1

II. Contracts

A. In. General

1. Definition
Article 1305. A contract is a
meeting of minds between two
persons whereby one binds
himself, with respect to the
other, to give something or to
render some service.

Auto-contract
Article 1491. The following persons
cannot acquire by purchase, even at
a public or judicial auction, either in
person or through the mediation of
another:
(1) The guardian, the property of the
person or persons who may be under
his guardianship;
(2) Agents, the property whose
administration or sale may have
been intrusted to them, unless the
consent of the principal has been
given;
(3) Executors and administrators, the
property of the estate under
administration;

(4) Public officers and employees,

the property of the State or of any
subdivision thereof, or of any
government-owned or controlled
corporation,
or
institution,
the
administration of which has been
intrusted to them; this provision shall
apply to judges and government
experts
who,
in
any
manner
whatsoever, take part in the sale;
(5) Justices, judges, prosecuting
attorneys, clerks of superior and
inferior courts, and other officers and
employees connected with the
administration
of
justice,
the
property and rights in litigation or
levied upon an execution before the
court within whose jurisdiction or
territory
they
exercise
their
respective functions; this prohibition
includes the act of acquiring by
assignment and shall apply to
lawyers, with respect to the property
and rights which may be the object
of any litigation in which they may
take part by virtue of their
profession;
(6) Any others specially disqualified
by law.

Article 1646. The persons

disqualified to buy referred to
in articles 1490 and 1491, are
also disqualified to become
lessees of the things
mentioned therein.

Article 1890. If the agent has

been empowered to borrow
money, he may himself be the
lender at the current rate of
interest. If he has been
authorized to lend money at
interest, he cannot borrow it
without the consent of the
principal.

said U.S. military bases. Resolution

695 moreover, denies their right to
reacquire at the preferred rate ninety
per cent (90%) of the foreign exchange
the sold or surrendered earnings to
Central Bank for the purpose of
determining whether the imports
against proceeds of contracts entered
into prior to April 25, 1960 are
classified
as
dollar-to-dollar
transactions or not.

2. Elements of contracts

George Batchelder, an American

Citizen permanently residing in the
Philippines who is engaged in the
Construction Business, surrendered to
the Central Bank his dollar earnings
amounting to U.S. $199,966.00. He
compels
Central
Bank
of
the
Philippines
to
resell
to
him
$170,210.60 at the preferred rate of
exchange of two Philippine pesos for
one American dollar, more specifically
P2.00375 which was denied by the
court.

a. essential
b. natural
c. accidental

Batchelder vs CB

Facts:
Monetary Board Resolution No. 857
requires Filipino and American resident
contractors for constructions in U.S.
military bases in the Philippines to
surrender to the Central Bank their
dollar earnings under their respective
contracts but were entitled to utilize
90% of their surrendered dollars for
importation at the preferred rate of
commodities for use within or outside

He then contended that said decision

failed to consider that if there was no
contract obligating the bank to resell
to him at the preferred rate, the
judgment of the lower court can and
should nevertheless be sustained on
the basis of there being such an
obligation arising from law.

Issue: Whether or not Central Bank

has the obligation arising from law to
resell the US$154,094.56 to Batchelder
at the preferred rate.

Held:
Central Bank was intended to attain
basic objectives in the field of currency
and
finance.
It shall
be the
responsibility of the Central Bank of
the Philippines to administer the
monetary and banking system of the
Republic. It shall be the duty of the
Central Bank to use the powers
granted to it under this Act to achieve
the following objectives: (a) to
maintain monetary stability in the
Philippines; (b) to preserve the
international value of the peso and the
convertibility of the peso into other
freely convertible currencies; and (c) to
promote a rising level of production,
employment and real income in the
Philippines."

It is, of course, true that obligations

arise from 1) law; 2) contracts; 3)
quasi-contracts; 4) acts or omissions
punished by law and 5) quasi-delicts.
One of the sources an obligation then
is a law. A legal norm could so require
that a particular party be chargeable
with a prestation or undertaking to
give or to deliver or to do or to render
some service. It is an indispensable
requisite though that such a provision,

thus in fact exists. There must be a

showing to that effect. As early as
1909 in Pelayo v. Lauron, Court
through Justice Torres, categorically
declared: "Obligation arising from law
are not presumed." For in the language
of Justice Street in Leung Ben v.
O'Brien, a 1918 decision, such an
obligation is "a creation of the positive
law." They are ordinarily traceable to
code or statute. It is true though, as
noted in the motion for reconsideration
following People v. Que Po Lay, that a
Central Bank circular may have the
force and effect of law, especially
when issued in pursuance of its quasilegislative power. That of itself,
however, is no justification to conclude
that it has thereby assumed an
obligation.

B. Fundamental
Characteristics/Principles of
contracts

1. Consensuality of contracts
Article 1305. A contract is a
meeting of minds between two
persons whereby one binds
himself, with respect to the
other, to give something or to
render some service.
Article 1317. No one may contract in
the name of another without being

authorized by the latter, or unless he

has by law a right to represent him.
A contract entered into in the name of
another by one who has no authority
or legal representation, or who has
acted beyond his powers, shall be
unenforceable, unless it is ratified,
expressly or impliedly, by the person
on whose behalf it has been executed,
before it is revoked by the other
contracting party.

Contract of Adhesion

Republic vs PLDT
Sometime in 1933, the
defendant PLDT entered into an
agreement with RCA
Communications Inc., an
American corporation, whereby
telephone messages coming
from the US and received by
RCAs domestic station, could
automatically be transferred to
the lines of PLDT, and vice
versa.

The plaintiff through the Bureau

of Telecommunications, after
having set up its own
Government Telephone System,

by utilizing its own appropriation

and equipment and by renting
trunk lines of the PLDT, entered
into an agreement with RCA for
a joint overseas telephone
service.

Alleging that plaintiff is in

competition with them, PLDT
notified the former and
receiving no reply, disconnected
the trunk lines being rented by
the same; thus, prompting the
plaintiff to file a case before the
CFI praying for judgment
commanding PLDT to execute a
contract with the Bureau for the
use of the facilities of PLDTs
telephone system, and for a writ
of preliminary injunction against
the defendant to restrain the
severance of the existing trunk
lines and restore those severed.

Issue
Whether or not the defendant
PLDT can be compelled to enter
into a contract with the plaintiff.

Held

x x x while the Republic may not

compel the PLDT to celebrate a
contract with it, the Republic
may, in the exercise of the
sovereign power of eminent
domain, require the telephone
company to permit
interconnection of the
government telephone system
and that

Corpus vs CA and David

Petitioner and private

respondent were close friends
and members of the Civil
Liberties Union. Atty. Juan David
agreed to take on Corpus's
illegal dismissal case against his
former employer. David argued
the case all the way up to the
Supreme Court, which ruled in
favor of Corpus, and remanded
it for further proceedings.

Corpus offered David a check in

the amount of P2,000 as a small
token of appreciation for his
legal services, which David
rejected:

April 25, 1962

My dear Marino:

Yesterday, I received your letter of

April 18th with its enclosure. I
wished thank you for your kind
thoughts, however, please don't take
offense if I have to return the
check. I will explain.

When
I
decided
to
render
professional services in your case, I
was motivated by the value to me of
the very intimate relations which
you and I have enjoyed during the
past
many
years. It
was
nor
primarily, for a professional fee....

Your appreciation of the efforts I

have invested in your case is enough
compensation therefor, however,
when you shall have obtained a
decision which would have finally
resolved the case in your favor,
remembering me then will make me
happy. In the meantime, you will
make me happier by just keeping
the check.

Sincerely yours,

Issue:

JUANING

whether or not private

respondent Atty. Juan T. David is
entitled to attorney's fees.

After further proceedings, David

won the case and was held to be
entitled to the payment of his
backwages. Corpus then wrote
the Governor of Central Bank
requesting that the amount
representing the sack salaries of
the defendant be made out in
two, one in favor of the
defendant and the other
representing his professional
fees equivalent to 50% of the
said back salaries being claimed
by the plaintiff.

To obtain the relief from the

Governor of Central Bank, the
plaintiff instituted this action.
The RTC ruled that David is
entitled to professional fees of
P30,000, which Corpus denies.
Corpus asserts that David
rendered his services
gratuitously, but if ever the
latter is entitled to
compensation, it won't be more
than P2,500.

Held: YES, he is entitled to

attorney's fees

Ratio:
The payment of attorney's fees
to respondent David may
be
justified by virtue of the
innominate contract
of facio ut
des (I do and you give which is
based on the principle
that
"no one shall unjustly enrich
himself at the expense of
another."

Article 1307 that such contracts

shall be regulated by the
stipulations of the parties, by
the general provisions or

principles of obligations and

contracts, by the rules
governing the most analogous
nominate contracts, and
by
the customs of the people.

While there was no express

contract between the parties for
the payment of attorney's fees,
the fact remains that
respondent David rendered legal
services to petitioner Corpus
and therefore as aforestated, is
entitled to compensation under
the innominate contract of facio
lit des And such being the case,
respondent David is entitled to a
reasonable compensation.

Court is of the opinion that the

reasonable compensation of
respondent David should be
P20,000.00.

Ejercito et al vs Oriental
Assurance Corp.

Respondent Oriental Assurance

Corp. issued a surety bond in
favor of FFV Travel & Tours Inc.,
intended to guarantee the
company's payment of airline
tickets purchased on credit from
participating members of
International Air Transport
Association (IATA) to the extent
of P3M. On the same day,
petitioners and Merissa C.
Somes (Somes) executed a
Deed of Indemnity in favor of
respondent.

The Surety Bond was effective

for one year from its issuance
until 10 May 2000. It was
renewed for another year, from
10 May 2000 to 10 May 2001.

FFV Travel & Tours, Inc. has been

declared in default for failure to
pay its obligations amounting to
P5,484,086.97 and USD
18,760.98 as of 31 July 2000.
Consequently, IATA demanded
payment of the bond, and
respondent heeded the demand.

Respondent sent demand letters

to petitioners and Somes for
reimbursement of the P3 million
pursuant to the indemnity
agreement. For their failure to
reimburse respondent, the latter
filed a collection suit.

Issue:
w/n petitioners are liable to
indemnify the respondent under
the deed of indemnity
considering that petitioners did
not give their consent to be
bound thereby beyond the one
(1) year effectivity period of the
original surety bond

Held: YES, they are liable for

such

Ratio.

The contract of indemnity is the

law between the parties It is a
cardinal rule in the
interpretation of a contract that
if its terms are clear and leave
no doubt on the intention of the

contracting parties, the literal

meaning of its stipulation shall
control.

The CA aptly found provisions in

the contract that could not
exonerate petitioners from their
liability. The Deed of Indemnity
contains the following
stipulations:
INDEMNITY: - To indemnify the
COMPANY for any damages,
payments, advances, prejudices,
loss, costs and expenses of
whatever kind and nature,
including counsel or attorney's
fees, which the Company may
at any time, sustain or incur, as
a consequence of having
executed the above-mentioned
Bond, its renewals, extensions,
modifications or substitutions
and said attorney's fees shall
not be less than fifteen (15%)
per cent of the amount claimed
by the Company in each action,
the same to be due and
payable, irrespective of whether
the case is settled judicially or
extrajudicially.
xxxx

MATURITY OF OUR OBLIGATIONS

AS CONTRACTED HEREWITH: The said indemnities will be paid
to the COMPANY as soon as
demand is received from the
Creditor, or as soon as it
becomes liable to make
payment of any sum under
the terms of the abovementioned Bond, its renewals,
extension,

Petitioners have expressly

bound themselves to the
contract, which provides for the
terms granting authority to the
Company to renew the original
bond. he terms of the contract
are clear, explicit and
unequivocal. Therefore, the
subsequent acts of the
Company, through Somes, that
led to the renewal of the surety
bond are binding on petitioners
as well.

2. Autonomy of contracts
Article 1306. The contracting
parties may establish such
stipulations, clauses, terms and

conditions as they may deem

convenient, provided they are
not contrary to law, morals,
good customs, public order, or
public policy.

Article 1799. A stipulation

which excludes one or more
partners from any share in the
profits or losses is void. (1691)

Article 2088. The creditor

cannot appropriate the things
given by way of pledge or
mortgage, or dispose of them.
Any stipulation to the contrary is
null and void.

Article 2130. A stipulation

forbidding the owner from
alienating the immovable
mortgaged shall be void.

Daisy Tiu vs Platinum Plans

Respondent Platinum Plans

Philippines, Inc. is a domestic
corporation engaged in the pre-

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need industry. From 1987 to

1989, petitioner Daisy B. Tiu
was its Division Marketing
Director. On January 1, 1993,
respondent re-hired petitioner
as Senior Assistant VicePresident and Territorial
Operations Head in charge of its
Hong Kong and Asean
operations. The parties
executed a contract of
employment valid for five years.

On September 16, 1995,

petitioner stopped reporting for
work. In November 1995, she
became the Vice-President for
Sales of Professional Pension
Plans, Inc., a corporation
engaged also in the pre-need
industry.

Consequently, respondent sued

petitioner for damages before
the RTC of Pasig City, Branch
261. Respondent alleged,
among others, that petitioners
employment with Professional
Pension Plans, Inc. violated the
non-involvement clause in her
contract of employment. In
upholding the validity of the

non-involvement clause, the

trial court ruled that a contract
in restraint of trade is valid
provided that there is a
limitation upon either time or
place. In the case of the preneed industry, the trial court
found the two-year restriction to
be valid and reasonable. On
appeal, the Court of Appeals
affirmed the trial courts ruling.
It reasoned that petitioner
entered into the contract on her
own will and volition. Thus, she
bound herself to fulfill not only
what was expressly stipulated in
the contract, but also all its
consequences that were not
against good faith, usage, and
law. The appellate court also
ruled that the stipulation
prohibiting non-employment for
two years was valid and
enforceable considering the
nature of respondents business.

Issue:
Whether the Court of Appeals
erred in sustaining the validity
of the non-involvement clause

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Held
In this case, the noninvolvement clause has a time
limit: two years from the time
petitioners employment with
respondent ends. It is also
limited as to trade, since it only
prohibits petitioner from
engaging in any pre-need
business akin to respondents.
More significantly, since
petitioner was the Senior
Assistant Vice-President and
Territorial Operations Head in
charge of respondents
Hongkong and Asean
operations, she had been privy
to confidential and highly
sensitive marketing strategies of
respondents business. To allow
her to engage in a rival business
soon after she leaves would
make respondents trade secrets
vulnerable especially in a highly
competitive marketing
environment. In sum, The Court
finds the non-involvement
clause not contrary to public
welfare and not greater than is
necessary to afford a fair and
reasonable protection to
respondent. Hence the restraint

is valid and such stipulation

prevails.

Cui vs Arellano University

Emetrio Cui took his preparatory

law course at Arellano
University. He then enrolled in
its College of Law from first year
(SY1948-1949) until first
semester of his 4th year. During
these years, he was awarded
scholarship grants of the said
university amounting to a total
of P1,033.87. He then
transferred and took his last
semester as a law student at
Abad Santos University. To
secure permission to take the
bar, he needed his transcript of
records from Arellano
University. The defendant
refused to issue the TOR until he
had paid back the P1,033.87
scholarship grant which Emetrio
refunded as he could not take
the bar without Arellanos
issuance of his TOR.

On August 16, 1949, the

Director of Private Schools

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issued Memorandum No. 38

addressing all heads of private
schools, colleges and
universities. Part of the
memorandum states that the
amount in tuition and other fees
corresponding to these
scholarships should not be
subsequently charged to the
recipient students when they
decide to quit school or to
transfer to another institution.
Scholarships should not be
offered merely to attract and
keep students in a school.

they transfer before graduation,

is contrary to public policy,
sound policy and good morals or
tends clearly to undermine the
security of individual rights and
hence, null and void.

The court sentenced the

defendant to pay Cui the sum of
P1,033.87 with interest thereon
at the legal rate from Sept.1,
1954, date of the institution of
this case as well as the costs
and dismissing defendants
counterclaim.

Issue
Whether or not Emetrio Cui can
refund the P1,033.97 payment
for the scholarship grant
provided by Arellano University.

Held:
The memorandum of the
Director of Private Schools is not
a law where the provision set
therein was advisory and not
mandatory in nature. Moreover,
the stipulation in question,
asking previous students to pay
back the scholarship grant if

Saura vs Sindico

Ramon Saura and Estela Sindico

were contesting for nomination
as the official candidate of the
Nacionalista Party in the 4th
district of Pangasinan in the
congressional elections. The
parties entered into a written
agreement, containing a pledge
that Each aspirant shall
respect the result of the
aforesaid convention, i.e., no
one of us shall either run as a
rebel or independent candidate

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after losing in said convention.

In the provincial convention held
by the Nacionalista Party, Saura
was elected and proclaimed the
Party's official congressional
candidate for the aforesaid
district of Pangasinan.
Nonetheless, Sindico, in
disregard of the covenant, filed
her certificate of candidacy for
the same office with the
COMELEC, and she openly and
actively campaigned for her
election. Wherefore, Saura
commenced this suit for the
recovery of damages. The lower
court dismissed the complaint
on the basis that the agreement
sued upon is null and void, in
that (1) the subject matter of
the contract, being a public
office, is not within the
commerce of man; and (2) the
"pledge" was in curtailment of
the free exercise of elective
franchise and therefore against
public policy.

Issue: w/n the agreement is null

and void.

Held: YES.

Ratio:
Among those that may not be
the subject matter (object) of
contracts are certain rights of
individuals, which the law and
public policy have deemed wise
to exclude from the commerce
of man. Among them are the
political rights conferred upon
citizens, including, but not
limited to, once's right to vote,
the right to present one's
candidacy to the people and to
be voted to public office,
provided, however, that all the
qualifications prescribed by law
obtain. Such rights may not,
therefore, be bargained away
curtailed with impunity, for they
are conferred not for individual
or private benefit or advantage
but for the public good and
interest. Constitutional and
statutory provisions fix the
qualifications of persons who
may be eligible for certain
elective public offices. Said
requirements may neither be
enlarged nor reduced by mere
agreements between private
parties. A voter possessing all
the qualifications required to fill

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an office may, by himself or

through a political party or
group, present his candidacy
without further limitations than
those provided by law. In the
case at hand, we certainly
cannot entertain plaintiff's
action, which would result in
limiting the choice of the
electors to only those persons
selected by a small group or by
party boses.

Leal vs IAC

-Reversal of IAC in its Resolution

dated Sept. 27, 1983 of the
earlier decision dated June 28,
1978 penned by Justice Paras of
the Court of Appeals, in the
same case, affirming the trial
courts dismissal of the private
respondents complaint.

March 21, 1941: Vicente

Santiago and Cirilio Leal entered
into a contract which was called
the Compraventa where V.
Santiago sold to the latter three

parcels of land. Cited in the

contract was: En caso deventa,
no podran vender a otrosdichos
tres lotes de terrenosino al aqui
rendedor Vicente Santiago, o los
herederos o sucesores de
estepor el niismo precio de
P5,600 siempre y cuando estos
ultimos pueden hacer la
compra.

1960-1965: Parts of the

properties were mortgaged or
leased to the co-petitioners or to
third party

1966-1957: V. Santiago offered

re-purchase of the properties
but the petitioner refused the
offer

August 2, 1967: V. Santiago

instituted complaint for specific
performance. The trial court
(Court of First Instance in Q.C.)
rendered its decision
dismissing the case for it was
thought to be a premature case
or that there was no sale at all.
The respondent was not
contented at all that he filed

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another complaint in the Court

of Appeals

June 28, 1978: Justice Paras of

the Court of Appeals affirmed
the trial courts dismissal of
respondents complaint.
Included in the decision was the
order for the cancellation of the
annotations at the back of the
Transfer Certificates of Title
issued which prohibits the
petitioner to sell the land to the
third party. Respondentsfiled a
motion for reconsideration and
an opposition to the
petitioners(Leal) motion to
amend but the incidents were
not resolved since the Court of
Appeals was abolished and was
replaced by the IAC.

Sept. 27, 1983: The June 28,

1978 decision of the CA was
reversed. The petitioners were
to accept P5,600 for re-purchase
of Land and they should pay
rental of P3,087.50 as rental
from 1967-1968 and the same
amount every year after. The
Transfer Certificate of Title No.
42535 was ordered to be in the

names of V. Santiago & Luis

Santiago and to issue another
TCT to S. Santiago.

Issues
Whether or not it is quoted in
the Compraventa that the
private respondent has the right
of re-purchase.

Whether the annotations of the

prohibition to sell at the back of
the TCTs should be cancelled.

Held:
The Resolution dated Sept. 27,
1983 was SET ASIDE and the
Decision promulgated on June
28, 1978 is Reinstated. The
annotations of the prohibition to
sell at the back of TCT Nos.
138837-138842 were cancelled
cost against respondent.

For the following reasons:

-In IACs resolution : repurchase

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was given birth by the phrase

siempre y cuando ultimos
pueden hacer la compra (when
the buyer has money to buy).
Under Article 1508 (2nd
Paragraph) there is agreement
as to the time, although it is
indefinite, therefore the right
should be exercised within ten
years, because the law does not
favor suspended ownership.

-The right to redeem must be

expressly stipulated in the
contract of sale in order that it
may have legal existence. Under
Article 1606 of the Civil Code of
the Philippines the right to
redeem or repurchase, in the
absence of an express
agreement as to time, shall last
four years from the date of
contract.

-Civil Code of the Phil. Art. 1306

includes that contracting parties
may establish such stipulations,
clauses, terms and conditions as
they may deem convenient,
provided they are not contrary
to law, morals, good customs,
public order, or public policy.
Public order signifies the public
weal public policy.
Essentially, therefore, public
order and public policy mean
one and the same thing. One
such condition which is contrary
to public policy is the present
prohibition to self to third
parties(or perpetual restriction
to the right of ownership
specifically the owners right to
freely dispose of his properties.

3. Mutuality of contracts
-Prohibition to sell the lots to
persons other than the vendor
(back of TCT) will be cancelled
or deleted since the prohibition
to alienate should not exceed 20
years otherwise there would be
subversion of public policy.

Article 1308. The contract

must bind both contracting
parties; its validity or
compliance cannot be left to the
will of one of them.

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Article 1309. The determination of

the performance may be left to a third
person, whose decision shall not be
binding until it has been made known
to both contracting parties. (n)

Article 1310. The determination shall

not be obligatory if it is evidently
inequitable. In such case, the courts
shall decide what is equitable under
the circumstances

Article 1182. When the

fulfillment of the condition
depends upon the sole will of
the debtor, the conditional
obligation shall be void. If it
depends upon chance or upon
the will of a third person, the
obligation shall take effect in
conformity with the provisions of
this Code.

Acceleration clause

Banco FIlipino Savings vs

Hon. Navarro and Florante
del Valle

Del Valle borrowed a loan

secured by a real estate
mortgage from Banco Filipino.
Stamped on the promissory note
evidencing the loan is an
Escalation Clause, reading as
follows:
I/We hereby authorize Banco
Filipino
to
correspondingly
increase
the interest rate
stipulated in this contract
without advance notice to
me/us in the event law should
be enacted increasing the
lawful rates of interest that may
be charged on this particular
kind of loan.

CIRCULAR No. 494 was issued,

and BANCO FILIPINO gave notice
to the BORROWER of the
increase of interest rate on the
LOAN from 12% to 17% per
annum effective on March 1,
1976.

Escalation clause
Contending that CIRCULAR No.

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494 is not the law contemplated

in the Escalation Clause of the
promissory note, the
BORROWER filed suit against
BANCO FILIPINO for "Declaratory
Relief" with respondent Court,
praying that the Escalation
Clause be declared null and void
and that BANCO FILIPINO be
ordered to desist from enforcing
the increased rate of interest on
the BORROWER's real estate
loan.

Issues:

1. whether the Escalation Clause is a

valid or void stipulation.

2. whether BANCO FILIPINO can

increase the interest rate on the LOAN
from 12% to 17% per annum under the
Escalation Clause

Held:

1. YES, it is valid.

There should be no question that the

clause is valid.
Some contracts contain what is known
as an "escalator clause," which is
defined as one in which the contract
fixes a base price but contains a
provision that in the event of specified
cost increases, the seller or contractor
may raise the price up to a fixed
percentage of the base. Attacks on
such a clause have usually been based
on the claim that, because of the open
price-provision, the contract was too
indefinite to be enforceable and did
not evidence an actual meeting of the
minds of the parties, or that the
arrangement left the price to be
determined arbitrarily by one party so
that the contract lacked mutuality. In
most
instances,
however,
these
4
attacks have been unsuccessful.
Cost of living index adjustment clauses
are widely used in commercial
contracts in an effort to maintain fiscal
stability and to retain "real dollar"
value to the price terms of long term
contracts. The provision is a common
one, and has been universally upheld
and enforced.5
2. NO, it cannot increase the
interest rate under the said
escalation clause

The Escalation Clause reads as follows:

19

I/We hereby authorize Banco Filipino

to correspondingly
increase
the
interest rate stipulated in this contract
without advance notice to me/us in the
event a law increasing the lawful rates
of interest that may be charged on this
particular kind of loan. (Paragraphing
and emphasis supplied)

It is clear from the stipulation between

the parties that the interest rate may
be increased "in the event a law
should be enacted increasing the
lawful rate of interest that may be
charged on this particular kind of
loan." " The Escalation Clause was
dependent on an increase of rate
made by "law" alone.

constituted a Real Estate

Mortgage and Promissory Note.
After almost a year from her
resignation, LBP increased the
interest rate on the loan from 95
per annum to 17%. LBP
informed Florendo and the latter
protested the increase. LBP kept
on demanding Florendo to pay
the increased interest or the
new monthly installments based
on the increased interest rate.
Florendo maintained that such
increase is unjustified and
unlawful. Nevertheless, Florendo
just disregarded the increased
rate and continued to pay the
obligation under the original
contract.

CIRCULAR No. 494, although it has the

effect of law, is not a law.

Issue:
Florendo vs CA
Florendo was an employee of
Landbank of the Philippines
(LBP) from May 17, 1976 until
August 16, 1984 when she
voluntarily resigned. Before her
resignation, she applied for a
housing loan payable in 25
years from LBPs Provident
Fund. Both parties executed a
Housing Loan Agreement and

WON the LBP have a valid and

legal basis to impose an
increased interest rate on the
housing loan.

Held:
The increased rate imposed or
charged is not valid.

20

In Banco Filipino, this Court, x x

x, disallowed the bank from
increasing the interest rate on
the subject loan from 12% to
17% despite an escalation
clause in the loan agreement
authorizing the bank to
correspondingly increase the
interest rate stipulated in this
contract without advance notice
to me/us in the event the law
should be enacted increasing
the lawful rates of interest that
may be charged on this
particular kind of loan.

