary and indispensable to the usual business of petitioner. Petitioner failed to present such employment contract for a specific project signed by private respondent that would show that his employment with the petitioner was for the duration of a particular project. Moreover, notwithstanding petitioners claim in its reply that in taking interest in the welfare of its workers, petitioner would strive to provide them with more continuous work by successively employing its workers, in this case, private respondent, petitioner failed to present any report of termination. Petitioner should have submitted or filed as many reports of termination as there were construction projects actually finished, considering that private respondent had been hired since 1976. The failure of petitioner to submit reports of termination supports the claim of private respondent that he was indeed a regular employee. The Court finds no grave abuse of discretion committed by NLRC in finding that private respondent was not a project employee. Private respondent clearly specified in his affidavit the specific dates in which he was not paid overtime pay, that is, from the period March 16, 1989 to April 3, 1989 amounting to P765.63, project allowance from April 16, 1989 to July 31, 1989 in the total amount of P255.00, wage adjustment for the period from August 1, 1989 to August 14, 1989 in the amount of P256.50 and the proportionate 13th month pay for the period 16

covering January to May 1988, November-December 1988, and from January to August 1989. This same affidavit was confirmed by private respondent in one of the scheduled hearings where he moved that he be allowed to present his evidence ex-parte for failure of petitioner or any of his representative to appear thereat. On the other hand, petitioner submitted its unverified Comment to private respondents complaint stating that he had already satisfied the unpaid wages and 13th month pay claimed by private respondent, but this was not considered by the Labor Arbiter for being unverified. Petitioner failed to rebut the claims of private respondent. It failed to show proof by means of payroll or other evidence to disprove the claim of private respondent. Petitioner was given the opportunity to cross-examine private respondent yet petitioner forfeited such chance when it did not attend the hearing, and failed to rebut the claims of private respondent. However, the award of moral and exemplary damages must be deleted for being devoid of legal basis. Moral and exemplary damages are recoverable only where the dismissal of an employee was attended by bad faith or fraud, or constituted an act oppressive to labor, or was done in a manner contrary to morals, good customs or public policy. The person claiming moral damages must prove the existence of bad faith by clear and convincing evidence for the law always presumes good faith. It is not enough that one merely suffered sleepless nights, mental anguish, serious anxiety as the result of the actuations of the other party. Invariably, such action must be shown to have been willfully done in bad faith or with ill-motive, and bad faith or ill motive under the law cannot be presumed but must be established with clear and convincing evidence. Private respondent predicated his claim for such damages on his own allegations of sleepless nights and mental anguish, without establishing bad faith, fraud or ill motive as legal basis therefor. Private respondent not being entitled to award of moral damages, an award of exemplary damages is likewise baseless. Where the award of moral and exemplary damages is eliminated, so must the award for attorneys fees be deleted. Private respondent has not shown that he is entitled thereto pursuant to Art. 2208 of the Civil Code. WHEREFORE, the challenged resolutions of the respondent NLRC are hereby AFFIRMED with the MODIFICATION that the awards of moral and exemplary damages and attorneys fees are DELETED.

WHERE PAYMENT MUST BE MADE LORENZO SHIPPING VS. BJ MARTHEL 443 S 163 November 19, 2004 FACTS: Petitioner Lorenzo Shipping is engaged in coastwise shipping and owns the cargo M/V Dadiangas Express. BJ Marthel is engaged in trading, marketing an dselling various industrial commodities. Lorenzo Shipping ordered for the second time cylinder lines from the respondent stating the term of payment to be 25% upon delivery, the balance payable in 5 bi-monthly equal installments, no again stating the date of the cylinders delivery. It was allegedly paid through post dated checks but the same was dishonored due to insufficiency of funds. Despite due demands by the respondent, petitioner falied 17

contending that time was of the essence in the delivery of the cylinders and that there was a delay since the respondent committed said items within two months after receipt of fir order. RTC held respondents bound to the quotation with respect to the term of payment, which was reversed by the Court of appeals ordering appellee to pay appellant P954,000 plus interest. There was no delay since there was no demand. ISSUE: Whether or not respondent incurred delay in performing its obligation under the contract of sale RULING: By accepting the cylinders when they were delivered to the warehouse, petitioner waived the claimed delay in the delivery of said items. Supreme Court geld that time was not of the essence. There having been no failure on the part of the respondent to perform its obligations, the power to rescind the contract is unavailing to the petitioner. Petition is denied. Court of appeals decision is affirmed.

SPECIAL FORMS OF PAYMENT: A. DACION EN PAGO / DATION IN PAYMENT 1. 2. 3. 4. ESTANISLAO VS. EAST-WEST BANKING CORP., 544 S 369 AQUINTEY VS. TIBONG, 511 S 414 VDA. DE JAYME VS. CA, 390 SCRA 380 CALTEX VS. IAC, NOV. 13, 1992

SPOUSES RAFAEL ESTANISLAO v. EASTWEST BANKING CORPORATION G.R. No. 178537,February 11, 2008 FACTS: On July 24,1997, petitioner obtained a loan fro the respondent in the amount of P3,925,000 evidenced by a promissory note and secured by two deeds of chattel mortgage covering two dump trucks and a bull dozer . Petitioner defaulted entire obligation became due and demandable. A deed of assignment was drafted by the respondent on October 6, 2000 and March 8, 2001 respectively. Petitioners completed the delivery of heavy equipment mentioned in the deed of assignment to respondent which accepted the same without protest or objection. Respondent manifested to admit an amended complaint for the seizure and delivery of two more heavy equipment which are covered under the second deed of the chattel mortgage. RTC ruled that the deed of assignment and the petitioners delivery of the heavy equipment effectively extinguished the petitioners obligation and respondent as stopped. CA reversed the decision ordering the petitioner the outstanding debt of P4,275,919.69 plus interests. ISSUE: 18

Did the Deed of Assignment operate to extinguish petitioners debt to the respondent such that the replevin suit could no longer prosper? RULING: The deed of assignment was a perfected agreement which extinguished petitioners total outstanding obligation to the respondent. The nature of the assignment was a dacion en pago whereby property is alienated to the creditor in the satisfaction of a debt in money. Since the agreement was consummated by the delivery of the last unit of heavy equipment under the deed, petitioners are deemed to have been released from all their obligations from the respondents. SPECIAL FORMS OF PAYMENT: DATION EN PAGO/ DATION IN PAYMENT AQUINTEY v. SPOUSES TIBONG G.R. No. 166704,December 20, 2006 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 or not the deeds of assignment in favor of petitioner has the effect of payment of the original obligation that would partially extinguish the same RULING: Substitution of the person of the debtor ay be affected by delegacion. Meaning, the debtor offers, the creditor accepts a third person who consent of the substitution and assumes the obligation. It is necessary that the old debtor be released fro the obligation and the third person or new debtor takes his place in the relation . Without such release, there is no novation. Court of Appeals correctly found that the respondents obligation to pay the balance of their account with petitioner was extinguished pro tanto by the deeds of credit. CA decision is affirmed with the modification that the principal amount of the respondents is P33,841. SPECIAL FORMS OF PAYMENT: DATION EN PAGO/ DATION IN PAYMENT

VDA. DE JAYME VS. CA 19

390 SCRA 380 2002 Oct 4 FACTS: On January 8, 1973, the spouses Graciano and Mamerta Jayme entered into a Contract of Lease with George Neri, president of Airland Motors Corporation (now Cebu Asiancars Inc.), covering one-half of Lot 2700 owned and registered to the former. The lease was for twenty (20) years. The terms and conditions of the lease contract stipulated that Cebu Asiancars Inc. may use the leased premises as a collateral to secure payment of a loan which Asiancars may obtain from any bank, provided that the proceeds of the loan shall be used solely for the construction of a building which, upon the termination of the lease or the voluntary surrender of the leased premises before the expiration of the contract, shall automatically become the property of the Jayme spouses (the lessors). In October 1977, Asiancars obtained a loan of P6,000,000 from the Metropolitan Bank and Trust Company. The entire Lot 2700 was offered as one of several properties given as collateral for the loan. As mortgagors, the spouses signed a Deed of Real Estate Mortgage dated November 21, 1977 in favor of MBTC. It stated that the deed was to secure the payment of a loan obtained by Asiancars from the bank. Meeting financial difficulties and incurring an outstanding balance on the loan, Asiancars conveyed ownership of the building on the leased premises to MBTC, by way of "dacion en pago." The building was valued at P980,000 and the amount was applied as partial payment for the loan. There still remained a balance of P2,942,449.66, which Asiancars failed to pay. Eventually, MBTC extrajudicially foreclosed the mortgage. A public auction was held on February 4, 1981. MBTC was the highest bidder for P1,067,344.35. A certificate of sale was issued and was registered with the Register of Deeds on February 23, 1981. Meanwhile, Graciano Jayme died, survived by his widow Mamerta and their children. As a result of the foreclosure, Gracianos heirs filed a civil complaint, in January of 1982, for Annulment of Contract with Damages with Prayer for Issuance of Preliminary Injunction, against respondent Asiancars, its officers and incorporators and MBTC. Later, in 1999, Mamerta Jayme also passed away. The trial court ruled that the REM is valid and binding upon the Jaymes. The CA affirmed with modifications. Both the trial and appellate courts found that no fraud attended the execution of the deed of mortgage. The Motion for Reconsideration was denied. ISSUE: Whether or not the dacion en pago by Asiancars in favor of MBTC is valid and binding despite the stipulation in the lease contract that ownership of the building will vest on the Jaymes at the termination of the lease. RULING: YES. The alienation of the building by Asiancars in favor of MBTC for the partial satisfaction of its indebtedness is valid. The ownership of the building had been effectively in the name of the lesseemortgagor (Asiancars), though with the provision that said ownership be transferred to the Jaymes upon termination of the lease or the voluntary surrender of the premises. The lease was constituted on January 8, 1973 and was to expire 20 years thereafter, or on January 8, 1993. The alienation via dacion en pago was made by Asiancars to MBTC on December 18, 1980, during the subsistence of the lease. At this point, the mortgagor, Asiancars, could validly exercise rights of ownership, including the right to alienate it, as it did to MBTC. 20

Dacion en pago is the delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation. It is a special mode of payment where the debtor offers another thing to the creditor who accepts it as equivalent of payment of an outstanding debt. The undertaking really partakes in one sense of the nature of sale, that is the creditor is really buying the thing or property of the debtor, payment for which is to be charged against the debtors debt. As such, the essential elements of a contract of sale, namely, consent, object certain, and cause or consideration must be present. In its modern concept, what actually takes place in dacion en pago is an objective novation of the obligation where the thing offered as an accepted equivalent of the performance of an obligation is considered as the object of the contract of sale, while the debt is considered as the purchase price. In any case, common consent is an essential prerequisite, be it sale or novation, to have the effect of totally extinguishing the debt or obligation. Private respondent MBTC is ordered to pay petitioners rentals in the total amount of P602,083.33, with six (6) percent interest per annum until fully paid.

SPECIAL FORMS OF PAYMENT: DATION EN PAGO/ DATION IN PAYMENT CALTEX (PHILIPPINES), INC., petitioner, VS. The INTERMEDIATE APPELLATE COURT and ASIA PACIFIC AIRWAYS, INC., respondents November 13, 1992 G.R. No. 72703 FACTS: On January 12, 1978, private respondent Asia Pacific Airways Inc. entered into an agreement with petitioner Caltex (Philippines) Inc., whereby petitioner agreed to supply private respondent's aviation fuel requirements for two (2) years, covering the period from January 1, 1978 until December 31, 1979. Pursuant thereto, petitioner supplied private respondent's fuel supply requirements. As of June 30, 1980, private respondent had an outstanding obligation to petitioner in the total amount of P4,072,682.13, representing the unpaid price of the fuel supplied. To settle this outstanding obligation, private respondent executed a Deed of Assignment dated July 31, 1980, wherein it assigned to petitioner its receivables or refunds of Special Fund Import Payments from the National Treasury of the Philippines to be applied as payment of the amount of P4,072,683.13 which private respondent owed to petitioner. On February 12, 1981, pursuant to the Deed of Assignment, Treasury Warrant No. B04708613 in the amount of P5,475,294.00 representing the refund to respondent of Special Fund Import Payment on its fuel purchases was issued by the National Treasury in favor of petitioner. Four days later, on February 16, 1981, private respondent, having learned that the amount remitted to petitioner exceeded the amount covered by the Deed of Assignment, wrote a letter to petitioner, requesting a refund of said excess. Petitioner, acting on said request, made a refund in the amount of P900,000.00 plus in favor of private respondent. The latter, believing that it was entitled to a larger amount by way of refund, wrote petitioner anew, demanding the refund of the remaining amount. In response thereto, petitioner informed private respondent that the amount not returned (P510,550.63) represented interest and service charges at the rate of 18% per annum on the unpaid and overdue account of respondent from June 1, 1980 to July 31, 1981. Thus, on September 13, 1982, private respondent filed a complaint against petitioner in the Regional Trial Court of Manila, to collect the sum of P510,550.63.00. 21

Petitioner (defendant in the trial court) filed its answer, reiterating that the amount not returned represented interest and service charges on the unpaid and overdue account at the rate of 18% per annum. It was further alleged that the collection of said interest and service charges is sanctioned by law, and is in accordance with the terms and conditions of the sale of petroleum products to respondent, which was made with the conformity of said private respondent who had accepted the validity of said interest and service charges. On November 7, 1983, the trial court rendered its decision dismissing the complaint, as well as the counterclaim filed by defendant therein. Private respondent (plaintiff) appealed to the Intermediate Appellate Court (IAC). On August 27, 1985, a decision was rendered by the said appellate court reversing the decision of the trial court, and ordering petitioner to return the amount of P510,550.63 to private respondent. ISSUE: Whether or not there is a valid dation in payment in this case. RULING: The Supreme Court ruled that the Deed of Assignment executed by the parties on July 31, 1980 is not a dation in payment and did not totally extinguish respondent's obligations as stated therein. The then Intermediate Appellate Court ruled that the three (3) requisites of dacion en pago are all present in the instant case, and concluded that the Deed of Assignment of July 31, 1980) constitutes a dacion in payment provided for in Article 1245 of the Civil Code which has the effect of extinguishing the obligation, thus supporting the claim of private respondent for the return of the amount retained by petitioner. The Supreme Court, speaking of the concept of dation in payment, in the case of Lopez vs. Court of Appeals, among others, stated: "'The dation in payment extinguishes the obligation to the extent of the value of the thing delivered, either as agreed upon by the parties or as may be proved, unless the parties by agreement, express or implied, or by their silence, consider the thing as equivalent to the obligation, in which case the obligation is totally extinguished." From the above, it is clear that a dation in payment does not necessarily mean total extinguishment of the obligation. The obligation is totally extinguished only when the parties, by agreement, express or implied, or by their silence, consider the thing as equivalent to the obligation. In the instant case, the then Intermediate Appellate Court failed to take into account the express recitals of the Deed of Assignment. "That Whereas, ASSIGNOR has an outstanding obligation with ASSIGNEE in the amount of P4,072,682.13 as of June 30, 1980, plus any applicable interest on overdue account. Now therefore in consideration of the foregoing premises, ASSIGNOR by virtue of these presents, does hereby irrevocably assign and transfer unto ASSIGNEE any and all funds and/or Refund of Special Fund Payments, including all its rights and benefits accruing out of the same, that ASSIGNOR might be entitled to, by virtue of and pursuant to the decision in BOE Case No. 80-123, in payment of ASSIGNOR's outstanding obligation plus any applicable interest charges on overdue account and other avturbo fuel lifting and deliveries that ASSIGNOR may from time to time receive from the ASSIGNEE, and ASSIGNEE does hereby accepts such assignment in its favor." 22

Hence, it could easily be seen that the Deed of Assignment speaks of three (3) obligations (1) the outstanding obligation of P4,072,682.13 as of June 30, 1980; (2) the applicable interest charges on overdue accounts; and (3) the other avturbo fuel lifting and deliveries that assignor (private respondent) may from time to time receive from assignee (Petitioner). As aptly argued by petitioner, if it were the intention of the parties to limit or fix respondent's obligation to P4,072.682.13, they should have so stated and there would have been no need for them to qualify the statement of said amount with the clause "as of June 30, 1980 plus any applicable interest charges on overdue account" and the clause "and other avturbo fuel lifting and deliveries that ASSIGNOR may from time to time receive from the ASSIGNEE". The terms of the Deed of Assignment being clear, the literal meaning of its stipulations should control. In the construction of an instrument where there are several provisions or particulars, such a construction is, if possible, to be adopted as will give effect to all. Likewise, the then Intermediate Appellate Court failed to take into consideration the subsequent acts of the parties which clearly show that they did not intend the Deed of Assignment to totally extinguish the obligation: (1) After the execution of the Deed of Assignment on July 31, 1980, petitioner continued to charge respondent with interest on its overdue account up to January 31, 1981. This was pursuant to the Deed of Assignment which provides for respondent's obligation for "applicable interest charges on overdue account". The charges for interest were made every month and not once did respondent question or take exception to the interest; and (2) In its letter of February 16, 1981, respondent addressed the following request to petitioner: In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered (Art. 1253, Civil Code). The foregoing subsequent acts of the parties clearly show that they did not intend the Deed of Assignment to have the effect of totally extinguishing the obligations of private respondent without payment of the applicable interest charges on the overdue account. Finally, the payment of applicable interest charges on overdue account, separate from the principal obligation of P4,072,682.13 was expressly stipulated in the Deed of Assignment. The law provides that "if the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered." (Art. 1253, Civil Code).