In the case at bar, the loan was

perfected on July 20, 1983. PD
No. 116 became effective on
January 29, 1973. x x x x x x x x
x In the light of the CB issuances
in force at that time, respondent
bank was fully aware that it
could have imposed an interest
higher than 9% per annum rate
for the housing loans of its
employees, but it did not. In the
subject loan, the respondent
bank knowingly agreed that the
interest rate on the petitioners
loans shall remain at 9% unless
a CB issuance is passed
authorizing an increase (or

decrease) in the rate on such

employee loans and the
Provident Fund Board of
Trustees acts accordingly.

Thus, as far as the parties were

concerned, all other onerous
factors, such as employee
resignations, which could have
been used to trigger the
application of the escalation
clause were considered barred
or waived.

x x x (I)t will not be amiss to

point out that the unilateral
determination and imposition of
increased interest rates by the
herein respondent bank is
obviously violative of the
principle of mutuality of
contracts ordained in Article
1308 of the Civil Code. x x x x x
xxxx

Let it be clear that this Court

understands respondents
banks position that the
concessional interest rate was
really intended as a means to
remunerate its employees and

21

thus an escalation clause due to

resignation would have been a
valid stipulation. But no such
stipulation was in fact made,
and thus escalation provision
could not be legally applied and
enforced against herein
petitioners.

4. Obligatory force of
contracts
Article 1159. Obligations
arising from contracts have the
force of law between the
contracting parties and should
be complied with in good faith.

Article 1315. Contracts are perfected

by mere consent, and from that
moment the parties are bound not only
to the fulfillment of what has been
expressly stipulated but also to all the
consequences which, according to
their nature, may be in keeping with
good faith, usage and law. (1258)

Article 1316. Real contracts, such as

deposit, pledge and commodatum, are
not perfected until the delivery of the
object of the obligation.

Article 749. In order that the donation

of an immovable may be valid, it must
be made in a public document,
specifying
therein
the
property
donated and the value of the charges
which the donee must satisfy.
The acceptance may be made in the
same deed of donation or in a separate
public document, but it shall not take
effect unless it is done during the
lifetime of the donor.
If the acceptance is made in a
separate instrument, the donor shall
be notified thereof in an authentic
form, and this step shall be noted in
both instrument

New World Developers and

Management Inc. vs AMA
Computer Learning Center

AMA leased the second floor of

petitioner's building. They
entered a lease contract for an 8
year period The contract also
provided that AMA may

22

preterminate the contract by

sending notice in writing to New
World at least six months before
the intended date. In case of
pretermination, AMA shall be
liable for liquidated damages in
an amount equivalent to six
months of the prevailing rent.

For the first 3 years, AMA paid

the monthly rent with the
required adjustment in
accordance with the escalation
rate for the second and the third
years. In 2002 and 2003, AMA
requested the deferment of the
annual increase in the monthly
rent by citing financial
constraints brought about by a
decrease in its enrollment. New
World agreed to reduce the
escalation rate .d
However, in 2004, AMA removed
all its office equipment and
furniture from the leased
premises. It sent New World a
letter, stating that AMA had
decided to preterminate the
contract effective immediately
on the ground of business losses
due to a drastic decline in
enrollment. AMA also demanded

the refund of its advance rental

and security deposit.
New World replied with
Statement of Account indicating
the amounts to be paid by AMA:
1) unpaid two months rent in
the amount of P466,620; 2) 3%
monthly interest for the unpaid
rent in the amount of
P67,426.59; 3) liquidated
damages equivalent to six
months of the prevailing rent in
the amount of P1,399,860; and
4) damage to the leased
premises amounting to P15,580.
The deduction of the advance
rental and security deposit paid
by AMA still left an unpaid
balance in the amount of
P1,049,486.59.
Despite the meetings between
the parties, they failed to arrive
at a settlement regarding the
payment of the foregoing
amounts. New World thus filed
a complaint for a sum of money
and damages against AMA.

Issue
1. Whether AMA is liable to pay
six months worth of rent as

23

liquidated damages.

Held
1. YES, it is liable to pay 6
mos worth of rent as
liquidated damages.

Item No. 14 of the Contract of

Lease
states:chanRoblesvirtualLawlibr
ary
That [AMA] may pre-terminate
this Contract of Lease by notice
in writing to [New World] at
least six (6) months before the
intended date of pretermination, provided, however,
that in such case, [AMA] shall be
liable to [New World] for an
amount equivalent to six (6)
months current rental as
liquidated
damages;30cralawlawlibrary
Quite notable is the fact that
AMA never denied its liability for
the payment of liquidated
damages in view of its
pretermination of the lease
contract with New World. What

it claims, however, is that it is

entitled to the reduction of the
amount due to the serious
business losses it suffered as a
result of a drastic decrease in its
enrollment.

The law does not relieve a

party from the
consequences of a contract
it entered into with all the
required formalities (cf with
CC 1159 and 1306) Courts have
no power to ease the burden of
obligations voluntarily assumed
by parties, just because things
did not turn out as expected at
the inception of the contract. It
must also be emphasized that
AMA is an entity that has had
significant business experience,
and is not a mere babe in the
woods.
In the sphere of personal and
contractual relations governed
by laws, rules and regulations
created to promote justice and
fairness, equity is deserved, not
demanded. The application of
equity necessitates a balancing
of the equities involved in a
case, for [h]e who seeks equity

24

must do equity, and he who

comes into equity must come
with clean hands. Persons in
dire straits are never justified in
trampling on other persons
rights. Litigants shall be denied
relief if their conduct has been
inequitable, unfair and
dishonest as to the controversy
in issue. The actions of AMA
smack of bad faith.
1. It preterminated the lease
without notifying New World at
least six months before the
intended date.

2. It removed all its office

equipment and left the premises
in the middle of the night.

3. Only after it had cleared the

premises did it send New World
a notice of pretermination
effective immediately.

4. It had the gall to demand a

full refund of the advance rental
and security deposit, albeit
without prejudice to their

removal of the improvements

introduced in the premises.

5. Relativity of contracts
Article 1311. Contracts take effect
only between the parties, their assigns
and heirs, except in case where the
rights and obligations arising from the
contract are not transmissible by their
nature, or by stipulation or by
provision of law. The heir is not liable
beyond the value of the property he
received from the decedent.

If a contract should contain some

stipulation in favor of a third person,
he may demand its fulfillment provided
he communicated his acceptance to
the obligor before its revocation. A
mere incidental benefit or interest of a
person
is
not
sufficient.
The
contracting parties must have clearly
and deliberately conferred a favor
upon a third person. (1257a)

Article 1312. In contracts creating

real rights, third persons who come
into possession of the object of the
contract are bound thereby, subject to
the provisions of the Mortgage Law
and the Land Registration Laws. (n)

25

Article 1313. Creditors are protected

in cases of contracts intended to
defraud them. (n)

Article 1314. Any third person who

induces another to violate his contract
shall be liable for damages to the other
contracting party.

creditors when the latter cannot

in any other manner collect the
claims due them;

Saludo Jr. vs Security Bank

Corp.

FACTS:
Article 1177. The creditors, after
having pursued the property in
possession of the debtor to satisfy
their claims, may exercise all the rights
and bring all the actions of the latter
for the same purpose, save those
which are inherent in his person; they
may also impugn the acts which the
debtor may have done to defraud
them. (1111)

Article 1178. Subject to the laws, all

rights acquired in virtue of an
obligation are transmissible, if there
has been no stipulation to the contrary.

Article 1381. The following

contracts are rescissible:

(3) Those undertaken in fraud of

On May 30, 1996, Booklight was

extended an omnibus line credit
facility by SBS in the amount of
10,000,000.00. Said loan was
covered by a Credit Agreement
and Continuing Suretyship with
the herein petitioner as surety,
both documents dated August 1,
1996 to secure full payment and
performance of the obligations
arising from the credit
accommodation.

Booklight drew several

availments of the approved
credit facility from 1996 to 1997
and faithfully complied with the
terms of the loan. On October
30, 1997, SBC approved the
renewal of the credit facility of
Booklight in the amount of

26

10,000,000.00 under the

prevailing security lending rate.
From August 3-14, 1998
Booklight executed 9 promissory
notes in favor of SBC in the
aggregate amount of
9,652,725.00. As of May 15,
2000 the obligation of Booklight
stood at 10,487,875.41,
inclusive of interest past due
and penalty.

On June 16, 2000, SBC filed

against Booklight and herein
petitioner an action for
collection of sum of money with
the RTC. On March 7, 2005
Booklight was declared in
default.

ISSUE:
WON petitioner
should be held soldarily
liable for the second credit
facility extended to
Booklight
.
RULING:

Yes. There is no doubt that

Booklight was extended two

credit facilities, each with oneyear term, by SBC. Booklight

availed of these two credit lines.
While Booklight was able to
comply with its obligation under
the first credit line, it defaulted
in the payment of the loan
obligation amounting to
9,652,725.00 under the second
credit line. The first credit line
was covered by a Continuing
Suretyship with peitioner acting
as the surety. It is concluded
that the liability of the petitioner
did not expire upon the
termination of the first credit
facility.

It cannot be gainsaid that the

second credit facility was
renewed for another one-year
term by SBC. This very renewal
is explicitly covered by the
guaranteed obligation of the
Continuing Surety.

It is the first credit facility that

expired and not the Credit
Agreement. There was a second
loan pursuant to the same credit
agreement. The terms and
conditions under the Credit

27

Agreement continue to apply

and the Continuing Suretyship
continues to guarantee the
Credit Agreement.

Metropolitan Bank and Trust

Company vs Reynado and
Adrandea

On January 31, 1997, petitioner

Metrobank (MB) charged
respondents with the crime of
estafa. It was alleged that there
are uncovered fraudulent
transactions perpetrated by
respondents in connivance with
client Universal Converter
Philippines, Inc. (Universal);
through the so-called Bills
Purchase Transaction, Universal,
which has a paid-up capital of
only P125,000.00 and actual
maintaining balance of
P5,000.00, was able to make
withdrawals totaling
P81,652,000.006 against
uncleared regional checks
deposited in its account at MBs
Port Area branch wherein said
checks were later dishonored by

MB for the reason "Account

Closed". Respondents denied
the allegation.

Meanwhile, on February 26,

1997, MB and Universal entered
into a Debt Settlement
Agreement whereby the latter
acknowledged its indebtedness
to the former in the total
amount of P50,990,976.27 as of
February 4, 1997 and undertook
to pay the same in bimonthly amortizations in the
sum of P300,000.00 starting
January 15, 1997, covered by
postdated checks, "plus balloon
payment of the remaining
principal balance and interest
and other charges, if any, on
December 31, 2001."

The prosecutor dismissed the

complaint holding that because
of the execution of debt
settlement agreement, novation
has set in and prevented the
incipience of any criminal
liability on the part of the
respondents. The DOJ and CA
affirmed said decision.

28

Issue:
WON novation extinguishes
criminal liability or WON the
execution of the debt settlement
agreement precluded MB from
holding respondents criminally
liable for estafa

Held:
No.

Novation is not a mode of

extinguishing criminal liability
for estafa; Criminal liability for
estafa is not affected by
compromise or novation of
contract.

Initially, it is best to emphasize

that "novation is not one of the
grounds prescribed by the
Revised Penal Code for the
extinguishment of criminal
liability."

SC held in People v. Moreno and

in People v. Ladera, that
"criminal liability for estafa is
not affected by compromise or
novation of contract, for it is a
public offense which must be
prosecuted and punished by the
Government on its own motion
even though complete
reparation should have been
made of the damage suffered by
the offended party." Similarly in
the case of Metropolitan Bank
and Trust Company v. Tonda,
cited by MB, we held that in a
crime of estafa, reimbursement
of or compromise as to the
amount misappropriated, after
the commission of the crime,
affects only the civil liability of
the offender, and not his
criminal liability.

Thus, the doctrine that evolved

from the aforecited cases is that
a compromise or settlement
entered into after the
commission of the crime does
not extinguish accuseds liability
for estafa. Neither will the same
bar the prosecution of said
crime. Accordingly, in such a
situation, as in this case, the

29

complaint for estafa against

respondents should not be
dismissed just because MB
entered into a Debt Settlement
Agreement with Universal.
Petition granted.

Prudential Bank vs Abasolo

Valenzuela-Rosales inherited
two parcels of land situated in
Laguna. After she passed away,
her heirs executed a special
power of attorney in favor of
Abasolo herein respondent
empowering her to sell the
properties.

Sometime in 1995, one Corazon

Marasigan (Corazon) wanted to
buy the properties, but having
no available cash, she broached
the idea of first mortgaging the
properties to petitioner
Prudential bank and trust
company and that the proceeds
of which would be paid directly
to respondent. Respondent in
response agreed to the
proposal.

To guarantee the payment of

the property, Corazon executed
a Promissory note for 1,448,960
in favor of respondent to cover
the amountof the real property.
On the other hand, Mendiola, an
employee of PBTC, advised
respondent to transfer the
properties first to Corazon for
immediate processing of
Corazon's loan application with
assurance that the proceeds
thereof would be paid directly to
her(respondent), and the
obligation would be refelcted in
a bank guarantee. Heeding
Mendiola's advice, respondent
executed a Deed of Absolute
Sale in favor of Corazon.
Corazon then after applied for a
loan with PBTC and executed a
real estate mortgage covering
the properties to secure the
payment of the loan. Such loan
was granted.

Unfortunately, despite repeated

demands, Corazon failed to pay
the purchase price of the
properties. What she received
from Corazon was a partial
payment in kind consisting 5

30

vehicles totaled P665,000.

Respondent then filed a

complaint for collection of sum
of money and annulment of sale
and mortgage with damages
against Corazon and the
Petitioner before the RTC.

Issue:
Whether or not the petitioner is
subsidiarily liable to respondent
Abasolo

Held:
No. To a banking institution,
well-defined lending policies and
sound lending practices are
essential to perform its lending
function effectively and
minimize the risk inherent in
any extension. However, in the
absence of lender-borro
wer relationship between
petitioner and Abasolo, there is
no inherent obligationof
petitioner to release the
proceeds of the loan to her.

Asian Cathay Finance and

Leasing Corp. vs Sps de Vera
Asian Cathay Finance and
Leasing Corporation (ACFLC)
extended a loan of P800,000.00
to respondent Cesario Gravador
(Cesario), with respondents
Norma de Vera and Emma
Concepcion Dumigpi as his comakers. The loan was payable in
60 monthly installments of
P24,000.00 each and secured by
a real estate mortgage executed
by Cesario over his property.
Respondents paid the first
installment for November 1999
but failed to pay the subsequent
installments. In February 2000,
ACFLC demanded payment of
P1,871,480.00 from
respondents. Respondents
asked for more time to pay but
ACFLC denied their request.

Respondents filed a case for

annulment of the real estate
mortgage and promissory note
before the Regional Trial Court
(RTC). Respondents averred that

31

the mortgage did not make

reference to the promissory note
and contained a provision on the
waiver of the mortgagors right
of redemption, which is contrary
to law and public policy.
Respondents added that the
promissory note did not specify
the maturity date of the loan,
the interest rate, and the mode
of payment, and illegally
imposed liquidated damages.

ACFLC filed a petition for

extrajudicial foreclosure of
mortgage with the office of the
Deputy Sheriff.

The RTC dismissed respondents

complaint for annulment of
mortgage for lack of cause of
action, holding that respondents
were well-educated individuals
who could not feign naivet in
the execution of the loan
documents. The RTC further
held that the alleged defects in
the promissory note and in the
deed of real estate mortgage
were too insubstantial to
warrant the nullification of the
mortgage. It added that a

promissory note was not one of

the essential elements of a
mortgage, thus, reference to a
promissory note was neither
indispensable nor imperative for
the validity of the mortgage.

Respondents appealed to the

Court of Appeals (CA) which
reversed the RTC. The CA held
that the amount of
P1,871,480.00 demanded by
ACFLC from respondents was
unconscionable and excessive.
The CA fixed the interest rate at
12% per annum and reduced
the penalty charge to 1% per
month. The CA also invalidated
the waiver of respondents right
of redemption for reasons of
public policy.

When the CA denied ACFLCs

motion for reconsideration,
ACFLC brought the case to the
Supreme Court, insisting on the
validity of the real estate
mortgage and promissory note.
ACFLC argued that right of
redemption was a privilege
which respondents could waive
as they did in this case. It

32

further argued that respondents

action for annulment of
mortgage was a collateral
attack on its certificate of title.

Issues:
(1) Whether or not the interest
imposed by ACFLC was
unconscionable and excessive;
(2) Whether or not the provision
in the real estate mortgage on
the mortgagors waiver of right
of redemption should be voided
for being against public policy;
and
(3) Whether or not the action for
annulment of mortgage was a
collateral attack on ACFLCs
certificate of title.

Held:
(1) It is true that parties to a
loan agreement have a wide
latitude to stipulate on any
interest rate in view of Central
Bank Circular No. 905, series of
1982, which suspended the
Usury Law ceiling on interest
rate effective 1 January 1983.
However, interest rates,

whenever unconscionable, may

be equitably reduced or even
invalidated.

In a span of 3 months (from the

payment of the initial
installment for November 1999
up to ACFLCs demand on 1
February 2000), respondents
principal obligation of
P800,000.00 ballooned by more
than P1,000,000.00. ACFLC
failed to show any computation
on how much interest was
imposed and on the penalties
charged. Thus, the amount
claimed by ACFLC was
unconscionable.

Stipulations authorizing the

imposition of iniquitous or
unconscionable interest are
contrary to morals, if not against
the law. Under Article 1409 of
the Civil Code, these contracts
are inexistent and void from the
beginning. They cannot be
ratified nor the right to set up
their illegality as a defense be
waived. The nullity of the
stipulation on the usurious
interest does not, however,

33

affect the lenders right to

recover the principal of the loan.
Nor would it affect the terms of
the real estate mortgage. The
right to foreclose the mortgage
remains with the creditors, and
said right can be exercised upon
the failure of the debtors to pay
the debt due. The debt due is to
be considered without the
stipulation of the excessive
interest. A legal interest of 12%
per annum will be added in
place of the excessive interest
formerly imposed. The
nullification by the CA of the
interest rate and the penalty
charge and the consequent
imposition of an interest rate of
12% and penalty charge of 1%
per month cannot, therefore, be
considered a reversible error.

The Court cited Spouses Castro

vs. Tan, et al. (G.R. No. 168940;
24 November 2009), where it
held that: The imposition of an
unconscionable rate of interest
on a money debt, even if
knowingly and voluntarily
assumed, is immoral and unjust.
It is tantamount to a repugnant
spoliation and an iniquitous

deprivation of property,
repulsive to the common sense
of man. It has no support in law,
in principles of justice, or in the
human conscience nor is there
any reason whatsoever which
may justify such imposition as
righteous and as one that may
be sustained within the sphere
of public or private morals.

(2) Settled is the rule that for a

waiver to be valid and effective,
it must, in the first place, be
couched in clear and
unequivocal terms which will
leave no doubt as to the
intention of a party to give up a
right or benefit which legally
pertains to him. The intention to
waive a right or an advantage
must be shown clearly and
convincingly. ACFLC failed to
convince the Court that
respondents waived their right
of redemption voluntarily.

The Court agreed with the CAs

explanation in invalidating the
waiver: The supposed waiver
was in fine print and in the form
and language prepared by

34

ACFLC, partaking of the nature

of a contract of adhesion.
Doubts in the interpretation of
stipulations in contracts of
adhesion should be resolved
against the party that prepared
them. This principle especially
holds true with regard to
waivers, which are not
presumed, but which must be
clearly and convincingly shown.
ACFLC failed to show the
efficacy of this waiver.
Moreover, to say that the
mortgagors right of redemption
may be waived through a fine
print in a mortgage contract is,
in the last analysis, tantamount
to placing at the mortgagees
absolute disposal the property
foreclosed. It would render
practically nugatory this right
that is provided by law for the
mortgagor for reasons of public
policy. A contract of adhesion
may be struck down as void and
unenforceable for being
subversive to public policy,
when the weaker party is
completely deprived of the
opportunity to bargain on equal
footing.

(3) The case for annulment of

mortgage was filed long before
the consolidation of ACFLCs
title over the property. In fact,
when respondents filed said
case at the first instance, the
title to the property was still in
Cesarios name. It was pending
with the RTC when ACFLC filed a
petition for foreclosure of
mortgage and even when a writ
of possession was issued.
Clearly, ACFLCs title was
subject to the final outcome of
the case for annulment of
mortgage.

Velasco vs CA

Alta Farms secured 2 loans from

GSIS to finance a piggery
project.. The loans were secured
by two mortgages. Alta Farms
defaulted in the payment of the
load, and thus executed a deed
of sale with assumption of
mortgage with Asian
Engineering Corp., but without
the consent of GSIS (thus
violating the provision on

35

mortgage contracts).

Asian Engineering Corp. then

executed an Exclusive Sales
Agency, Management and
Administration Contract in favor
of Laigo Realty Corporation, with
the intention of converting the
piggery farm into a subdivision
(Exh. "D"). And on October 20,
1969, Asian Engineering
executed another contract with
Laigo, whereby Laigo was to
undertake the development of
the property into a subdivision
(Exh. "E"). Conformably with the
two contracts (Exh "D" and "E"),
Laigo started the development
of the lot into a subdivision.

Laigo then entered into

contracts with petitioners for the
construction of the houses.
When neither Laigo nor the
individual home buyers paid for
the home constructed, Velasco
wrote GSIS to intercede. The
amount that Laigo paid Velasco
in checks bounced.

Issue:

whether or not GSIS is liable to

the petitioners for the cost of
the materials and labor
furnished by them in
construction of the 63 houses
now owned by the GSIS and for
the construction of which no
payment has been made on the
balance due petitioners

Held:
We so hold that even in equity alone,
GSIS should pay the petitioners. After
all, it admits it has not collected from
the ones who appear to be the buyers
thereof, albeit it must be collecting the
installments on the lots. All it has to do
then is to pass on to them what it has
to pay petitioners. In law, GSIS is,
under the peculiar circumstances of
this case, the owner of said houses.
Pursuant to Article 1729 of the Civil
Code:
Those who put their
labor upon or furnish
materials for a piece of
work undertaken by the
contractor have an
action against the owner
up to the amount owing
from the latter to the
contractor at the time
the claim is made.
However, the following

36

shall not prejudice the

laborers, employees and
furnishers of materials:

Kauffman vs PNB

1) Payments made by
the owner to the
contractor before they
are due;

Plaintiff George Kauffman was

the president and owner of
almost all shares of stocks of
the Philippine Fiber and Produce
Company in the Philippine
Islands. On February 5, 1918,
the board of directors of said
company, declared a dividend of
P100,000 from its surplus
earnings for the year 1917, of
which the plaintiff was entitled
to the sum of P98,000. This
amount was accordingly placed
to his credit on the books of the
company, and so remained until
in October of the same year
when an unsuccessful effort was
made to transmit the whole, or
a greater part thereof, to the
plaintiff in New York City.

2) Renunciation by the
contractor of any
amount due him from
the owner.

Article 1311 of the Civil Code

which GSIS invokes is not
applicable where the situation
contemplated in Article 1729
obtains. The intention of the
latter provision is to protect the
laborers and the materialmen
from being taken advantage of
by unscrupulous contractors and
from possible connivance
between owners and
contractors. Thus, a constructive
vinculum or contractual privity
is created by this provision, by
way of exception to the principle
underlying Article 1311 between
the owner, on the one hand, and
those who furnish labor and/or
materials, on the other.

On October 9, 1918, George B.

Wicks, treasurer of the
Philippine Fiber and Produce
Company, presented himself in
the exchange department of the
Philippine National Bank in
Manila and requested that a
telegraphic transfer of $45,000
should be made to the plaintiff

37

in New York City, upon account

of the Philippine Fiber and
Produce Company.
On the same day the Philippine
National Bank dispatched to its
New York agency a cablegram to
the following effect: "Pay George
A. Kauffman, New York, account
Philip- pine Fiber Produce Co.,
$45,000. (Sgd.) PHILIPPINE
NATIONAL BANK, Manila."

However the Philippine National

Bank in Manila, upon advise by
the banks representative in
New York of the plaintiffs
reluctance to accept bills from
his company and that payment
be withheld, sent another
telegram message on October
11 to its representative to
withhold the payment to plaintiff
as suggested.

Meanwhile, Wicks cabled the

plaintiff in New York advising
him that the $45,000 had been
placed to his credit in the New
York agency of PNB. Thereafter,
plaintiff presented himself at the
office of PNB in New York City

demanding payment. By this

time, the message from PNB
Manila of October 11 directing
the withholding of payment and
that payment was therefore
refused.

In view of these facts, the

plaintiff Kauffman instituted the
present action in the Court of
First Instance of the city of
Manila to recover said sum, with
interest and costs; and
judgment having been there
entered favorably to the
plaintiff, the defendant
appealed.

ISSUE: WON THE PLAINTIFF CAN

MAINTAIN THE ACTION
CONSIDERING HIS LACK OF
PRIVITY TO THE CONTRACT
BETWEEN PNB AND GEORGE
WICKS?

HELD YES
The only express provision of
law as bearing directly on this
question is the second
paragraph of article 1257 of the

38

Civil Code; This provision states

an exception to the general rule
expressed in the first paragraph
of the same article to the effect
that contracts are productive of
effects only between the parties
who execute them; XXXX

Bonifacio Bros vs Mora

>
Enrique Mora mortgaged his
Odlsmobile sedan car to HS Reyes Inc.
with the condition that Mora would
insure the car with HS Reyes as
beneficiary.
> The car was then insured with State
Insurance Company and the policy
delivered to Mora.

Mora was billed P2,102.73. The bill

was sent to the insurers appraiser.
The insurance company drew a check
in the amount of the insurance
proceeds and entrusted the check to
its appraiser for delivery to the proper
party.
> The car was delivered to Mora
without the consent of HS Reyes, and
without payment to Bonifacio Bros and
Ayala.
> Upon the theory that the insurance
proceeds should be directly paid to
them, Bonifacio and Ayala filed a
complaint against Mora and the insurer
with the municipal court for the
collection of P2,102.73.
> The insurance company filed its
answer with a counterclaim for
interpleader, requiring Bonifacio and
HS Reyes to interplead in order to
determine who has a better right to
the proceeds.

>
During the effectivity of the
insurance contract, the car figured in
an accident.
The company then
assigned the accident to an insurance
appraiser
for
investigation
and
appraisal of the damage.

Issue:

> Mora without the knowledge and

consent of HS Reyes, authorized
Bonifacio Bros to fix the car, using
materials supplied by the Ayala Auto
Parts Company.

Held:

> For the cost of Labor and materials,

Whether or not there is privity of

contract between Bonficacio and Ayala
on one hand and State Insurance on
the other.

NONE.
It is fundamental that contracts take
effect only between the parties
thereto, except in some specific

39

instance provided by law where the

contract contains some stipulation in
favor of a third person.
Such
stipulation is known as a stipulation
pour autrui; or a provision in favor of a
third person not a party to the
contract.

Under this doctrine, a third person is

ed to avail himself of a benefit granted
to him by the terms of the contract,
provided that the contracting parties
have clearly and deliberately conferred
a
favor
upon
such
person.
Consequently, a third person NOT a
party to the contract has NO action
against the aprties thereto, and cannot
generally demand the enforcement of
the same.

The question of whether a third person

has an enforceable interest in a
contract
must
be
settled
by
determining whether the contracting
parties intended to tender him such an
interest by deliberately inserting terms
in their agreement with the avowed
purpose of conferring favor upon such
third person. IN this connection, this
court has laid down the rule that the
fairest test to determine whether the
interest of a 3rd person in a contract is
a stipulation pour autrui or merely an
incidental interest, is to rely upon the
intention of the parties as disclosed by
their contract.

In the instant case the insurance

contract does not contain any words or
clauses to disclose an intent to give
any benefit to any repairmen or
material men in case of repair of the
car in question. The parties to the
insurance
contract
omitted
such
stipulation, which is a circumstance
that supports the said conclusion. On
the other hand, the "loss payable"
clause
of
the
insurance
policy
stipulates that "Loss, if any, is payable
to H.S. Reyes, Inc." indicating that it
was only the H.S. Reyes, Inc. which
they intended to benefit.

A policy of insurance is a distinct and

independent contract between the
insured and insurer, and third persons
have no right either in a court of
equity, or in a court of law, to the
proceeds of it, unless there be some
contract of trust, expressed or implied,
by the insured and third person. In
this case, no contract of trust, express
or implied. In this case, no contract of
trust, expressed or implied exists. We,
therefore, agree with the trial court
that no cause of action exists in favor
of the appellants in so far as the
proceeds of insurance are concerned.
The appellant's claim, if at all, is
merely equitable in nature and must
be made effective through Enrique
Mora who entered into a contract with
the Bonifacio Bros Inc. This conclusion
is deducible not only from the principle
governing the operation and effect of

40

insurance contracts in general, but is

clearly covered by the express
provisions of section 50 of the
Insurance Act (now Sec. 53).

The policy in question has been so

framed that "Loss, if any, is payable to
H. S. Reyes, Inc." which unmistakably
shows the intention of the parties.

Florentino vs Encarnacion

facts of the case

- The parties filed with the CFI of Ilocos
Sur an application for the registration
of a parcel of agricultural land
stating that they are the coowners of the said land;
that they had acquired the land
by
inheritance
from
their
predecessor in interest, lately
their aunt;
that the land was adjudicated to
them by virtue of deed of
extrajudicial partition; and
that
applicants
Salvador
Encarnacion,
Jr.
and
Angel
Encarnacion
acquired
their
respective shares of the land thru
purchase from the original heirs.

- The deed of extrajudicial partition had

a stipulation in Spanish (Exhibit O1) which provided that the products
of the said land shall answer for the
expenses to be incurred by the
Church for the preparation and
celebration of the Holy Week.

- One of the petitioners asked the court

to include the said stipulation as an
encumbrance on the land sought to
be registered and cause its entry on
the fact of the title that will be
issued. Salvador Encarnacion, Sr.,
Salvador Encarnacion, Jr., and Angel
Encarnacion opposed.

[Note that Salvador Sr. was a

signatory to the Deed of
Extrajudicial Partition, while
Salvador Jr. and Angel were
NOTsince they were mere
buyers of the shares of the
original heirs.]
- CFI ruled that the stipulation is void.
It
being
a
self-imposed
arrangement in favor of the
Church (i.e., a donation) which
has not been accepted by the
Church as donee.
Also
because
Salvador
Encarnacion
Jr.
and
Angel
Encarnacion made no oral or
written grant at all as in fact they
are even opposed to it.
Thus, the religious expenses
should be made and entered on
the undivided shares of all the
applicants except Salvador Sr.,
Salvador Jr., and Angel.
- CFI modified its earlier decision: The
stipulation was validly revoked by
Salvador Sr.
If the stipulation is to be
considered as a stipulation pour
autrui, it cannot now be enforced
because the Church in whose

41

favor it was made has not

communicated its acceptance to
the oppositors before the latter
revoked it.

issues
Whether the stipulation in
question is just an arrangement
stipulation or a grant revocable
at the unilateral option of the
co-owers.NO.

Whether the encumbrance or

religious expenses contained
the Deed of Extrajudicial
Partition between the co-heirs is
binding only on the petitioners
excluding Salvador Sr., Salvador
Jr., and Angel. NO.

Whether the stipulation in

question is a stipulation pour
autrui. YES.

Ratio
- The stipulation on religious expenses is
not revocable at the unilateral option
of the co-owners and neither is it
binding only on the petitioners. It is
also binding on the oppositors
Salvador Sr., Salvador Jr., and Angel.

- The
stipulation
is
part
of
an
extrajudicial partition duly agreed
and signed by the parties, hence the
same must bind the contracting
parties thereto and its validity or
compliance cannot be left to the will
of one of them (NCC 1308). Under
NCC 1311, this stipulation takes
effect between the parties, their
assigns and heirs.

The stipulation in question

is a stipulation pour autrui.
- A stipulation pour autrui is a stipulation
in favor of a third person conferring a
clear and deliberate favor upon him,
and which stipulation is merely a part
of a contract entered into by the
parties, neither of whom acted as
agent of the third person, and such
third person may demand its
fulfillment
provided
that
he
communicates his acceptance to the
obligor before it is revoked.
- The requisites are: (1) that the
stipulation in favor of a third person
should be a part, not the whole, of
the contract; (2) that the favorable
stipulation should not be conditioned
or compensated by any kind of
obligation whatever; and (3) neither
of the contracting parties bears the
legal representation or authorization
of third party.
- To constitute a valid stipulation pour
autrui, it must be the purpose and
intent of the stipulating parties to
benefit the third person, and it is not
sufficient that the third person may
be incidentally benefited by the
stipulation.

42

- The fairest test to determine whether

the interest of third person in a
contract
is
a
stipulation pour
autrui or
merely
an
incidental
interest, is to rely upon the
intention of the parties as
disclosed by their contract. In
applying this test, it matters not
whether the stipulation is in the
nature of a gift or whether there is an
obligation owing from the promisee
to the third person. That no such
obligation exists may in some degree
assist in determining whether the
parties intended to benefit a third
person.
- Here, the evidence shows that the true
intention of the parties is to confer
and material benefit upon the
Church. The fruits of the land were
used thenceforth to defray the
expenses of the Church in the
preparation and celebration of the
Holy Week, an annual religious
function.

immemorial, up to a year before the

filing of their application in May
1964, the Church had been enjoying
the benefits of the stipulation.
- The enjoyment of benefits flowing
therefrom for almost seventeen
years without question from any
quarters can only be construed as an
implied acceptance by the Church
of the stipulation pour autruibefore
its revocation.
- Thus, Salvador Sr., Salvador Jr., and
Angel must bear with the stipulation.
Salvador Jr., and Angel, being
subsequent purchasers are privies or
successors in interest; it is axiomatic
that
contracts
are
enforceable
against the parties and their privies.
- The annotation being sought by
petitioner in this case is merely a
guarantee
of
the
continued
enforcement and fulfillment of the
beneficial stipulation.

The stipulation is not revocable at

the option of the co-owners.
- While a stipulation in favor of a third
person has no binding effect in itself
before its acceptance by the party
favored, the law does not provide
when the third person must make his
acceptance. As a rule, there is no
time limit; such third person has
all the time until the stipulation
is revoked.
- Here, the Church accepted the
stipulation in its favor before it is
sought to be revoked by some of the
co-owners, namely the oppositors
herein. It is not disputed that from
the time of the death of Dona
EncarnacionFlorentino in 1941, as
had always been the case since time

Bank of America vs IAC

Plaintiff
Air
Cargo
and
Travel
Corporation is the owner of Account
Number 19842-01-2 with defendant
Bank of America. Defendant Toshiyuki
Minami,
President
of
plaintiff
corporation in Japan, is the owner of
Account Number 24506-01-7 with
defendant Bank.
On March 10, 1981, the Bank received
a tested telex advise from Kyowa Bank
of Japan stating,
ADVISE PAY USDLS 23,595. TO YOUR

43

A/C NBR 24506-01-7 OF A. C. TRAVEL

CORPORATION
MR.
TOSHIYUKO
MINAMI.
and the Bank credited the amount of
US$23,595.00 to Account Number
24506-07-1 (should be 24506-01-7)
owned, as aforesaid, by Minami.
On March 12, 1981, Minami withdrew
the sum of P180,000.00 the equivalent
in Philippine Pesos of the sum of
US$23,595.00 from the Bank on his
Account Number 24506-07-1 (should
be 24506-01-7)
It
may
be
explained
that
the "tested" telex advice is a message
signed in "code". Evidently, there was
a previous contractual agreement
between Kyowa Bank of Japan (KYOWA)
and Petitioner (BANKAMERICA) that,
from time to time, KYOWA can ask
BANKAMERICA to pay amounts to a
third
party
(beneficiary)
with
BANKAMERICA
afterwards
billing
KYOWA the indicated amount given to
the beneficiary. To assure itself that an
Order received from KYOWA really
comes from KYOWA, it is usually
agreed that KYOWA's signature will be
in accordance with a confidential code.
According to ACTC in its Comment, in
the early part of 1981, it was Tokyo
Tourist Corporation in Japan which
applied with Kyowa Bank, Ltd. also
based in Tokyo, Japan, for telegraphic
transfer of the sum of US$23,595.00
payable to ACTC's account with
BANKAMERICA, Manila.

When the tested telex was received on

May
10,
1981,
employees
of
BANKAMERICA
noted
its
patent
ambiguity. Notwithstanding, on the
following day, BANKAMERICA credited
the amount of US$23,595.00 to the
account of Minami. ACTC claimed that
the amount should have been credited
to
its
account
and
demanded
restitution, but BANKAMERICA refused.
On February 18, 1982, ACTC filed suit
for damages against
BANKAMERICA
and Minami before the Trial Court in
Pasig for the failure of BANKAMERICA
to restitute. Minami was declared in
default. Thereafter, judgment was
rendered holdingdefendant Bank and
defendant Minami jointly and severally
liable for.
1. The sum of US$23,595.00 or in
Philippine Currency at the current
guiding rate of exchange which is
P14.00 to the dollar, as and by way of
actual damages with interest at the
rate of twelve (12%) per cent per
annum from the filing of the complaint
until fully paid;
2. The sum of P50,000.00 as
temperate and exemplary damages;
3. The sum of P10,000.00 as attorney's
fees;;
4. The costs of this suit.
The CA affirmed this in toto.
We must say that the Bank personnel

44

were in fact confused or in doubts as

to the real payee.

Minami, (Emphasis supplied)

Held:

The Senior Clerk who initially received

the tested telex had called up Mr.
Colegado, Mr. Ichiban, Miss Mayagama
and Atty. Villanueva, all of plaintiffappellee,
but
he
received
"no
answer."(Exh. 3; pp. 9-10, t.s.n., Dec.
2, 1982).
Thereupon, the processor checked the
alphabetical listings and he saw that
the payee, Account Number 24506-017, matched the name appearing in the
tested telex advise (p. 10, t.s.n., Dec.
2, 1981).
The gross negligence then of appellant
Bank may be sum (sic) up as follows;
The words "A.C. TRAVEL CORPORATION
MR. TOSHIYUKO MINAMI" engendered
or cast doubt on the part of the Senior
Clerk as to the real payee despite the
"A.C. NBR 24506-01-7" and should
have consulted higher officials of
plaintiff before giving the advise to the
processor who sent the same to the
computer
center
for
ultimate
processing (p. 11, Appellant's Brief).
The processor verified that Account
Number 24506-01-7 belonged to
TOSHIYUKO MINAMI' only and not to
"A.C. TRAVEL
CORPORATION
MR.
TOSHIYUKO
MINAMI"
and
this
circumstance should have moved the
processor to be more prudent and to
consult higher officials instead of
sending the advise to the computer
center for processing or crediting the
remittance to the account of Toshiyuko

We are constrained to reverse.

It is our considered opinion that, in the
tested telex, considered either as a
patent ambiguity or as a latent
ambiguity, the beneficiary is Minami.
The mention of Account No. 24506-017, as well as the name of Minami, has
to be given more weight than the
mention of the name of ACTC.
BANKAMERICA could not have very
well disregarded that account number.
It could also be that the mention of
ACTC's
name
was
a
further
identification of Minami, to prevent
payment to a possible another
"Toshiyuko Minami" who may not be
connected with ACTC. On the other
hand, it should be difficult to concede
that, in the tested telex, Account No.
24506-01-7 was erroneously written
and should be substituted by Account
No. 19842-01-2 in the name of ACTC.
In Vargas Plow Factory, Inc. vs. Central
Bank, it was held that "the opening of
a letter of credit in favor of the
exporter becomes ultimately but the
result of a stipulation pour autrui" (27
SCRA 84 [1969]). Similarly, when
KYOWA asked BANK-AMERICA to pay an
amount to a beneficiary (either ACTC
or Minami), the contract was between
KYOWA and BANK-AMERICA and it had
a stipulation pour autrui.
It should be recalled that the tested

45

telex originated from KYOWA at the

behest of Tokyo Tourist Corporation
with whom ACTC had business
dealings. Minami, on the other hand,
was the liaison officer of ACTC in Japan.
As the entity responsible for the tested
telex was Tokyo Tourist Corporation, it
can reasonably be concluded that if it
had intended that the US$23,595.00
should be credited to ACTC, upon
learning that the amount was credited
to Minami, it should have gone,
together with the representatives of
ACTC, in protest to KYOWA and lodged
a protest. Since that was not done, it
could well be that Tokyo Tourist
Corporation had really intended its
remittance to be credited to Minami.
The identity of the beneficiary should
be
in
accordance
with
the
identification made by KYOWA, and
ACTC
cannot
question
that
identification as it is not a party to the
arrangement between KYOWA and
BANKAMERICA (see Manila Railroad Co.
vs. Compaia Trasatlantica, 38 Phil.
875 [1918]).
Marimperio vs CA
In 1964 Philippine Traders (PH Traders)
and Union Import (Union) entered into
a joint business venture for the
purchase of copra from Indonesia for
sale in Europe. They commissioned
one ExequielToeg of Interocean to look
for a vessel and he found the vessel SS
Paxoi, owned by petitioner Marimperio.
Toeg was instructed by Ph Traders and
Union to hide the identity of the real
parties to the charter

Thus a uniform time charter was

entered into on March 1965 between
Marimperio and Interocean (which was
made to appear as charterer although
it was really Ph Traders and Union)
Thus, Ph and Union offered to buy from
one Karkam of Indonesia 4, tons of
copra for $180/ton. Marimperia was
supposed to be the one go get the
copra but PH Traders and Union were
however in default in their payments.
They were late in giving money for the
15-day hires from March 27-April 1
1965 (they only gave money on April
6) and from April 12-27 1965
Although the late payments were
received, Marimperias representative
informed Interocean (who was again
acting for PH and Union) that they
were withdrawing the vessel from their
service in accordance with Clause 6 of
the Charter Party. After this notice of
withdrawal, Marimperia refused to
receive the payments for the 3rd 15day hire
In default of payment of the Owners
to have the right of withdrawing the
vessel from the services of the
Charterer, without noting any protest
and without interference by any court
or any formality whatsoever and
without prejudice the owners may
otherwise have on the Charterer under
the Charter
That is why Ph and Union were forced
to
enter
into
another
charter
agreement with another company
Union and PH then field with the CFI a
complaint for specific performance
with
prayer
for
preliminary
attachment.
Marimperia,
in
its
defense, stated that the party it
entered into a Charter Agreement with,

46

Interocean, was not a party to the

complaint. It averred that it had no
relationship whatsoever with PH and
Union.
It said that the charter agreement did
not authorize a sub-charter of the SS
Paxoi to other parties. Even if it was
allowed, it was done without its
knowledge, and therefore not binding
That is why Interocean filed a
complaint-in-intervention to collect
what it claims to be its loss by income.
The
lower court
1st
ruled
for
Marimperia, but on MR, it ordered
Marimperia to return to PH and Union
the payments it made for the 15-day
hires.
CA affirmed

issue
Whether PH and Union have the
legal capacity to bring the suit
for specific performance based
on the charter party.
NO

Whether the default of the

Charterer in the payment of the
charter hire within the time
agreed upon gives Marimperia
the right to rescind the charter
arty extrajudicially. YES

Ratio
1st Issue:
Marimperia

Nope,

they

cant

sue

According to Article 1311 of the Civil

Code, a contract takes effect between
the parties who made it, and also their
assigns and heirs, except in cases
where the rights and obligations
arising from the contract are not
transmissible by their nature, or by
stipulation or by provision of law.
Since a parties may be violated only by
the parties, the real parties in interest,
must be parties to said contract.
In this case, the parties to the charter
agreement were Marimperia and
Interocean. Unknown to Merimperia,
interocean then sublet the vessel to
Union which in turn sublet it to PH
Traders. The Union Time Charter
(Charter Agreement) however provided
that INterocean can sublet it, but it
must notify Marimperia of such
fact.
The SC held that this contemplates a
contract of sub-lease. In a sub-lease,
there are two leases and two distinct
judicial relation. The sub-lessees
relation is only with the original lessee,
and thus generally does not have
any direct action against the
lessor.
Although the civil code provides two
instances wherein the lessor can file

47

an action against the sublessee, no

provision
of
law
allows
the
sublessee to maintain an action
against the original lessor.
According to Article 1883 of the Civil
Code:
If an agent acts in his own name, the
principal has no right of action against
the persons with whom the agent has
contracted; neither have such persons
against the principal
In such case the agent is the one
directly bound in favor of the person
with whom he has contracted, as if the
transaction were his own, except when
the contract involves things belonging
to the principal
2nd Issue: Obvious
A contract is the law between the
contracting parties. Since Clause 6
provided that Marimperia can rescind
the charter extra-judicially in case of
default, then it was correct in
rescinding the contract in this case.

action: liability from

wrongful interference.

Issue: Whether a person who is

not a party to a contract for the
sale of land makes himself
liable for damages to the
vendee by colluding with the
vendor in the effort to resist an
action for specific performance

The Court held the defendants

liable
for
the
use
and
occupation of the land and for
its act of inducing the old lady
to renege on her contract with
the petitioner, but its liability
shall be only equal to that
of the principal contracting
party.

Malice is not essential

agreement: It is enough if
wrongdoer, having
knowledge of existence of
contract relation, in bad
faith sets about to break it
up.

No liability if disinterested
advice. Liable if advice is
for indirect purpose of
benefiting defendant at
expense of plaintiff and
contract broken because
of the advice. (Doctrine
under Lumley v. Gye

Daywalt vs Corp de PP Agustinos

Daywalt seeks to recover

damages on ground that
defendant corporation, for
own selfish purposes,
induces Teodorica to
refrain from performance
of contract of sale and
withhold delivery of
Torrens title. Cause of

48

requires interference by
unlawful means.)

Court held that it is

enough that defendant
used property with notice
that plaintiff had a prior
and better right liability
of stranger to contract
must not be more than
liability of person who
actually breached contract
Special damages awarded
only when external
conditions present, apart
from actual terms

HELD:

The judgment of the trial court

should be affirmed, and it is so
ordered, with costs against the
appellant.

RATIO:

1st issue

While it was true that the

circumstances pointed to
an entire sympathy on the
part of the defendant
corporation with the
efforts of Teodorica
Endencia to defeat the
plaintiff's claim to the
land, the fact that its
officials may have advised
her not to carry the
contract into effect would
not constitute
actionable interference
with such contract.

According to the English

and American authorities,
no question can be made
as to the liability to one
who interferes with a
contract existing between
others by means which,

ISSUES:
1. Whether a person who is
not a party to a contract for
the sale of land makes
himself liable for damages
to the vendee, beyond the
value
of
the
use
and
occupation,
by
colluding
with
the
vendor
and
maintaining him in the
effort to resist an action for
specific performance. NO
2. Whether the damages which
the plaintiff seeks to recover
under this head are too remote
and speculative to be the
subject of recovery. YES

49

under known legal

cannons, can be
denominated an unlawful
means. Thus, if
performance is prevented
by force, intimidation,
coercion, or threats, or by
false or defamatory
statements, or by
nuisance or riot, the
person using such
unlawful means is, under
all the authorities, liable
for the damage which
ensues. (Doctrine under
Lumley v. Gye)

Translated into terms

applicable to the case at
bar, the decision in
Gilchrist vs. Cuddy (29
Phil. Rep., 542), indicates
that the defendant
corporation, having notice
of the sale of the land in
question to Daywalt,
might have been enjoined
by the latter from using
the property for grazing its
cattle thereon. That the
defendant corporation is
also liable in this action for
the damage resulting to
the plaintiff from the
wrongful use and

occupation of the property

has also been already
determined. But it will be
observed that in order to
sustain this liability it is
not necessary to resort to
any subtle exegesis
relative to the liability of a
stranger to a contract for
unlawful interference in
the performance thereof.
It is enough that
defendant use the
property with notice
that the plaintiff had a
prior and better right.

Article 1902 of the Civil

Code declares that any
person who by an act or
omission, characterized by
fault or negligence,
causes damage to another
shall be liable for the
damage so done. Ignoring
so much of this article as
relates to liability for
negligence, we take the
rule to be that a person is
liable for damage done to
another by any culpable
act; and by "culpable
act" we mean any act
which is blameworthy
when judged by

50

accepted legal
standards. The idea thus
expressed is undoubtedly
broad enough to include
any rational conception of
liability for the tortious
acts likely to be developed
in any society.

Article 1257 of the Civil

Code declares that
contracts are binding only
between the parties and
their privies. In conformity
with this it has been held
that a stranger to a
contract has no right of
action for the
nonfulfillment of the
contract except in the
case especially
contemplated in the
second paragraph of the
same article.

If the two antagonistic ideas which

we
have
just
brought
into
juxtaposition
are
capable
of
reconciliation, the process must
be accomplished by distinguishing
clearly between the right of action
arising
from
the
improper
interference with the contract by a
stranger thereto, considered as an
independent act generate of civil
liability, and the right of action ex
contractu against a party to the

contract resulting from the breach

thereof

Gilchrist vs Cuddy
FACTS:
1. Cuddy was the owner of the film
Zigomar, w/c he rented for a week to
Gilchrist for Php 125 on Apr. 24, 1913
and was to be delivered on May 26,
1913 (start of the said week).

2.A few days before this, Cuddy

sent back the money forwarded
by Gilchrist to the former saying
that he had made other
arrangements with his film.The
other arrangements was the
rental to these defendants
Espejoand his partner
Zaldarriaga for Php 350 for the
week.
3. Gilchrist filed an action for injunction
against Cuddy, Espejo and Zaldarriaga.

4. An ex parte mandatory
injunction was then issued
directing Cuddy to send to
Gilchrist "Zigomar"
incompliance with an alleged
contract which had been
enteredinto between these two,
and at the same time an
exparte preliminary injunction
was issued restraining Espejo
and Zaldarriaga from receiving
and exhibiting in their

51

theaterthe Zigomar until further

orders of the court.
5. Espejo and Zaldarriaga
moved to have the injunction
dissolved, but the same motion
was denied. They then filed an
answer denying all allegations
with a cross-complaint asking
for damages (Php 800) for the
wrongfulissuance of the
preliminary injunction.
6. When case was called for
trial, Gilchrist then moved for
thedismissal of the complaint
"for the reason that there is
nofurther necessity for the
maintenance of the
injunction."The motion was
granted without objection as to
Cuddy anddenied as to Espejo
and Zaldarriaga in order to give
them anopportunity to prove
that the injunctions were
wrongfullyissued and the
amount of damages suffered by
reasonthereof.
7. The lower court found
Cuddy to have willfully
violated his contract with
Gilchrist. (Thus, there is
no question that he will be
liable for damages due to
breach of contract.)

8. Espejoadmitted that he knew

Cuddy was the owner of thefilm.
He received a letter from his
agents in Manila datedApril 26,
assuring him that he could not
get the film forabout 6 weeks.
The arrangements between
Cuddy and Espejo for the
exhibition of the film by the
latter on the26th of May were
perfected after April 26, so that
the 6 weeks would include and
extend beyond May 26. Espejo
and Zaldarriaga must
necessarily have known at the
time theymade their offer to
Cuddy that the latter had
booked orcontracted the film for
six weeks from April 26. Thus, it
can be concluded that they
knowinglyinduced Cuddy to
violate his contract with another
person. However, there is no
specific finding that they know
that it was Gilchrist who had
earlier contracted with Cuddy
for the film.
ISSUE/S:
1. WoN Espejo and Zaldarriaga are
liable for interfering with the
Gilchrist-Cuddy contract even when
they were not aware of Gilchrists
identity YES
2. WoN injunction was the proper
action YES (w/ respect to the

52

preliminary injunction vs Espejo

and Zaldarriaga);
PROPRIETY
OF
MANDATORY
INJUNCTION
VS
CUDDY
NOT
RAISED TO THE COURT

contractual obligations, as they

were under nosuch obligations
to induce Cuddy to violate his
contract with Gilchrist.

RULING:Judgment affirmed
RATIO:
Liability of Espejo and Zaldarriaga

1. While it is said that the

interference must be malicious,
the U.S. Supreme Court has
taken contrary view in Angle v.
Railway Co.. In that case, the
only motive for interference by
the third partywas the desire to
make a profit to the injury of
one of the contracting parties.
There was no malicebeyond the
desire to make an unlawful gain
to thedetriment of one of the
contracting parties.

2. In this case, the only motive

for interference with GilchristCuddy contract was a desire to
make profit by exhibiting thefilm
in their theater. While there is
no malice beyond this desire,
Espejo and Zaldarriaga are still
liable for interfering with that
contract and causing
itsbreach.Their liability arises
from unlawful acts andnot from

3. Assuming that Gilchrists

action was for damages (note
that his action was for an
injunction), the action would fall
under Article 1902 of the Civil
Code (culpa aquiliana), which
provides that aperson who, by
act or omission. causes damage
to anotherwhen there is fault or
negligence, shall be obliged to
repairthe damage so done.
There is nothing in this article
whichrequires as a condition
precedent to the liability of
atortfeasor that he must know
the identity of a person towhom
he causes damage. In fact, the
chapter wherein thisarticle is
found clearly shows that no
such knowledge isrequired in
order that the injured party may
recover for thedamage suffered.