PAYMENT BY CESSION OR ASSIGNMENT

ANTONIO LO, petitioner, VS. THE HON. COURT OF APPEALS AND NATIONAL ONIONS GROWERS COOPERATIVE MARKETING ASSOCIATION, INC., respondents FACTS: At the core of the present controversy are two parcels of land measuring a total of 2,147 square meters, with an office building constructed thereon. Petitioner acquired the subject parcels of land in an auction sale on November 9, 1995 for P20,170,000 from the Land Bank of the Philippines (Land Bank). Private respondent National Onion Growers Cooperative Marketing Association, Inc., an agricultural cooperative, was the occupant of the disputed parcels of land under a subsisting contract of lease with Land Bank. The lease was valid until December 31, 1995. Upon the expiration of the lease 23

contract, petitioner demanded that private respondent vacate the leased premises and surrender its possession to him. Private respondent refused on the ground that it was, at the time, contesting petitioners acquisition of the parcels of land in question in an action for annulment of sale, redemption and damages. Petitioner filed an action for ejectment before the MTC. He asked, inter alia, for the imposition of the contractually stipulated penalty of P5,000 per day of delay in surrendering the possession of the property to him. On September 3, 1996, the trial court decided the case in favor of petitioner. On appeal to the RTC, the MTC decision was affirmed in toto. The CA rendered its assailed decision affirming the decision of the trial court, with the modification that the penalty imposed upon private respondent for the delay in turning over the leased property to petitioner was reduced from P 5,000 to P 1000 per day. ISSUE: Whether or not the Court of Appeals erred in reducing the penalty awarded by the trial court, the same having been stipulated by the parties. RULING: No. Generally, courts are not at liberty to ignore the freedom of the parties to agree on such terms and conditions as they see fit as long as they are not contrary to law, morals, good customs, public order or public policy. Nevertheless, courts may equitably reduce a stipulated penalty in the contract if it is iniquitous or unconscionable, or if the principal obligation has been partly or irregularly complied with. This power of the courts is explicitly sanctioned by Article 1229 of the Civil Code which provides: Article 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable. The question of whether a penalty is reasonable or iniquitous is addressed to the sound discretion of the court and depends on several factors, including, but not limited to, the following: the type, extent and purpose of the penalty, the nature of the obligation, the mode of breach and its consequences, the supervening realities, the standing and relationship of the parties. In this case, the stipulated penalty was reduced by the appellate court for being unconscionable and iniquitous. Petition denied; CA decision affirmed. APPLICATION OF PAYMENTS 1. 2. 3. 4. ASI CORP., VS. EVANGELISTA, 545 S 300 PACULDO VS. REGALADO, 345 SCRA 134 CBC VS. CA, 265 SCRA 327 MOBIL VS. CA, 272 SCRA 523

ASI CORP and ANTONIO SAN JUAN v. SPOUSES EFREN EVANGELISTA FACTS: Respondents are engaged in the large-scale business of buying broiler eggs, hatching and selling them and egg by-products. For incubation and hatchings, respondents availed of the hatching services of ASJ Corp. They agreed o service fees 24

of 80 centavos per egg. Service fees were paid upon release. Fro consecutive times the respondents failed to pay the fee until such time that ASJ retained the chicks demanding full payment from the respondent. ASJ received P15,000 for partial payment but the chicks were still not released. RTC ruling, which was affirmed by the Court of Appeals holding that ASJ Corp and Antonio San Juan be solidarily liable to the respondents. ISSUE: Was petitioners retention of the chicks and by-products, on account of respondents failure to pay the corresponding fees unjustified? RULING: Respondents offer to partially satisfy their accounts is not enough to extinguish their obligation. Respondents cannot substitute or apply as their payment the value of the chicks and by-products they expect to derive because it is necessary that all the debts be paid for the same kind. The petition is partly granted. The Court of Appeals decision is modified.

APPLICATION OF PAYMENTS PACULDO VS. REGALADO 345 SCRA 134 FACTS: On December 27, 1990, petitioner Nereo Paculdo and respondent Bonifacio Regalado entered into a contract of lease over a parcel of land with a wet market building, located at Fairview Park, Quezon City. The contract was for twenty five (25) years, commencing on January 1, 1991 and ending on December 27, 2015. For the first five (5) years of the contract beginning December 27, 1990, Nereo would pay a monthly rental of P450,000, payable within the first five (5) days of each month with a 2% penalty for every month of late payment. Aside from the above lease, petitioner leased eleven (11) other property from the respondent, ten (10) of which were located within the Fairview compound, while the eleventh was located along Quirino Highway Quezon City. Petitioner also purchased from respondent eight (8) units of heavy equipment and vehicles in the aggregate amount of Php 1, 020,000. On account of petitioners failure to pay P361, 895.55 in rental for the month of May, 1992, and the monthly rental of P450, 000.00 for the months of June and July 1992, the respondent sent two demand letters to petitioner demanding payment of the back rentals, and if no payment was made within fifteen (15) days from the receipt of the letter, it would cause the cancellation of the lease contract. Without the knowledge of petitioner, on August 3, 1992, respondent mortgaged the land subject of the lease contract, including the improvements which petitioner introduced into the land amounting to P35, 000,000.00, to Monte de Piedad Savings Bank, as a security for a loan. On August 12, 1992, and the subsequent dates thereafter, respondent refused to accept petitioners daily rental payments. 25

Subsequently, petitioner filed an action for injunction and damages seeking to enjoin respondents from disturbing his possession of the property subject of the lease contract. On the same day, respondent also filed a complaint for ejectment against petitioner. The lower court rendered a decision in favor of the respondent, which was affirmed in toto by the Court of Appeals. ISSUE: Whether or not the petitioner was truly in arrears in the payment of rentals on the subject property at the time of the filing of the complaint for ejectment. RULING: NO, the petitioner was not in arrears in the payment of rentals on the subject property at the time of the filing of the complaint for ejectment. As found by the lower court there was a letter sent by respondent to herein petitioner, dated November 19, 1991, which states that petitioners security deposit for the Quirino lot, be applied as partial payment for his account under the subject lot as well as to the real estate taxes on the Quirino lot. Petitioner interposed no objection, as evidenced by his signature signifying his conformity thereto. Meanwhile, in an earlier letter, dated July 15, 1991, respondent informed petitioner that the payment was to be applied not only to petitioners accounts under the subject land and the Quirino lot but also to heavy equipment bought by the latter from respondent. Unlike in the November letter, the July letter did not contain the signature of petitioner. Petitioner submits that his silence is not consent but is in fact a rejection. As provided in Article 1252 of the Civil Code, the right to specify which among his various obligations to the same creditor is to be satisfied first rest with the debtor. In the case at bar, at the time petitioner made the payment, he made it clear to respondent that they were to be applied to his rental obligations on the Fairview wet market property. Though he entered into various contracts and obligations with respondent, all the payments made, about P11,000,000.00 were to be applied to rental and security deposit on the Fairview wet market property. However, respondent applied a big portion of the amount paid by petitioner to the satisfaction of an obligation which was not yet due and demandable- the payment of the eight heavy equipments. Under the law, if the debtor did not declare at the time he made the payment to which of his debts with the creditor the payment is to be applied, the law provided the guideline; i.e. no payment is to be applied to a debt which is not yet due and the payment has to be applied first to the debt which is most onerous to the debtor. The lease over the Fairview wet market is the most onerous to the petitioner in the case at bar. Consequently, the petition is granted.

APPLICATION OF PAYMENTS CHINA BANKING CORPORATION, ATTYS. REYNALDO M. CABUSORA and RENATO C. TAGUIAM, petitioners, 26

VS. COURT OF APPEALS, HON. PEDRO T. SANTIAGO, SPS. SO CHING and CRISTINA SO, and NATIVE WEST INTERNATIONAL TRADING CORP., respondents 1996 December 05 G.R. No. 121158 FACTS: China Banking Corporation (China Bank) extended several loans to Native West International Trading Corporation (Native West) and to So Ching, Native West's president. Native West in turn executed promissory notes in favor of China Bank. So Ching, with the marital consent of his wife, Cristina So, additionally executed two mortgages over their properties, viz., a real estate mortgage executed on July 27, 1989 covering a parcel of land situated in Cubao, Quezon City, under TCT No. 277797, and another executed on August 10, 1989 covering a parcel of land located in Mandaluyong, under TCT No. 5363. The promissory notes matured and despite due demands by China Bank neither private respondents Native West nor So Ching paid. Pursuant to a provision embodied in the two mortgage contracts, China Bank filed petitions for the extra-judicial foreclosure of the mortgaged properties before Notary Public Atty. Renato E. Taguiam for TCT No. 277797, and Notary Public Atty. Reynaldo M. Cabusora for TCT No. 5363, copies of which were given to the spouses So Ching and Cristina So. After due notice and publication, the notaries public scheduled the foreclosure sale of the spouses' real estate properties on April 13, 1993. Eight days before the foreclosure sale, however, private respondents filed a complaint with the Regional Trial Court for accounting with damages and with temporary restraining order against petitioners alleging several grounds, including Violation of Article 1308 of the Civil Code. On April 7, 1993, the trial court issued a temporary restraining order to enjoin the foreclosure sale. Petitioners moved for reconsideration, but it was denied in an Order dated September 23, 1993. To annul the trial court's Orders of April 28, 1993 and September 23, 1993, petitioners elevated the case through certiorari and prohibition before public respondent Court of Appeals. In a decision dated January 17, 1995, respondent Court of Appeals held that Administrative Circular No. 3 is the governing rule in extra-judicial foreclosure of mortgage, which circular petitioners however failed to follow, and with respect to the publication of the notice of the auction sale, the provisions of P.D. No. 1079 is the applicable statute, which decree petitioners similarly failed to obey. Respondent Court of Appeals did not pass upon the other issues and confined its additional lengthy discussion on the validity of the trial court's issuance of the preliminary injunction, finding the same neither capricious nor whimsical exercise of judgment that could amount to grave abuse of discretion. The Court of Appeals accordingly dismissed the petition, as well as petitioners' subsequent motion for reconsideration. Hence, the instant petition under Rule 45 of the Rules of Court reiterating the grounds raised before respondent court. ISSUE: Whether or not there was a correct application of payment in this case. RULING: An important task in contract interpretation is the ascertainment of the intention of the contracting parties which is accomplished by looking at the words they used to project that intention in their contract, i.e., all the words, not just a particular word or two, and words in context, not words standing alone. Indeed, Article 1374 of the Civil Code, states the 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." Applying the rule, we find that the parties intent is to constitute the real estate properties as continuing securities liable for future obligations beyond the amounts of P6.5 million and 27

P3.5 million respectively stipulated in the July 27, 1989 and August 10, 1989 mortgage contracts. Thus, while the "whereas" clause initially provides that "the mortgagee has granted, and may from time to time hereafter grant to the mortgagors . . . credit facilities not exceeding six million five hundred thousand pesos only (P6,500,000.00)" yet in the same clause it provides that "the mortgagee had required the mortgagor(s) to give collateral security for the payment of any and all obligations heretofore contracted/incurred and which may thereafter be contracted/incurred by the mortgagor(s) and/or debtor(s), or any one of them, in favor of the mortgagee" which qualifies the initial part and shows that the collaterals or real estate properties serve as securities for future obligations. The first paragraph which ends with the clause, "the idea being to make this deed a comprehensive and all embracing security that it is" supports this qualification. Similarly, the second paragraph provides that "the mortgagee may take further advances and all sums whatsoever advanced by the mortgagee shall be secured by this mortgagee . . ." And although it was stated that "[t]he said credit shall extend to any account which shall, within the said limit of P6,500,000.00 exclusive of interest", this part of the second sentence is again qualified by its succeeding portion which provides that "this mortgage shall stand as security for all indebtedness of the mortgagor(s) and/or debtor(s), or any one of them, at any and all times outstanding . . ." Again, under the third paragraph, it is provided that "the mortgagee may from time to time grant the mortgagor(s)/debtor(s) credit facilities exceeding the amount secured by this mortgage . . ." The fourth paragraph, in addition, states that ". . . all such withdrawals, and payments, whether evidenced by promissory notes or otherwise, shall be secured by this mortgage" which manifestly shows that the parties principally intended to constitute the real estate properties as continuing securities for additional advancements which the mortgagee may, upon application, extend. It is well settled that mortgages given to secure future advancements or loans are valid and legal contracts, and that the amounts named as consideration in said contracts do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered. The allegations stated are a clear admission that they were unable to settle to the fullest their obligation. Foreclosure is valid where the debtors, as in this case, are in default in the payment of their obligation. The essence of a contract of mortgage indebtedness is that a property has been identified or set apart from the mass of the property of the debtor-mortgagor as security for the payment of money or the fulfillment of an obligation to answer the amount of indebtedness, in case of default of payment. It is a settled rule that in a real estate mortgage when the obligation is not paid when due, the mortgagee has the right to foreclose the mortgage and to have the property seized and sold in view of applying the proceeds to the payment of the obligation. In fact, aside from the mortgage contracts, the promissory notes executed to evidence the loans also authorize the mortgagee to foreclose on the mortgages. Thus: . . . CHINA BANKING CORPORATION is hereby authorized to sell at public or private sales such securities or things of value for the purpose of applying their proceeds to such payments. And while private respondents aver that they have already paid ten million pesos, an allegation which has still to be settled before the trial court, the same cannot be utilized as a shield to enjoin the foreclosure sale. A mortgage given to secure advancements, is a continuing security and is not discharged by repayment of the amount named in the mortgage, until the full amount of the advancements are paid.

28

APPLICATION OF PAYMENTS MOBIL OIL PHILIPPINES, INC., and CALTEX (PHILS.), INC., petitioners VS. HON. COURT OF APPEALS and CONTINENTAL CEMENT CORPORATION, respondents G.R. No. 103052 23 May 2003 FACTS: The petition for review on certiorari in the case at bar seeks the reversal of the decision of the Court of Appeals, affirming that 2 of the Regional Trial Court (RTC), Branch 101, of Quezon City, which found herein petitioners Mobil Oil Philippines, Inc., and Caltex Philippines, Inc., jointly and severally liable to private respondent Continental Cement Corporation in the amount of eight million pesos (P8,000,000.00) for actual damages, plus ten percent (10%) thereof by way of attorneys fees, for having delivered water-contaminated bunker fuel oil to the serious prejudice and damage of the cement firm. Sometime in May 1982, petitioner Mobil Oil Philippines, Inc. (MOPI), a firm engaged in the marketing of petroleum products to industrial users, entered into a supply agreement with private respondent Continental Cement Corporation (CCC), a cement producer, under which the former would supply the latters industrial fuel oil (IFO) or bunker fuel oil (BFO) requirements. MOPI extended to CCC an unsecured credit line of P2,000,000.00 against which CCCs purchases of oil could initially be charged. MOPI had a hauling contract with Century Freight Services (CFS) whereby CFS undertook the delivery of Mobil products to designated consignees of MOPI. During the period starting from 12 July to 07 October 1982, MOPI made a total of sixty-seven deliveries of BFO, each delivery consisting of 20,000 liters, to CCCs cement factory in Norzagaray, Bulacan. On 08 October 1982, CCC discovered that what should have been MOPIs 20,000 BFO delivery to CCCs Norzagaray plant, through CFSs lorry truck, was, in fact, pure water. CCC at once informed MOPI of this anomaly and of its intention to meanwhile hold in abeyance all payments due to MOPI on its previous deliveries until such time as the parties would have ascertained that those deliveries were not themselves adulterated. CCC suggested that MOPIs storage tank in the Norzagaray plant be likewise investigated for possible contamination. Alleging in the complaint it ultimately filed with the RTC that its factory equipment broke down from 19 to 22 September 1982 due to the utilization of the watercontaminated BFO supplied by MOPI; that on 23 September 1982, its plant operations had to be stopped completely; and that it was able to resume operations only after essential repairs had been undertaken on 02 October 1982; CCC sought to recover consequential damages from MOPI. In answer, MOPI averred that CCC had accepted each delivery of BFO in accordance with the procedure for testing and acceptance of BFO deliveries; that it was only on 08 October 1982 that CCC brought to its attention the alleged anomalous delivery of 20,000 liters of BFO under invoice No. 47587 through Mariano Riveras lorry truck; that when the delivery was being inspected by CCCs representatives, the truck driver and helper fled; that Rivera acknowledged full liability for such delivery; that Rivera promised to pay the amount of P42,730.00 for the 20,000 liters of BFO delivered; and that MOPI agreed to the water draining activity solely for the purpose of maintaining good business relations with CCC but not to admit any liability therefore. In its compulsory counterclaim, MOPI claimed that CCC had an outstanding obligation to it, as of 30 November 1982, in the amount of P1,096,238.51, and that as a consequence of the frivolous and malicious suit: which besmirched MOPIs reputation, 29

it suffered moral damages of not less than P10,000,000.00, exemplary damages of the same amount, and the incurrence of attorneys fees. ISSUES: Whether or not Petitioner Mobil is stopped from claiming that no Mobil BFO remained unused by Continental on 22 October 1982; and that the deliveries of BFO made by Mobil to Continental before 8 October 1982 were not contaminated with water. Whether or not Petitioners can be held liable for the contaminated BFO delivered on 8 October 1982 on the ground that Country Freight Service, as carrier-hauler, was an agent of Mobil. RULING: The claim that the Court of Appeals conveniently made an inference that the subject Continental storage tank contained Mobil BFO deliveries only because Mobil and Continental agreed to jointly examine the same, and that the appellate court had so misapprehended the facts, is unacceptable. The factual finding that deliveries previous to 08 October 1982 were adulterated BFO was supported by the 22 October 1982 joint undertaking. This document, witnessed and signed by representatives of both MOPUI and CCC, clearly showed that a detailed verification of water contained on all BFO delivered by MOBIL OIL PHILS., INC., except those that have already been used in cement operation by CCC,: was undertaken. Implicit from this statement was that there still was at the time an availability of BFO in the storage tank designated by CCC for past Mobil deliveries. The same could be said of the second water draining process, evidence by the second joint undertaking. Although done without the participation of MOPI, the latter, nonetheless, was notified of the counting thrice, the last of which had indicated that failure on MOPIs part to send a representative would be tantamount to a waiver of its right to participate therein. The appellate court may not thus be faulted for holding that petitioners and barred from questioning the results of water draining processes conducted on the MOPI tank in the CCC plant site, in the same manner that MOPI may not belatedly question the testing procedure theretofore adopted. MOPI cannot be allowed to turn its back to its own acts (or inactions) to the prejudice of CCC, which, in good faith, relied upon MOPIs conduct. CFS was the contractor of MOPI, not CCC, and the contracted price of the BFO that CCC paid to MOPI included hauling charges. The presumption laid down under Article 1523 of the Civil Code that delivery to the carrier should be deemed to be delivery to the buyer would have no application where, such as in this case, the sale itself specifically called for delivery by the seller to the buyer at the latters place of business. WHEREFORE, the herein questioned decision of the Court of Appeals in AFFIRMED in toto. Costs against petitioners.

TENDER OF PAYMENT OR CONSIGNATION 1. 2. 3. 4. 5. 6. BENOS VS. LAWILAO, 509 S 549 PEOPLES INDUSTRIAL VS. CA, OCT. 24, 1997 ETERNAL GARDENS VS. CS, DEC. 9, 1997 RAYOS VS. REYES, 398 SCRA 24 CEBU INTERNATIONAL VS. CA, 316 SCRA 488 DE MESA VS. CA, OCT. 19, 1999 30

SPOUSES JAIME BENOS v. SPOUSES GREGORIO LAWILAO G.R. No. 172259, December 5, 2006 FACTS: On February 11,1999, petitioner-spouses Benos and respondent Lawilao executed a Pacto de Retro Sale where Benos sold their lot and the building erected thereon for P300,000, one-half of which to be paid in cash to the Benos and the other half to be paid to the bank to pay off the loans of the Benos which was secured by the same lot and building. Under the contract, Benos could redeem the property within 18 months from the date of execution by returning the contract price, otherwise, the sale would become irrevocable. After paying the P150,000, Lawilao took possession of the property, restructured it twicw, eventually the loan become due and demandable. On August 14, 2000, a son of Benos and Lawilao paid the bankl but the bank refused. Lawilao filed for consignation against the bank and deposited the amount of P159,000.00. RTC declared Lawilao of the ownership of the subject property, which was affirmed by the Court of Appeals. ISSUE: Whether or not the contract of Pacto de Retro Sale be rescinded by the petitioner RULING: In the instant case, records show that Lawilao filed the petition for consignation against the bank in Civil Case without notifying the Benos. Hence, Lawilao failed to prove their offer to pay the balance, even before the filing of the consignation case. Lawilao never notified the Benos. Thus, as far as the Benos are concerned, there was no full and complete payment of the contract price which gives them the right to rescind. Petition is granted. Court of Appeals decision is reversed and set aside, that the Pacto de Retro Sale is rescinded and petitioner are ordered to return the amount of P150,000 to respondents.

TENDER OF PAYMENT OR CONSIGNATION PEOPLE'S INDUSTRIAL AND COMMERCIAL CORPORATION, petitioner VS. COURT OF APPEALS and MAR-ICK INVESTMENT CORPORATION, respondents. Oct 24, 1997 G.R. No. 112733 FACTS: Private respondent Mar-ick Investment Corporation is the exclusive and registered owner of Mar-ick Subdivision in Barrio Buli, Cainta, Rizal. On May 29, 1961, private respondent entered into six agreements with petitioner People's Industrial and Commercial Corporation sell to petitioner six subdivision lots. Five of the agreements, 31

involving similarly stipulate that the petitioner agreed to pay private respondent for each lot, the amount of P7,333.20 with a down payment of P480.00. The balance of P6,853.20 shall be payable in 120 equal monthly installments of P57.11 every 30th of the month, for a period of ten years. With respect to Lot No. 8, the parties agreed to the purchase price of P7,730.00 with a down payment of P506.00 and equal monthly installments of P60.20. After ten years, however, petitioner still had not fully paid for the six lots; it had paid only the down payment and eight installments, even after private respondent had given petitioner a grace period of four months to pay the arrears. As of May 1, 1980, the total amount due to private respondent under the contract was P214,418.00. In his letter of March 30, 1980 to Mr. Tomas Siatianum, who signed the agreements for petitioner, private respondent's counsel protested petitioner's encroachment upon a portion of its subdivision. It added that petitioner had failed to abide by its promise to remove the encroachment, or to purchase the lots involved "at the current price or pay the rentals on the basis of the total area occupied, all within a short period of time." It also demanded the removal of the illegal constructions on the property that had prejudiced the subdivision and its neighbors. After a series of negotiations between the parties, they agreed to enter into a new contract to sell 8 involving seven lots. The contract stipulates that the previous contracts involving the same lots "have been cancelled due to the failure of the purchaser to pay the stipulated installments." It states further that the new contract was entered into "to avoid litigation, considering that the purchaser has already made use of the premises since 1981 to the present without paying the stipulated installments." The parties agreed that the contract price would be P423,250.00 with a down payment of P42,325.00 payable upon the signing of the contract and the balance of P380,925.00 payable in forty-eight equal monthly amortization payments of P7,935.94. The new contract bears the date of October 11, 1983 but neither of the parties signed it. Thereafter, Tomas Siatianum issued the checks in the total amount of P37,642.72 to private respondent. Private respondent received but did not encash those checks. Instead filed in the trial court a complaint for accion publiciana de posesion against petitioner and Tomas Siatianum, as president and majority stockholder of petitioner. The lower court rendered a decision finding that the original agreements of the parties were validly cancelled in accordance with provision No. 9 of each agreement. The parties did not enter into a new they did not sign the draft contract. Receipt by private respondent of the five checks could not amount to perfection of the contract because private respondent never encashed and benefited from those checks, they represented the deposit under the new contract because petitioner failed to prove that those were monthly installments that private respondent refused to accept. Thus, the fact that the parties tried to negotiate a new Contract indicated that they considered the first contract as "already cancelled." This decision was affirmed by the Court of Appeals. ISSUE: Whether there was a tender of payment and consignation in the case. RULING: The parties' failure to agree on a fundamental provision of the contract was aggravated by petitioner's failure to deposit the installments agreed upon. Neither did it attempt to make a consignation of the installments. As held in the Adelfa Properties case: 32

"The mere sending of a letter by the vendee expressing the intention to pay, without the accompanying payment, is not considered a valid tender of payment. Besides, a mere tender of payment is not sufficient to compel private respondents to deliver the property and execute the deed of absolute sale. It is consignation which is essential in order to extinguish petitioner's obligation to pay the balance of the purchase price. The rule is different in case of an option contract or in legal redemption or in a sale with right to repurchase, wherein consignation is not necessary because these cases involve an exercise of a right or privilege (to buy, redeem or repurchase) rather than the discharge of an obligation, hence tender of payment would be sufficient to preserve the right or privilege. This is because the provisions on consignation are not applicable when there is no obligation to pay. A contract to sell, as in the case before us, involves the performance of an obligation, not merely the exercise of a privilege or a right. Consequently, performance or payment may be effected not by tender of payment alone but by both tender and consignation." In the case, petitioner did not lift a finger towards the performance of the contract other than the tender of down payment. There is no record that it even bothered to tender payment of the installments or to amend the contract to reflect the true intention of the parties as regards the number of lots to be sold. Indeed, by petitioner's inaction, private respondent may not be judicially enjoined to validate a contract that the former appeared to have taken for granted. As in the earlier agreements, petitioner ignored opportunities to resuscitate a contract to sell that were rendered moribund and inoperative by its inaction. Petition denied. Decision affirmed. TENDER OF PAYMENT OR CONSIGNATION ETERNAL GARDENS MEMORIAL PARK CORPORATION VS. COURT OF APPEALS and NORTH PHILIPPINE UNION MISSION OF THE SEVENTH DAY ADVENTIST 1997 Dec 9 G.R. No. 124554 FACTS: Petitioner EGMPC and private respondent NPUM entered into a Land Development Agreement dated October 6, 1976. Under the agreement, EGMPC was to develop a parcel of land owned by NPUM into a memorial park subdivided into lots. The parties further agreed that EGMPC had the obligation to remit monthly to NPUM forty percent (40%) of its net gross collection from the development of a memorial park on property owned by NPUM. It also provides for the designation of a depository/trustee bank to act as the depository/trustee for all funds collected by EGMPC. Later, two claimants of the parcel of land surfaced Maysilo Estate and the heirs of a certain Vicente Singson Encarnacion. EGMPC thus filed an action for interpleader against Maysilo Estate and NPUM. The Singson heirs in turn filed an action for quieting of title against EGMPC and NPUM. From these two cases, several proceedings ensued. One such case, from the interpleader action, EGMPC assailed the appellate court's resolution requiring "petitioner Eternal Gardens [to] deposit whatever amounts are due from it under the Land Development Agreement with a reputable bank to be designated by the respondent court." 33

The trial court dismissed the cases and the appellate court affirmed insofar as it dismissed the claims of the intervenors, including the Maysilo Estate, and the titles of NPUM to the subject parcel of land were declared valid; and the trial court's decision favor of the Singson heirs was reversed and set aside. Through the resolution issued by the Supreme Court resolution, the Court of Appeals proceeded with the disposition of the case and required the parties to appear at a scheduled hearing on June 16, 1994, "with counsel and accountants, as well as books of accounts and related records,' to determine the remaining accrued rights and liabilities of said parties." The accounting of the parties' respective obligations was referred to the Court's Accountant, Mrs. Carmencita Angelo, with the concurrence of the parties, to whom the documents were to be submitted. NPUM prepared and submitted a Summary of Sales and Total Amounts Due based on the following documents it likewise submitted to the court. However, EGMPC did not submit any document whatsoever to aid the appellate court in its mandated task. Thus, the appellate court declared that EGMPC has waived its right to present the records and documents necessarily for accounting, and that it will now proceed "to the mutual accounting required to determine the remaining accrued rights and liabilities of the said partiesand that the Court will proceed to do what it is required to do on the basis of the documents submitted by the NPUMC. Ms. Angelo submitted her Report dated January 31, 1995, to which the appellate court required the parties to comment on. EGMPC took exception to the appellate court's having considered it to have waived its right to present documents. Considering EGMPC's arguments, the court set a hearing date where NPUM would present its documents "according to the Rules [of Court], and giving the private respondent [EGMPC] the opportunity to object thereto." ISSUE: Whether or not EGMPC is liable for interest because there was still the unresolved issue of ownership over the property subject of the Land Development Agreement of October 6, 1976. RULING: The Supreme Court held that the argument is without merit. EGMPC under the agreement had the obligation to remit monthly to NPUM forty percent (40%) of its net gross collection from the development of a memorial park on property owned by NPUM. It also provides for the designation of a depository/trustee bank to act as the depository/trustee for all funds collected by EGMPC. There was no obstacle, legal or otherwise, to the compliance by EGMPC of this provision in the contract, even on the affectation that it did not know to whom payment was to be made. Even disregarding the agreement, EGMPC cannot "suspend" payment on the pretext that it did not know who among the subject property's claimants was the rightful owner. It had a remedy under the New Civil Code of the Philippines to give in consignation the amounts due, as these fell due. Consignation produces the effect of payment. The rationale for consignation is to avoid the performance of an obligation becoming more onerous to the debtor by reason of causes not imputable to him. For its failure to consign the amounts due, EGMPCs obligation to NPUM necessarily became more onerous as it became liable for interest on the amounts it failed to remit. Thus, the Court of Appeals correctly held Eternal Gardens liable for interest at the rate of twelve percent (12%). The withholding of the amounts due under the agreement was tantamount to a forbearance of money.

34

TENDER OF PAYMENT OR CONSIGNATION SPOUSES TEOFILO and SIMEONA RAYOS, and GEORGE RAYOS VS. DONATO REYES, SATURNINO REYES, TOMASA R. BUSTAMANTE and TORIBIA R. CAMELO G.R. No. 150913 February 20, 2003 398 SCRA 25 FACTS: At stake in this petition for review is the ownership of 3 parcels of unregistered land with an area of approximately 130,947 square meters situated in Brgy. Sapa, Burgos, Pangasinan, the identities of which are not disputed. The 3 parcels were formerly owned by the spouses Francisco and Asuncion Tazal who on 1 September 1957 sold them for P724.00 to respondents predecessor-ininterest, one Mamerto Reyes, with right to repurchase within 2 years from date thereof by paying to the vendee the purchase price and all expenses incident to their reconveyance. After the sale the vendee a retro took physical possession of the properties and paid the taxes thereon. The otherwise inconsequential sale became controversial when 2 of the 3 parcels were again sold on 24 December 1958 by Francisco Tazal for P420.00 in favor of petitioners predecessor-in-interest Blas Rayos without first availing of his right to repurchase the properties. In the meantime, on 1 September 1959 the conventional right of redemption in favor of spouses Francisco and Asuncion Tazal expired without the right being exercised by either the Tazal spouses or the vendee Blas Rayos. After the expiration of the redemption period, Francisco Tazal attempted to repurchase the properties from Mamerto Reyes by asserting that the 1 September 1957 deed of sale with right of repurchase was actually an equitable mortgage and offering the amount of P724.00 to pay for the alleged debt. But Mamerto Reyes refused the tender of payment and vigorously claimed that their agreement was not an equitable mortgage. On 9 May 1960 Francisco Tazal filed a complaint with the Court of First Instance of Pangasinan against Mamerto Reyes for the declaration of the 1 September 1957 transaction as a contract of equitable mortgage. He also prayed for an order requiring defendant Mamerto Reyes to accept the amount of P724.00 which he had deposited on 31 May 1960 with the trial court as full payment for his debt, and canceling the supposed mortgage on the 3 parcels of land with the execution of the corresponding documents of reconveyance in his favor. Defendant denied plaintiffs allegations and maintained that their contract was a sale with right of repurchase that had long expired. On 22 June 1961 Francisco Tazal again sold the third parcel of land previously purchased by Mamerto Reyes to petitioner-spouses Teofilo and Simeona Rayos for P400.00. On 1 July 1961 petitioner-spouses bought from Blas Rayos for P400.00 the 2 lots that Tazal had sold at the first instance to Mamerto Reyes and thereafter to Blas Rayos. Curiously, these contracts of sale in favor of petitioner-spouses were perfected while the aforementioned case was pending before the trial court. ISSUE: Whether or not the consignation made by the petitioners is valid. 35

RULING: In order that consignation may be effective the debtor must show that (a) there was a debt due; (b) the consignation of the obligation had been made because the creditor to whom a valid tender of payment was made refused to accept it; (c) previous notice of the consignation had been given to the person interested in the performance of the obligation; (d) the amount due was placed at the disposal of the court; and, (e) after the consignation had been made the person interested was notified thereof. In the instant case, petitioners failed, first, to offer a valid and unconditional tender of payment; second, to notify respondents of the intention to deposit the amount with the court; and third, to show the acceptance by the creditor of the amount deposited as full settlement of the obligation, or in the alternative, a declaration by the court of the validity of the consignation. The failure of petitioners to comply with any of these requirements rendered the consignation ineffective. Mamerto Reyes was therefore within his right to refuse the tender of payment offered by petitioners because it was conditional upon his waiver of the two (2)-year redemption period stipulated in the deed of sale with right to repurchase. Wherefore, the petition for review is denied.