Injunction as Remedy
1. The fact that the interference
with the Gilchrist contract was

53

actionable did not of itself

entitle Gilchrist to sue out an
injunction against Espejo and
Zaldarriaga.
2. In Devesa v. Arbes, it was
stated that injunction is a
special remedy in cases where
there is no 'plain,adequate, and
complete remedy at law,' which
'will not be grantedwhile the
rights between the parties are
undetermined, except
inextraordinary cases where
material and irreparable injury
will bedone,' which cannot be
compensated in damages, and
where therewill be no adequate
remedy, and which will not, as a
rule, begranted, to take
property out of the possession
of one party and putit into that
of another whose title has not
been established by law.

Whether injunction will issue

to restrain wrongful
interference with contracts
by strangers to such
contracts:

the proper remedy to prevent a

wrongfulinterference with
contracts by strangers to such
contractswhere the legal
remedy is insufficient and the
resultinginjury is irreparable.
And where there is a malicious
interference with lawful and
valid contracts a
permanentinjunction will
ordinarily issue without proof of
expressmalice

But the remedy by injunction

cannot be used torestrain a
legitimate competition, though
such competitionwould involve
the violation of a contract.

Estate of KH Kennedy vs Luzon

Surety
The Luzon Surety Co. had filed a claim
against the Estate based on twenty
different indemnity agreements, or
counter bonds, each subscribed by a
distinct principal and by the deceased
K. H. Hemady (as surety solidary
guarantor) in all of them.
The lower court dismissed the claims
of Luzon Surety Co., on two grounds:

Elliot on Contracts: Injunction is

(1) The premiums due and cost of

54

documentary
stamps
were
not
contemplated under the indemnity
agreements to be a part of the
undertaking
of
the
guarantor
(Hemady), since they were not
liabilities incurred after the execution
of the counter-bonds; and
(2) Whatever losses may occur after
Hemady's death, are not chargeable to
his estate, because upon his death he
ceased to be guarantor. A requirement
to be a guarantor is his integrity, which
is not transmissible upon death.

Under the Civil Code the heirs,

by virtue of the rights of
succession are subrogated to all
the rights and obligations of the
deceased and cannot be
regarded as third parties with
respect to a contract to which
the deceased was a party,
touching the estate of the
deceased.

issue
WONthe Estate of K.H. Hemady
is liable under the indemnity
agreements as surety after
death [YES]

ratio
While in our successional
system the responsibility of the
heirs for the debts of their
decedent cannot exceed the
value of the inheritance they
receive from him, the principle
remains intact that these heirs
succeed not only to the rights of
the deceased but also to his
obligations. Articles 774 and
776 expressly so provide,
thereby confirming Article 1311.

Under our law, the general

rule is that a party's
contractual rights and
obligations are transmissible
to the successors, except in
case where the rights and
obligations arising from the
contract are not transmissible
by their nature, or by stipulation
or by provision of law

Nature: The nature of the

obligation of the surety or
guarantor does not warrant
the conclusion that his
peculiar individual qualities
are contemplated as a
principal inducement for the
contract. Luzon just wanted
to be paid.
Stipulation:
Being
exceptional and contrary to
the
general
rule,
this
intransmissibility should not
be easily implied, but must

55

be expressly established, or
at the very least, clearly
inferable
from
the
provisions of the contract
itself, and the text of the
agreements
sued
upon
nowhere indicate that they
are non-transferable. Here,
there is no such stipulation.
Law:The provision makes
reference to those cases
where the law expresses
that the rights or obligations
are extinguished by death,
as is the case in legal
support
(Article
300),
parental authority (Article
327), usufruct (Article 603),
contracts for a piece of work
(Article 1726), partnership
(Article 1830 and agency
(Article 1919). By contract,
the articles of the Civil
Code
that
regulate
guaranty or suretyship
(Articles 2047 to 2084)
contain no provision that
the
guaranty
is
extinguished upon the
death of the guarantor
or the surety

Since no exception is applicable, the

general rule applies. The obligation in
this case is transmitted to the
successors.

2.

3.

4.
5.

6.

7.

So Pung Bun vs CA
1. 1963: Tek Hua Trading Co,
through its managing partner, So
Pek Giok, entered into lease

8.

agreements with lessor Dee C.

Chuan & Sons Inc. (DCCSI). The 4
lease contracts involved premises
located at Soler Street, Binondo,
Manila. Tek Hua used the areas to
store its textiles.
The contracts each had a one-year
term. They provided that should
the lessee continue to occupy the
premises after the term, the lease
shall be on a month-to-month
basis.
When the contracts
expired, the parties did not
renew the contracts, but Tek
Hua continued to occupy the
premises.
1976: Tek Hua Trading Co. was
dissolved and Tek Hua Enterprising
Corp was later formed by the
original members of Tek Hua
Trading Co. including Manuel C.
Tiong. In 1986, So Pek Giok died.
So
Ping
Bun,
occupied
the
warehouse for his own textile
business, Trendsetter Marketing
August 1, 1989: DCCSI sent letters
addressed to Tek Hua Enterprises,
informing the latter of the 25%
increase
in
rent
effective
September 1, 1989. This was later
reduced to 20% effective January 1,
1990, upon lessees demand.
December
1,
1990:
DCCSI
implemented a 30% rent increase.
Enclosed in their letters were new
lease contracts for signing which
Tek Hua did not answer. Still, the
lease contracts were not rescinded.
Tiong then sent a letter to So Ping
Bun telling him to vacate the
warehouse, but he refused to do
so. Instead, he requested formal
contracts of lease with DCCSI in
favor Trendsetter Marketing, to
which DCCSI agreed to.
A suit for injunction was filed by Tek
Hua. RTC: Annulled the four
Contracts
of
Lease
without

56

awarding damages. CA affirmed.

ISSUE:
1. WON CA erred in affirming the TC
Decision finding petitioner guilty of
tortuous interference of contract
NO
RULING: CA Decision AFFIRMED.
RATIO:
1.
Elements
of
tort
interference are: (1) existence of
a valid contract; (2) knowledge
on the part of the third person of
the existence of contract; and (3)
interference of the third person
is without legal justification or
excuse.
2.
(See Doctrine) In this
case, Trendsetter Marketing asked
DCCSI to execute lease contracts in
its favor, and as a result So Ping
Bun deprived Tek Hua of the
latters property right. The three
elements of tort interference are
clearly present.
3.
While it is generally
viewed
that
interfering
with
business of another is justified
when the actors motive is to
benefit himself, that justification
doesnt exist when the sole motive
is to cause harm to the other.
Justification for protection of ones
financial position should not be
made to depend on a comparison
of his economic interest in the
subject matter with that of others.
It is sufficient if the impetus of his
conduct lies in a proper business
interest rather than in wrongful
motives.
4.
Gilchrist
v
Cuddy:
where there was no malice in the
interference of a contract, and the
impulse behind ones conduct lies
in a proper business interest rather

than in wrongful motives, a party

cannot be a malicious interferer.
5.
In this case, although
So Ping Bun took interest in the
property of Tek Hua and benefited
from it, nothing on record imputes
deliberate wrongful motives or
malice on him.
6.
On damages:
TC
didnt
award
damages
to
respondents, and petitioner used
this to argue that he should be
absolved from any liability. The
Court said that TC didnt award
damages only because it was not
quantifiable. Further, the Court said
that while there was no malice on
the part of the interferer, it doesnt
relieve him of the legal liability for
entering into contracts and causing
breach of existing ones. The legal
liability here is the injunction.

C. Classification of Contracts

1. according to degree of dependence

a. preparatory

Article 1479. A promise to buy and sell a

determinate thing for a price certain is reciprocally
demandable.
An accepted unilateral promise to buy or to sell a
determinate thing for a price certain is binding upon
the promisor if the promise is supported by a

57

consideration distinct from the price.

consumable so that the latter may use the same for

a certain time and return it, in which case the
contract is called a commodatum; or money or other
consumable thing, upon the condition that the same
Article 1767. By the contract of partnership two oramount of the same kind and quality shall be paid,
more persons bind themselves to contribute money,in which case the contract is simply called a loan or
property, or industry to a common fund, with the mutuum.
intention of dividing the profits among themselves.
Two or more persons may also form a partnership for
the exercise of a profession.
Commodatum is essentially gratuitous.

Article 1868. By the contract of agency a person Simple loan may be gratuitous or with a stipulation
binds himself to render some service or to do
to pay interest.
something in representation or on behalf of another,
with the consent or authority of the latter.

b. principal

In commodatum the bailor retains the ownership of

the thing loaned, while in simple loan, ownership
passes to the borrower.

Article 1458. By the contract of sale one of the

Article 1962. A deposit is constituted from the
contracting parties obligates himself to transfer the moment a person receives a thing belonging to
ownership and to deliver a determinate thing, and another, with the obligation of safely keeping it and
the other to pay therefor a price certain in money orof returning the same. If the safekeeping of the thing
its equivalent.
delivered is not the principal purpose of the contract,
A contract of sale may be absolute or conditional.

there is no deposit but some other contract.

c. accessory
Article 1638. By the contract of barter or exchange
one of the parties binds himself to give one thing in
consideration of the other's promise to give another
thing.
Article 2047. By guaranty a person, called the
guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter
should fail to do so.
Article 1642. The contract of lease may be of
things, or of work and service.

Article 1933. By the contract of loan, one of the

parties delivers to another, either something not

If a person binds himself solidarily with the principal

debtor, the provisions of Section 4, Chapter 3, Title I
of this Book shall be observed. In such case the

58

contract is called a suretyship.

the law governing the form of contracts.

Article 2085. The following requisites are essentialb. real

to the contracts of pledge and mortgage:
(1) That they be constituted to secure the fulfillment
Article 1316. Real contracts, such as deposit,
of a principal obligation;
pledge and commodatum, are not perfected until the
(2) That the pledgor or mortgagor be the absolute delivery of the object of the obligation.
owner of the thing pledged or mortgaged;
(3) That the persons constituting the pledge or
mortgage have the free disposal of their property, Article 1934. An accepted promise to deliver
something by way of commodatum or simple loan is
and in the absence thereof, that they be legally
binding upon parties, but the commodatum or
authorized for the purpose.
simple loan itself shall not be perfected until the
Third persons who are not parties to the principal delivery of the object of the contract.
obligation may secure the latter by pledging or
mortgaging their own property.
c. formal
2.

according to perfection

Article 1356. Contracts shall be obligatory, in

whatever form they may have been entered into,
provided all the essential requisites for their validity
are present. However, when the law requires that a
contract be in some form in order that it may be
Article 1315. Contracts are perfected by mere
valid or enforceable, or that a contract be proved in
consent, and from that moment the parties are
a certain way, that requirement is absolute and
bound not only to the fulfillment of what has been indispensable. In such cases, the right of the parties
expressly stipulated but also to all the consequences
stated in the following article cannot be exercised.
which, according to their nature, may be in keeping
with good faith, usage and law.
a. consensual

3.

according to solemnity or form

Article 1475. The contract of sale is perfected at

the moment there is a meeting of minds upon the Article 1356. Contracts shall be obligatory, in
thing which is the object of the contract and upon whatever form they may have been entered into,
provided all the essential requisites for their validity
the price.
are present. However, when the law requires that a
contract be in some form in order that it may be
valid or enforceable, or that a contract be proved in
From that moment, the parties may reciprocally
a certain way, that requirement is absolute and
demand performance, subject to the provisions of indispensable. In such cases, the right of the parties

59

stated in the following article cannot be exercised. Article 1933. By the contract of loan, one of the
parties delivers to another, either something not
consumable so that the latter may use the same for
a certain time and return it, in which case the
a. any form
contract is called a commodatum; or money or other
b. special form
consumable thing, upon the condition that the same
amount of the same kind and quality shall be paid,
in which case the contract is simply called a loan or
4. according to purpose
mutuum.
a. transfer of ownership

Article 725. Donation is an act of liberality whereby

a person disposes gratuitously of a thing or right in Commodatum is essentially gratuitous.
favor of another, who accepts it.
Simple loan may be gratuitous or with a stipulation
to pay interest.

Article 1458. By the contract of sale one of the

contracting parties obligates himself to transfer the
ownership and to deliver a determinate thing, and
the other to pay therefor a price certain in money or
In commodatum the bailor retains the ownership of
its equivalent.
the thing loaned, while in simple loan, ownership
A contract of sale may be absolute or conditional. passes to the borrower.

c. rendition of service
Article 1638. By the contract of barter or exchange
one of the parties binds himself to give one thing in
consideration of the other's promise to give another
Article 1642. The contract of lease may be of
thing.
things, or of work and service.

b.

conveyance of use

Article 1868. By the contract of agency a person

binds himself to render some service or to do
something in representation or on behalf of another,
Article 562. Usufruct gives a right to enjoy the
property of another with the obligation of preservingwith the consent or authority of the latter.
its form and substance, unless the title constituting
it or the law otherwise provides.
5.
Article 1642. The contract of lease may be of
things, or of work and service.

according to nature
produced
a. bilateral

of

obligation

Article 1642. The contract of lease may be of

60

things, or of work and service.

a.

onerous

Article 1458. By the contract of sale one of the

contracting parties obligates himself to transfer the Article 1458. By the contract of sale one of the
ownership and to deliver a determinate thing, and contracting parties obligates himself to transfer the
the other to pay therefor a price certain in money orownership and to deliver a determinate thing, and
the other to pay therefor a price certain in money or
its equivalent.
its equivalent.

A contract of sale may be absolute or conditional.

A contract of sale may be absolute or conditional.
b.

unilateral

Article 1638. By the contract of barter or exchange

one of the parties binds himself to give one thing in
Article 2047. By guaranty a person, called the
consideration of the other's promise to give another
guarantor, binds himself to the creditor to fulfill the thing.
obligation of the principal debtor in case the latter
should fail to do so.
If a person binds himself solidarily with the principalArticle 1642. The contract of lease may be of
debtor, the provisions of Section 4, Chapter 3, Title Ithings, or of work and service.
of this Book shall be observed. In such case the
contract is called a suretyship.
b.

gratuitous or lucrative

Article 2093. In addition to the requisites

prescribed in article 2085, it is necessary, in order toArticle 725. Donation is an act of liberality whereby
a person disposes gratuitously of a thing or right in
constitute the contract of pledge, that the thing
pledged be placed in the possession of the creditor, favor of another, who accepts it.
or of a third person by common agreement.
Article 1933. By the contract of loan, one of the
parties delivers to another, either something not
6. according to cause
consumable so that the latter may use the same for
a certain time and return it, in which case the
Article 1350. In onerous contracts the cause is
contract is called a commodatum; or money or other
understood to be, for each contracting party, the consumable thing, upon the condition that the same
prestation or promise of a thing or service by the amount of the same kind and quality shall be paid,
other; in remuneratory ones, the service or benefit in which case the contract is simply called a loan or
which is remunerated; and in contracts of pure
mutuum.
beneficence, the mere liberality of the benefactor.

61

b. right
Commodatum is essentially gratuitous.

c. service

Simple loan may be gratuitous or with a stipulation D. Stages of Contracts

to pay interest.
1. Negotiation
In commodatum the bailor retains the ownership of
the thing loaned, while in simple loan, ownership
Contract of Option
passes to the borrower.

c.
7.

remuneratory

according to risk
a. commutative
b. aleatory

Article 1324. When the offerer has allowed the

offeree a certain period to accept, the offer may be
withdrawn at any time before acceptance by
communicating such withdrawal, except when the
option is founded upon a consideration, as
something paid or promised.

Article 2010. By an aleatory contract, one of the

parties or both reciprocally bind themselves to give Article 1479. A promise to buy and sell a
or to do something in consideration of what the
determinate thing for a price certain is reciprocally
other shall give or do upon the happening of an
demandable.
event which is uncertain, or which is to occur at an
indeterminate time.

8.

according to name
a. nominate
b. Innominate

An accepted unilateral promise to buy or to sell a

determinate thing for a price certain is binding upon
the promisor if the promise is supported by a
consideration distinct from the price.

Article 1307. Innominate contracts shall be

Article 1482. Whenever earnest money is given in
regulated by the stipulations of the parties, by the
a contract of sale, it shall be considered as part of
provisions of Titles I and II of this Book, by the rules
the price and as proof of the perfection of the
governing the most analogous nominate contracts,
contract.
and by the customs of the place.

9. according to subject matter

a. thing

Sanchez v. Rigos
June 14, 1972

62

sum
mar
y

Sanchez and Rigos executed an

Option to Purchase a parcel of
land. If within 2 years from the
date of execution of the
instrument Sanchez shall not
exercise his right to buy the
property, the option shall be
terminated. Within the period,
Sanchez made several attempts
to pay Rigos but the latter
rejected the payments. Sanchez
deposited the amount with CFI
Nueva Ecija.
An accepted unilateral promise
can only have binding effect if
supported by a consideration,
which means that the option can
still be withdrawn absent a
consideration (See Art. 1324) The
document drawn between them
does not require Sanchez to
purchase the property; not a
contract to buy and sell. The
document does not state that the
promise is supported by a
consideration distinct from the
price stipulated.

facts of the case

Sanchez and Rigos executed an
instrument entitled Option to Purchase
whereby, Rigos agreed to sell to Sanchez
for P1,510 a parcel of land with the
understanding that the option shall be
deemed terminated and elapsed if Sanchez
failed to exercise his right to buy the
property within 2 years. Sanchez tendered
payment but was rejected by Rigos.
Sanchez deposited the amount with the CFI
of Nueva Ecija and commenced an action
for specific performance and damages.

Lower court ruled in favor of Sanchez

ordering Rigos to accept the sum and to
execute the deed of conveyance.

issue
Whether or not it was a contract to buy and
sell. NO

ratio
The option did not impose the
obligation to purchase the property. It was
not a contract to buy and sell. It merely
granted Sanchez an option to buy. There
is nothing to indicate that the agreement is
supported by a consideration distinct from
the price stipulated for the sale of the land.

Relying on Art. 1354, the lower court

presumed the existence of the
consideration. However, Article 1354
applies to contracts in general where the
second paragraph of Article 1479 refers to
sales in particular, more specifically, to
an accepted unilateral promise to buy or
sell. In other words, Art. 1479 is
controlling in the case at bar.

In order that the unilateral promise be

binding, Art. 1479 requires the concurrence
of a condition that the promise be
supported by a consideration distinct from
the price. The promisee cannot compel the
promisor to comply with the promise,
unless the former establishes the existence
of said distinct consideration. In other
words, the promisee has the burden of
proving such consideration.

63

Rigos explicitly stated the absence of

the consideration for the promise to sell.

Court cited Southwestern Sugar v

Atlantic (old doctrine, court abandoned this
doctrine): Invoking Art. 1324 When the
offerer has allowed the offeree a certain
period to accept, the offer may be
withdrawn at any time before acceptance
by communicating such withdrawal, except
when the option is founded upon a
consideration, as something paid or
promised.Applying this, with 1479 which
applies to a promise to buy and sell,
specifically; for a promise to sell to be
valid, it must be supported by a
consideration distinct from the price.

In Atkins v Cua Hian Tek (newer

doctrine), the court saw no distinction
between 1324 and 1479. It states that
where a unilateral promise to sell (treating
such promise as an option) lacks a distinct
consideration, it is not binding as a
contract in itself, HOWEVER, it generates a
bilateral contract of purchase and sale
upon acceptance. If the option is given
without a consideration, it is a mere offer of
a contract of sale which is not binding until
it is accepted. If, however, acceptance is
made before a withdrawal, it constitutes a
binding contract of sale, even though the
option was not supported by a sufficient
consideration.

ANTONIO, concurring:
Agreed with the abandonment of
the Southwestern case which holds that an
option to sell can still be withdrawn, even if

accepted, if the same is not supported by

any consideration, and the reaffirmance of
the doctrine in Atkins, Kroll & Co., Inc. vs.
Cua Hian Tek, holding that "an option
implies ... the legal obligation to keep the
offer (to sell) open for the time specified;"
that it could be withdrawn before
acceptance, if there was no consideration
for the option, but once the "offer to sell" is
accepted, a bilateral promise to sell and to
buy ensues, and the offeree ipso facto
assumes the obligations of a purchaser. In
other words, if the option is given without a
consideration, it is a mere offer to sell,
which is not binding until accepted. If,
however, acceptance is made before a
withdrawal, it constitutes a binding
contract of sale. The concurrence of both
acts the offer and the acceptance
could in such event generate a contract.
Since Rigos' offer sell was accepted
by Sanchez, before she could withdraw her
offer, a bilateral reciprocal contract to
sell and to buy was generated.

2. Perfection

Tong Brothers v. IAC

Dec. 21, 1987

sum
mar
y

The vessel Zamboanga-J was

totally lost after it was undocked
from Tong Bros. Co.s drydock and
left exposed to the elements. The
owner of the vessel, Juliano and
Co. sued Tong Bros. alleging that
the latter breached its contract to
repair the vessel. Tong Bros.

64

assailed the existence of a

perfected contract between them.

The Court ruled that there was no

perfected contract based on the
facts and circumstances of the
case (e.g. communications
between the parties). It also ruled
that the proximate cause of the
loss of the vessel was the
negligence of the owner for not
bothering, for two years, to find
out what happened to its vessel
despite knowledge that the boat
had been undocked and to take
concrete steps to save and
rehabilitate it.

b.

Because of such
relationship, they entered
into contracts for repair
works without need of a
formal written contract.

c.

[Dec. 1974] JULIANO

brought its vessel
Zamboanga-J to TONGs
dockyard.
i.

facts of the case

1.

TONG Bros. Co. is a general

partnership engaged in the
construction and repair of vessels.
JULIANO & Co. is a domestic
corporation engaged in the
coastwise shipping industry.

2.

JULIANO filed a complaint against

TONG for specific performance and
damages before the CFI.

3.

JULIANO tried to establish the

following facts:
a.

Since 1960, the parties had

been in a business
relationship whereby
JULIANOs vessels would be
drydocked and repaired by
TONG. After each job, a
statement of account
would be sent to JULIANO,
which remitted payments
to TONG.

4.

TONG asked for a

deposit of
PHP15,000. Even
without such
amount, TONG
still drydocked
the vessel on Dec.
27, 1974. The next
day, TONG
received
PHP15,000 for
which it issued two
receipts, one for
PHP5,000 and
another for
PHP10,000.

d.

With this payment, TONG

commenced work on
Zamboanga-J by removing
the rudders, pulling out tail
shafts, and removing the
bottom hull plankings and
replacing them, etc.

e.

For some reason, TONG did

not continue the job and
undocked the vessel on
Feb. 4, 1975 and left it
exposed to the elements. It
remained there until it
became a total loss.

TONG, on the other hand, insisted

that there was no contract based
on the following:

65

a.

The PHP15,000
represented partial
payment of old accounts.

b.

While admittedly the man

of JULAINO in Zamboanga,
Mr. Canto, had no authority
to enter into a contract
with TONG for the repair of
Zamboanga-J, TONGs
representative prepared a
written contract for the
signature of JULIANOs
authorized representative.

c.

Mr. Canto was informed on

several occasions by TONG
to get in touch with
JULIANO to see for himself
the deterioration of the
vessel and to sign the
written contract prepared
by TONG.
i.

ii.

However, no
authorized
representative of
JULIANO came to
Zamboanga.
JULIANO only sent
several telegrams
demanding that
TONG repair the
vessel.
TONG advised
JULIANO again to
send its authorized
representative to
see the
deterioration
personally and to
sign the contract.
TONG insisted that
it had no contract
yet for the repair of
Zamboanga-J.

d.

5.

In addition, JULIANO never

bothered to secure the job
order from the Coast
Guard. Without such order
to cover several expenses,
Zamboanga-J could not be
refloated, resulting to its
non-repair and total loss.

The CFI ruled in favor of TONG. The

IAC affirmed.

Issue/held/ratio
W/N there was a perfected contract
between TONG and JULIANO for the
repair of Zamboanga-J NO, there
was none.

Before accepting the job request to

repair Zamboanga-J, TONG
wanted to have JULIANO sign a
written contract with an initial
downpayment of PHP50,000 to
cover various expenses.

It is equally likely that the

PHP15,000 paid was only a
condition precedent to the
acceptance of Zamboanga-J for
drydocking and not a
downpayment for its repair,
considering the parties previous
business relations.
o

This is strengthened by the

fact that no estimate of the
expenses had yet been
made on Dec. 28 (a day
after admission for
drydocking) and TONG
would have no basis for

66

requesting an immediate
downpayment.

There was no job order issued by

the Coast Guard. What was
presented by JULIANO was merely
an application for inspection to the
Coast Guard.

The mentioned actions in (Facts.

3.d.) are standard operating
procedures on the part of TONG to
inspect the condition of the vessel.
This did not amount to a
commencement of the repair of the
vessel or a partial compliance with
a contract to repair.

and proximate
reason which
justifies the
creation of an
obligation thru the
will of the
contracting parties.
o

Based on the communications

of the parties through
telegrams,1 there was no
perfected contract.
o

As can be gleaned from

their exchanges, there was
not yet a meeting of the
minds as to the cause of
the contract.

1 For example: TONG: WE CANNOT START THE

JOB ORDER WITHOUT YOUR PRESENCE TO
DETERMINE THE EXTENT OF WORK.
TONG: "YOUR PRESENCE BADLY NEEDED UP TO
FRIDAY IF NOT ARRIVED PRESUME NOT
INTERESTED WITH THE REPAIR OF ZBGAJ.
JULIANO: REZAMBOANGAJ PARTY CONCERNED
OUT OF CITY ANYTHING YOU DO NOT IN
ACCORDANCE WITH AGREEMENT IS SOLELY AT
YOUR OWN RISK.
TONG: NO AGREEMENT AS TO THE EXTENT OF
REPAIRS AND PAYMENT WILL UNDOCK VESSEL.

That TONG had not yet consented

to the contract is evident when it
sent a telegram stating: " NO
AGREEMENT AS TO THE EXTENT OF
REPAIRS AND PAYMENT WILL
UNDOCK VESSEL."
o

Cause is the
immediate, direct

For JULIANO, the cause of

the contract was the repair
of its vessel ZamboangaJ
while for TONG the cause
would be its commitment
to repair the vessel and
make it seaworthy.

The fact that JULIANO

received this telegram and
ignored it, confirms that
there was no perfected
contract to repair
ZamboangaJ.