TENDER OF PAYMENT OR CONSIGNATION CEBU INTERNATIONAL FINANCE CORPORATION VS. COURT of APPEALS G. R. No. 123031. October 12, 1999 316 SCRA 488 FACTS: Cebu International Finance Corporation (CIFC) is a quasi-banking institution engaged in money market operations. On April 25, 1991, private respondent Vicente Alegre invested with CIFC P500, 000.00 in cash. Petitioner issued a promissory note to mature on May 27, 1991. The note for P516, 238. 67 covered private respondents placement plus interest at 20.5% for 32 days. On May 27, 1991, CIFC issued BPI Check No. 513397 for P514, 390.94 in favor of the private respondent as proceeds of his mature investment plus interest. The check was drawn from petitioners current account maintained with Bank of the Philippine Islands (BPI) main branch at Makati City. On June 17, 1991, private respondents wife deposited the check with Rizal Commercial Banking Corp. (RCBC) in Puerto Princesa, Palawan. BPI dishonored the check, that the check is subject of an investigation. BPI took custody of the check pending an investigation of several counterfeit checks drawn against CIFCs checking account. BPI used the check to trace the perpetrators of the forgery. Immediately, private respondent notified CIFC of the dishonored check and demanded that he be paid in cash. CIFC denied the request and instead instructed private respondent to wait for its ongoing bank reconciliation with BPI. Private respondent made a formal demand of his money market placement. In turn, CIFC promised to replace the check but required an impossible condition that the original check must first be surrendered. On February 25, 1992, Alegre filed a complaint for recovery of sum of money against petitioner. On July 13, 1992, CIFC sought to recover its lost funds and formally filed against BPI a separate civil action for collection of a sum of money with RTCMakati Branch. It alleged that BPI unlawfully deducted from CIFCs checking account, counterfeit checks amounting to P1, 724, 364. 58. The action included the prayer to collect the amount of the check paid to Alegre but dishonored by BPI. CIFC in its response to Alegres complaint filed for leaver of court and impleaded BPI to enforce a right, for contribution and indemnity. The court granted CIFCs motion but upon the 36

motion to dismiss the third-party complaint filed by BPI, the court dismissed the thirdparty complaint. During the hearing, BPI through its Manager, testified that on July 16, 1993, BPI encashed and deducted the said amount from the account of CIFC, but the proceeds, as well as the check remained in BPIs custody. This was alleged in accordance with the Compromise Agreement it entered with CIFC to end the litigation in RTC-Makati Branch. On July 27, 1993, BPI filed a separate collection suit against Alegre, alleging that he had connived with other persons to forge several checks of BPIs client, amounting to P1, 724, 364.58. On September 27, 1993, RTC-Makati Branch rendered its judgment in favor of private respondent. CIFC appealed from the said decision, but the appellate court affirmed in toto the decision of the lower court. ISSUE: Whether or not the petitioner is still liable for the payment of check even though BPI accepted the instrument RULING: The Supreme Court held that the money market transaction between the petitioner and private respondent is in the nature of loan. In a loan transaction, the obligation to pay a sum certain in money may be paid in money, which is the legal tender or, by the use of a check. A check is not a legal tender, and therefore cannot constitute valid tender of payment. In effect, CIFC has not yet tendered a valid payment of its obligation to the private respondent. Tender of payment involves a positive and unconditional act by the obligor of offering legal tender currency as payment to the obligee for the formers obligation and demanding that the latter accept the same. Tender of payment cannot be presumed by a mere inference from surrounding circumstances. Hence, CIFC is still liable for the payment of the check. Wherefore, the assailed decision is affirmed and the petition is denied. TENDER OF PAYMENT OR CONSIGNATION DOLORES LIGAYA DE MESA, petitioner, vs. THE COURT OF APPEALS, OSSA HOUSE, INC. AND DEVELOPMENT BANK OF THE PHILIPPINES, respondents G.R. No. 106467-68 October 19, 1999 FACTS: Petitioner Dolores Ligaya de Mesa owns several parcels of land in Makati, Pasay City, Cavite, and General Santos City which were mortgaged to the Development Bank of the Philippines (DBP) as security for a loan she obtained from the bank. Failing to pay her mortgage debt, all her mortgaged properties were foreclosed and sold at public auction held on different days. On April 30, 1977, the Makar property was sold and the corresponding certificate of sale inscribed on March 10, 1978. On August 25, 1977, the Naic, Cavite property was sold and the certificate of sale registered on the same day. On August 30, 1977, the two (2) parcels of land in Makati were sold at public auction and the certificate of sale was inscribed on November 25, 1977. And on January 12, 1978, the three (3) parcels of land in Pasay City were also sold and the certificate of sale was recorded on the same date. In all the said auction sales, DBP was the winning bidder. On October 23, 1978, Mrs. de Mesa, under a Deed of Sale with Assumption of Mortgage, sold the foreclosed properties to private respondent OSSA under the condition that the latter was to assume the payment of the mortgage debt by the repurchase of all the properties mortgaged on installment basis, with an initial payment of P90,000.00 representing 20% of the total obligation. On March 11, 1981, petitioner de Mesa notified private respondent OSSA that she 37

was rescinding the Deed of Sale with Assumption of Mortgage she executed in favor of the latter on the ground that OSSA failed to comply with the terms and conditions of their agreement, particularly the payment of installments to the Development Bank of the Philippines, the discharge and cancellation of the mortgage on the property listed in item IV of the first whereas clause, and the payment of the balance of more or less P45,000.00 to petitioner, representing the difference between the purchase price of subject properties and the actual obligation to the DBP. On August 5, 1981, DBP refused to accept the 9th quarterly installment paid by OSSA, prompting the latter to file against DBP and the petitioner, on August 11, 1981, Civil Case No. 42381 for specific performance and consignation, with the then Court of First Instance of Pasig, Rizal, depositing in said case the amount of P15,824.92. After trial, the lower court came out with a Decision for the private respondent OSSA. The petitioner appealed to the Court of Appeals which handed down on March 31, 1992, its decision modifying the challenged decision. ISSUE: Whether or not the Court erred in ruling that the mandatory requirements of the Civil Code on consignation can be waived by the trial court or whether or not the requirements of Articles 1256 to 1261 can be 'relaxed' or 'substantially complied with'. RULING: Petitioner argues that there was no notice to her regarding OSSA's consignation of the amounts corresponding to the 12th up to the 20th quarterly installments. The records, however, show that several tenders of payment were consistently turned down by the petitioner, so much so that the respondent OSSA found it pointless to keep on making formal tenders of payment and serving notices of consignation to petitioner. Moreover, in a motion dated May 7, 1987, OSSA prayed before the lower court that it be allowed to deposit by way of consignation all the quarterly installments, without making formal tenders of payment and serving notice of consignation, which prayer was granted by the trial court in the Order dated July 3, 1982. The motion and the subsequent court order served on the petitioner in the consignation proceedings sufficiently served as notice to petitioner of OSSA's willingness to pay the quarterly installments and the consignation of such payments with the court. For reasons of equity, the procedural requirements of consignation are deemed substantially complied with in the present case.

Petitioner also insists that there was no valid tender of payment because the amount tendered was P34,363.08, not P51,243.26, and assuming ex gratia argumenti that it was the correct amount, the tender thereof was still not valid, the same having been made by check. This claim, however, does not accord with the records on hand. Thus, the Court of Appeals ratiocinated: "The 'Deed of Sale with Assumption of Mortgage', was for a consideration of P500,000.00, from which shall be deducted de Mesas's outstanding obligation, with the DBP pegged as of May 10, 1978, by the parties themselves, at P455,636.92. This amount of P455,636.92 owing DBP, is what OSSA agreed to assume. What remained to be paid de Mesa was P44,636.08, but OSSA made an advance payment of P10,000.00, hence the remaining amount payable to de Mesa is P34,363.08, which OSSA tendered in cash. It is thus beyond cavil that the respondent OSSA tendered the correct amount, the tender of which was in cash and not by check, as theorized by petitioner. 38

The Court of Appeals erred not in affirming the decision of the trial court of origin. The petition is DENIED and the assailed Decision of the Court of Appeals in CAG.R. Nos. 19145 and 19156 dated March 31, 1992 AFFIRMED.

LOSS OF THE PRESTATION: KINDS OF LOSS 1. 2. OCCENA VS. CA, OCT. 29, 1976 ORTIGAS VS. FEATI BANK, 94 SCRA 533

OCCENA VS. JABSON, COURT OF APPEALS AND TROPICAL HOMES, INC 73 SCRA 637 NO. L-44349, OCTOBER 29, 1976 FACTS: Private respondent Tropical Homes, Inc had a subdivision contract with petitioners who are the owners of the land subject of subdivision development by private respondent. The contract stipulated that the petitioners fixed and sole share and participation is the land which is equivalent to forty percent of all cash receipts from the sale of the subdivision lots. When the development costs increased to such level not anticipated during the signing of the contract and which threatened the financial viability of the project as assessed by the private respondent, respondent filed at the lower court a complaint for the modification of the terms and conditions of the contract by fixing the proper shares that should pertain to the parties therein out of the gross proceeds from the sales of the subdivision lots. Petitioners moved for the dismissal of the complaint for lack of cause of action. The lower court denied the motion for dismissal which was upheld by the CA based on the civil code provision that when the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part. Insisting that the worldwide increase in prices cited by private respondent does not constitute a sufficient cause of action for the modification of the terms and conditions of the contract, petitioners filed the instant petition. ISSUE: Whether or not private respondent may demand modification of the terms of the contract on the ground that the prestation has manifestly come beyond the contemplation of the parties. RULING: If the prayer of the private respondent is to be released from its contractual obligations on account of the fact that the prestation has become beyond the contemplation of the parties, then private respondent can rely on said provision of the civil code. But the prayer of the private respondent was for the modification of their valid contract. The above-cited civil code provision does not grant the court the power to remake, modify, or revise the contract or to fix the division of the shares between the parties as contractually stipulated with the force of law between the parties. Therefore, private respondents complaint for modification of its contract with petitioner must be dismissed. The decision of respondent court is reversed. LOSS OF THE PRESTATION: KINDS OF LOSS ORTIGAS & CO., LIMITED PARTNERSHIP VS. FEATI BANK AND TRUST CO. G.R. No. L-24670 39

December 14, 1979 FACTS: Plaintiff is a limited partnership and defendant Feati Bank and Trust Co., is a corporation duly organized and existing in accordance with the laws of the Philippines. Plaintiff is engaged in real estate business, developing and selling lots to the public, particularly the Highway Hills Subdivision along EDSA, Mandaluyong, Rizal. On March 4, 1952, plaintiff, as vendor, and Augusto Padilla and Natividad Angeles, as vendees, entered into separate agreements of sale on installments over two parcels of land. On July 19, 1962, the said vendees transferred their rights and interests over the aforesaid lots in favor of one Emma Chavez. Upon completion of payment of the purchase price, the plaintiff executed the corresponding deeds of sale in favor of Emma Chavez. Both the agreements (of sale on installment) and the deeds of sale contained some stipulations or restrictions which were later annotated in TCT Nos. 101509 and 101511 of the Register of Deeds of Rizal, covering the said lots and issued in the name of Emma Chavez. Eventually, defendant-appellee acquired Lots Nos. 5 and 6, with TCT Nos. 101613 and 106092 issued in its name, respectively and the building restrictions were also annotated therein. Defendant-appellee bought Lot No. 5 directly from Emma Chavez, "free from all liens and encumbrances as stated in Annex 'D', 5 while Lot No. 6 was acquired from Republic Flour Mills through a "Deed of Exchange," Annex "E". TCT No. 101719 in the name of Republic Flour Mills likewise contained the same restrictions, although defendant-appellee claims that Republic Flour Mills purchased the said Lot No. 6 "in good faith. free from all liens and encumbrances," as stated in the Deed of Sale, Annex "F" between it and Emma Chavez. Plaintiff-appellant claims that the restrictions annotated on TCT Nos. 101509, 101511, 101719, 101613, and 106092 were imposed as part of its general building scheme designed for the beautification and development of the Highway Hills Subdivision which forms part of the big landed estate of plaintiff-appellant where commercial and industrial sites are also designated or established. Defendant-appellee, upon the other hand, maintains that the area along the western part of EDSA from Shaw Boulevard to Pasig River, has been declared a commercial and industrial zone, per Resolution No. 27, dated February 4, 1960 of the Municipal Council of Mandaluyong, Rizal. It alleges that plaintiff-appellant 'completely sold and transferred to third persons all lots in said subdivision facing EDSA" and the subject lots thereunder were acquired by it "only on July 23, 1962 or more than two (2) years after the area ... had been declared a commercial and industrial zone. On or about May 5, 1963, defendant-appellee began laying the foundation and commenced the construction of a building on Lots Nos. 5 and 6, to be devoted to banking purposes, but which defendant-appellee claims could also be devoted to, and used exclusively for, residential purposes. The following day, plaintiff-appellant demanded in writing that defendant-appellee stop the construction of the commerical building on the said lots. The latter refused to comply with the demand, contending that the building was being constructed in accordance with the zoning regulations, defendant-appellee having filed building and planning permit applications with the Municipality of Mandaluyong, and it had accordingly obtained building and planning permits to proceed with the construction. ISSUE: Whether or not Resolution No. 27 s-1960 is a valid exercise of police power; and whether or not the said Resolution can nullify or supersede the contractual obligations assumed by defendant-appellee. RULING: The validity of the resolution was admitted at least impliedly, in the stipulation of facts below when plaintiff-appellant did not dispute the same. Granting that Resolution 40

No. 27 is not an ordinance, it certainly is a regulatory measure within the intendment or ambit of the word "regulation" under the provision. As a matter of fact the same section declares that the power exists "(A)ny provision of law to the contrary notwithstanding ... "

With regard to the contention that said resolution cannot nullify the contractual obligations assumed by the defendant-appellee referring to the restrictions incorporated in the deeds of sale and later in the corresponding Transfer Certificates of Title issued to defendant-appellee, it should be stressed, that while non-impairment of contracts is constitutionally guaranteed, the rule is not absolute, since it has to be reconciled with the legitimate exercise of police power. Resolution No. 27, s-1960 declaring the western part of highway , now EDSA, from Shaw Boulevard to the Pasig River as an industrial and commercial zone, was obviously passed by the Municipal Council of Mandaluyong, Rizal in the exercise of police power to safeguard or promote the health, safety, peace, good order and general welfare of the people in the locality. Judicial notice may be taken of the conditions prevailing in the area, especially where lots Nos. 5 and 6 are located. The lots themselves not only front the highway; industrial and commercial complexes have flourished about the place. EDSA, a main traffic artery which runs through several cities and municipalities in the Metro Manila area, supports an endless stream of traffic and the resulting activity, noise and pollution are hardly conducive to the health, safety or welfare of the residents in its route. Having been expressly granted the power to adopt zoning and subdivision ordinances or regulations, the municipality of Mandaluyong, through its Municipal 'council, was reasonably, if not perfectly, justified under the circumstances, in passing the subject resolution. The motives behind the passage of the questioned resolution being reasonable, and it being a " legitimate response to a felt public need," not whimsical or oppressive, the non-impairment of contracts clause of the Constitution will not bar the municipality's proper exercise of the power. It is, therefore, clear that even if the subject building restrictions were assumed by the defendant-appellee as vendee of Lots Nos. 5 and 6, in the corresponding deeds of sale, and later, in Transfer Certificates of Title Nos. 101613 and 106092, the contractual obligations so assumed cannot prevail over Resolution No. 27, of the Municipality of Mandaluyong, which has validly exercised its police power through the said resolution. Accordingly, the building restrictions, which declare Lots Nos. 5 and 6 as residential, cannot be enforced.

REBUS SIC STANTIBUS 1. 2. 3. MAGAT VS. CA, 337 SCRA 298 PNCC VS. CA, 272 SCRA 183 NATELCO VS. CA, 230 SCRA 351 MAGAT VS. COURT OF APPEALS 337 SCRA 298 FACTS: Private respondent Santiago A. Guerrero was President and Chairman of "Guerrero Transport Services", a single proprietorship. Sometime in 1972, Guerrero 41

Transport Services won a bid for the operation of a fleet of taxicabs within the Subic Naval Base, in Olongapo. As highest bidder, Guerrero was to "provide radio-controlled taxi service within the U.S. Naval Base, Subic Bay, utilizing as demand requires . . . 160 operational taxis consisting of four wheel, four-door, four passenger, radio controlled, meter controlled, sedans, not more than one year . . . " On September 22, 1972, with the advent of martial law, President Ferdinand E. Marcos issued Letter of Instruction No. 1. On September 25, 1972, pursuant to the aforequoted Letter of Instruction, the Radio Control Office issued Administrative Circular No. 4: Subject: Suspending the acceptance and processing of applications for radio station construction permits and for permits to own and/or possess radio transmitters or transceivers. On September 25, 1972, Guerrero and Victorino D. Magat, as General Manager of Spectrum Electronic Laboratories, a single proprietorship, executed a letter-contract for the purchase of transceivers at a quoted price of US$77,620.59, FOB Yokohoma. Victorino was to deliver the transceivers within 60 to 90 days after receiving notice from Guerrero of the assigned radio frequency, "taking note of Government Regulations. The contract was signed and Victorino contacted his Japanese supplier, Koide & Co., Ltd. and placed an order for the transceivers. On September 29, 1972, Navy Exchange Officer, A. G. Mason confirmed that Guerrero won the bid for the commercial transportation contract. On October 4, 1972, middle man and broker Isidro Q. Aligada of Reliance Group Engineers, Inc. , wrote Victorino, informing him that a radio frequency was not yet assigned to Guerrero and that government regulations might complicate the importation of the transceivers. However, in the same letter, Victorino was advised to advise his supplier "to proceed (with) production pending frequency information." Victorino was also assured of Guerrero's financial capability to comply with the contract. On October 6, 1972, Guerrero informed Aligada of the frequency number assigned by Subic Naval Base authorities. Aligada was instructed to "proceed with the order thru Spectrum Electronics Laboratories." On October 7, 1972, Aligada informed Magat of the assigned frequency number. Aligada also advised Victorino to "proceed with the order upon receipt of letter of credit." On January 10, 1973, Guerrero applied for a letter of credit with the Metropolitan Bank and Trust Company. This application was not pursued. On March 27, 1973, Victorino, represented by his lawyer, Atty. Sinesio S. Vergara, informed Guererro that the order with the Japanese supplier has not been canceled. Should the contract be canceled, the Japanese firm would forfeit 30% of the deposit and charge a cancellation fee in an amount not yet known, Guerrero to bear the loss. Further, should the contract be canceled, Victorino would demand an additional amount equivalent to 10% of the contract price. Unable to get a letter of credit from the Central Bank due to the refusal of the Philippine government to issue a permit to import the transceivers, Guerrero commenced operation of the taxicabs within Subic Naval Base, using radio units borrowed from the U.S. government. Victorino thus canceled his order with his Japanese supplier. On May 22, 1973, Victorino filed with the Regional Trial Court, Makati a complaint for damages arising from breach of contract against Guerrero. On June 7, 1973, Guerrero moved to dismiss the complaint on the ground that it did not state a cause of action. On June 16, 1973, the trial court granted the motion and dismissed the complaint. On July 11, 1973, Victorino filed a petition for review on certiorari with this Court assailing the dismissal of the complaint. 42