W/N the proximate cause of the total

loss of Zamboanga-J was the
negligence of JULIANO YES, it was.

After the undocking on Feb. 4,

1974: (1) the officers and the crew
were allowed to depart; (2) no
measures were taken to have the
vessel repaired; (3) the vessel was
left to the elements; (4) a marine
surveyor was hired only six months
later when the ship was already
beyond repair, the subsequent loss
can be attributed solely to the
negligence of the owner JULIANO.

67

JULIANO did not bother from Jan.

1975 to Sept. 1976 to find out what
happened to its vessel despite
knowledge that the boat had been
undocked and to take concrete
steps to save and rehabilitate it.

Petition GRANTED.

Velasco v. CA
June 29, 1973

o equal monthly amortization will be

determined as soon as the P30,000.00 DP
had been completed.

Plaintiff paid P10,000.00 on November 29,

1962 (Exh. "A")

On Jan 8, 1964 he tendered the payment

of P20,000.00 but the defendant refused to
accept and refused to execute a formal
deed of sale.

Facts:
Suit for specific performance filed by
Lorenzo Velasco against the Magdalena
Estate, Inc.

Socorro Velasco is his sister-in-law and

that he had requested her to make the
necessary contacts referring to the
purchase of the property because he does
not understand English well.

Plaintiffs Version

On Nov 29, 1962 the plaintiff and the

defendant had entered into a CONTRACT
OF SALE of land (2,059 sq m) at for
P100,000.00.

The receipt states: "Earnest money for the

purchase of Lot 15, Block 7, Psd-6129, Area
2,059 square meters including
improvements thereon P10,000.00." At
the bottom of Exhibit A the following
appears: "Agreed price: P100,000.00,
P30,000.00 down payment, bal. in 10
years."

Payment terms:
Defendant:
o down payment: P10,000.00 and
P20,000.00

o P70,000.00 would be paid in installments

No contract of sale was perfected because

the minds of the parties did not meet "in
regard to the manner of payment.

68

Contract is unenforceable under the

Statute of Frauds.

the property was leased by Socorro

Velasco and that the defendant indicated
its willingness to sell the property for
P100,000.00:

o P30,000.00

On January 8, 1964 that Socorro Velasco

tendered payment of P20,000.00, which
offer the defendant refused to accept
because it had considered the offer to sell
rescinded on account of her failure to
complete the down payment on or before
December 31, 1962.

Issue: Whether the talks between the

Magdalena Estate, Inc. and Lorenzo Velasco
ever ripened into a consummated sale?
NO.

o P20,000.00 of which was to be paid on

November 31, 1962,

Ratio:

o P70,000.00 including interest a 9% per

annum was to be paid on installments for a
period of ten years at the rate of P5,381.32
on June 30 and December of every year
until the same shall have been fully paid;

The material averments contained in the

petitioners' complaint disclose a lack of
complete "agreement in regard to the
manner of payment" of the lot in question.
The complaint states pertinently:

On November 29, 1962 Socorro Velasco

offered to pay P10,000.00 as initial
payment instead of the agreed P20,000.00
but because the amount was short of the
alleged P20,000.00 the same was accepted
merely as deposited and upon request of
Socorro Velasco the receipt was made in
the name of her brother-in-law the plaintiff
herein;

o 4. That plaintiff and defendant further

agreed that the total down payment shall
by P30,000.00, including the P10,000.00
partial payment mentioned in paragraph 3
hereof, and that upon completion of the
said down payment of P30,000.00, the
balance of P70,000.00 shall be said by the
plaintiff to the defendant in 10 years from
November 29, 1962;

Socorro Velasco failed to complete the

down payment of P30,000.00 and neither
has she paid any installments on the
balance of P70,000.00 up to the present
time;

o 5. That the time within the full down

payment of the P30,000.00 was to be
completed was not specified by the parties
but the defendant was duly compensated
during the said time prior to completion of
the down payment of P30,000.00 by way of
lease rentals on the house existing thereon

69

which was earlier leased by defendant to

the plaintiff's sister-in-law, Socorro J.
Velasco, and which were duly paid to the
defendant by checks drawn by plaintiff.

E. Essential Elements of Contracts

Petitioners admit that they still had to

meet and agree on how and when the
down-payment and the installment
payments were to be paid.

(1) Consent of the contracting parties;

Article 1318. There is no contract unless the

following requisites concur:

(2) Object certain which is the subject matter of the

contract;
(3) Cause of the obligation which is established.

Such being the situation, it cannot be said

that a definite and firm sales agreement
between the parties had been perfected
over the lot in question.

Indeed, this Court has already ruled

before that a definite agreement on the
manner of payment of the purchase price
is an essential element in the formation of
a binding and enforceable contract of sale.

The fact that the petitioners delivered to

the respondent the sum of P10,000 cannot
be considered as sufficient proof of the
perfection of any purchase and sale
agreement between the parties herein
under article 1482 of the new Civil Code, as
the petitioners themselves admit that
some essential matter the terms of
payment still had to be mutually
covenanted.

3. Performance

1. consent of the contracting parties

Article 1319. Consent is manifested by the meeting

of the offer and the acceptance upon the thing and
the cause which are to constitute the contract. The
offer must be certain and the acceptance absolute. A
qualified acceptance constitutes a counter-offer.

Acceptance made by letter or telegram does not

bind the offerer except from the time it came to his
knowledge. The contract, in such a case, is
presumed to have been entered into in the place
where the offer was made. (1262a)

Article 1320. An acceptance may be express or

implied. (n)

Article 1321. The person making the offer may fix

the time, place, and manner of acceptance, all of
which must be complied with. (n)

4. Consummation
Article 1322. An offer made through an agent is
accepted from the time acceptance is

70

communicated to him. (n)

Article 1329. The incapacity declared in article

1327 is subject to the modifications determined by
law, and is understood to be without prejudice to
special disqualifications established in the laws.
Article 1323. An offer becomes ineffective upon the
(1264)
death, civil interdiction, insanity, or insolvency of
either party before acceptance is conveyed. (n)
Article 1330. A contract where consent is given
through mistake, violence, intimidation, undue
influence, or fraud is voidable. (1265a)

Article 1324. When the offerer has allowed the

offeree a certain period to accept, the offer may be
withdrawn at any time before acceptance by
communicating such withdrawal, except when the
option is founded upon a consideration, as
Article 1331. In order that mistake may invalidate
something paid or promised. (n)
consent, it should refer to the substance of the thing
which is the object of the contract, or to those
conditions which have principally moved one or both
parties to enter into the contract.
Article 1325. Unless it appears otherwise, business
advertisements of things for sale are not definite
offers, but mere invitations to make an offer. (n)
Mistake as to the identity or qualifications of one of
the parties will vitiate consent only when such
identity or qualifications have been the principal
Article 1326. Advertisements for bidders are simply
cause of the contract.
invitations to make proposals, and the advertiser is
not bound to accept the highest or lowest bidder, A simple mistake of account shall give rise to its
unless the contrary appears. (n)
correction. (1266a)

Article 1327. The following cannot give consent to Article 1332. When one of the parties is unable to
a contract:
read, or if the contract is in a language not
understood by him, and mistake or fraud is alleged,
(1) Unemancipated minors;
the person enforcing the contract must show that
the terms thereof have been fully explained to the
(2) Insane or demented persons, and deaf-mutes
former. (n)
who do not know how to write. (1263a)

Article 1333. There is no mistake if the party

Article 1328. Contracts entered into during a lucid
alleging it knew the doubt, contingency or risk
interval are valid. Contracts agreed to in a state of
affecting the object of the contract. (n)
drunkenness or during a hypnotic spell are voidable.
(n)
Article 1334. Mutual error as to the legal effect of

71

an agreement when the real purpose of the parties

is frustrated, may vitiate consent. (n)

Article 1335. There is violence when in order to

wrest consent, serious or irresistible force is
employed.

Article 1338. There is fraud when, through

insidious words or machinations of one of the
contracting parties, the other is induced to enter into
a contract which, without them, he would not have
agreed to. (1269)

Article 1339. Failure to disclose facts, when there is

There is intimidation when one of the contracting a duty to reveal them, as when the parties are
parties is compelled by a reasonable and wellbound by confidential relations, constitutes fraud. (n)
grounded fear of an imminent and grave evil upon
his person or property, or upon the person or
property of his spouse, descendants or ascendants,
Article 1340. The usual exaggerations in trade,
to give his consent.
when the other party had an opportunity to know the
facts, are not in themselves fraudulent. (n)
To determine the degree of intimidation, the age, sex
and condition of the person shall be borne in mind.
Article 1341. A mere expression of an opinion does
not signify fraud, unless made by an expert and the
other party has relied on the former's special
A threat to enforce one's claim through competent knowledge. (n)
authority, if the claim is just or legal, does not vitiate
consent. (1267a)
Article 1342. Misrepresentation by a third person
does not vitiate consent, unless such
Article 1336. Violence or intimidation shall annul misrepresentation has created substantial mistake
the obligation, although it may have been employedand the same is mutual. (n)
by a third person who did not take part in the
contract. (1268)
Article 1343. Misrepresentation made in good faith
is not fraudulent but may constitute error. (n)

Article 1337. There is undue influence when a

person takes improper advantage of his power over
the will of another, depriving the latter of a
Article 1344. In order that fraud may make a
reasonable freedom of choice. The following
circumstances shall be considered: the confidential,contract voidable, it should be serious and should
not have been employed by both contracting
family, spiritual and other relations between the
parties, or the fact that the person alleged to have parties.
been unduly influenced was suffering from mental
weakness, or was ignorant or in financial distress. (n)

Incidental fraud only obliges the person employing it

72

to pay damages. (1270)

belief or political opinion.

Article 1345. Simulation of a contract may be

absolute or relative. The former takes place when
the parties do not intend to be bound at all; the
latter, when the parties conceal their true
agreement. (n)

A married woman, twenty-one years of age or over,

is qualified for all acts of civil life, except in cases
specified by law. (n)

Article 40. Birth determines personality; but the

conceived child shall be considered born for all
Article 1346. An absolutely simulated or fictitious purposes that are favorable to it, provided it be born
contract is void. A relative simulation, when it does later with the conditions specified in the following
not prejudice a third person and is not intended for article. (29a)
any purpose contrary to law, morals, good customs,
public order or public policy binds the parties to their
real agreement. (n)
Article 41. For civil purposes, the foetus is
considered born if it is alive at the time it is
completely delivered from the mother's womb.
Article 37. Juridical capacity, which is the fitness toHowever, if the foetus had an intra-uterine life of
be the subject of legal relations, is inherent in everyless than seven months, it is not deemed born if it
natural person and is lost only through death.
dies within twenty-four hours after its complete
Capacity to act, which is the power to do acts with delivery from the maternal womb. (30a)
legal effect, is acquired and may be lost. (n)

Article 42. Civil personality is extinguished by

Article 38. Minority, insanity or imbecility, the statedeath.
of being a
The effect of death upon the rights and obligations of the
deaf-mute, prodigality and civil interdiction are meredeceased is determined by law, by contract and by will. (32a
restrictions on capacity to act, and do not exempt
the incapacitated person from certain obligations, as
when the latter arise from his acts or from property
Article 739. The following donations shall be void:
relations, such as easements. (32a)
(1) Those made between persons who were guilty of
adultery or concubinage at the time of the donation;

Article 39. The following circumstances, among

others, modify or limit capacity to act: age, insanity,(2) Those made between persons found guilty of the
imbecility, the state of being a deaf-mute, penalty, same criminal offense, in consideration thereof;
prodigality, family relations, alienage, absence,
(3) Those made to a public officer or his wife,
insolvency and trusteeship. The consequences of
descendants and ascendants, by reason of his office.
these circumstances are governed in this Code,
other codes, the Rules of Court, and in special laws. In the case referred to in No. 1, the action for declaration of
Capacity to act is not limited on account of religiousnullity may be brought by the spouse of the donor or donee;

73

the guilt of the donor and donee may be proved by government-owned or controlled corporation, or
preponderance of evidence in the same action.
institution, the administration of which has been
intrusted to them; this provision shall apply to
judges and government experts who, in any manner
whatsoever, take part in the sale;
Article 1476. In the case of a sale by auction:
(5) Justices, judges, prosecuting attorneys, clerks of
superior and inferior courts, and other officers and
employees connected with the administration of
(4) Where notice has not been given that a sale by
justice, the property and rights in litigation or levied
auction is subject to a right to bid on behalf of the
upon an execution before the court within whose
seller, it shall not be lawful for the seller to bid
jurisdiction or territory they exercise their respective
himself or to employ or induce any person to bid at
functions; this prohibition includes the act of
such sale on his behalf or for the auctioneer, to
acquiring by assignment and shall apply to lawyers,
employ or induce any person to bid at such sale on
with respect to the property and rights which may be
behalf of the seller or knowingly to take any bid from
the object of any litigation in which they may take
the seller or any person employed by him. Any sale
part by virtue of their profession;
contravening this rule may be treated as fraudulent
by the buyer. (n)
(6) Any others specially disqualified by law.

Article 1490. The husband and the wife cannot sellArticle 1533. The seller is bound to exercise
property to each other, except:
reasonable care and judgment in making a resale,
and subject to this requirement may make a resale
(1) When a separation of property was agreed upon
either by public or private sale. He cannot, however,
in the marriage settlements; or
directly or indirectly buy the goods.
(2) When there has been a judicial separation of
property under article 191. (1458a)
Article 1646. The persons disqualified to buy
referred to in articles 1490 and 1491, are also
Article 1491. The following persons cannot acquiredisqualified to become lessees of the things
mentioned therein.
by purchase, even at a public or judicial auction,
either in person or through the mediation of another:
(1) The guardian, the property of the person or
persons who may be under his guardianship;
(2) Agents, the property whose administration or
sale may have been intrusted to them, unless the
consent of the principal has been given;

Article 1782. Persons who are prohibited from

giving each other any donation or advantage cannot
enter into universal partnership.

Article 1409. The following contracts are inexistent

(3) Executors and administrators, the property of the
and void from the beginning:
estate under administration;
(4) Public officers and employees, the property of
the State or of any subdivision thereof, or of any

(7) Those expressly prohibited or declared void by

74

law.

Emancipation also takes place:

These contracts cannot be ratified. Neither can the (1) By the marriage of the minor; or
right to set up the defense of illegality be waived.
(2) By the recording in the Civil Register of an
agreement in a public instrument executed by the
parent exercising parental authority and the minor at
FC, Art. 87. Every donation or grant of gratuitous least eighteen years of age. Such emancipation shall
advantage, direct or indirect, between the spouses be irrevocable.
during the marriage shall be void, except moderate
gifts which the spouses may give each other on the
occasion of any family rejoicing. The prohibition shall
also apply to persons living together as husband and
wife without a valid marriage.
Republic Act No. 6809
December 13, 1989
Art. 124. The administration and enjoyment of the
conjugal partnership shall belong to both spouses
jointly. In case of disagreement, the husband's
AN ACT LOWERING THE AGE OF
decision shall prevail, subject to recourse to the
MAJORITY FROM TWENTY-ONE TO
court by the wife for proper remedy, which must be
EIGHTEEN YEARS, AMENDING FOR
availed of within five years from the date of the
THE PURPOSE EXECUTIVE ORDER
contract implementing such decision.
NUMBERED TWO HUNDRED NINE,
AND FOR OTHER PURPOSES
Be it enacted by the Senate and House
In the event that one spouse is incapacitated or
of Representatives of the Philippines in
otherwise unable to participate in the administration of
Congress assembled::
the conjugal properties, the other spouse may assume
sole powers of administration. These powers do not
Section 1. Article 234 of Executive
include disposition or encumbrance without authority of
Order No. 209, the Family Code of the
the court or the written consent of the other spouse. In
Philippines, is hereby amended to read
the absence of such authority or consent, the
as follows:
disposition or encumbrance shall be void. However, the
transaction shall be construed as a continuing offer "Art.
on 234. Emancipation takes place by
the part of the consenting spouse and the third person,
the attainment of majority. Unless
and may be perfected as a binding contract upon the
otherwise provided, majority commences
acceptance by the other spouse or authorization by at
the
the age of eighteen years."
court before the offer is withdrawn by either or both
offerors.
Section 2. Articles 235 and 237 of the
same Code are hereby repealed.
Section 3. Article 236 of the same Code
Art. 234. Emancipation takes place by the
is also hereby amended to read as
attainment of majority. Unless otherwise provided, follows:
majority commences at the age of twenty-one years.
"Art. 236. Emancipation shall terminate

75

parental authority over the person and

property of the child who shall then be
qualified and responsible for all acts of
civil life, save the exceptions established
by existing laws in special cases.
"Contracting marriage shall require
parental consent until the age of twentyone.
"Nothing in this Code shall be construed
to derogate from the duty or
responsibility of parents and guardians
for children and wards below twenty-one
years of age mentioned in the second
and third paragraphs of Article 2180 of
the Civil Code."
Section 4. Upon the effectivity of this
Act, existing wills, bequests, donations,
grants, insurance policies and similar
instruments containing references and
provisions favorable to minors will not
retroact to their prejudice.
Section 5. This Act shall take effect
upon completion of its publication in at
least two (2) newspapers of general
circulation.

1987 Constitution, Art XII, Section

7. Save in cases of hereditary
succession, no private lands shall be
transferred or conveyed except to
individuals, corporations, or associations
qualified to acquire or hold lands of the
public domain.

Section 8. Notwithstanding the

provisions of Section 7 of this Article, a
natural-born citizen of the Philippines
who has lost his Philippine citizenship
may be a transferee of private lands,

subject to limitations provided by law.

Cognition Theory
Manifestation Theory

2. object certain which is the subject

matter of the contract

Article 1347. All things which are not outside the

commerce of men, including future things, may be
the object of a contract.

All rights which are not intransmissible may also be

the object of contracts.

No contract may be entered into upon future

inheritance except in cases expressly authorized by
law.

All services which are not contrary to law, morals,

good customs, public order or public policy may
likewise be the object of a contract. (1271a)

Article 1348. Impossible things or services cannot

be the object of contracts. (1272)

Article 1349. The object of every contract must be

determinate as to its kind. The fact that the quantity
is not determinate shall not be an obstacle to the
existence of the contract, provided it is possible to
determine the same, without the need of a new

76

contract between the parties.

unlawful cause, produce no effect whatever. The

cause is unlawful if it is contrary to law, morals, good
customs, public order or public policy. (1275a)

Article 1311. Contracts take effect only between

the parties, their assigns and heirs, except in case
where the rights and obligations arising from the
Article 1353. The statement of a false cause in
contract are not transmissible by their nature, or bycontracts shall render them void, if it should not be
stipulation or by provision of law. The heir is not
proved that they were founded upon another cause
liable beyond the value of the property he received which is true and lawful. (1276)
from the decedent.
Article 1354. Although the cause is not stated in
If a contract should contain some stipulation in favorthe contract, it is presumed that it exists and is
of a third person, he may demand its fulfillment
lawful, unless the debtor proves the contrary. (1277)
provided he communicated his acceptance to the
obligor before its revocation. A mere incidental
benefit or interest of a person is not sufficient. The
Article 1355. Except in cases specified by law,
contracting parties must have clearly and
deliberately conferred a favor upon a third person. lesion or inadequacy of cause shall not invalidate a
contract, unless there has been fraud, mistake or
undue influence.
Article 1178. Subject to the laws, all rights
acquired in virtue of an obligation are transmissible,
4.
if there has been no stipulation to the contrary.
5.
3.

cause of the obligation

Article 1350. In onerous contracts the cause is

understood to be, for each contracting party, the
prestation or promise of a thing or service by the
other; in remuneratory ones, the service or benefit
which is remunerated; and in contracts of pure
beneficence, the mere liberality of the benefactor.
(1274)

Delivery
Due
observance
formalities

of

prescribed

Clemente v CA, Jalandoon (2015)

FACTS:

Adela owned three (3) adjoining parcels of

land in Scout Ojeda Street, Diliman,
Quezon City, subdivided as Lots 32, 34 and
35-B (the "Properties"). Among the
improvements on the Properties was
Adela's house (also referred to as the "big
house"). During her lifetime, Adela allowed
Article 1351. The particular motives of the parties
her children, namely, Annie Shotwell
in entering into a contract are different from the
Jalandoon, Carlos G. Shotwell ("Carlos Sr."),
cause thereof. (n)
Anselmo G. Shotwell and Corazon S.
Basset, and her grandchildren, the use and
possession of the Properties and its
improvements.
Article 1352. Contracts without cause, or with

77

Sometime in 1985 and 1987, Adela

simulated the transfer of Lots 32 and Lot
34 to her two grandsons from Carlos Sr.,
namely, Carlos V. Shotwell, Jr. ("Carlos Jr.")
and Dennis V. Shotwell. As a consequence,
Transfer Certificate of Title (TCT) No.
338708/PR 9421 was issued over Lot 32
under the name of Carlos Jr., while TCT No.
366256/PR 9422 was issued over Lot 34
under the name of Dennis. On the other
hand, Lot 35-B remained with Adela and
was covered by TCT No. 374531. It is
undisputed that the transfers were never
intended to vest title to Carlos Jr. and
Dennis who both will return the lots to
Adela when requested.

On April 18, 1989, prior to Adela and

petitioner's departure for the United States,
Adela requested Carlos Jr. and Dennis to
execute a deed of reconveyance over Lots
32 and 34. The deed of reconveyance was
executed on the same day and was
registered with the Registry of Deeds on
April 24, 1989.

On April 25, 1989, Adela executed a deed

of absolute sale over Lots 32 and 34, and
their improvements, in favor of petitioner,
bearing on its face the price of
P250,000.00. On the same day, Adela also
executed a special power of attorney (SPA)
in favor of petitioner. Petitioner's authority
under the SPA included the power to
administer, take charge and manage, for
Adela's benefit, the Properties and all her
other real and personal properties in the
Philippines. The deed of absolute sale and
the SPA were notarized on the same day by
Atty. Dionilo D. Marfil in Quezon City.

On April 29, 1989, Adela and petitioner left

for the United States. When petitioner
returned to the Philippines, she registered
the sale over Lots 32 and 34 with the
Registry of Deeds on September 25, 1989.
TCT No. 19811 and TCT No. 19809 were
then issued in the name of petitioner over
Lots 32 and 34, respectively.

On January 14, 1990, Adela died in the

United States and was succeeded by her
four children.

Soon thereafter, petitioner sought to eject

Annie and Carlos Sr., who were then
staying on the Properties. Only then did
Annie and Carlos Sr. learn of the transfer of
titles to petitioner. Thus, on July 9, 1990,
Annie, Carlos Sr. and Anselmo, represented
by Annie, ("private respondents") filed a
complaint for reconveyance of property
against petitioner before Branch 89 of the
RTC of Quezon City. It was docketed as Civil
Case No. Q-90-6035 and titled "Annie S.
Jalandoon, et al. v. Valentino. Clemente

In their amended complaint, private

respondents sought nullification of the
Deeds of Absolute Sale. They alleged that
Adela only wanted to help petitioner travel
to the United States, by making it appear
that petitioner has ownership of the
Properties. They further alleged that similar
to the previous simulated transfers to
Carlos Jr. and Dennis, petitioner also
undertook and warranted to execute a
deed of reconveyance in favor of the
deceased over the Properties, if and when
Adela should demand the same. They

78

finally alleged that no consideration was

given by petitioner to Adela in exchange
for the simulated conveyances.

On October 3, 1997, Carlos Sr. died and

was substituted only by Dennis. In an order
dated June 18, 1999, the case was
dismissed with respect to Annie after she
manifested her intention to withdraw as a
party-plaintiff. Anselmo Shotwell also died
without any compulsory heir on September
7, 2000.

On February 26, 2001, the trial court

promulgated a Decision in favor of private
respondents. CA affirmed with modification
- ruled that the Deeds of Absolute Sale
were simulated. It also ruled that the
conveyances of the Properties to petitioner
were made without consideration and with
no intention to have legal effect. The CA
agreed with the trial court that the
contemporaneous and subsequent acts of
petitioner and her grandmother are enough
to render the conveyances null and void on
the ground of being simulated. CA found
that Adela retained and continued to
exercise dominion over the Properties even
after she executed the conveyances to
petitioner. By contrast, petitioner did not
exercise control over the properties
because she continued to honor the
decisions of Adela. The CA also affirmed
the court a quo's finding that the
conveyances were not supported by any
consideration.

ISSUE: whether or not the CA erred in

affirming the decision of the trial court,
that the Deeds of Absolute Sale between
petitioner and her late grandmother over
the Properties are simulated and without
consideration, and hence, void and
inexistent.

HELD: Denied.

While the Deeds of Absolute Sale appear to

be valid on their face, the courts are not
completely precluded to consider
evidence aliunde in determining the real
intent of the parties. This is especially true
when the validity of the contracts was put
in issue by one of the parties in his
pleadings. Here, private respondents assail
the validity of the Deeds of Absolute Sale
by alleging that they were simulated and
lacked consideration.

A. Simulated contract
CC defines a contract as a meeting of
minds between two persons whereby one
binds himself, with respect to the other, to
give something or to render some service.
Article 1318 provides that there is no
contract unless the following requisites
concur:

(1) Consent of the contracting parties;

(2) Object certain which is the subject
matter of the contract; and
(3) Cause of the obligation which is
established.

All these elements must be present to

constitute a valid contract; the absence of

79

one renders the contract void. As one of

the essential elements, consent when
wanting makes the contract non-existent.
Consent is manifested by the meeting of
the offer and the acceptance of the thing
and the cause, which are to constitute the
contract. A contract of sale is perfected at
the moment there is a meeting of the
minds upon the thing that is the object of
the contract, and upon the price.

Here, there was no valid contract of sale

between petitioner and Adela because their
consent was absent. The contract of sale
was a mere simulation.

Simulation takes place when the parties do

not really want the contract they have
executed to produce the legal effects
expressed by its wordings. Article 1345
provides that the simulation of a contract
may either be absolute or relative. The
former takes place when the parties do not
intend to be bound at all; the latter, when
the parties conceal their true agreement.
The case of Heirs of Policronio M. Ureta, Sr.
v. Heirs of Liberate M. Ureta47 is instructive
on the matter of absolute simulation of
contracts, viz:

In absolute simulation, there is a

colorable contract but it has no
substance as the parties have no
intention to be bound by it. The main
characteristic of an absolute simulation is
that the apparent contract is not really
desired or intended to produce legal effect
or in any way alter the juridical situation of
the parties. As a result, an absolutely
simulated or fictitious contract is void,
and the parties may recover from each
other what they may have given under the
contract...48 (Emphasis supplied)

In short, in absolute simulation there

appears to be a valid contract but there is
actually none because the element of
consent is lacking. This is so because the
parties do not actually intend to be bound
by the terms of the contract.
In determining the true nature of a
contract, the primary test is the intention
of the parties. If the words of a contract
appear to contravene the evident intention
of the parties, the latter shall prevail. Such
intention is determined not only from the
express terms of their agreement, but also
from the contemporaneous and
subsequent acts of the parties. This is
especially true in a claim of absolute
simulation where a colorable contract is
executed.