On April 20, 1983, the Supreme Court ruled that the complaint sufficiently averred a cause of action. The Court set aside the order of dismissal and remanded the case to the trial court for further proceedings. On November 27, 1984, the trial court ordered that the case be archived for failure of Victorino to prosecute. On March 11, 1985, petitioners, Olivia, Dulce, Ma. Magnolia, Ronald and Dennis Magat, moved to reinstate the case and to substitute Victorino in its prosecution. Apparently, Victorino died on February 18, 1985. On April 29, 1985, the trial court granted the motion. On July 12, 1991, the trial court decided in favor of the heirs of Victorino and ordered Guerrero to pay temperate, moral and exemplary damages, and attorney's fees. On August 21, 1991, Guerrero appealed to the Court of Appeals. However it was dismissed. On October 26, 1995, the heirs of Victorino filed with the Court of Appeals a motion for reconsideration. On March 12, 1996, the Court of Appeals denied the motion for reconsideration. ISSUES: Whether or not the transceivers were contraband items prohibited by the LOI and Administrative Circular to import; hence, the contract is void. Whether or not the contract was breached. RULING: Anent the 1st issue, NO. The contract was not void ab initio. Nowhere in the LOI and Administrative Circular is there an express ban on the importation of transceivers. The LOI and Administrative Circular did not render radios and transceivers illegally per se. The Administrative Circular merely ordered the Radio Control Office to suspend the acceptance and processing of application for permits to possess, own, transfer, purchase and sell radio transmitters and transceivers therefore; possession and importation of the radio transmitters and transceivers was legal provided one had the necessary license for it. The LOI and Administrative Circular did not render the transceivers outside the commerce of man. They were valid objects of the contract. Anent the 2nd issue, NO. The contract was not breached. Affirming the validity of the contract, the law provides that when the service (required by the contract) has become so manifestly beyond the contemplation of the parties, the obligor may also be released there from in whole or in parts. Here, Guerreros inability to secure a letter of credit and to comply with his obligation was a direct consequence of the denial of the permit to import. For this, he cannot be faulted. Even if the Court assumes that there was a breach of contract, damages cannot be awarded. Damnum absque injuria comes into the fore.

REBUS SIC STANTIBUS PNCC VS. CA 272 SCRA 183 FACTS: On 18 November 1985, private respondents and petitioner entered into a contract of lease of a parcel of land owned by the former. The terms and conditions of said contract of lease are as follows: a) the lease shall be for a period of five (5) years which begins upon the issuance of permit by the Ministry of Human Settlement and renewable at the option of the lessee under the terms and conditions, b) the monthly rent is P20, 000.00 which shall be increased yearly by 5% based on the monthly rate, c) 43

the rent shall be paid yearly in advance, and d) the property shall be used as premises of a rock crushing plan. On January 7, 1986, petitioner obtained permit from the Ministry which was to be valid for two (2) years unless revoked by the Ministry. Later, respondent requested the payment of the first annual rental. But petitioner alleged that the payment of rental should commence on the date of the issuance of the industrial clearance not on the date of signing of the contract. It then expressed its intention to terminate the contract and decided to cancel the project due to financial and technical difficulties. However, petitioner refused to accede to respondents request and reiterated their demand for the payment of the first annual rental. But the petitioner argued that it was only obligated to pay P20, 000.00 as rental for one month prompting private respondent to file an action against the petitioner for specific performance with damages before the RTC of Pasig. The trial court rendered decision in favor of private respondent. Petitioner then appealed the decision of the trial court to the Court of Appeals but the later affirmed the decision of the trial court and denied the motion for reconsideration. ISSUE: Whether or not petitioner can avail of the benefit of Article 1267 of the New Civil Code. RULING: NO. The petitioner cannot take refuge of the said article. Article 1267 of the New Civil Code provides that when the service has become so difficult as to manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part. This article, which enunciates the doctrine of unforeseen events, is not, however an absolute application of the principle of rebus sic stantibus, which would endanger the security of contractual relations. The parties to the contract must be presumed to have assumed the risks of unfavorable developments. It is therefore only in absolutely exceptional chances of circumstances that equity demands assistance for the debtor. The principle of rebus sic stantibus neither fits in with the facts of the case. Under this theory, the parties stipulate in the light of certain prevailing conditions, and once these conditions cease to exist, the contract also ceases to exist. In this case, petitioner averred that three (3) abrupt change in the political climate of the country after the EDSA Revolution and its poor financial condition rendered the performance of the lease contract impractical and inimical to the corporate survival of the petitioner. However, as held in Central Bank v. CA, mere pecuniary inability to fulfill an engagement does not discharge a contractual obligation, nor does it constitute a defense of an action for specific performance. REBUS SIC STANTIBUS NAGA TELEPHONE CO., INC. (NATELCO) AND LUCIANO M. MAGGAY, petitioners, VS. THE COURT OF APPEALS AND CAMARINES SUR II ELECTRIC COOPERATIVE, INC. (CASURECO II), respondents 1994 Feb 24 230 SCRA 351 FACTS: Petitioner Naga Telephone Co., Inc. (NATELCO) is a telephone company rendering local as well as long distance service in Naga City while private respondent Camarines Sur II Electric Cooperative, Inc. (CASURECO II) is a private corporation established for the purpose of operating an electric power service in the same city.

44

On November 1, 1977, the parties entered into a contract for the use by petitioners in the operation of its telephone service the electric light posts of private respondent in Naga City. In consideration therefor, petitioners agreed to install, free of charge, ten (10) telephone connections for the use by private respondent. After the contract had been enforced for over ten (10) years, private respondent filed with the Regional Trial Court against petitioners for reformation of the contract with damages, on the ground that it is too one-sided in favor of petitioners; that it is not in conformity with the guidelines of the National Electrification Administration (NEA); that after eleven (11) years of petitioners' use of the posts, the telephone cables strung by them thereon have become much heavier with the increase in the volume of their subscribers; that a post now costs as much as P2,630.00; so that justice and equity demand that the contract be reformed to abolish the inequities thereon. As second cause of action, private respondent alleged that starting with the year 1981, petitioners have used 319 posts outside Naga City, without any contract with it; that at the rate of P10.00 per post, petitioners should pay private respondent for the use thereof the total amount of P267,960.00 from 1981 up to the filing of its complaint; and that petitioners had refused to pay private respondent said amount despite demands. And as third cause of action, private respondent complained about the poor servicing by petitioners. The trial court ruled, as regards private respondents first cause of action, that the contract should be reformed by ordering petitioners to pay private respondent compensation for the use of their posts in Naga City, while private respondent should also be ordered to pay the monthly bills for the use of the telephones also in Naga City. And taking into consideration the guidelines of the NEA on the rental of posts by telephone companies and the increase in the costs of such posts, the trial court opined that a monthly rental of P10.00 for each post of private respondent used by petitioners is reasonable, which rental it should pay from the filing of the complaint in this case on January 2, 1989. And in like manner, private respondent should pay petitioners from the same date its monthly bills for the use and transfers of its telephones in Naga City at the same rate that the public are paying. On private respondent's second cause of action, the trial court found that the contract does not mention anything about the use by petitioners of private respondent's posts outside Naga City. Therefore, the trial court held that for reason of equity, the contract should be reformed by including therein the provision that for the use of private respondent's posts outside Naga City, petitioners should pay a monthly rental of P10.00 per post, the payment to start on the date this case was filed, or on January 2, 1989, and private respondent should also pay petitioners the monthly dues on its telephone connections located outside Naga City beginning January, 1989. And with respect to private respondent's third cause of action, the trial court found the claim not sufficiently proved. The Court of Appeals affirmed the decision of the trial court, but based on different grounds to wit: (1) that Article 1267 of the New Civil Code is applicable and (2) that the contract was subject to a potestative condition which rendered said condition void. ISSUE: Whether or not the principle of Rebus Sic Stantibus is applicable in the case at bar. RULING: 45

No. Article 1267 speaks of "service" which has become so difficult. Taking into consideration the rationale behind this provision, the term "service" should be understood as referring to the "performance" of the obligation. In the present case, the obligation of private respondent consists in allowing petitioners to use its posts in Naga City, which is the service contemplated in said article. Furthermore, a bare reading of this article reveals that it is not a requirement thereunder that the contract be for future service with future unusual change. According to Senator Arturo M. Tolentino, Article 1267 states in our law the doctrine of unforseen events. This is said to be based on the discredited theory of rebus sic stantibus in public international law; under this theory, the parties stipulate in the light of certain prevailing conditions, and once these conditions cease to exist the contract also ceases to exist. Considering practical needs and the demands of equity and good faith, the disappearance of the basis of a contract gives rise to a right to relief in favor of the party prejudiced. The allegations in private respondent's complaint and the evidence it has presented sufficiently made out a cause of action under Article 1267. The Court, therefore, release the parties from their correlative obligations under the contract. However, the disposition of the present controversy does not end here. The Court has to take into account the possible consequences of merely releasing the parties therefrom: petitioners will remove the telephone wires/cables in the posts of private respondent, resulting in disruption of their essential service to the public; while private respondent, in consonance with the contract will return all the telephone units to petitioners, causing prejudice to its business. The Court shall not allow such eventuality. Rather, the Court requires, as ordered by the trial court: 1) petitioners to pay private respondent for the use of its posts in Naga City and in the towns of Milaor, Canaman, Magarao and Pili, Camarines Sur and in other places where petitioners use private respondent's posts, the sum of ten (P10.00) pesos per post, per month, beginning January, 1989; and 2)private respondent to pay petitioner the monthly dues of all its telephones at the same rate being paid by the public beginning January, 1989. The peculiar circumstances of the present case, as distinguished further from the Occea case, necessitates exercise of a equity jurisdiction. By way of emphasis, the Court reiterates the rationalization of respondent court that: ". . . In affirming said ruling, we are not making a new contract for the parties herein, but we find it necessary to do so in order not to disrupt the basic and essential services being rendered by both parties herein to the public and to avoid unjust enrichment by appellant at the expense of plaintiff . . . " Decision affirmed.

REQUISITES OF CONDONATION NOT INOFFICIOUS TRANS-PACIFIC INDUSTRIAL SUPPLIES, INC., petitioner, VS. THE COURT OF APPEALS and ASSOCIATED BANK, respondents 1994 Aug 19 235 SCRA 494 FACTS: 46

Sometime in 1979, petitioner applied for and was granted several financial accommodations amounting to P1,300,000.00 by respondent Associated Bank. The loans were evidence and secured by four (4) promissory notes, a real estate mortgage covering three parcels of land and a chattel mortgage over petitioner's stock and inventories. Unable to settle its obligation in full, petitioner requested for, and was granted by respondent bank, a restructuring of the remaining indebtedness which then amounted to P1,057,500.00, as all the previous payments made were applied to penalties and interests. To secure the re-structured loan of P1,213,400.00, three new promissory notes were executed by Trans-Pacific. The mortgaged parcels of land were substituted by another mortgage covering two other parcels of land and a chattel mortgage on petitioner's stock inventory. The released parcels of land were then sold and the proceeds amounting to P1,386,614.20, according to petitioner, were turned over to the bank and applied to Trans-Pacific's restructured loan. Subsequently, respondent bank returned the duplicate original copies of the three promissory notes to Trans-Pacific with the word "PAID" stamped thereon. Despite the return of the notes, or on December 12, 1985, Associated Bank demanded from Trans-Pacific payment of the amount of P492,100.00 representing accrued interest on PN No. TL-9077-82. According to the bank, the promissory notes were erroneously released. Initially, Trans-Pacific expressed its willingness to pay the amount demanded by respondent bank. Later, it had a change of heart and instead initiated an action before the Regional Trial Court for specific performance and damages. There it prayed that the mortgage over the two parcels of land be released and its stock inventory be lifted and that its obligation to the bank be declared as having been fully paid. After trial, the court a quo rendered judgment in favor of Trans-Pacific. The appellate court which, as aforesaid, reversed the decision of the trial court. ISSUE: Whether or not petitioner has indeed paid in full its obligation to respondent bank. RULING: No. The Court found no reversible error committed by the appellate court in disposing of the appealed decision. As gleaned from the decision of the court a quo, judgment was rendered in favor of petitioner on the basis of presumptions. The above disquisition finds no factual support, however, per review of the records. The presumption created by the Art. 1271 of the Civil Code is not conclusive but merely prima facie. If there be no evidence to the contrary, the presumption stands. Conversely, the presumption loses its legal efficacy in the face of proof or evidence to the contrary. In the case at bar, the Court finds sufficient justification to overthrow the presumption of payment generated by the delivery of the documents evidencing petitioners indebtedness. It may not be amiss to add that Article 1271 of the Civil Code raises a presumption, not of payment, but of the renunciation of the credit where more convincing evidence would be required than what normally would be called for to prove payment. The rationale for allowing the presumption of renunciation in the delivery of a private instrument is that, unlike that of a public instrument, there could be just one copy of the evidence of credit. Where several originals are made out of a private document, the intendment of the law would thus be to refer to the delivery only of the original rather than to the original duplicate of which the debtor would normally retain a copy. Petition denied

47

IMPLIED CONDONATION PRESUMPTION OF DELIVERY 1. 2. DALUPAN VS. HARDEN, NOV. 27, 1951 LOPEZ LISO VS. TAMBUNTING, 33 PHIL. 226 DALUPAN VS. HARDEN 1951 Nov 27 FACTS: The case is an appeal taken from an order of the First Instance of Manila dated May 19, 1950, setting aside the writs of execution and garnishment issued to the sheriff of Manila commanding him to levy on two (2) checks, one for P9,028.50, and another for P24,546.00, payable to Fred M. Harden which were then in possession of the receiver appointed in case involving the liquidation of the conjugal partnership of the spouses Fred M. Harden and Esperanza P. de Harden. On August 26, 1948, plaintiff filed an action against the defendant for the collection of P113,837.17, with interest thereon from the filing of the complaint, which represents fifty (50) per cent of the reduction plaintiff was able to secure from the Collector of Internal Revenue in the amount of unpaid taxes claimed to be due from the defendant. Defendant acknowledged this claim and prayed that judgment be rendered accordingly. The receiver in the liquidation of case No. R-59634 and the wife of the defendant, Esperanza P. de Harden, filed an answer in intervention claiming that the amount sought by the plaintiff was exorbitant and prayed that it be reduced to 10 per cent of the rebate. By reason of the acquiescence of the defendant to the claim on one hand, and the opposition of the receiver and of the wife on the other, an amicable settlement was concluded by the plaintiff and the intervenor whereby it was agreed that the sum of P22,767.43 be paid to the plaintiff from the funds under the control of the receiver "and the balance of P91,069.74 shall be charged exclusively against the defendant Fred M. Harden from whatever share he may still have in the conjugal partnership between him and Esperanza P. de Harden after the final liquidation and partition thereof, without pronouncement as to costs and interests." The court rendered judgment in accordance with this stipulation. Almost one year thereafter, plaintiff filed a motion for the issuance of a writ of execution to satisfy the balance of P91, 069.74, which was favorably acted upon. At that time the receiver had in his possession two (2) checks payable to Fred M. Harden amounting to P33,574.50, representing part of the proceeds of the sale of two (2) lots belonging to the conjugal partnership which was ordered by the court upon the joint petition of the spouses in order that they may have funds with which to defray their living and other similar expenses. One-half of the proceeds was given to Mrs. Harden. The sheriff attempted to garnish these two (2) checks acting upon the writ of execution secured by the plaintiff, but the receivership court quashed the writ, stating however in the order that it will be without prejudice to the right of Francisco Dalupan to attach the money of the defendant Fred M. Harden, after the same has been delivered to the latter. When said checks were delivered to the latter. ISSUE: Whether or not the proffer made by the plaintiff to the defendant is binding. RULING: YES, the proffer made by the plaintiff to the defendant to the effect that in the event you lose your case with your wife, Mrs. Esperanza P. de Harden, and that after adjudication of the conjugal property what is left with you will not be sufficient for your livelihood. I shall be pleased to write off as bad debt the balance of your account in the sum of P42, 069.74. This proffer was contained in a letter sent by the plaintiff to the 48

defendant on March 23, 1949, which was accepted expressly by Fred M. Harden. Harden regarded this proffer as a binding obligation and acted accordingly, and for plaintiff to say now that proffer is but a mere gesture of generosity or an act of Christian charity without any binding legal effect is unfair to say at least. This is an added circumstance, which confirms the Courts view that the understanding between the plaintiff and the defendant is really to defer payment of the balance of the claim until after the final liquidation of the conjugal partnership. IMPLIED CONDONATION PRESUMPTION OF DELIVERY LEONIDES LOPEZ LISO, plaintiff-appellee, VS. MANUEL TAMBUNTING, defendant-appellant 1916 January 19 G.R. No. 9806 33 PHIL 226 FACTS: These proceedings were brought to recover from the defendant the sum of P2,000, amount of the fees, which, according to the complaint, are owing for professional medical services rendered by the plaintiff to a daughter of the defendant from March 10 to July 15, 1913, which fees the defendant refused to pay, notwithstanding the demands therefor made upon him by the plaintiff. The defendant denied the allegations of the complaint, and furthermore alleged that the obligation which the plaintiff endeavored to compel him to fulfill was already extinguished. The Court of First Instance of Manila, after hearing the evidence introduced by both parties, rendered judgment on December 17, 1913, ordering the defendant to pay to the plaintiff the sum of P700, without express finding as to costs. The defendant, after entering a motion for a new trial, which was denied, appealed from said judgment and forwarded to this court the proper bill of exceptions. ISSUE: Whether or not the obligation alleged in the complaint has already been extinguished. RULING: No, the Supreme Court ruled that the obligation has not been extinguished. The receipt signed by the plaintiff, for P700, the amount of his fees he endeavored to collect from the defendant after he had finished rendering the services in question was in the latter's possession, and this fact was alleged by him as proof that he had already paid said fees to the plaintiff. The court, after hearing the testimony, reached the conclusion that, notwithstanding that the defendant was in possession of the receipt, the said P700 had not been paid to the plaintiff. Number 8 of section 334 of the Code of Civil Procedure provides as a legal presumption "that an obligation delivered up to the debtor has been paid." Article 1188 of the Civil Code also provides that the voluntary surrender by a creditor to his debtor, of a private instrument proving a credit, implies the renunciation of the right of action against the debtor; and article 1189 prescribes that whenever the private instrument which evidences the debt is in the possession of the debtor, it will be presumed that the creditor delivered it of his own free will, unless the contrary is proven. But the legal presumption established by the foregoing provisions of law cannot stand if sufficient proof is adduced against it. In the case at bar the trial court correctly held that there was sufficient evidence to the contrary, in view of the preponderance thereof in favor of the plaintiff and of the circumstances connected with the defendant's 49

possession of said receipt. Furthermore, in order that such a presumption may be taken into account, it is necessary, as stated in the laws cited, that the evidence of the obligation be delivered up to the debtor and that the delivery of the instrument proving the credit be made voluntarily by the creditor to the debtor. In the present case, it cannot be said that these circumstances concurred, inasmuch as when the plaintiff sent the receipt to the defendant for the purpose of collecting his fee, it was not his intention that that document should remain in the possession of the defendant if the latter did not forthwith pay the amount specified therein. By reason of the foregoing, the Court affirmed the judgment appealed from, with the costs of this instance against the appellant.

CONFUSION OR MERGER OR RIGHTS 1. 2. ESTATE OF MOTA VS. SERRA, 47 PHIL 464 YEK TN LIN VS. YUSINGCO, 64 PHIL 1062 ESTATE OF MOTA VS. SERRA 47 PHIL. 464 FACTS: On February 1, 1919, plaintiffs and defendant entered into a contract of partnership, for the construction and exploitation of a railroad line from the "San Isidro" and "Palma" centrals to the place known as "Nandong." The original capital stipulated was P150, 000. It was covenanted that the parties should pay this amount in equal parts and the plaintiffs were entrusted with the administration of the partnership. The agreed capital of P150,000, however, did not prove sufficient, as the expenses up to May 15, 1920, had reached the amount of P226,092.92, presented by the administrator and O.K.'d by the defendant. January 29, 1920, the defendant entered into a contract of sale with Venancio Concepcion, Phil. C. Whitaker, and Eusebio R. de Luzuriaga, whereby he sold to the latter the estate and central known as "Palma" with its running business, as well as all the improvements, machineries and buildings, real and personal properties, rights, choices in action and interests, including the sugar plantation of the harvest year of 1920 to 1921, covering all the property of the vendor. This contract was executed before a notary public of Iloilo. Before the delivery to the purchasers of the hacienda thus sold, Eusebio R. de Luzuriaga renounced all his rights under the contract of January 29, 1920, in favor of Messrs. Venancio Concepcion and Phil. C. Whitaker. This gave rise to the fact that on July 17, 1920, Venancio Concepcion and Phil. C. Whitaker and the herein defendant executed before Mr. Antonio Sanz, a notary public in and for the City of Manila, another deed of absolute sale of the said "Palma" Estate for the amount of P1,695,961.90, of which the vendor received at the time of executing the deed the amount of P945,861.90, and the balance was payable by installments in the form and manner stipulated in the contract. The purchasers guaranteed the unpaid balance of the purchase price by a first and special mortgage in favor of the vendor upon the hacienda and the central with all the improvements, buildings, machineries, and appurtenances then existing on the said hacienda. Afterwards, on January 8, 1921, Venancio Concepcion and Phil. C. Whitaker bought from the plaintiffs the one-half of the railroad line pertaining to the latter, executing therefore the document. The price of this sale was P237,722.15, excluding 50

any amount which the defendant might be owing to the plaintiffs. Of the purchase price, Venancio Concepcion and Phil. C. Whitaker paid the sum of P47,544.43 only. In the Deed, the plaintiffs and Concepcion and Whitaker agreed, among other things, that the partnership "Palma" and "San Isidro," formed by the agreement of February 1, 1919, between Serra, Lazaro Mota, now deceased, and Juan J. Vidaurrazaga for himself and in behalf of his brother, Felix and Dionisio Vidaurrazaga, should be dissolved upon the execution of this contract, and that the said partnership agreement should be totally cancelled and of no force and effect whatever. Since the defendant Salvador Serra failed to pay one-half of the amount expended by the plaintiffs upon the construction of the railroad line, that is, P113,046.46, as well as Phil. C. Whitaker and Venancio Concepcion, the plaintiffs instituted the present action praying: 1) that the deed of February 1, 1919, be declared valid and binding; 2) that after the execution of the said document the defendant improved economically so as to be able to pay the plaintiffs the amount owed, but that he refused to pay either in part or in whole the said amount notwithstanding the several demands made on him for the purpose; and 3) that the defendant be sentenced to pay plaintiffs the aforesaid sum of P113, 046.46, with the stipulated interest at 10 per cent per annum beginning June 4, 1920, until full payment thereof, with the costs of the present action. Defendant set up three special defenses: 1) the novation of the contract by the substitution of the debtor with the conformity of the creditors; 2) the confusion of the rights of the creditor and debtor; and 3) the extinguishment of the contract. The court a quo in its decision held that there was a novation of the contract by the substitution of the debtor, and therefore absolved the defendant from the complaint with costs against the plaintiffs. With regard to the prayer that the said contract be declared valid and binding, the court held that there was no way of reviving the contract which the parties themselves in interest had spontaneously and voluntarily extinguished. ISSUES: Whether or not there was a novation of the contract by the substitution of the debtor with the consent of the creditor, as required by Article 1205 of the Civil Code; and Whether or not there was a merger of rights of debtor and creditor under Article 1192 of the Civil Code. RULING: 1. NO, there was no novation of the contract. It should be noted that in order to give novation its legal effect, the law requires that the creditor should consent to the substitution of a new debtor. This consent must be given expressly for the reason that, since novation extinguishes the personality of the first debtor who is to be substituted by new one, it implies on the part of the creditor a waiver of the right that he had before the novation which waiver must be express under the principle that renuntiatio non praesumitur, recognized by the law in declaring that a waiver of right may not be performed unless the will to waive is indisputably shown by him who holds the right. The fact that Phil. C. Whitaker and Venancio Concepcion were willing to assume the defendant's obligation to the plaintiffs is of no avail, if the latter have not expressly consented to the substitution of the first debtor. As has been said, in all contracts of novation consisting in the change of the debtor, the consent of the creditor is indispensable, pursuant to Article 1205 of the Civil Code which reads as follows: Novation which consists in the substitution of a new debtor in the place of the original one may be made without the knowledge of the latter, but not without the consent of the creditor. 51

2. NO, there was no merger of Rights. Another defense urged by the defendant is the merger of the rights of debtor and creditor, whereby under Article 1192 of the Civil Code, the obligation, the fulfillment of which is demanded in the complaint, became extinguished. It is maintained in appellee's brief that the debt of the defendant was transferred to Phil. C. Whitaker and Venancio Concepcion by the document. These in turn acquired the credit of the plaintiffs by virtue of the debt; thus, the rights of the debtor and creditor were merged in one person. The argument would at first seem to be incontrovertible, but if we bear in mind that the rights and titles which the plaintiffs sold to Phil. C. Whitaker and Venancio Concepcion refer only to one-half of the railroad line in question, it will be seen that the credit which they had against the defendant for the amount of one-half of the cost of construction of the said line was not included in the sale. That the plaintiffs sold their rights and titles over one-half of the line. The purchasers, Phil. C. Whitaker and Venancio Concepcion, to secure the payment of the price, executed a mortgage in favor of the plaintiffs on the same rights and titles that they had bought and also upon what they had purchased from Mr. Salvador Serra. In other words, Phil. C. Whitaker and Venancio Concepcion mortgaged unto the plaintiffs what they had bought from the plaintiffs and also what they had bought from Salvador Serra. If Messrs. Phil. C. Whitaker and Venancio Concepcion had purchased something from Mr. Salvador Serra, the herein defendant, regarding the railroad line, it was undoubtedly the one-half thereof pertaining to Mr. Salvador Serra. This clearly shows that the rights and titles transferred by the plaintiffs to Phil. C. Whitaker and Venancio Concepcion were only those they had over the other half of the railroad line. Therefore, as already stated, since there was no novation of the contract between the plaintiffs and the defendant, as regards the obligation of the latter to pay the former onehalf of the cost of the construction of the said railroad line, and since the plaintiffs did not include in the sale, the credit that they had against the defendant, the allegation that the obligation of the defendant became extinguished by the merger of the rights of creditor and debtor by the purchase of Messrs. Phil. C. Whitaker and Venancio Concepcion is wholly untenable. CONFUSION OR MERGER OR RIGHTS YEK TONG LIN VS. YUSINGCO 64 PHIL 473 FACTS: The defendant Pelagio Yusingco was the owner of the steamship Yusingco and, as such, he executed, on November 19, 1927, a power of attorney in favor of Yu Seguios to administer, lease, mortgage and sell his properties, including his vessels or steamships. Yu Seguios, acting as such attorneys in fact of Pelagio Yusingco, mortgaged to the plaintiff Yek Tong Lin Fire & Marine Insurance Co., Ltd., with the approval of the Bureau of Customs, the steamship Yusingco belonging to the defendant, to answer for any amount that said plaintiff might pay in the name of the defendant on account of a promissory note for P45, 000 executed by it. One year and some months later, or in February, 1930, and in April, 1931, the steamship Yusingco needed some repairs which were made by the Earnshaw Docks & Honolulu Iron Works upon petition of A. Yusingco Hermanos which, according to documentary evidence of record, was co-owner of Pelagio Yusingco. The repairs were made upon the guaranty of the defendant and appellant Vicente Madrigal at a cost of P8,244.66. When neither A. Yusingco Hermanos nor Pelagio Yusingco could pay said sum to the Earnshaw Docks & Honolulu Iron Works, the defendant and appellant Vicente Madrigal had to make payment thereof with the stipulated interest thereon, which was at the rate of 9 per cent per annum, on March 9, 1932, because he was bound thereto by 52

reason of the bond filed by him, the payment then made by him having amounted to P8,777.60. Some days later, when said defendant discovered that he was not to be reimbursed for the repairs made on the steamship Yusingco, he brought an action against his co-defendant Pelagio Yusingco and A. Yusingco Hermanos to compel them to reimburse him, which resulted in a judgment favorable to him and adverse to the Yusingcos, as the latter were ordered to pay him the sum of P3,269.66 plus interest thereon at said rate of 9 per cent per annum from May 6, 1931, with the costs of the suit. It was provided in the judgment that upon failure of the Yusingcos to pay the above-stated amounts to Vicente Madrigal, a writ of execution would be issued in order to have the steamship Yusingco sold at public auction for the purpose of satisfying said amounts with the proceeds thereof. Inasmuch as neither the defendant Pelagio Yusingco nor A. Yusingco Hermanos paid the amount of the judgment rendered in civil case No. 41654, in favor of the defendant and appellant Vicente Madrigal, the latter sought and obtained from the Court of First Instance, which tried the case, the issuance of the corresponding writ of execution. However, before the sale of the steamship Yusingco, by virtue of the writ of execution so issued, was carried out, the plaintiff and appellant filed with the defendant sheriff a third party claim demanding said ship for himself, alleging that it had been mortgaged to him long before the issuance of said writ and, therefore, he was entitled to the possession thereof. The defendant sheriff then informed the defendant and appellant Vicente Madrigal that if he wished to have the execution sought by him carried out, he should file the indemnity bond required by section 451 of Act No. 190. This was done by Vicente Madrigal, but in order to prevent him and the sheriff from proceeding with the execution, the plaintiff and appellant instituted this case in the court of origin and asked for the issuance of a writ of preliminary injunction addressed to said two defendants to restrain them from selling the steamship Yusingco at public auction. The writ of preliminary injunction, which was issued on August 19, 1932, was later dissolved, the defendant and appellant Vicente Madrigal having filed a bond of P5,000. This left the preliminary injunction unimpaired and valid for the sale of the steamship Yusingco at public auction. For this reason, said ship was sold at public auction on September 19, 1932, and was purchased, under the circumstances, by the plaintiff and appellant itself, which was the highest bidder, having made the highest bid of P12,000. Of said amount, the defendant sheriff turned over P10,195 to Vicente Madrigal in payment of his judgment credit. It is said sum of P10,195 which the lower court ordered Vicente Madrigal to turn over to the plaintiff. ISSUE: Whether or not the credit of the plaintiff, as mortgaged creditor of Pedagio Yusingco, is superior to that of Vicente Madrigal, as judgment creditor of said Pelagio Yusingco and A. Yusingco Hermones.

RULING: NO, the defendant and appellant Vicente Madrigal enjoy preference in the payment of his judgment credit. After the steamship Yusingco had been sold by virtue of the judicial writ issued in civil case No. 41654 for the execution of the judgment rendered in favor of Vicente Madrigal, the only right left to the plaintiff was to collect its mortgage credit from the purchaser thereof at public auction, inasmuch as the rule is that a mortgage directly and immediately subjects the property on which it is imposed, whoever its possessor may be, to the fulfillment of the obligation for the security of which it was created (Article 1876, Civil Code); but it so happens that it can not take such steps now because it was 53

the purchaser of the steamship Yusingco at public auction, and it was so with full knowledge that it had a mortgage credit on said vessel. Obligations are extinguished by the merger of the rights of the creditor and debtor (Articles 1156 and 1192, Civil Code). COMPENSATION REQUISITES 1. 2. 3. EGV REALTY VS. CA, 20 JULY 1999 AEROSPACE CHEMICAL VS. CA, 23 SEPTEMBER 1999 APODCA VS. NLRC, 172 S 442 E.G.V. REALTY V CA G.R.No. 120236 July 20, 1999 FACTS Petitioner E.G.V. Realty Development Corporation is the owner/developer of a seven-storey condominium building known as Cristina Condominium. Cristina Condominium Corporation holds title to all common areas of Cristina Condominium and is in charge of managing, maintaining and administering the condominiums common areas and providing for the buildings security. Respondent Unisphere International, Inc. (hereinafter referred to as Unisphere) is the owner/occupant of Unit 301 of said condominium. On November 28, 1981, respondent Unispheres Unit 301 was allegedly robbed of various items valued at P6,165.00. The incident was reported to petitioner CCC. On July 25, 1982, another robbery allegedly occurred at Unit 301 where the items carted away were valued at P6,130.00, bringing the total value of items lost to P12,295.00. This incident was likewise reported to petitioner CCC. On October 5, 1982, respondent Unisphere demanded compensation and reimbursement from petitioner CCC for the losses incurred as a result of the robbery. On January 28, 1987, petitioners E.G.V. Realty and CCC jointly filed a petition with the Securities and Exchange Commission (SEC) for the collection of the unpaid monthly dues in the amount of P13,142.67 against respondent Unisphere. ISSUE Whether or not set-off or compensation has taken place in the instant case. RULING Compensation or offset under the New Civil Code takes place only when two persons or entities in their own rights, are creditors and debtors of each other. (Art. 1278). A distinction must be made between a debt and a mere claim. A debt is an amount actually ascertained. It is a claim which has been formally passed upon by the courts or quasi-judicial bodies to which it can in law be submitted and has been declared to be a debt. A claim, on the other hand, is a debt in embryo. It is mere evidence of a debt and must pass thru the process prescribed by law before it develops into what is properly called a debt. Absent, however, any such categorical admission by an obligor or final adjudication, no compensation or off-set can take place. Unless admitted by a debtor himself, the conclusion that he is in truth indebted to another cannot be definitely and finally pronounced, no matter how convinced he may be from the examination of the pertinent records of the validity of that conclusion the indebtedness must be one that is admitted by the alleged debtor or pronounced by final judgment of a competent court or in this case by the Commission. There can be no doubt that Unisphere is indebted to the Corporation for its unpaid monthly dues in the amount of P13,142.67. This is admitted. 54