In ruling that the Deeds of Absolute Sale

were absolutely simulated, the lower courts
considered the totality of the prior,
contemporaneous and subsequent acts of
the parties. The following circumstances
led the RTC and the CA to conclude that the
Deeds of Absolute Sale are simulated, and
that the transfers were never intended to
affect the juridical relation of the parties:

80

a) There was no indication that Adela

intended to alienate her properties in favor
of petitioner. In fact, the letter of Adela to
Dennis dated April 18, 1989 reveals that
she has reserved the ownership of the
Properties in favor of Dennis.
b) Adela continued exercising acts of
dominion and control over the properties,
even after the execution of the Deeds of
Absolute Sale, and though she lived abroad
for a time. In Adela's letter dated August
25, 1989 to a certain Candy, she advised
the latter to stay in the big house. Also, in
petitioner's letter to her cousin Dennis
dated July 3, 1989, she admitted that Adela
continued to be in charge of the Properties;
that she has no "say" when it comes to the
Properties; that she does not intend to
claim exclusive ownership of Lot 35-B; and
that she is aware that the ownership and
control of the Properties are intended to be
consolidated in Dennis.

c) The SPA executed on the same day as

the Deeds of Absolute Sale appointing
petitioner as administratrix of Adela's
properties, including the Properties, is
repugnant to petitioner's claim that the
ownership of the same had been
transferred to her.

d) The previous sales of the Properties to

Dennis and Carlos, Jr. were simulated. This
history, coupled with Adela's treatment of
petitioner, and the surrounding
circumstances of the sales, strongly show
that Adela only granted petitioner the
same favor she had granted to Dennis and
Carlos Jr.

The April 18, 1989 letter to Dennis

convincingly shows Adela's intention to

give him the Properties. Part of the letter

reads: "Dennis, the two lot [sic] 32-34 at
your said lower house will be at name
yours [sic] plus the 35 part of Cora or
Teens [sic] house are all under your
name" Petitioner claims this letter was not
properly identified and is thus, hearsay
evidence. The records, however, show that
the letter was admitted by the trial court in
its Order dated February 24, 1993. While it
is true that the letter is dated prior (or six
days before to be exact) to the execution of
the Deeds of Absolute Sale and is not
conclusive that Adela did not change her
mind, we find that the language of the
letter is more consistent with the other
pieces of evidence that show Adela never
intended to relinquish ownership of the
Properties to petitioner. In this regard, we
see no compelling reason to depart from
the findings of the trial court as there
appears no grave abuse of discretion in its
admission and consideration of the letter.
Petitioner's letter to her cousin Dennis
dated July 3, 1989 also sufficiently
establishes that Adela retained control over
the Properties, even after the execution of
the Deeds of Absolute Sale. Petitioner
herself admitted that she was only
following the orders of Adela, and that she
has no claim over the Properties. We quote
in verbatim the relevant part of the letter:
...Now, before I left going back here in Mla.
Mommy Dela ask me to read your letter
about the big house and lot, and I
explained it to her. Now Mommy and
Mommy Dela wants that the house is for
everyone who will need to stay, well that is
what they say. Alam mo naman, I have
no "say" esp. when it comes with
properties & you know that. Now kung
ano gusto nila that goes. Now, to be
honest Mommy was surprise [sic] bakit
daw kailangan mawalan ng karapatan sa

81

bahay eh Nanay daw nila iyon at tayo apo

lang, Eh wala akong masasabi dyan, to
be truthful to you, I only get the
orders... Tapos, sinisingil pa ako ng
P1,000 --para sa gate napinapagawa nya
sa lot 35-B, eh hindi na lang ako kiimibo
pero nagdamdam ako, imagine minsan na
lang sya nakagawa ng bien sa akin at wala
sa intention ko na suluhin ang 35-B,
ganyan pa sya... Now tungkol sa iyo, alam
ko meron ka rin lupa tapos yung bahay
na malaki ikaw rin ang titira at
magmamahala sa lahat. Anyway, itong
bahay ko sa iyo rin, alam mo naman
na I'm just making the kids grow a little
older then we have to home in the
states...56 (Emphasis supplied)

Moreover, Adela's letter to petitioner's

cousin Candy dated August 25, 1989 shows
Adela's retention of dominion over the
Properties even after the sales. In the
letter, Adela even requested her
granddaughter Candy to stay in the house
rent and expense free. Petitioner claims
that Candy and the house referred to in the
letter were not identified. Records show,
however, that petitioner has testified she
has a cousin named Candy Shotwell who
stayed at the "big house" since February
1989.

Clearly, the submission of petitioner to the

orders of Adela does not only show that the
latter retained dominion over the
Properties, but also that petitioner did not
exercise acts of ownership over it. If at all,
her actions only affirm the conclusion that
she was merely an administratrix of the
Properties by virtue of the SPA.

On the SPA, petitioner claims the lower

courts erred in holding that it is

inconsistent with her claim of ownership.

Petitioner claims that she has sufficiently
explained that the SPA is not for the
administration of the Properties, but for the
reconstitution of their titles.

We agree with the lower courts that the

execution of an SPA for the administration
of the Properties, on the same day the
Deeds of Absolute Sale were executed, is
antithetical to the relinquishment of
ownership. The SPA shows that it is so
worded as to leave no doubt that Adela is
appointing petitioner as the administratrix
of her properties in Scout Ojeda. Had the
SPA been intended only to facilitate the
processing of the reconstitution of the
titles, there would have been no need to
confer other powers of administration, such
as the collection of debts, filing of suit, etc.,
to petitioner. In any case, the explanation
given by petitioner that the SPA was
executed so as only to facilitate the
reconstitution of the titles of the Properties
is not inconsistent with the idea of her
being the administratrix of the Properties.
On the other hand, the idea of assigning
her as administratrix is not only
inconsistent, but also repugnant, to the
intention of selling and relinquishing
ownership of the Properties.

Petitioner next questions the lower courts'

findings that the Deeds of Absolute Sale
are simulated because the previous
transfers to Adela's other grandchildren
were also simulated. It may be true that,
taken by itself, the fact that Adela had
previously feigned the transfer of
ownership of Lots 32 and 34 to her other
grandchildren would not automatically
mean that the subject Deeds of Absolute
Sale are likewise void. The lower courts,
however, did not rely solely on this fact,
but considered it with the rest of the

82

evidence, the totality of which reveals that

Adela's intention was merely to feign the
transfer to petitioner.

The fact that unlike in the case of Dennis

and Carlos, Jr., she was not asked by Adela
to execute a deed of reconveyance, is of no
moment. There was a considerable lapse of
time from the moment of the transfer to
Dennis and Carlos, Jr. of Lots 32 and 34 in
1985 and in 1987, respectively, and until
the execution of the deed of reconveyance
in 1989. Here, the alleged Deeds of
Absolute Sale were executed in April 1989.
Adela died in January 1990 in the United
States. Given the short period of time
between the alleged execution of the
Deeds of Absolute Sale and the sudden
demise of Adela, the fact that petitioner
was not asked to execute a deed of
reconveyance is understandable. This is
because there was no chance at all to do
so. Thus, the fact that she did not execute
a deed of reconveyance does not help her
case.

We affirm the conclusion reached by the

RTC and the CA that the evidence
presented below prove that Adela did not
intend to alienate the Properties in favor of
petitioner, and that the transfers were
merely a sham to accommodate petitioner
in her travel abroad.

Petitioner claims that we should consider

that there is only one heir of the late Adela
who is contesting the sale, and that out of
the many transactions involving the
decedent's other properties, the sale to
petitioner is the only one being questioned.
We are not convinced that these are
material to the resolution of the case. As
aptly passed upon by the CA in its assailed
Resolution:

In a contest for the declaration of nullity of

an instrument for being simulated, the
number of contestants is not determinative
of the propriety of the cause. Any person
who is prejudiced by a simulated
contract may set up its inexistence. In
this instant case, it does not matter if the
contest is made by one, some or all of the
heirs.

Neither would the existence of other

contracts which remain unquestioned deter
an action for the nullity of an instrument. A
contract is rendered meaningful and
forceful by the intention of the parties
relative thereto, and such intention can
only be relevant to that particular contract
which is produced or, as in this case, to
that which is not produced. That the deed
of sale in [petitioner's] favor has been held
to be simulated is not indicative of the
simulation of any other contract executed
by the deceased Adela de Guzman
Shotwell during her lifetime.

To this we add that other alleged

transactions made by Adela cannot be
used as evidence to prove the validity of
the conveyances to petitioner. For one, we
are not aware of any of these transactions
or whether there are indeed other
transactions. More importantly, the validity
of these transactions does not prove
directly or indirectly the validity of the
conveyances in question.

B. No consideration for the sale

We also find no compelling reason to
depart from the court a quo's finding that
Adela never received the consideration
stipulated in the simulated Deeds of

83

Absolute Sale.
Although on their face, the Deeds of
Absolute Sale appear to be supported by
valuable consideration, the RTC and the CA
found that there was no money involved in
the sale. The consideration in the Deeds of
Absolute Sale was superimposed on the
spaces therein, bearing a font type
different from that used in the rest of the
document. The lower courts also found that
the duplicate originals of the Deeds of
Absolute Sale bear a different entry with
regard to the price.

Article 1471 of the Civil Code provides that

"if the price is simulated, the sale is void."
Where a deed of sale states that the
purchase price has been paid but in fact
has never been paid, the deed of sale is
null and void for lack of consideration.
Thus, although the contracts state that the
purchase price of P250,000.00 and
P60,000.00 were paid by petitioner to
Adela for the Properties, the evidence
shows that the contrary is true, because no
money changed hands. Apart from her
testimony, petitioner did not present proof
that she paid for the Properties.

There is no implied trust.

We also affirm the CA's deletion of the
pronouncement of the trial court as to the
existence of an implied trust. The trial
court found that a resulting trust, a form of
implied trust based on Article 1453 was
created between Adela and petitioner.
Resulting trusts arise from the nature or
circumstances of the consideration
involved in a transaction whereby one
person becomes invested with legal title
but is obligated in equity to hold his title for
the benefit of another. It is founded on the

equitable doctrine that valuable

consideration and not legal title is
determinative of equitable title or interest
and is always presumed to have been
contemplated by the parties.Since the
intent is not expressed in the instrument or
deed of conveyance, it is to be found in the
nature of the parties' transaction. Resulting
trusts are thus describable as intentionenforcing trusts. An example of a resulting
trust is Article 1453.

We, however, agree with the CA that no

implied trust can be generated by the
simulated transfers because being fictitious
or simulated, the transfers were null and
void ab initio from the very beginning
and thus vested no rights whatsoever in
favor of petitioner. That which is inexistent
cannot give life to anything at all.

Article 1453 contemplates that legal titles

were validly vested in petitioner.
Considering, however, that the sales lack
not only the element of consent for being
absolutely simulated, but also the element
of consideration, these transactions are
void and inexistent and produce no effect.
Being null and void from the beginning, no
transfer of title, both legal and beneficial,
was ever effected to petitioner.
In any case, regardless of the presence of
an implied trust, this will not affect the
disposition of the case. As void contracts
do not produce any effect, the result will be
the same in that the Properties will be
reeonveyed to the estate of the late Adela
de Guzman Shotwell.

Pentacapital Investment Corp. vs. Mahinay, G.R.

No. 171736 July 5, 2010

84

Doctrine: Lastly, respondent promised to

pay 25% of his outstanding obligations as
attorneys fees in case of non-payment
thereof. Attorneys fees here are in the
nature of liquidated damages. As long as
said stipulation does not contravene law,
morals, or public order, it is strictly binding
upon respondent. Nonetheless, courts are
empowered to reduce such rate if the same
is iniquitous or unconscionable pursuant to
the above-quoted provision.

Facts:
Petitioner filed a complaint for a sum of
money
against
respondent
Makilito
Mahinay based on two separate loans
obtained
by
the
latter,
amounting
to P1,520,000.00 and P416,800.00, or a
total amount of P1,936,800.00. These loans
were evidenced by two promissory notes.

Answer with Compulsory Counterclaim:

Petitioner had no cause of action because
the PNs were subject to a condition that did
not occur. While admitting that he indeed
signed the promissory notes, he insisted
that he never took out a loan and that the
notes were not intended to be evidences of
indebtedness. By way of counterclaim,
respondent prayed for the payment of
moral and exemplary damages plus
attorneys fees.

Respondent explained that he was the

counsel of Ciudad Real Development Inc.
(CRDI). In 1994, Pentacapital Realty
Corporation (Pentacapital Realty) offered to
buy parcels of land known as the Molino

Properties, owned by CRDI. The Molino

Properties were sold. As the Molino
Properties were the subject of a pending
case, Pentacapital Realty paid only the
down
payment
amounting
to P12,000,000.00.
CRDI
allegedly
instructed Pentacapital Realty to pay the
formers creditors, including respondent
who
thus
received
a
check
worth P1,715,156.90.

Respondent, Pentacapital Realty and CRDI

allegedly agreed that respondent had a
charging lien equivalent to 20% of the total
consideration of the sale in the amount
of P10,277,040.00. Pending the submission
of the Entry of Judgment and as a sign of
good
faith,
respondent
purportedly
returned
the P1,715,156.90
check
to
Pentacapital Realty. However, the Molino
Properties continued to be haunted by the
seemingly interminable court actions
initiated by different parties which thus
prevented respondent from collecting his
commission.
On motion of respondent, the Regional Trial
Court (RTC) allowed him to file a Third Party
Complaint against CRDI, subject to the
payment of docket fees.

Admittedly, respondent earlier instituted an

action for Specific Performance against
Pentacapital Realty before the RTC of Cebu
City, Branch 57, praying for the payment of
his commission on the sale of the Molino
Properties. In an Amended Complaint,
respondent referred to the action he
instituted as one of Preliminary Mandatory
Injunction instead of Specific Performance.
Acting on Pentacapital Realtys Motion to

85

Dismiss, the RTC dismissed the case for

lack of cause of action. The dismissal
became final and executory.

With the dismissal of the aforesaid case,

respondent filed a Motion to Permit
Supplemental Compulsory Counterclaim. In
addition to the damages that respondent
prayed for in his compulsory counterclaim,
he sought the payment of his commission
amounting to P10,316,640.00, plus interest
at the rate of 16% per annum, as well as
attorneys fees equivalent to 12% of his
principal claim. Respondent claimed that
Pentacapital Realty is a 100% subsidiary of
petitioner. Thus, although petitioner did not
directly participate in the transaction
between Pentacapital Realty, CRDI and
respondent, the latters claim against
petitioner was based on the doctrine of
piercing the veil of corporate fiction. Simply
stated, respondent alleged that petitioner
and Pentacapital Realty are one and the
same entity belonging to the Pentacapital
Group of Companies.

TC: This court hereby orders the plaintiff to

pay unto defendant the following sums, to
wit:
1. P1,715,156.90 representing the
amount plaintiff is obligated to pay
defendant as provided for in the
deed of sale and the supplemental
agreement, plus interest at the rate
of 16% per annum, to be computed
from September 23, 1998 until the
said amount shall have been fully
paid;
2. Php 10,316,640.00 representing

defendants share of the proceeds

of the sale of the Molino property
(defendants charging lien) plus
interest at the rate of 16% per
annum, to be computed from
September 23, 1998 until the said
amount shall have been fully paid;
3. Php 50,000.00 as attorneys fees
based on quantum meruit;
4.
Php
50,000.00
litigation
expenses, plus costs of suit.

Issue: Whether or not the attorneys fees

as liquidated damages can be reduced by
the court?

Held: Yes.
The promissory notes likewise required the
payment of a penalty charge of 3% per
month or 36% per annum. We find such
rates unconscionable. This Court has
recognized a penalty clause as an
accessory obligation which the parties
attach to a principal obligation for the
purpose of ensuring the performance
thereof by imposing on the debtor a special
prestation (generally consisting of the
payment of a sum of money) in case the
obligation is not fulfilled or is irregularly or
inadequately fulfilled. However, a penalty
charge
of
3%
per
month
is
unconscionable; hence, we reduce it to 1%
per month or 12% per annum, pursuant to
Article 1229 of the Civil Code which states:

Art. 1229. The judge shall equitably reduce

86

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.

Lastly, respondent promised to pay 25% of

his outstanding obligations as attorneys
fees in case of non-payment thereof.
Attorneys fees here are in the nature of
liquidated damages. As long as said
stipulation does not contravene law,
morals, or public order, it is strictly binding
upon respondent. Nonetheless, courts are
empowered to reduce such rate if the same
is iniquitous or unconscionable pursuant to
the above-quoted provision. This sentiment
is echoed in Article 2227 of the Civil Code,
to wit:

Art. 2227. Liquidated damages, whether

intended as an indemnity or a penalty,
shall be equitably reduced if they are
iniquitous or unconscionable.

Hence, we reduce the stipulated attorneys

fees from 25% to 10%.

Ong Yiu v. CA, 91 SCRA 223

Summary: Petitioners luggage was
misplaced on a PAL flight. When it was
eventually returned to him, a folder
containing documents for trial was missing.
He filed suit. The TC ruled in his favor, but
the CA limited PALs liability to P100 based

on the limited liability provision printed on

the back of his plane ticket. The SC upheld
the CAs ruling.
Doctrine: Limited liability provisions can be
a part of the contract of carriage, and valid
and binding upon the passenger regardless
of the latters lack of knowledge or assent
to the regulation.

FACTS:
1. On 26 Aug 1967, petitioner took a PAL
flight from Cebu to Butuan. He was
scheduled to attend a trial set for hearing
on 28-31 Aug. He checked in one maleta
containing documents needed for said trial.
Upon his arrival at the Bancasi airport, he
tried to claim his luggage, but it could not
be found. He claimed he was only attended
to after reacting indignantly, which was
denied by the porter clerk Gomez.
2. At 3 p.m., PAL Butuan sent a message to
PAL Cebu inquiring about the missing
luggage, which was relayed in full to the
Mactan Airport teletype operator at 3:45
p.m. At 3:59, PAL Manila wired PAL Cebu
advising that the luggage had been
overcarried to Manila, and would be
forwarded to Cebu on the same day.
Instructions were given that the luggage be
immediately forwarded to Butuan on the
first available flight. PAL Cebu messaged
PAL Butuan at 5 p.m., but PAL Butuan did
not receive this since all the personnel had
already left.
3. At 10 p.m., petitioner wired PAL Cebu
demanding delivery before noon next day,
otherwise, he would hold PAL liable for
damages. The PAL Cebu supervisor
received it but did not reply since he
assumed that the luggage had would have
already arrived by the time a reply would
reach Butuan.
4. Early next morning, petitioner went to
Bancasi airport to inquire about his

87

luggage. He did not wait for the morning

flight which arrived at 10 a.m, with his
luggage. Gomez paged petitioner, who had
already left. Emilio Dagorro, a driver who
used to drive petitioner, offered to take the
luggage to him. Gomez took the luggage
and put it on the counter. Dagorro
examined the lock, pressed it, and it
opened. Calling Gomezs attention, the
maleta was opened. Gomez examined the
contents without touching them. Dagorro
then delivered the maleta to petitioner with
the information that the lock was open.
5. A folder containing exhibits, transcripts,
and private documents for the case was
missing, as well as two gifts for his parentsin-law. He refused to accept the luggage.
Dagorro returned it to Gomez, who sealed
and forwarded it to PAL Cebu.
6. Petitioner was granted postponement of
his hearing due to the loss of his
documents. He wrote to PAL Cebu
demanding his luggage be produced intact,
with P250k actual and moral damages,
within five days from receipt of the letter;
else, he would file suit. On 31 Aug, Leon,
Narvasi and Agustin of PAL Cebu went to
his office to deliver the maleta. The
contents were listed and receipted for by
petitioner.
8. Petitioner inquired about the
investigation he was promised to pinpoint
responsibility for the unauthorized opening
of the maleta. PAL replied on 6 Sept 1967
that they still had not found his lost folder
nor pinpointed the personnel who allegedly
pilfered his baggage, and stated that no
inventory was taken of the cargo and they
had no way of knowing the real contents of
his baggage when it was loaded.
9. Petitioner filed a complaint against PAL
for breach of contract of transportation.
The CFI ruled that PAL acted with bad faith
and malice, and awarded him moral and
exemplary damages, attorneys fees, and
costs. The CA found PAL guilty only of
simple negligence and limited PALs liability

to P100, the baggage liability assumed by

it under the condition of carriage printed at
the back of the ticket.
ISSUE: WoN PALs liability should be
limited to P100 - YES
RULING: Petition denied. Judgment
affirmed in toto.
RATIO:
1. PAL clearly incurred delay in delivery of
the luggage. However, there was no bad
faith or malice. PAL exerted due diligence
in complying with its duty to look for
petitioners luggage which it had
miscarried. The TC found bad faith because
PAL telegrammed Mactan only at 3 p.m.
But this was less than an hour after
petitioners luggage could not be found.
Efforts had to be exerted to locate the
maleta, and other passengers had to be
attended to. Also, PAL Cebu immediately
wired PAL Manila, which promptly replied.
The baggage was sent back the same
afternoon.
2. Neither was PAL Cebus failure to reply
to the rush telegram indicative of bad faith.
The PAL Mactan supervisor was notified of
it only the morning of the next day. The
maleta was already to be forwarded to
Butuan. Hence, there was no bad faith in
his assumption that the plane with the
luggage would arrive earlier than a reply.
Had petitioner waited or caused someone
to wait at the Bancasi airport for the
morning flight, he would have been able to
retrieve his luggage sooner.
3. Absent bad faith, wrongful act or
omission, or fraud, petitioner is not entitled
to moral damages. Nor is he entitled to
exemplary damages, as these can only be
granted if PAL acted in a wanton,
fraudulent, reckless, oppressive or
malevolent manner, which was not proven.
4. PALs liability for the loss is limited to
P100 pursuant to the stipulation on the
back of the ticket:
8. BAGGAGE LIABILITY The total liability

88

of the Carrier for lost or damaged baggage

of the passenger is limited to P100.0 for
each ticket unless a passenger declares a
higher valuation in excess of P100.00, but
not in excess, however, of a total valuation
of P1,000.00 and additional charges are
paid pursuant to Carriers tariffs.
5. Petitioner did not declare a higher value
nor pay any additional transportation
charge. Though he did not sign the plane
ticket, he is nevertheless bound by the
provisions thereof. They are a part of the
contract of carriage, and valid and binding
upon the passenger regardless of the
latters lack of knowledge or assent to the
regulation. This is a contract of adhesion. A
contract limiting liability upon an agreed
valuation does not offend against the
policy of the law forbidding one from
contracting against his own negligence.

Weldon v. CA, 154 SCRA 618

FACTS:
Petitioner drafted plans for a theater
building which private respondent Cancio
intended to put up. He submitted a
proposal for the supervision of the
construction on commission basis which
private respondent never signed. Included
is a setting up a revolving fund of P10K for
the costs replenished by Cancio and the
payment to petitioner of a 10% of total
costs as commission. Upon payment of the
P10K, petitioner sent another proposal
stipulating a price of P600K for the
construction entitled Building Contract.
Subsequent payments were made by
Cancio as per accomplishment until he fully
paid the P600K. However, petitioner still
demanded payment of the commission
which Cancio refused to pay. Hence,
petitioner initiated a suit for the recovery of
the 10% of the total cost of construction as

commission. CFI ruled that the agreement

was a contract of supervision of
construction and ordered in favor of the
Petitioner, ordering Cancio to pay the
commission which the CA reversed.

ISSUES:
Whether or not parties are bound by the
first proposal or by the second proposal?
Parties are bound by the second
proposal, Building Contract, as the
first proposal containing the provision
on commission was never perfected.
Subsequent payments were only made
after the signing of the second
proposal; thus it was the intention of
the parties to enforce such contract.

DECISION:
The first proposal is simply a proposal as it
was never perfected as a contract. Only an
absolute acceptance of a definite offer
manifests consent necessary to perfect a
contract. The mere payment of P10K was
not an unqualified acceptance of the offer
of the first proposal. The second proposal,
signed by the contracting parties, has
already been consummated when the
building was completed. Therefore, its
validity and binding effect cannot be
disputed by the contracting parties. The
subsequent payments made by Cancio only
after the signing of the Building Contract
prove that it was the second proposal that
was intended to be fulfilled. It cannot be
said that these amounts are mere
replenishments in accordance to the first
proposal. Since it is fully paid, there is no
basis for the petitioners demand for the
commission. To allow such payment would
be equivalent to changing the terms of the

89

contract which needed the consent of the

owner of the building.

C & C Commercial Corp. v. Menor, 120

SCRA 112
FACTS:
Justice Cloribel of CFI of Manila ordered the
GM of NAWASA to allow petitioner to
participate as a bidder for the supply of
asbestos cement pipes wherein it was the
lowest bidder. Menor, the GM of Nawasa,
required petitioner to submit tax clearance
certificate pursuant to Presidential
Administrative Order 68. Long after
Cloribels judgment when he had no more
jurisdiction to amend it, petitioner filed a
motion wherein it prayed that Nawasa
officials award the contract for the supply
of asbestos to petitioner which Cloribel
granted. Subsequently, petitioner filed in
LC a petition for mandamus praying that
Nawasa and Menor be restrained from
awarding the contract to another bidder
and be ordered to award the same to
petitioner which was denied.

Nawasa awarded the contract to Regal

Trading as the lowest complying bidder
which was approved by the President.
Petitioner asked this court to enjoin the
implementation of the said contract.

ISSUE:
Whether the order of Judge Cloribel
compelling Nawasa to award the said
contract to petitioner was binding in the
part of Nawasa? No. Judge Cloribel did
not just act without jurisdiction but
refusal of Nawasa to grant the
contract to petitioner was likewise

justified as it failed to comply with the

requirement of a tax clearance
certificate. Also, what was delivered
to petitioner was merely an
advertisement for a bidding which
does not bind the advertiser to accept
the bids.