COMPENSATION REQUISITES AEROSPACE CHEMICAL V CA g.r.no. 108129 september 23, 1999 FACTS On June 27, 1986, petitioner Aerospace Industries, Inc. (Aerospace) purchased five hundred (500) metric tons of sulfuric acid from private respondent Philippine Phosphate Fertilizer Corporation (Philphos). Initially set beginning July 1986, the agreement provided that the buyer shall pay its purchases in equivalent Philippine currency value, five days prior to the shipment date. Petitioner as buyer committed to secure the means of transport to pick-up the purchases from private respondent's loadports. Per agreement, one hundred metric tons (100 MT) of sulfuric acid should be taken from Basay, Negros Oriental storage tank, while the remaining four hundred metric tons (400 MT) should be retrieved from Sangi, Cebu. On December 18, 1986, M/T Sultan Kayumanggi docked at Sangi, Cebu, but withdrew only 157.51 MT of sulfuric acid. Again, the vessel tilted. Further loading was aborted. Two survey reports conducted by the Societe Generale de Surveillance (SGS) Far East Limited, dated December 17, 1986 and January 2, 1987, attested to these occurrences. Later, on a date not specified in the record, M/T Sultan Kayumanggi sank with a total of 227.51 MT of sulfuric acid on board. Petitioner chartered another vessel, M/T Don Victor, with a capacity of approximately 500 MT.6 [TSN, September 1, 1989, pp. 28-29.] On January 26 and March 20, 1987, Melecio Hernandez, acting for the petitioner, addressed letters to private respondent, concerning additional orders of sulfuric acid to replace its sunken purchases. ISSUE Should expenses for the storage and preservation of the purchased fungible goods, namely sulfuric acid, be on seller's account pursuant to Article 1504 of the Civil Code? RULING Petitioner tries to exempt itself from paying rental expenses and other damages by arguing that expenses for the preservation of fungible goods must be assumed by the seller. Rental expenses of storing sulfuric acid should be at private respondent's account until ownership is transferred, according to petitioner. However, the general rule that before delivery, the risk of loss is borne by the seller who is still the owner, is not applicable in this case because petitioner had incurred delay in the performance of its obligation. Article 1504 of the Civil Code clearly states: "Unless otherwise agreed, the goods remain at the seller's risk until the ownership therein is transferred to the buyer, but when the ownership therein is transferred to the buyer the goods are at the buyer's risk whether actual delivery has been made or not, except that: (2) Where actual delivery has been delayed through the fault of either the buyer or seller the goods are at the risk of the party at fault." On this score, we quote with approval the findings of the appellate court, thus: The defendant [herein private respondent] was not remiss in reminding the plaintiff that it would have to bear the said expenses for failure to lift the commodity for an unreasonable length of time.But even assuming that the plaintiff did not consent to be so bound, the provisions of Civil Code come in to make it liable for the damages sought by the defendant.

55

COMPENSATION REQUISITES APODACA V NLRC G.R.No. 80039 April1 8, 1989 FACTS Petitioner was employed in respondent corporation. On August 28, 1985, respondent Jose M. Mirasol persuaded petitioner to subscribe to P1,500 shares of respondent corporation it P100.00 per share or a total of P150,000.00. He made an initial payment of P37,500.00. On September 1, 1975, petitioner was appointed President and General Manager of the respondent corporation. However, on January 2, 1986, he resigned. On December 19, 1986, petitioner instituted with the NLRC a complaint against private respondents for the payment of his unpaid wages, his cost of living allowance, the balance of his gasoline and representation expenses and his bonus compensation for 1986. Petitioner and private respondents submitted their position papers to the labor arbiter. Private respondents admitted that there is due to petitioner the amount of P17,060.07 but this was applied to the unpaid balance of his subscript in the amount of P95,439.93. Petitioner questioned the set-off alleging that there was no call or notice for the payment of unpaid subscription and that, accordingly, the alleged obligation is not enforceable. ISSUE Does the National Labor Relations Commission (NLRC) have jurisdiction to resolve a claim for non-payment of stock subscriptions to a corporation? Assuming that it has, can an obligation arising therefrom be offset against a money claim of an employee against the employer? RULING Firstly, the NLRC has no jurisdiction to determine such intra-corporate dispute between the stockholder and the corporation as in the matter of unpaid subscriptions. This controversy is within the exclusive jurisdiction of the Securities and Exchange Commission. Secondly, assuming arguendo that the NLRC may exercise jurisdiction over the said subject matter under the circumstances of this case, the unpaid subscriptions are not due and payable until a call is made by the corporation for payment. Private respondents have not presented a resolution of the board of directors of respondent corporation calling for the payment of the unpaid subscriptions. It does not even appear that a notice of such call has been sent to petitioner by the respondent corporation.

COMPENSATION LEGAL; WHEN PROHIBITED (Art. 1287-1288) 1. 2. 3. 4. PNB MANAGEMENT VS. R & R METAL, 373 SCRA 1 SILAHIS MARKETING VS. IAC, DEC. 7, 1989 FRANCIA VS. CA, JUNE 28, 1988 TRINIDAD VS. ACAPULCO, 494 S 179

56

PNB MANAGEMENT and DEVELOPMENT CORP. (PNB MADECOR), petitioner, VS. R&R METAL CASTING and FABRICATING, INC., respondent January 2, 2002 G. R. No. 132245 FACTS: On November 19, 1993, respondent R&R Metal Casting and Fabricating, Inc. (R&R) obtained a judgment in its favor against Pantranco North Express, Inc. (PNEI). PNEI was ordered to pay respondent P213,050 plus interest as actual damages, P50,000 as exemplary damages, 25 percent of the total amount payable as attorneys fees, and the costs of suit. However, the writ of execution was returned unsatisfied since the sheriff did not find any property of PNEI recorded at the Registries of Deeds of the different cities of Metro Manila. Neither did the sheriff receive a reply to the notice of garnishment he sent to PNB-Escolta. On March 27, 1995, respondent filed with the trial court a motion for the issuance of subpoenae duces tecum and ad testificandum requiring petitioner PNB Management and Development Corp. (PNB MADECOR) to produce and testify on certain documents pertaining to transactions between petitioner and PNEI from 1981 to 1995. From the testimony of the representative of PNB MADECOR, it was discovered that NAREDECO, petitioners forerunner, executed a promissory note in favor of PNEI for P7.8 million, and that PNB MADECOR also had receivables from PNEI in the form of unpaid rentals amounting to more than P7.5 million. On the basis of said testimony, respondent filed with the trial court a motion for the application of funds or properties of PNEI, its judgment debtor, in the hands of PNB MADECOR for the satisfaction of the judgment in favor of respondent. The trial court issued an order garnishing the amount owed by petitioner to PNEI under the promissory note, to satisfy the judgment against PNEI and in favor of respondent. On appeal, the Court of Appeals affirmed the decision. The appellate court also denied petitioners motion for reconsideration. ISSUE: Whether or not the Court of Appeals erred when it ruled that the requisites for legal compensation as set forth under articles 1277 and 1278 of the civil code do not concur in the case at bar. RULING: NO. Legal compensation could not have occurred because of the absence of one requisite in this case - that both debts must be due and demandable. As observed by the Court of Appeals, under the terms of the promissory note, failure on the part of NAREDECO (PNB MADECOR) to pay the value of the instrument after due notice has been made by PNEI would entitle PNEI to collect an 18% interest per annum from date of notice of demand. Petitioner makes a similar assertion in its petition. Petitioners obligation to PNEI appears to be payable on demand. Petitioner is obligated to pay the amount stated in the promissory note upon receipt of a notice to pay from PNEI. If petitioner fails to pay after such notice, the obligation will earn an interest of 18 percent per annum. Respondent alleges that PNEI had already demanded payment. The Court agrees with petitioner that this letter was not one demanding payment, but one that merely informed petitioner of (1) the conveyance of a certain portion of its obligation to PNEI per a dacion en pago arrangement between PNEI and PNB, and (2) the unpaid balance of its obligation after deducting the amount conveyed to PNB. The import of this letter is not that PNEI was demanding payment, but that PNEI was 57

advising petitioner to settle the matter of implementing the earlier arrangement with PNB. Since petitioners obligation to PNEI is payable on demand, and there being no demand made, it follows that the obligation is not yet due. Therefore, this obligation may not be subject to compensation for lack of a requisite under the law. Without compensation having taken place, petitioner remains obligated to PNEI to the extent stated in the promissory note. This obligation may undoubtedly be garnished in favor of respondent to satisfy PNEIs judgment debt. There is another alleged demand letter on record, dated January 24, 1990. It was addressed to Atty. Domingo A. Santiago, Jr., Senior Vice President and Chief Legal Counsel of PNB, and signed by Manuel Vijungco, chairman of the Board of Directors of PNEI. In said letter, PNEI requested offsetting of accounts between petitioner and PNEI. However, PNEIs own Assistant General Manager for Finance at that time, Atty. Loreto N. Tang, testified that the letter was not a demand letter. THUS, Petition denied. Decision affirmed

COMPENSATION LEGAL; WHEN PROHIBITED SILAHIS MARKETING CORPORATION, petitioner, VS. INTERMEDIATE APPELLATE COURT and GREGORIO DE LEON, doing business under the name and style of "MARK INDUSTRIAL SALES", respondents. 1989 December 07 G.R. No. 74027 FACTS: On various dates in October, November and December, 1975, Gregorio de Leon doing business under the name and style of Mark Industrial Sales sold and delivered to Silahis Marketing Corporation various items of merchandise covered by several invoices in the aggregate amount of P22,213.75 payable within thirty (30) days from date of the covering invoices. Allegedly due to Silahis' failure to pay its account upon maturity despite repeated demands, de Leon filed a complaint for the collection of the said accounts including accrued interest thereon in the amount of P661.03 and attorney's fees of P5,000.00 plus costs of litigation. The answer admitted the allegations of the complaint insofar as the invoices were concerned but presented as affirmative defenses; [a] a debit memo for P22,200.00 as unrealized profit for a supposed commission that Silahis should have received from de Leon for the sale of sprockets in the amount of P111,000.00 made directly to Dole Philippines, Incorporated by the latter sometime in August 1975; and [b] Silahis' claim that it is entitled to return the stainless steel screen which was found defective by its client, Borden International, Davao City, and to have the corresponding amount cancelled from its account with de Leon. ISSUE: Whether or not private respondent is liable to the petitioner for the commission or margin for the direct sale which the former concluded and consummated with Dole Philippines, Incorporated without coursing the same through herein petitioner. RULING: 58

It must be remembered that compensation takes place when two persons, in their own right, are creditors and debtors to each other. Article 1279 of the Civil Code provides that: "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." Undoubtedly, petitioner admits the validity of its outstanding accounts with private respondent in the amount of P22,213.75 as contained in its answer. But whether private respondent is liable to pay the petitioner a 20% margin or commission on the subject sale to Dole Philippines, Inc. is vigorously disputed. This circumstance prevents legal compensation from taking place. The Court agrees with respondent appellate court that there is no evidence on record from which it can be inferred that there was any agreement between the petitioner and private respondent prohibiting the latter from selling directly to Dole Philippines, Incorporated. Definitely, it cannot be asserted that the debit memo was a contract binding between the parties considering that the same, as correctly found by the appellate court, was not signed by private respondent nor was there any mention therein of any commitment by the latter to pay any commission to the former involving the sale of sprockets to Dole Philippines, Inc. in the amount of P111,000.00. Indeed, such document can be taken as self-serving with no probative value absent a showing or at the very least an inference, that the party sought to be bound assented to its contents or showed conformity thereto. Thus the questioned decision of respondent appellate court is hereby affirmed. COMPENSATION LEGAL; WHEN PROHIBITED ENGRACIO FRANCIA VS. INTERMEDIATE APPELLATE COURT and HO FERNANDEZ G.R. No. L-67649 June 28, 1988 162 SCRA 753 FACTS: Engracio Francia is the registered owner of a residential lot, 328 square meters, and a two-story house built upon it situated at Barrio San Isidro, now District of Sta. Clara, Pasay City, Metro Manila. On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by the Republic of the Philippines for the sum of P4,116.00 representing the estimated amount equivalent to the assessed value of the aforesaid portion. Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5, 1977, his property was sold at public auction pursuant to Section 73 of Presidential Decree No. 464 known as the Real Property Tax Code in order to satisfy a tax delinquency of P2,400.00. Ho Fernandez was the highest bidder for the property. On March 20, 1979, Francia filed a complaint to annul the auction sale. He later amended his complaint on January 24, 1980. The petitioner seeks to set aside the auction sale of his property which took place on December 5, 1977, and to allow him to recover a 203 square meter lot which was sold at public auction to Ho Fernandez and ordered titled in the latter's name. He further averred that his tax delinquency of P2,400.00 has been extinguished by legal compensation since the government owed him P4, 116.00 when a portion of his land was expropriated.

59

The lower court rendered a decision in favor Fernandez which was affirmed by the Intermediate Appellate Court . Hence, this petition for review. ISSUE: Whether or not the tax delinquency of Francia has been extinguished by legal compensation. RULING: There is no legal basis for the contention. By legal compensation, obligations of persons, who in their own right are reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil Code). The circumstances of the case do not satisfy the requirements provided by Article 1279, to wit: (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 the two debts be due. The Court had consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government. In addition, a taxpayer cannot refuse to pay his tax when called upon by the collector because he has a claim against the governmental body not included in the tax levy. There are also other factors which compelled the Court to rule against the petitioner. The tax was due to the city government while the expropriation was effected by the national government. Moreover, the amount of P4,116.00 paid by the national government for the 125 square meter portion of his lot was deposited with the Philippine National Bank long before the sale at public auction of his remaining property. Notice of the deposit dated September 28, 1977 was received by the petitioner on September 30, 1977. The petitioner admitted in his testimony that he knew about the P4,116.00 deposited with the bank but he did not withdraw it. It would have been an easy matter to withdraw P2,400.00 from the deposit so that he could pay the tax obligation thus aborting the sale at public auction. The petition for review was dismissed. COMPENSATION REQUISITES TRINIDAD V ACAPULCO G.R.No. 147477 June 27, 2006 FACTS On May 6, 1991, respondent Estrella Acapulco filed a Complaint before the RTC seeking the nullification of a sale she made in favor of petitioner Hermenegildo M. Trinidad. She alleged: Sometime in February 1991, a certain Primitivo Caete requested her to sell a Mercedes Benz for P580,000.00. Caete also said that if respondent herself will buy the car, Caete was willing to sell it for P500,000.00. Petitioner borrowed the car from respondent for two days but instead of returning the car as promised, petitioner told respondent to buy the car from Caete for P500,000.00 and that petitioner would pay respondent after petitioner returns from Davao. Following petitioners instructions, respondent requested Caete to execute a deed of sale covering the car in respondents favor for P500,000.00 for which respondent issued three checks in favor of Caete. Respondent thereafter executed a deed of sale in favor of petitioner even though petitioner did not pay her any consideration for the sale. When petitioner returned from Davao, he refused to pay respondent the amount of 60

P500,000.00 saying that said amount would just be deducted from whatever outstanding obligation respondent had with petitioner. Due to petitioners failure to pay respondent, the checks that respondent issued in favor of Caete bounced, thus criminal charges were filed against her.[3] Respondent then prayed that the deed of sale between her and petitioner be declared null and void; that the car be returned to her; and that petitioner be ordered to pay damages. ISSUE Whether or not petitioners claim for legal compensation was already too late RULING The court ruled in favor of the petitioner. Compensation takes effect by operation of law even without the consent or knowledge of the parties concerned when all the requisites mentioned in Article 1279 of the Civil Code are present.[26] This is in consonance with Article 1290 of the Civil Code which provides that: Article 1290. When all the requisites mentioned in article 1279 are present, compensation takes effect by operation of law, and extinguishes both debts to the concurrent amount, even though the creditors and debtors are not aware of the compensation. Since it takes place ipso jure,[27] when used as a defense, it retroacts to the date when all its requisites are fulfilled. Petitioners stance is that legal compensation has taken place and operates even against the will of the parties because: (a) respondent and petitioner were personally both creditor and debtor of each other; (b) the monetary obligation of respondent was P566,000.00 and that of the petitioner was P500,000.00 showing that both indebtedness were monetary obligations the amount of which were also both known and liquidated; (c) both monetary obligations had become due and demandable petitioners obligation as shown in the deed of sale and respondents indebtedness as shown in the dishonored checks; and (d) neither of the debts or obligations are subject of a controversy commenced by a third person. NOVATION: SUBJECTIVE NOVATION; SUBSTITUION OF DEBTOR (Art. 1293) (EXPROMISION VS. DELEGACION) AQUINTEY V. TIBONG G.R. No. 166704 December 20, 2006 FACTS On May 6, 1999, petitioner Agrifina Aquintey filed before the RTC of Baguio City, a complaint for sum of money and damages against the respondents, spouses Felicidad and Rico Tibong. Agrifina alleged that Felicidad had secured loans from her on several occasions, at monthly interest rates of 6% to 7%. Despite demands, the spouses Tibong failed to pay their outstanding loan, amounting to P773,000.00 exclusive of interests. In their Answer with Counterclaim, spouses Tibong admitted that they had secured loans from Agrifina. The proceeds of the loan were then re-lent to other borrowers at higher interest rates. They, likewise, alleged that they had executed deeds of assignment in favor of Agrifina, and that their debtors had executed promissory notes in Agrifinas favor. According to the spouses Tibong, this resulted in a novation of the original obligation to Agrifina. They insisted that by virtue of these documents, Agrifina became the new collector of their debtors; and the obligation to pay the balance of their loans had been extinguished. ISSUE 61

Whether or not there is valid novation in the instant case? RULING Novation which consists in substituting a new debtor in the place of the original one 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, accepts a third person who consents to the substitution and assumes the obligation. Thus, the consent of those three persons is necessary. 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. 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. In the case at bar, the court 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. 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. NOVATION: SUBJECTIVE NOVATION; SUBROGATION OF THE RIGHTS OF THE CREDITOR (LEGAL VS. CONVENTIONAL) 1. 2. 3. 4. 5. 6. 7. SWAGMAN VS. CA, 455 S 175 AZOLLA FARMS VS. CA, 11 NOVEMBER 2004 CALIFORNIA BUS LINES VS. STATE INVVESTMENT, 418 S 297 OCAMPO-PAULE VS. CA, 4 FEBRUARY 2002 REYES VS. CA, 383 S 471 BAUTISTA VS. PILAR DEVELOPMENT, 312 S 611 EVADEL REALTY VS. SORIANO, 357 S 395 SWAGMAN V CA G.R.No. 161135 April 8, 2005 FACTS Sometime in 1996 and 1997, petitioner Swagman Hotels and Travel, Inc., through Atty. Leonor L. Infante and Rodney David Hegerty, its president and vice-president, respectively, obtained from private respondent Neal B. Christian loans evidenced by three promissory notes dated 7 August 1996, 14 March 1997, and 14 July 1997. Each of the promissory notes is in the amount of US$50,000 payable after three years from its date with an interest of 15% per annum payable every three months. In a letter dated 16 December 1998, Christian informed the petitioner corporation that he was terminating the loans and demanded from the latter payment in the total amount of US$150,000 plus unpaid interests in the total amount of US$13,500. On 2 February 1999, private respondent Christian filed with the Regional Trial Court of Baguio City, Branch 59, a complaint for a sum of money and damages against the petitioner corporation, Hegerty, and Atty. Infante. The petitioner corporation, together with its president and vice-president, filed an Answer raising as defenses lack of cause of action and novation of the principal obligations. According to them, Christian had no cause of action because the three promissory notes were not yet due and demandable. 62

ISSUE Where there is a valid novation, may the original terms of contract which has been novated still prevail? HELD The receipts, as well as private respondents summary of payments, lend credence to petitioners claim that the payments were for the principal loans and that the interests on the three consolidated loans were waived by the private respondent during the undisputed renegotiation of the loans on account of the business reverses suffered by the petitioner at the time. There was therefore a novation of the terms of the three promissory notes in that the interest was waived and the principal was payable in monthly installments of US$750. Alterations of the terms and conditions of the obligation would generally result only in modificatory novation unless such terms and conditions are considered to be the essence of the obligation itself.[25] The resulting novation in this case was, therefore, of the modificatory type, not the extinctive type, since the obligation to pay a sum of money remains in force. Thus, since the petitioner did not renege on its obligation to pay the monthly installments conformably with their new agreement and even continued paying during the pendency of the case, the private respondent had no cause of action to file the complaint. It is only upon petitioners default in the payment of the monthly amortizations that a cause of action would arise and give the private respondent a right to maintain an action against the petitioner. NOVATION: SUBJECTIVE NOVATION; SUBROGATION OF THE RIGHTS OF THE CREDITOR (LEGAL VS. CONVENTIONAL) AZOLLA FARMS V CA G.R.No. 138085 November 11, 2004 FACTS Petitioner Francis R. Yuseco, Jr., is the Chairman, President and Chief Operating Officer of petitioner Azolla Farms International Philippines. In 1982, Azolla Farms undertook to participate in the National Azolla Production Program wherein it will purchase all the Azolla produced by the Azolla beneficiaries in the amount not exceeding the peso value of all the inputs provided to them. The project also involves the then Ministry of Agriculture, the Kilusang Kabuhayan at Kaunlaran, and the Kiwanis. To finance its participation, petitioners applied for a loan with Credit Manila, Inc., which the latter endorsed to its sister company, respondent Savings Bank of Manila (Savings Bank). The Board of Directors of Azolla Farms, meanwhile, passed a board resolution on August 31, 1982, authorizing Yuseco to borrow from Savings Bank in an amount not exceeding P2,200,000.00. The loan having been approved, Yuseco executed a promissory note on September 13, 1982, promising to pay Savings Bank the sum of P1,400,000.00 on or before September 13, 1983. the Azolla Farms project collapsed. Blaming Savings Bank, petitioners Yuseco and Azolla Farms filed on October 3, 1983 with the Regional Trial Court of Manila (Branch 25), a complaint for damages. In essence, their complaint alleges that Savings Bank unjustifiably refused to promptly release the remaining P300,000.00 which impaired the timetable of the project and inevitably affected the viability of the project resulting in its collapse, and resulted in their failure to pay off the loan. Thus, petitioners pray for P1,000,000.00 as actual damages, among others. ISSUE 63

Whether the trial court erred in admitting petitioners amended complaint RULING SEC. 5. Amendment to conform to or authorize presentation of evidence . When issues not raised by the pleadings are tried by express or implied consent of the parties, they shall be treated in all respects, as if they had been raised in the pleadings. Such amendment of the pleadings as may be necessary to cause them to conform to the evidence and to raise these issues may be made upon motion of any party at any time, even after judgment; but failure so to amend does not affect the result of the trial of these issues. If evidence is objected to at the trial on the ground that it is not within the issues made by the pleadings, the court may allow the pleadings to be amended and shall do so freely when the presentation of the merits of the action will be subserved thereby and the objecting party fails to satisfy the court that the admission of such evidence would prejudice him in maintaining his action or defense upon the merits. As can be gleaned from the records, it was petitioners belief that respondents evidence justified the amendment of their complaint. The trial court agreed thereto and admitted the amended complaint. On this score, it should be noted that courts are given the discretion to allow amendments of pleadings to conform to the evidence presented during the trial. NOVATION: SUBJECTIVE NOVATION; SUBROGATION OF THE RIGHTS OF THE CREDITOR (LEGAL VS. CONVENTIONAL) CALIFORNIA BUS LINES V STATE INVESMENTS G.R.No. 147950 December 11, 2003 FACTS Sometime in 1979, Delta Motors CorporationM.A.N. Division (Delta) applied for financial assistance from respondent State Investment House, Inc. SIHI agreed to extend a credit line to Delta for P25,000,000.00 in three separate credit agreements dated May 11, June 19, and August 22, 1979. Delta eventually became indebted to SIHI to the tune of P24,010,269.32 From April 1979 to May 1980, petitioner California Bus Lines, Inc. (hereafter CBLI), purchased on installment basis 35 units of M.A.N. Diesel Buses and two (2) units of M.A.N. Diesel Conversion Engines from Delta. To secure the payment of the purchase price of the 35 buses, CBLI and its president, Mr. Dionisio O. Llamas, executed sixteen (16) promissory notes in favor of Delta on January 23 and April 25, 1980.[5] In each promissory note, CBLI promised to pay Delta or order, P2,314,000 payable in 60 monthly installments starting August 31, 1980, with interest at 14% per annum. CBLI further promised to pay the holder of the said notes 25% of the amount due on the same as attorneys fees and expenses of collection, whether actually incurred or not, in case of judicial proceedings to enforce collection. In addition to the notes, CBLI executed chattel mortgages over the 35 buses in Deltas favor. When CBLI defaulted on all payments due, it entered into a restructuring agreement with Delta on October 7, 1981, to cover its overdue obligations under the promissory notes.CBLI continued having trouble meeting its obligations to Delta. This prompted Delta to threaten CBLI with the enforcement of the management takeover clause. ISSUE Whether the Restructuring Agreement dated October 7, 1981, between petitioner CBLI and Delta Motors, Corp. novated the five promissory notes Delta Motors, Corp. assigned to respondent SIHI. RULING 64

Novation has been defined as the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which terminates the first, either by changing the object or principal conditions, or by substituting the person of the debtor, or subrogating a third person in the rights of the creditor.For novation to take place, four essential requisites have to be met, namely, (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. In this case, the attendant facts do not make out a case of novation. The restructuring agreement between Delta and CBLI executed on October 7, 1981, shows that the parties did not expressly stipulate that the restructuring agreement novated the promissory notes. Absent an unequivocal declaration of extinguishment of the preexisting obligation, only a showing of complete incompatibility between the old and the new obligation would sustain a finding of novation by implication. NOVATION: SUBJECTIVE NOVATION; SUBROGATION OF THE RIGHTS OF THE CREDITOR (LEGAL VS. CONVENTIONAL)

OCAMPO-PAULE V CA G.R.No. 145872 February 4, 2002 FACTS During the period August, 1991 to April, 1993, petitioner received from private complainant Felicitas M. Calilung several pieces of jewelry with a total value of One hundred Sixty Three Thousand One hundred Sixty Seven Pesos and Ninety Five Centavos (P163,167.95). The agreement between private complainant and petitioner was that the latter would sell the same and thereafter turn over and account for the proceeds of the sale, or otherwise return to private complainant the unsold pieces of jewelry within two months from receipt thereof. Since private complainant and petitioner are relatives, the former no longer required petitioner to issue a receipt acknowledging her receipt of the jewelry.When petitioner failed to remit the proceeds of the sale of the jewelry or to return the unsold pieces to private complainant, the latter sent petitioner a demand letter. Notwithstanding receipt of the demand letter, petitioner failed to turn over the proceeds of the sale or to return the unsold pieces of jewelry. Private complainant was constrained to refer the matter to the barangay captain of Sta. Monica, Lubao, Pampanga. ISSUE Whether or not there was a novation of petitioners criminal liability when she and private complainant executed the Kasunduan sa Bayaran. RULING It is well-settled that the following requisites must be present for novation to take place: (1) a previous valid obligation; (2) agreement of all the parties to the new contract; (3) extinguishment of the old contract; and (4) validity of the new one. 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. The execution of the Kasunduan sa Bayaran does not constitute a novation of the original agreement between petitioner and private complainant. Said Kasunduan did not change the object or principal conditions of the contract between them. The change in manner of payment of petitioners obligation did not render the Kasunduan 65

incompatible with the original agreement, and hence, did not extinguish petitioners liability to remit the proceeds of the sale of the jewelry or to return the same to private complainant. An obligation to pay a sum of money is not novated, in a new instrument wherein the old is ratified, by changing only the terms of payment and adding other obligations not incompatible with the old one, or wherein the old contract is merely supplemented by the new one. In any case, novation is not one of the grounds prescribed by the Revised Penal Code for the extinguishment of criminal liability. NOVATION: SUBJECTIVE NOVATION; SUBROGATION OF THE RIGHTS OF THE CREDITOR (LEGAL VS. CONVENTIONAL)

REYES V CA june 26, 2002 FACTS This petition arose from a civil case for collection of a sum of money with preliminary attachment filed by respondent Pablo V. Reyes against his first cousin petitioner Arsenio R. Reyes and spouse Nieves S. Reyes. According to private respondent, petitioner-spouses borrowed from him P600,000.00 with interest at five percent (5%) per month, which totalled P1,726,250.00 at the time of filing of the Complaint. The loan was to be used supposedly to buy a lot in Paraaque. It was evidenced by an acknowledgment receipt dated 15 July 1990 signed by the petitionerspouses Arsenio R. Reyes and Nieves S. Reyes and witness Romeo Rueda. In their Answer petitioners admitted their loan from respondent but averred that there was a novation so that the amount loaned was actually converted into respondent's contribution to a partnership formed between them on 23 March 1990. ISSUE Whether or not there was novation in the instant case? RULING For novation to take place, the following requisites must concur: (a) there must be a previous valid obligation; (b) there must be an agreement of the parties concerned to a new contract; (c) there must be the extinguishment of the old contract; and, (d) there must be the validity of the new contract. In the case at bar, the third requisite is not present. The parties did agree that the amount loaned would be converted into respondent's contribution to the partnership, but this conversion did not extinguish the loan obligation. The date when the acknowledgment receipt/promissory note was made negates the claim that the loan agreement was extinguished through novation since the note was made while the partnership was in existence. Significantly, novation is never presumed. It must appear by express agreement of the parties, or by their acts that are too clear and unequivocal to be mistaken for anything else. An obligation to pay a sum of money is not novated in a new instrument wherein the old is ratified by changing only the terms of payment and adding other obligations not incompatible with the old one, or wherein the old contract is merely supplemented by the new one. 66

NOVATION: SUBJECTIVE NOVATION; SUBROGATION OF THE RIGHTS OF THE CREDITOR (LEGAL VS. CONVENTIONAL)

BAUTISTA V PILAR DEVELOPMENT g.r.no. 135046 august 17, 1999 FACTS In 1978, petitioner spouses Florante and Laarni Bautista purchased a house and lot in Pilar Village, Las Pinas, Metro Manila. To partially finance the purchase, they obtained from the Apex Mortgage & Loan Corporation a loan in the amount of P100,180.00. They executed a promissory note on December 22, 1978 obligating themselves, jointly and severally, to pay the "principal sum of P100,180.00 with interest rate of 12% and service charge of 3%" for a period of 240 months, or twenty years, from date, in monthly installments of P1,378.83. Late payments were to be charged a penalty of one and one-half per cent (1 1/2%) of the amount due. In the same promissory note, petitioners authorized Apex to "increase the rate of interest and/or service charges" without notice to them in the event that a law, Presidential Decree or any Central Bank regulation should be enacted increasing the lawful rate of interest and service charges on the loan. Payment of the promissory note was secured by a second mortgage on the house and lot purchased by petitioners.Petitioner spouses failed to pay several installments. On September 20, 1982, they executed another promissory note in favor of Apex. This note was in the amount of P142,326.43 at the increased interest rate of twenty-one per cent (21%) per annum with no provision for service charge but with penalty charge of 1 1/2% for late payments. ISSUE Whether or not there was valid novation in the case at bar? RULING Novation has four (4) essential requisites: (1) the existence of a previous valid obligation; (2) the agreement of all parties to the new contract; (3) the extinguishment of the old contract; and (4) the validity of the new one. In the instant case, all four requisites have been complied with. The first promissory note was a valid and subsisting contract when petitioner spouses and Apex executed the second promissory note. The second promissory note absorbed the unpaid principal and interest of P142,326.43 in the first note which amount became the principal debt therein, payable at a higher interest rate of 21% per annum. Thus, the terms of the second promissory note provided for a higher principal, a higher interest rate, and a higher monthly amortization, all to be paid within a shorter period of 16.33 years. These changes are substantial and constitute the principal conditions of the obligation. Both parties voluntarily accepted the terms of the second note; and also in the same note, they unequivocally stipulated to extinguish the first note. Clearly, there was animus novandi, an express intention to novate. The first promissory note was cancelled and replaced by the second note. This second note became the new contract governing the parties' obligations. NOVATION: SUBJECTIVE NOVATION; SUBROGATION OF THE RIGHTS OF THE CREDITOR (LEGAL VS. CONVENTIONAL)

EVADEL REALTY V SORIANO G.R.No. 144291 April 20, 2001 67

FACTS On April 12, 1996, the spouses Antero and Virginia Soriano (respondent spouses), as sellers, entered into a "Contract to Sell " with Evadel Realty and Development Corporation (petitioner), as buyer, over a parcel of land denominated as Lot 5536-C of the Subdivision Plan of Lot 5536 covered by Transfer Certificate of Title No. 125062 which was part of a huge tract of land known as the Imus Estate. Upon payment of the first installment, petitioner introduced improvements thereon and fenced off the property with concrete walls. Later, respondent spouses discovered that the area fenced off by petitioner exceeded the area subject of the contract to sell by 2,450 square meters. Upon verification by representatives of both parties, the area encroached upon was denominated as Lot 5536-D-1 of the subdivision plan of Lot 5536-D of Psd-04-092419 and was later on segregated from the mother title and issued a new transfer certificate of title, TCT No. 769166, in the name of respondent spouses. Respondent spouses successively sent demand letters to petitioner on February 14, March 7, and April 24, 1997, to vacate the encroached area. Petitioner admitted receiving the demand letters but refused to vacate the said area. ISSUE Whether or not there was novation of contract? RULING Petitioner's claim that there was a novation of contract because there was a "second" agreement between the parties due to the encroachment made by the national road on the property subject of the contract by 1,647 square meters, is unavailing. Novation, one of the modes of extinguishing an obligation, requires the concurrence of the following: (1) there is a valid previous obligation; (2) the parties concerned agree to a new contract; (3) the old contract is extinguished; and (4) there is valid new contract. Novation may be express or implied. 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 (express novation) or that the old and the new obligations be on every point incompatible with each other (implied novation). In the instant case, there was no express novation because the "second" agreement was not even put in writing. Neither was there implied novation since it was not shown that the two agreements were materially and substantially incompatible with each other. We quote with approval the following findings of the trial court: Since the alleged agreement between the plaintiffs [herein respondents] and defendant [herein petitioner] is not in writing and the alleged agreement pertains to the novation of the conditions of the contract to sell of the parcel of land subject of the instant litigation, ipso facto, novation is not applicable in this case since, as stated above, novation must be clearly proven by the proponent thereof and the defendant in this case is clearly barred by the Statute of Frauds from proving its claim.

68