DECISION:
Judge Cloribel acted without jurisdiction in
issuing his order thus the order is void.
Nawasa was likewise justified in not
awarding the contract to petitioner
because it had not tax clearance certificate
since it had a pending tax case in the BIR.
It is not the duty of Nawasa to award the
contract to petitioner even if it was the
lowest bidder, as according to its
Addendum no. 1 it reserved the right to
reject the bid of any bidder; thus, petitioner
has no cause to dispute the award as it was
rejected by Nawasa. Advertisements for
bidders are simply invitation to make
proposals and the advertiser is not bound
to accept the lowest or highest bidder
unless the contrary appears.

Tang v. CA, 90 SCRA 236

Facts:
> On Sept. 25, 2965, Lee Su Guat, widow,
61 years old and illiterate who spoke only
Chinese, applied for life insurance for 60T
with Philamlife. The application was in two
parts, both in English.
> The second part dealt with her state of
health. Her answers having shown that
she was health, Philamlife issued her a
policy effective Oct. 23, 1965 with her

90

nephew Vicente Tang as beneficiary.

> On Nov. 15, 1965, Lee again applied for
additional insurance of her life for 40T.
Since it was only recent from the time she
first applied, no further medical exam was
made but she accomplished Part 1 (which
certified the truthfulness of statements
made in Part. 2)
> The policy was again approved. On Apri
20 1966, Lee Su Guat died of Lung cancer.
> Tang claimed the amount o 100T but
Philamlife refused to pay on the ground
that the insured was guilty of concealment
and misrepresentation.
> Both trial court and CA ruled that Lee
was guilty of concealment.
> Tangs position, however, is that
because Lee was illiterate and spoke only
Chinese, she could not be held guilty of
concealment of her health history because
the application for insurance was English,
and the insurer has not proven that the
terms thereof had been fully explained to
her as provided by Art. 1332 of CC.

Issue: Whether or not Art. 1332 applies.

avoid its performance.

It is petitioner who is seeking to enforce it,

even as fraud or mistake is NOT alleged.
Accordingly, Philamlife was under no
obligation to prove that the terms of the
insurance contract were fully explained to
the other party. Even if we were to say
that the insurer is the one seeking the
performance of the cont contracts by
avoiding paying the claim, it has to be
noted as above stated that there has been
NO imputation of mistake of fraud by the
illiterate insured whose personality is
represented by her beneficiary. In sum,
Art. 1332 is inapplicable, and considering
the findings of both the trial court and the
CA as to the Concealment of Lee, the SC
affirms their decisions.

Concurring: J., Antonio

In a contract of insurance, each party must
communicate to the other, in good faith, all
facts within his knowledge which are
material to the contract, and which the
other has no means of ascertaining. As a
general rule, the failure by the insured to
disclose conditions affecting the risk of
which he is aware makes the contract
voidable at the option of the insurer.

Held: NO.
Art. 1332 is NOT applicable. Under said
article, the obligation to show that the
terms of the contract had been fully
explained to the party who is unable to
read or understand the language of the
contract, when fraud or mistake is alleged,
devolves on the party seeking
to enforce it. Here, the insurance
company is NOT seeking to enforce the
contract; on the contrary, it is seeking to

The reason for this rule is that insurance

policies are traditionally contracts
uberrimae fidei, which means most
abundant good faith, absolute and
perfect candor or openness and honesty,
absence of any concealment or deception
however slight. Here the CA found that
the insured deliberately concealed material
facts about her physical condition and

91

history and/or concealed with whoever

assisted her in relaying false information to
the medical examiner. Certainly, the
petitioner cannot assume inconsistent
positions by attempting to enforce the
contract of insurance for the purpose of
collecting the proceeds of the policy and at
the same time nullify the contract by
claiming that it was executed through fraud
or mistake.

NOTE: Art. 1332: When one of the parties

is unable to read or if the contract is in a
language not understood by him, and
mistake or fraud is alleged, the person
enforcing the contract must show that the
terms thereof have been fully explained to
him.

Pablo Encabo applied with the Bureau of

Lands to purchase a parcel of land which
was part of the Tuason Estate purchased by
the Government for resale to tenants
qualified to own public land in the
Philippines. Encabo, through an agent,
came to an agreement with Quesada,
transferring rights over the lot to the latter,
conditioned on approval by the Land
Tenure Administration (LTA). LTA, unaware
of the transfer of rights to Quesada,
adjudicated the lot in favor of Encabo
evidenced by an Agreement to Sell. Upon
knowledge of the transfer of rights of
Encabo to Quesada, LTA disapproved the
same on ground that the Quesada was
unqualified to acquire the lot as he is
already a lot owner. Notwithstanding,
Quesada entered into possession of the lot
and allowed his agent, the wife of
petitioner, to occupy the same.

Cario v. CA, 152 SCRA 529

FACTS:

Encabo executed a Deed of Sale of house

and Transfer of rights, allegedly conveying
to petitioner his rights over the lot subject
to approval of LTA. However, Encabo and
Quesada executed a document wherein the
latter alleged;y resold to Encabo the house
and rights over the lot. Petitioner filed a
petition with LTA seeking the approval of
the transfer of rights pursuant to the Deed
of sale of house and transfer of Rights to
which Encabo objected. Essentially, Encabo
and petitioners claimed the right to
purchase the lot to which LTA ruled that
status quo should be maintained. The
Office of the President affirmed the same.

Thereafter, the Encabos filed with CFI an

acitionto declare them the owners of the
lot which the TC granted which CA
affirmed. Hence, this petition.

92

the rights.
ISSUE:
Whether the Deed of Sale of house and
Transfer of Right, on which petitioners have
based their application over the lot, is
simulated and therefore an inexistent deed
of sale? Yes. The inconsistencies in the
testimonies of petitioner regarding
the documents, failure to produce
receipts evidencing the payment to
LTA, absence of the name of the
petitioners as transferee of the rights
over the lot in the application filed
with LTA indicates that the agreement
was indeed simulated; therefore is
inexistent.

DECISION:
The parties knew that the Deed of Sale of
House and Transfer of Rights was fictitious
and simulated where none of the parties
intended to be bound thereby. First, the
testimony of petitioner during direct
examination was inconsistent with her
testimony before LTA (e.g. amount of
payment to Encabos, place of the signing
of the Deed); hence it shows that no actual
sale took place between the Encabos and
petitioners. Second, since petitioners could
not produce the receipts evidencing the
payment they made to LTA for the lots nor
the Agreement to sell indicates that the
agreement was indeed simulated. Third,
the names of the petitioner were never
mentioned as transferees in the two
application with the LTA filed by Encabo.
Fourth, the document was executed in
November 1958 while petitioners asked LTA
to approve the transfer of Encabos rights
only on 1960. Lastly, the petitioners were,
as admitted by Encabo and Quesada,
meant only to be dummies to protect the
money invested by Quesada to purchase

Lagunzad v. Gonzales, 92 SCRA 476

FACTS: Petioner Manuel Lagunzad, a
newspaperman, began a movie production
entitled THE MOISES PADILLA STORY
wherein the movie narrates the events
which culminated the murder of Moises
Padilla who was then a mayoralty
candidate of Nacionalista party. Although
the emphasis of the movie was to depict
the public life of Padilla, there were
portions which dealt with his private and
family life including the portrayal in some
scenes of his mother Maria Soto Vda de
Gonzales, and Auring as his girlfriend. This
leads to the objection of Padillas half-sister
in behalf of her mother contending that
petitioner exploited the life story of Padilla,
and demanded in writing for certain
changes, correction and deletion in the
movie. Petitioner Lagunzad settles the
issue and bargains and comes up with a
Licensing Agreement between him and
Maria Soto whereby the petitioner
Lagunzad as Licensee is granted by
Licensor Vda. De Gonzales authority and
permission to exploit, use and develop the
life story of Padilla for purposes of the
movie production for consideration of
P20,000.00

Lagunzad paid Vda de Gonzales

P5,000 as first payment, subsequently the
movie was released all over the country.
Petitioner refused to pay any additional
amount pursuant to the agreement which
leads to instituting a suit against Lagunzad
and prays that 1.) Petitioner to pay for the
remaining balance amounting to 15,000
with legal interest 2.) review the proceeds
of the movie and pay the corresponding to

93

2 -1/2 % of royalty therefrom.

situation or type of situation.

Petitioner contended in his answer

that the movie depicts the life story of
Padilla which are already known by the
public which makes him a public figure.
Moreover petitioner also contends that the
licensing agreement was without cause or
consideration and constitutes an
infringement on the constitutional rights of
freedom of speech and of the press: and
that he paid Vda de Gonzales the amount
of 5,000 only because of the coercion and
threat employed upon him. Both trial court
and CA ruled in favour of Vda, de Gonzales.

In the case at bar, the interests

observable are the right to privacy
asserted by respondent and the right of
-freedom of expression invoked by
petitioner. Taking into account the interplay
of those interests, the court hold that under
the particular circumstances presented,
and considering the obligations assumed in
the Licensing Agreement entered into by
petitioner, the validity of such agreement
will have to be upheld particularly because
the limits of freedom of expression are
reached when expression touches upon
matters of essentially private concern.

ISSUE: Whether or not Licensing

Agreement infringes on the constitutional
right of freedom of speech and of the
press.

HELD: The courts find no merit in the

contention of the petitioner that the
Licensing Agreement infringes on the
constitutional right of freedom of speech
and of the press, Lagunzad as a citizen and
as a newspaperman; he had the right to
express his thoughts in film on the public
life of Moises Padilla without prior restraint.
The right of freedom of expression, indeed,
occupies a preferred position in the
"hierarchy of civil liberties, it is not,
however, without limitations

One criterion for permissible

limitation on freedom of speech and of the
press is the "balancing-of-interests test."
The principle requires a court to take
conscious and detailed consideration of the
interplay of interests observable in a given

Law v. Olympic Sawmill

Su
mm
ary

The defendants were not able to

pay its original loan of P10,000
from Liam Law. They executed
another document extending the
period of payment and increasing
the amount by P6,000.
Defendants again failed to pay
prompting Liam Law to file
collection case.
SC: Under NCC 1354, in regards
to the agreement as to the
P6,000 obligation, it is presumed
that it exists and is lawful, unless
the debtor proves the contrary.
No evidentiary hearing having
been held, it has to be concluded
that defendants had not proven
that the P6,000 obligation was
illegal. Thus, the P6,000
obligation should be viewed as
liquidated damages suffered by
the plaintiff, as of March 17,
1960, representing loss of

94

interest income, attorneys fees

and incidentals.

Ratio

facts of the case

- On Sep 7, 1957, Liam Law loaned P10,000
without interest to Olympic Sawmill Co.
and Elino Lee Chi as the managing
partner. The loan became due on Jan 31,
1960, but was not paid with the debtors
asking for a 3 month extension or up to
April 30, 1960.
- On March 17, 1960, the parties executed
another
loan
document
extending
payment to April 30, 1960, but the sum
was increased by P6,000. Defendants
(Olympic) again failed to pay the 10,000
but claimed that the P6,000 was usurious
interest.
- Plaintiff filed this collection case. [Upon
application of the Plaintiff, the Trial Court
issued a Writ of Attachment on real and
personal properties of defendants. On Jan
18, 1961, an Order was issued by the
trial court stating that after considering
the manifestations of both counsel in
Chambers, the court allows both parties
to simultaneously submit a Motion for
Summary Judgment.]
- Trial Court: rendered a decision ordering
defendants to pay the amount of P10,000
plus the further sum of P6,000 by way of
liquidated damages with legal rate of
interest on both amounts from April 30,
1960.
- Defendants appealed.
issues
Whether the decision of the Trial court is
correct. YES.

- Under NCC 1354, in regards to the

agreement as to the P6,000 obligation,
it is presumed that it exists and is
lawful, unless the debtor proves the
contrary.
- No evidentiary hearing having been held, it
has to be concluded that defendants had
not proven that the P6,000 obligation
was illegal. Thus, the P6,000 obligation
should be viewed as liquidated damages
suffered by the plaintiff, as of March 17,
1960, representing loss of interest
income, attorneys fees and incidentals.
- The main thrust of defendants appeal is
the allegation in their answer that the
P6,000 constituted usurious interest.
They insist the claim of usury should
have been deemed admitted by plaintiff
as it was not denied specifically under
oath. (Relying on Section 9 of the Usury
Law.)
"SEC. 9. The person or corporation sued
shall file its answer in writing under oath
to any complaint brought or filed against
said person or corporation before a
competent court to recover the money or
other personal or real property, seeds or
agricultural
products,
charged
or
received in violation of the provisions of
this Act. The lack of taking an oath to an
answer to a complaint will mean the
admission of the facts contained in the
latter."
SC: The foregoing provision envisages a
complaint filed against an entity which has
committed usury for the recovery of the
usurious interest paid. In that case, if the

95

entity sued shall not file its answer under

oath denying the allegation, the defendant
shall be deemed to have admitted the
usury.

upon the contract.

Article 1358. The following must appear in a public

document:
1) Acts and contracts which have for their
object,
the
creation,
transmission,
modification or extinguishment of real rights
over immovable property; sales of real
property or of an interest therein are
governed by Articles 1403, No. 2, and 1405;
2) The cession, repudiation or renunciation of
hereditary rights or of those of the conjugal
partnership of gains;
3) The power to administer property, or any
other power which has for its object an act
appearing or which should appear in a public
document, or should prejudice a third
person;
4) The cession of actions or rights proceeding
from an act appearing in a public document.

- The provision does not apply to a case

where it is the defendant who is alleging
usury, as in this case.
- Moreover, the usury has been legally nonexistent for some time now. Interest can
now be charged as lender and borrower
may agree upon. The Rules of Court in
regards
to
allegations
of
usury,
procedural
in
nature,
should
be
considered repealed with retroactive
effect.

F. Forms of Contracts Arts. 13561358

All other contracts where the amount involved

exceeds Five hundred pesos must appear in writing,
even a private one. But sales of goods, chattels or
things in action are governed by Articles 1403, No. 2
and 1405 (1280a)

Article 1356. Contracts shall be obligatory, in

whatever form they may have been entered into,
provided all the essential requisites for their validity
are present. However, when the law requires that a
contract be in some form in order that it may be
valid or enforceable, or that a contract be proved in
a certain way, that requirement is absolute and
indispensable. In such cases, the right of the parties
stated in the following article cannot be exercised.
(1278a)

1.
2.

any form oral

special form
a.

Validity Arts. 748, 749, 1744,

1773, 1874, 1956, 2134, Act
1147, Sec 22

Article 748. The donation of a movable may be

Article 1357. If the law requires a document or
made orally or in writing.
other special form, as in the acts and contracts
enumerated in the following article, the contracting
parties may compel each other to observe that form,
once the contract has been perfected. This right
An oral donation requires the simultaneous delivery
may be exercised simultaneously with the action
of the thing or of the document representing the

96

right donated.

carrier; and
3) Reasonable, just and not contrary to public
policy.

If the value of the personal property donated

exceeds Five thousand pesos, the donation and the
acceptance shall be made in writing. Otherwise, the
donation shall be void. (632a)
Article 1773. A contract of partnership is void,
whenever immovable property is contributed
thereto, if an inventory of said property is not made,
signed by the parties, and attached to the public
instrument.
Article 749. In order that the donation of an
immovable may be valid, it must be made in a public
document, specifying therein the property donated
and the value of the charges which the donee must
satisfy.
Article 1874. When a sale of a piece of land or any
interest therein is through an agent, the authority of
the latter shall be in writing; otherwise, the sale shall
be void. (n)
The acceptance may be made in the same deed of
donation or in a separate public document, but it
shall not take effect unless it is done during the
lifetime of the donor.
Article 1956. No interest shall be due unless it has
been expressly stipulated in writing. (1755a)

If the acceptance is made in a separate instrument,

the donor shall be notified thereof in an authentic
Article 2134. The amount of the principal and of
form, and this step shall be noted in both
the interest shall be specified in writing; otherwise,
instruments.
the contract of antichresis shall be void. (n)

Act 1147
Article 1744. A stipulation between the common
carrier and the shipper or owner limiting the liability
Section 22. No transfer of large cattle shall be valid
of the former for the loss, destruction, or
unless registered, and a certificate of transfer
deterioration of the goods to a degree less than
secured as herein provided
extraordinary diligence shall be valid, provided it be:
1) In writing, signed by the shipper or owner;
b.
2) Supported by a valuable consideration other
than the service rendered by the common

Enforceability
1878

Arts.

1403,

97

Article
1403. The
following
contracts
unenforceable unless they are ratified:

are

1) Those entered into in the name of another

person by one who has been given no
authority or legal representation, or who has
acted beyond his powers;

purchasers and persons on whose

account of the sale is made, it is a
sufficient memorandum;
(e)

An agreement for the leasing for a

longer period than one year, or for the
sale of real property or of an interest
therein;

2) Those that do not comply with the Statute of

Frauds as set forth in this number. In the
(f)
A representation as to the credit of a
following cases an agreement hereafter
third person.
made shall be unenforceable by action,
unless the same, or some note or 3) Those where both parties are incapable of
memorandum thereof, be in writing, and
giving consent to a contract.
subscribed by the party charged, or by his
agent; evidence, therefore, of the agreement
cannot be received without the writing, or a
secondary evidence of its contents;
Article 1878. Special powers of attorney are
necessary in the following cases:
(a)
An agreement that by its terms is not
to be performed within a year from the
1) To make such payments as are not usually
making thereof;
considered as acts of administration;
(b)

A special promise to answer for the

debt, default, or miscarriage of
another;

(c)

An agreement made in consideration

of marriage, other than a mutual
promise to marry;

(d)

An agreement for the sale of goods,

chattels or things in action, at a price
not less than Five hundred pesos,
unless the buyer accept and receive
part of such goods and chattels, or the
evidences, or some of them, of such
things in action, or pay at the time
some part of the purchase money; but
when a sale is made by auction and
entry is made by the auctioneer in his
sales book, at the time of the sale, of
the amount and kind of property sold,
terms of sale, price, names of the

2) To effect novations which put an end to

obligations already in existence at the time
the agency was constituted;
3) To compromise, to submit questions to
arbitration, to renounce the right to appeal
from a judgment, to waive objections to the
venue of an action or to abandon a
prescription already acquired;
4) To waive any obligation gratuitously;
5) To enter into any contract by which the
ownership of an immovable is transmitted or
acquired either gratuitously or for a valuable
consideration;
6) To make gifts, except customary ones for
charity or those made to employees in the

98

business managed by the agent;

7) To loan or borrow money, unless the latter
act be urgent and indispensable for the
preservation of the things which are under
administration;
8) To lease any real property to another person
for more than one year;

over immovable property; sales of real

property or of an interest therein are
governed by Articles 1403, No. 2, and 1405;
2) The cession, repudiation or renunciation of
hereditary rights or of those of the conjugal
partnership of gains;
3) The power to administer property, or any
other power which has for its object an act
appearing or which should appear in a public
document, or should prejudice a third
person;
4) The cession of actions or rights proceeding
from an act appearing in a public document.

9) To bind the principal to render some service

without compensation;
All other contracts where the amount involved
exceeds Five hundred pesos must appear in writing,
10) To bind the principal in a contract of
even a private one. But sales of goods, chattels or
partnership;
things in action are governed by Articles 1403, No. 2
and 1405 (1280a)
11) To obligate the principal as a guarantor or
surety;
12) To create or convey
immovable property;

real

rights

over
Lao Sok v. Sabaysabay, (1985)

13) To accept or repudiate an inheritance;

Petitioner

Responden
14) To ratify or recognize obligations contracted
ts
before the agency;
15) Any other act of strict dominion. (n)
summary

c.

Greater
Efficiency
Convenience Art. 1358

or

Article 1358. The following must appear in a public

document:
1) Acts and contracts which have for their
object,
the
creation,
transmission,
modification or extinguishment of real rights

Lao Sok
Lydia Sabaysabay,
Amparo Mangulat, Rosita
Salviejo, Nenita Ruinata,
Vilma Capillo and Virginia
Sanorjo
Petitioner owned and
operated a department
store while the private
respondents were all
salesladies of the
department store. The
department store was
razed by fire but
petitioner did not report
the loss of the job of the
salesladies as required by
the Labor Code.

99

The petitioner at first told

them that he would
transfer them to his other
department stores but he
didnt do so. He then told
them that he would give
them their separation pay
and other benefits due
them as soon as he
collected the insurance
proceeds arising from his
burned store. The private
respondents accepted
this offer of the petitioner.
However petitioner failed
do as he had promised
even after he collected
the insurance proceeds.

The Supreme Court ruled

in favor of the
respondents and stated
that petitioner is obliged
to give their separation
pay and other benefits.

Petitioner made a promise

which was accepted by
the employees. There
was, therefore, a meeting
of the minds between two
parties whereby one
bound himself with
respect to the other, to
give something or to
render some service. By
the unconditional
acceptance of the offer
that they would be paid
separation pay, a contract
was therefore perfected.

Petitioner contends that

the contract though orally
made is unenforceable
since it does not comply
with the Statute of
Frauds. This contention
has no merit.

Contracts in whatever
form they may have been
entered into are binding
on the parties unless form
is essential for the validity
and enforceability of that
particular contract.

The requirement of
writing for the offer made
by Lao Sok is only for
convenience and not
enforceability. In fact, the
petitioner could be
compelled to put the offer
in writing, a step no
longer necessary now
because of this petition.

facts of the case

Petitioner Lao Sok owned and operated
the Shelton Department Store located at
Carriedo Street, Quiapo, Manila. Private
respondents, Lydia Sabaysabay, Amparo
Mangulat, Rosita Salviejo, Nenita Ruinata,
Vilma Capillo and Virginia Sanorjo were all
salesladies of the department store.

100

On October 12, 1980, petitioner's store

was razed by fire. He did not report the loss
of jobs of the salesladies which resulted
from the burning of his department store to
the Regional Office of the Ministry of Labor.

Petitioner promised the private

respondents that he would transfer them to
his other department stores but he didnt
fulfil his promise. The petitioner then told
the respondents that he would give them
their separation pay and other benefits due
them as soon as he collected the insurance
proceeds arising from his burned store. The
private respondents accepted this offer of
the petitioner. Petitioner later collected the
proceeds of his insurance but he did not
give the private respondents their
separation pay and other benefits.

On May 14, 1981, the private

respondents filed a complaint with the
Ministry of Labor and Employment charging
the petitioner with illegal dismissal and
non-payment of their separation pay,
allowance and incentive leave pay.

LA ruled in favor of the respondents.

NLRC affirmed LA decision. Hence this
petition for review GAD on the part of the
NLRC.

Section 10, Rule XIV, Book V of the

Labor Code states that no clearance is
required if the shutdown of establishment
is due to serious accidents, fire, flood or
other disaster, calamity or public
emergencies, provided that the employer
makes a report thereon to the Regional
Office.

Section 11 (c), Rule XIV, Book V of the

Labor Code states that an employer shall
submit a report to the Regional Office on
the following instances of termination of
employment, suspension, layoff or
shutdown which may be effected by the
employer without prior clearance, within 5
days after the shutdown stated in Section
10.

Compliance with the above rules is only

an administrative matter and the failure to
make a report does not make the dismissal
illegal per se.

However, the petitioner's obligation to

pay severance compensation is not based
on his failure to make a report or to ask for
a prior clearance. Article 284 of the Labor
Code provides for separation pay whenever
there is a reduction of personnel caused by
the closure of an establishment which is
not intended to circumvent the provision of
the law.

Issue
WON Lao Sok is obligated to pay the
private respondents' separation pay. - YES

ratio

Rule 1, Section 4 (b) of the Rules and

Regulations Implementing the Labor Code
provides:
(b) In case the establishment where
the employee is to be reinstated has closed

101

or ceased operations or where his former

position no longer exists at the time of
reinstatement for reasons not attributable
to the fault of the employer, the employee
shall be entitled to separation pay
equivalent at least to one month salary or
to one month salary for every year of
service, whichever is higher, a fraction of
at least six months being considered as
one whole year.

That petitioner Lao Sok promised to

give his employees their separation pay, as
soon as he receives the insurance proceeds
for his burned building was not rebutted.

As stated by the Sol. Gen:

... It was in reality not a mere 'promise'
as petitioner terms it but a contract,
because all the essential requisites of a
valid contract are present, to wit: (1)
consent was freely given by the parties, (2)
there was a subject matter, which is the
payment of the separation pay of private
respondents, and (3) a cause, which is the
loss of job of private respondents who had
been petitioner's salesladies for several
years. ... .

Lao Sok made an offer which was duly

accepted by the private respondents. There
was, therefore, a meeting of the minds
between two parties whereby one bound
himself with respect to the other, to give
something or to render some service. By
the unconditional acceptance of the offer
that they would be paid separation pay, a
contract was therefore perfected.

Petitioner contends that the contract

though orally made is unenforceable since
it does not comply with the Statute of
Frauds. This contention has no merit.

Contracts in whatever form they may

have been entered into are binding on the
parties unless form is essential for the
validity and enforceability of that particular
contract.

The requirement of writing for the offer

made by Lao Sok is only for convenience
and not enforceability. In fact, the
petitioner could be compelled to put the
offer in writing, a step no longer necessary
now because of this petition.

Furthermore, it was also established

that petitioner Lao Sok has other
department stores where he promised to
absorb the salesladies. He was likewise
remiss in this obligation. There is Merit in
the Solicitor General's submission that, in
effect, the fire closed only a division or unit
of Lao Sok's business. His entire enterprise
consisting of the operation of various
department stores did not really close
down or cease.

Both the law and equity dictate that

private respondents must be compensated
for the loss of their jobs considering that
they were kept waiting and hoping that
they would be re-employed by the
petitioner, if not paid their severance pay.

WHEREFORE, the decision is hereby

102

AFFIRMED and judgment is rendered in

favor of private respondents, ordering the
petitioner to pay the former their
separation pay equivalent to one month
salary for every year of service
proportionate to their individual lengths of
service with the petitioner.

Gallardo v. IAC (1987)

Petitioners

Meliton Gallardo and

Teresa Villanueva

Responden
ts

Marta Villanueva vda de

Agana et. al.

Summary

Petitioners claimed that

the land was sold to them
in a private document (an
unnotarized deed of sale
written in Tagalog) that
was allegedly signed by
the late Pedro Villanueva
conveying and
transferring the property
in favor of the petitioners.

They had the title

reconstituted since all of
the records were
destroyed during the
second world war.
However, the respondents
filed an affidavit of
Adverse claim. Thus the
petitioners filed a
complaint for Quieting of
Title in the CFI.

CFI and IAC ruled in favor

of the respondents and

declared the deed of sale
null and void.

The SC ruled that there

was no valid
reconstitution of the TCT
since the unnotarized
deed of sale is not
considered as a valid
instrument for effecting
the alienation by way of
sale of a parcel of land
registered under the
Torrens System.

Facts of the Case

The subject matter of this controversy
involves a parcel of land in Cavinti, Laguna
consisting of 81,300 square meters
covered by an original Certificate of Title
No. 2262, issued on April 2, 1924 owned
and registered in the name of the late
Pedro Villanueva.

Petitioners were nephews and niece of

the late Pedro Villanueva and first cousin of
private respondent Marta Villanueva vda de
Agana. Mrta is the daughter of Pedro
Villanueva.

On August 10, 1937, petitioners

claimed that the land was sold to them in a
private document (an unnotarized deed of
sale written in Tagalog) that was allegedly
signed by the late Pedro Villanueva
conveying and transferring the property in

103

favor of the petitioners.

Issue
Subsequently, the Original Certificate
of Title was cancelled on the basis of the
private document of sale and a new
certificate of title was issued in the name
of the petitioners covered by Transfer
Certificate of Title No. RT- 6293 (No. 23350)
on January 4, 1944

During the Second World War, the

records as well as the Office of the Register
of Deeds of Laguna, where the original of
their new transfer certificate of title was
kept, were completely burned. Accordingly,
by virtue of an Affidavit of Reconstitution
dated December 2, 1958 and upon
presentation of the Owner's Duplicate
Certificate of Title, the title was
administratively reconstituted and the
Register of Deeds of Laguna issued
Transfer Certificate of Title No. RT-6293 (No.
23350) in the name of the petitioners.

Respondent Marta Villanueva executed

and filed an Affidavit of Adverse Claim with
the Office of the Register of Deeds of
Laguna. When petitioners learned of this
Affidavit of Adverse Claim, attempts were
made to settle the controversy amicably
but all of these failed.

Petitioners filed a complaint for

Quieting of Title and Damages with the CFI.
The CFI ruled in favor of respondents and
declared the private document null and
void. IAC affirmed in toto the decision of
the CFI.

WON there was a valid reconstitution of

Transfer Certificate of Title No. RT-6293 (No.
23350) issued in the names of petitioners
NONE.

Ratio
The crux of the matter centers on
whether or not the unnotarized deed of
sale purportedly executed on August 10,
1937 by the owner Pedro Villanueva, in
favor of petitioners, can be considered as a
valid instrument for effecting the alienation
by way of sale of a parcel of land registered
under the Torrens System.

Petitioners claim that the sale although

not in a public document, is nevertheless
valid and binding citing this Court's rulings
in the cases of Cauto v. Cortes, Guerrero v.
Miguel, and Bucton v. Gabar wherein this
Court ruled that even a verbal contract of
sale of real estate produces legal effects
between the parties. The contention is
unmeritorious.

As the respondent court aptly stated in

its decision:
True, as argued by appellants, a private
conveyance of registered property is valid
as between the parties. However, the only
right the vendee of registered property in a
private document is to compel through
court processes the vendor to execute a
deed of conveyance sufficient in law for
purposes of registration. Plaintiffsappellants' reliance on Article 1356 of the

104

Civil Code is unfortunate. The general rule

enunciated in said Art. 1356 is that
contracts are obligatory, in whatever form
they may have been entered, provided all
the essential requisites for their validity are
present. The next sentence provides the
exception, requiring a contract to be in
some form when the law so requires for
validity or enforceability. Said law is Section
127 of Act 496 which requires, among
other things, that the conveyance be
executed "before the judge of a court of
record or clerk of a court of record or a
notary public or a justice of the peace, who
shall certify such acknowledgment
substantially in form next hereinafter
stated.

Such law was violated in this case. The

action of the Register of Deeds of Laguna
in allowing the registration of the private
deed of sale was unauthorized and did not
lend a bit of validity to the defective
private document of sale.

Furthermore, Section 127 of the Land

Registration Act, Act 496 (now Sec. 112 of
P.D. No. 1529) provides:

Sec. 127. Deeds of Conveyance, ...

affecting lands, whether registered under
this act or unregistered shall be sufficient
in law when made substantially in
accordance with the following forms, and
shall be as effective to convey,
encumber, ... or bind the lands as though
made in accordance with the more prolix
forms heretofore in use: Provided, That
every such instrument shall be signed by
the person or persons executing the same,
in the presence of two witnesses, who shall

sign the instrument as witnesses to the

execution thereof, and shall be
acknowledged to be his or their free act
and deed by the person or persons
executing the same, before the judge of a
court of record or clerk of a court of record,
or a notary public, or a justice of the peace,
who shall certify to such acknowledgement
substantially in the form next hereinafter
stated.

The private document evidencing sale

is definitely not registerable under the
Land Registration Act.

Likewise noteworthy is the case of

Pornellosa and Angels v. Land Tenure
Administration and Guzman where the
Court ruled:
The deed of sale allegedly executed by
Vicente San Jose in favor of Pornellosa is a
mere private document and does not
conclusively establish their right to the
parcel of land. WhiIe it is valid and binding
upon the parties with respect to the sale of
the house erected thereon, yet it is not
sufficient to convey title or any right to the
residential lot in litigation. Acts and
contracts which have for their object the
creation, transmission, modification or
extinguishment of real rights over
immovable property must appear in a
public document.

Upon consideration of the facts and

circumstances surrounding the execution of
the assailed document, the trial court
found that said private document was null
and void.

105

Note: It was also found that the private

document was signed by somebody else
not Pedro Villanueva.

itself, the same cannot be

enforced by virtue of the Statute
of Frauds.

PETITION IS DENIED. IAC Decision is

AFFIRMED

The SC remanded the case to the

CFI.

Paredes v, Espino (1968)

App
ella
nt

Cirilo Paredes

App
elle
e

Jose Espino

sum
mar
y

Appellant filed an action to

compel appellee to execute a
deed of sale and to pay damages.
Defendant-Appellee filed a motion
to dismiss upon the ground that
the complaint stated no cause of
action, and that the plaintiff's
claim upon which the action was
founded was unenforceable under
the Statute of Frauds.

Plaintiff opposed the MTD and

annexed to his opposition a copy
of a letter purportedly signed by
defendant, a telegram from
defendant advising plaintiff of his
arrival as well as a previous letter
of defendant referring to the lot
as the one covered by Certificate
of Title No. 62.

The Statute of Frauds does

not require that the contract itself
be in writing. A written note or
memorandum embodying the
essentials of the contract and
signed by the party charged, or
his agent, suffices to make the
verbal agreement enforceable,
taking it out of the operation of
the statute.

In the case at bar, the 2

letters appended in the
opposition to the MTD constitute
an adequate memorandum of the
transaction. The letters contain
all the essential terms of the
contract, and they satisfy the
requirements of the Statute of
Frauds. It was ruled in Berg vs.
Magdalena Estate, Inc. that a
sufficient memorandum may be
contained in two or more
documents.

facts of the case

The CFI dismissed the
complaint on the ground that
there being no written contract,
although the contract is valid in

Appellant Cirilo Parades had filed an

action to compel defendant-appellee Jose
L. Espino to execute a deed of sale and to
pay damages. The complaint alleged that

106

the defendant "had entered into the sale"

to plaintiff of Lot No. 67 of the Puerto
Princesa Cadastre at P4.00 a square meter;
that the deal had been "closed by letter
and telegram" but the actual execution of
the deed of sale and payment of the price
were deferred to the arrival of defendant at
Puerto Princesa; that defendant upon
arrival had refused to execute the deed of
sale although plaintiff was able and willing
to pay the price, and continued to refuse
despite written demands of plaintiff; that
as a result, plaintiff had lost expected
profits from a resale of the property, and
caused plaintiff mental anguish and
suffering, for which reason the complaint
prayed for specific performance and
damages.

Defendant-Appellee filed a motion to

dismiss upon the ground that the complaint
stated no cause of action, and that the
plaintiff's claim upon which the action was
founded was unenforceable under the
Statute of Frauds.

Plaintiff opposed the MTD and annexed

to his opposition a copy of a letter
purportedly signed by defendant, a
telegram from defendant advising plaintiff
of his arrival as well as a previous letter of
defendant referring to the lot as the one
covered by Certificate of Title No. 62.

The CFI dismissed the complaint on the

ground that there being no written
contract, although the contract is valid in
itself, the same cannot be enforced by
virtue of the Statute of Frauds.

issue
WON the enforcement of the contract
pleaded in the complaint is barred by the
Statute of Frauds NO

ratio
The Statute of Frauds, embodied in
Article 1403 of the Civil Code of the
Philippines, does not require that the
contract itself be in writing. The plain text
of Article 1403, paragraph (2) is clear that
a written note or memorandum,
embodying the essentials of the contract
and signed by the party charged, or his
agent, suffices to make the verbal
agreement enforceable, taking it out of the
operation of the statute.

In the case at bar, the complaint pleads

that the deal had been closed by letter and
telegram" and the letter referred to was
evidently the one copy of which was
appended to plaintiff's opposition to the
motion dismiss. The 2 letters appended in
the opposition to the MTD constitute an
adequate memorandum of the transaction.
They are signed by the defendant-appellee;
refer to the property sold as a lot in Puerto
Princesa, Palawan, covered, by TCT No. 62;
give its area as 1826 square meters and
the purchase price of four (P4.00) pesos
per square meter payable in cash. The
letters contain all the essential terms of the
contract, and they satisfy the requirements
of the Statute of Frauds. It was ruled in
Berg vs. Magdalena Estate, Inc. that a
sufficient memorandum may be contained
in two or more documents.

Defendant-appellee argues that the

107

authenticity of the letters has not been

established. That is not necessary for the
purpose of showing prima facie that the
contract is enforceable. For as ruled by us
in Shaffer vs. Palma, whether the
agreement is in writing or not, is a question
of evidence; and the authenticity of the
writing need not be established until the
trial is held. The plaintiff having alleged
that the contract is backed by letter and
telegram, and the same being a sufficient
memorandum, his cause of action is
thereby established, especially since the
defendant has not denied the letters in
question. At any rate, if the Court below
entertained any doubts about the
existence of the written memorandum, it
should have called for a preliminary
hearing on that point, and not dismissed
the complaint.

WHEREFORE, the appealed order is

hereby set aside, and the case remanded
to the Court of origin for trial and decision.
Costs against defendant-appellee Jose L.
Espino.

has prevented a meeting of the minds of the parties,

the proper remedy is not reformation of the
instrument but annulment of the contract.

Article 1360. The principles of the general law on

the reformation of the instruments are hereby
adopted insofar as they are not in conflict with the
provisions of this Code.

Article 1361. When a mutual mistake of the parties

causes the failure of the instrument to disclose their
real agreement, said instrument may be reformed.

Article 1362. If one party was mistaken and the

other acted fraudulently or inequitably in such a way
that the instrument does not show their true
intention, the former may ask for the reformation of
the instrument.

G. Reformation of Contracts Art. 13591369

Article 1363. When one party was mistaken and

the other knew or believed that the instrument did
not state their real agreement, but concealed that
the fact from the former, the instrument may be
reformed.
Article 1359. When, there having been a meeting
of the minds of the parties to a contract, their true
intention is not expressed in the instrument
purporting to embody the agreement, by reason of
Article 1364. When through the ignorance, the lack
mistake, fraud, inequitable conduct or accident, one
of skill, negligence or bad faith on the part of the
of the parties may ask for the reformation of the
person drafting the instrument or of the clerk of
instrument to the end that such true intention may
typist, the instrument or of the clerk or typist, the
be expressed.
instrument does not express the true intention of the
parties, the courts may order that the instrument be
reformed.
If mistake, fraud, inequitable conduct, or accident

108

Article 1370. If the terms of a contract are clear

Article 1365. If two parties agree upon the
and leave no doubt upon the intention of the
mortgage or pledge of real or personal property, but
contracting parties, the literal meaning of its
the instrument states that the property is sold
stipulations shall control.
absolutely or with a right of repurchase, reformation
of the instrument is proper.

If the words appear to be contrary to the evident

intention of the parties, the latter shall prevail over
Article 1366. There shall be no reformation in the
the former. (1281)
following cases:
1) Simple donations inter vivos wherein no
condition is imposed;
Article 1371. In order to judge the intention of the
contracting parties, their contemporaneous and
2) Wills;
subsequent acts shall be principally considered.
(1282)
3) When the real agreement is void.

Article 1372. However general the terms of a

Article 1367. When one of the parties has brought
contract may be, they shall not be understood to
an action to enforce the instrument, he cannot
comprehend things that are distinct and cases that
subsequently ask for its reformation.
are different from those upon which the parties
intended to agree. (1283)

Article 1368. Reformation may be ordered at the

instance of either party or his successors in interest,
Article 1373. If some stipulation of any contract
if the mistake was mutual; otherwise, upon petition
should admit of several meanings, it shall be
of the injured party, or his heirs and assigns.
understood as bearing that import which is most
adequate to render it effectual. (1284)

Article 1369. The procedure for the reformation of

the instruments shall be governed by the rules of
Article 1374. The various stipulations of a contract
court to be promulgated by the Supreme Court.
shall be interpreted together, attributing to the
doubtful ones that sense which may result from all
of them taken jointly. (1285)
H. Interpretation of Contracts Art. 13701379

109

observed in the construction of contracts. (n)

Article 1375. Words which may have different
significations shall be understood in that which is
most in keeping with the nature and object of the
contract. (1286)

Lim v. CA 99 (1980)
Article 1376. The usage or custom of the place
shall be borne in mind in the interpretation of the
peti Lim Yhi Luya
ambiguities of a contract, and shall fill the omission
tion
of stipulations which are ordinarily established.
ers
(1287)
res
pon
den
Article 1377. The interpretation of obscure words
ts
or stipulations in a contract shall not favor the party
sum
who caused the obscurity. (1288)
mar
y

Hind Sugar Company

Article 1378. When it is absolutely impossible to

settle doubts by the rules established in the
facts of the case
preceding articles, and the doubts refer to incidental
circumstances of a gratuitous contract, the least

Petitioner
Lim
Yhi
Luya
is
a
transmission of rights and interests shall prevail. If businessman, resident of Lingayen,
the contract is onerous, the doubt shall be settled in Pangasinan where he operates a
grocery store, hardware store and
favor of the greatest reciprocity of interests.
gasoline station. Private respondent
Hind Sugar Company is engaged in the
manufacturing and marketing of sugar,
its principal office located in Manaoag,
If the doubts are cast upon the principal object of Pangasinan.

Vice President and General Manager of

the contract in such a way that it cannot be known
respondent company is Atty. Emiliano
what may have been the intention or will of the
Abalos. His assistant is Generoso
parties, the contract shall be null and void. (1289)
Bongato, while the cashier and
accountant of the company is Teodoro
Garcia.

Petitioner and private respondent since

1958 have had business dealings with
Article 1379. The principles of interpretation stated
each other, the company selling sugar
in Rule 123 of the Rules of Court shall likewise be to the petitioner and the latter has
been supplying the company with

110

diesoline, gasoline, muriatic acid,

sulfuric acid, other supplies and
materials ordered on credit.
The parties agreed to the purchase of
4,085 piculs of sugar at P35.00 per
picul. In compliance with the contract,
four delivery orders were issued to
petitioner by cashier Garcia upon
instructions
of
manager
Abalos
covering the total quantity of sugar
sold. Between November to January,
petitioner withdrew from the company
warehouse in varying quantities a total
amount
of
3,735
piculs
under
substitute delivery orders, leaving a
balance of 350 piculs undelivered
Petitioners claimed he had paid
P142,975 to the company cashier and
manager. As proof of his payment, he
referred to the stipulation in the
contract stating: Terms: Cash upon
signing of this contract.
Respondent company denied the claim
of petitioner and said he never paid for
the sugar. Respondent said that the
contract doesnt prove payment but
merely created petitioners obligation
to pay

issue
Whether the statement in the contract can
be construed as proof that the petitioner
has paid NO

Ratio

Interpretation shall not favor the party

who caused the ambiguity. Thus, the
one who prepared the contract which
states: Terms: Cash upon signing of
this contract, cannot deny that the
agreement was not a cash transaction.
See Articles 1370, 1371, 1375 and
1377 for the cardinal rules in
interpreting contracts.
Considering the admitted fact that the
contract of sale was prepared in the

office of respondent company by

Generoso Bongato, Assistant to the
Manager of the company, upon
instruction
of
General
Manager
Emiliano L. Abalos who is a lawyer, and
We are now confronted with the
varying or conflicting interpretations of
the parties thereto, the respondent
company
contending
that
the
stipulation Terms: Cash upon signing
of this contract does not mean that
the agreement was a cash transaction
because no money was paid by the
petitioner at the time of the signing
thereof whereas the petitioner insists
that it was a cash transaction inasmuch
as he paid cash amounting to
P142,975.00 upon the signing of the
contract, the payment having been
made at around 1:30 in the afternoon
of November 13, 1970 to the cashier,
Teodoro Garcia, and Manager Abalos
although the sale was agreed to in the
morning of the same day, November
13, 1970, the conflicting interpretations
have shrouded the stipulation with
ambiguity or vagueness. Then, the
cardinal rule should and must apply,
which is that the interpretation shall
not favor the party who caused the
ambiguity (Art. 1377, New Civil Code).
We rule that in the instant case, the
interpretation to be taken shall not
favor the respondent company since it
is the party who caused the ambiguity
in its preparation.
In truth, the stipulation in the contract
which reads: Terms: Cash upon
signing of this contract is very clear
and simple in its meaning, leaving no
doubt in Our minds upon the intention
of the contracting parties, hence, the
first rule of contract interpretation that
the literal meaning of its stipulation
shall control, is the governing rule at
hand. Resorting to Websters Third New
International
Dictionary
for
the
definition of the word upon which
literally means, among others, 10a
(1): immediately following on; very
soon after; x x b: on the occasion of; at
the time of; x x, the clear import of
the stipulation is that payment was

111

made on the occasion of or at the time

of the signing of the contract and not
that payment will follow the signing.
We must adopt the former meaning
because it is such an interpretation
that would most adequately render the
contract effectual, following Article
1373 of the New Civil Code.
The SC gave more weight to the
evidence presented by the petitioner
that it paid the whole amount upon the
signing of the contract and the contract
is an evidence of the payment of
P142,975.
Besides, the respondent cannot show
nor produce any document or record
whatsoever that petitioner did not pay
the consideration demanded in cash.
While Manager Abalos claims that the
mode of payment was altered or
changed, there is no showing or proof
that the contract, was accordingly
changed or altered. And neither was
such alteration or change noted or
recorded in the books of the
respondent company.
Another evidence which show that
there was already payment was the
contemporaneous acts of the parties
after the signing of the contract. This
includes the issuance of delivery orders
of the respondent and delivery to the
petitioner of the sugar.

basis. When Castellvi gave notice to

terminate the lease in 1956, the AFP
refused because of the permanent
installations and other facilities worth
almost P500,000.00 that were erected and
already established on the property. She
then instituted an ejectment proceeding
against the AFP. In 1959, however, the
republic commenced the expropriation
proceedings for the land in question.
ISSUE:
Whether or not the compensation should
be determined as of 1947 or 1959.

HELD:
The Supreme Court ruled that the taking
should not be reckoned as of 1947, and
that just compensation should not be
determined on the basis of the value of the
property that year.

The requisites for taking are:

1.

Republic v Castellvi (1974)

2.

Appel
lant

Republic of the Philippines

3.

Appel
lees

Carmen Vda De Castellvi et. al.

4.

5.
FACTS:
In 1947, the republic, through the Armed
Forces of the Philippines (AFP), entered into
a lease agreement over a land in
Pampanga with Castellvi on a year-to-year

The expropriator must enter a private

property;
The entry must be for more than a
momentary period;
It must be under warrant or color of
authorities;
The property must be devoted for
public use or otherwise informally
appropriated or injuriously affected;
and
The utilization of the property for public
use must be such a way as to oust the
owner and deprive him of beneficial
enjoyment of the property.

Only requisites 1, 3 and 4 are present. It is

clear, therefore, that the taking of
Castellvis property for purposes of

112

eminent domain cannot be considered to

have taken place in 1947 when the republic
commenced to occupy the property as
lessee thereof.

Requisite number 2 is not present

according to the Supreme Court,
momentary when applied to possession
or occupancy of real property should be
construed to mean a limited period -- not
indefinite or permanent. The aforecited
lease contract was for a period of one year,
renewable from year to year. The entry on
the property, under the lease, is
temporary, and considered transitory. The
fact that the Republic, through AFP,
constructed some installations of a
permanent nature does not alter the fact
that the entry into the lant was transitory,
or intended to last a year, although
renewable from year to year by consent of
the owner of the land. By express provision
of the lease agreement the republic, as
lessee, undertook to return the premises in
substantially the same condition as at the
time the property was first occupied by the
AFP. It is claimed that the intention of the
lessee was to occupy the land
permanently, as may be inferred from the
construction of permanent improvements.
But this intention cannot prevail over the
clear and express terms of the lease
contract.

The 5th requirement is also lacking. In the

instant case the entry of the Republic into
the property and its utilization of the same
for public use did not oust Castellvi and
deprive her of all beneficial enjoyment of
the property. Cstellvi remained as owner,
and was continuously recognized as owner
by the Republic, as shown by the renewal
of the lease contract from year to year, and

by the provision in the lease contract

whereby the Republic undertook to return
the property to Castellvi when the lease
was terminated. Neither was Castellvi
deprived of all the beneficial enjoyment of
the property, because the Republic was
bound to pay, and had been paying,
Castellvi the agreed monthly rentals until
the time when it filed the complaint for
eminent domain on June 26, 1959.

It is clear, therefore, that the taking of

Castellvis property for purposes of
eminent domain cannot be considered to
have taken place in 1947 when the
Republic commenced to occupy the
property as lessee thereof, and that the
just compensation to be paid for the
Castellvis property should not be
determined on the basis of the value of the
property as of that year. The lower court
did not commit an error when it held that
the taking of the property under
expropriation commenced with the filing of
the complaint in this case.

Under Sec. 4, Rule 67 of the Rules of Court,

just compensation is to be determined as
of the date of the filing of the complaint.
The Supreme Court has ruled that when
the taking of the property sought to be
expropriated coincides with the
commencement of the expropriation
proceedings, or takes place subsequent to
the filing of the complaint for eminent
domain, the just compensation should be
determined as of the date of the filing of
the complaint.

Eastern Shipping v. Margarina-VerkaufsUnion (1979)

113

petitio
ners

Eastern Shipping Lines, Inc.

respon
dents

Margarine-Verkaufs-Union

summa
ry

Petitioner Eastern Shipping

was contracted to transport
500 long tons of Philippine
copra to Hamburg, Germany.
A fire broke out and a portion
of the shipment was water
damaged. The petitioner
refused to grant the claim of
US$591.38 of respondent for
the said damage. It cited the
Code of Commerce which
barred claims for averages
not exceeding 5% of the
claimant's interest. The
respondent insists that Rule 3
of said York-Antwerp Rules
applies as basis for its claim
for damages. The Court held
the Code of Commerce is not
applicable in this particular
case for the reason that the
bill of lading contains "an
agreement to the contrary"
for it is expressly provided in
the last sentence of the first
paragraph that "In case of
average, same shall be
adjusted according to YorkAntwerp Rules of 1950." The
said law allows the claim of
the Respondent. Also, the bill
of lading is a contract of
adhesion. Any ambiguity
therein must be construed
against petitioner as the
author.

FACTS:

Respondent,
a
West
German
corporation not engaged in business in
the Philippines, was the consignee of
500 long tons of Philippine copra in
bulk with a total value of US$
108,750.00 shipped from Cebu City on
board
petitioner's
(a
Philippine
corporation) vessel, the SS "EASTERN
PLANET" for discharge at Hamburg,
Germany.
Petitioners bill of lading for the cargo
provides: Except as otherwise stated
herein and in - the Charter Party, this
contract shall be governed by the laws
of the Flag of the Ship carrying the
goods. In case of average, same shall
be adjusted according to York-Antwerp
Rules of 1950.
A fire broke out aboard the ship and
caused water damage to the copra
shipment in the amount of US$591.38.
Respondent filed a claim for payment
from the petitioner but the latter
rejected the claim. Respondent then
filed a case for recovery of the amount
with the CFI Manila
o CFI: Ruled in favor of the
respondent. Ordered the
petitioner to pay
Petitioners argument: Article 848 of
the Code of Commerce which would
bar claims for averages not exceeding
5% of the claimant's interest should be
applied rather than the lower court's
ruling that petitioner's bill of lading
expressly contained "an agreement to
the contrary," i.e. for the application of
the York-Antwerp Rules which provide
for respondent's fun recovery of the
damage loss.

ISSUE:
WON petitioner should pay for the damage
[YES]

HELD:

114

Yes.
1.
2.
-

The cited codal article is not applicable

in this particular case for the reason
that the bill of lading contains "an
agreement to the contrary" for it is
expressly provided in the last sentence
of the first paragraph that "In case of
average, same shall be adjusted
according to York-Antwerp Rules of
1950."
The insertion of said condition is
expressly
authorized
by
Commonwealth Act No. 65 which has
adopted in toto the U.S. Carriage of
Goods by Sea Act. Now, it has not been
shown that said rules limit the recovery
of damage to cases within a certain
percentage or proportion that said
damage may bear to claimant's
interest either in the vessel or cargo as
provided in Article 848 of the Code of
Commerce
Rule 3 of said York-Antwerp Rules
expressly states that "Damage done to
a ship and cargo, or either of them, by
water or otherwise, including damage
by breaching or scuttling a burning
ship, in extinguishing a fire on board
the ship, shall be made good as
general average."
There is a clear and irreconcilable
inconsistency
between
the
YorkAntwerp Rules expressly adopted by
the parties as their contract under the
bill
of
lading
which
sustains
respondent's claim and the codal
article cited by petitioner which would
bar the same.
What is here involved is a contract of
adhesion as embodied in the printed
bill of lading issued by petitioner for
the shipment to which respondent as
the consignee merely adhered, having
no choice in the matter, and
consequently, any ambiguity therein
must be construed against petitioner
as the author.

Valid and Binding

Valid but Defective
i.
Rescissible Contracts Arts.
1380-1389, 1191

Article 1380. Contracts validly agreed upon may be

rescinded in the cases established by law. (1290)

Article 1381. The following contracts are

rescissible:
1) Those which are entered into by guardians
whenever the wards whom they represent
suffer suffer lesion by more than one-fourth
of the value of the things which are the
object thereof;
2) Those agreed upon in representation of
absentees, if the latter suffer the lesion
stated in the preceding number;
3) Those undertaken in fraud of creditors when
the latter cannot in any other manner collect
the claims due them;
4) Those which refer to things under litigation if
they have been entered into by the
defendant without the knowledge and
approval of the litigants or of competent
judicial authority;
5) All other contracts specially declared by law
to be subject to rescission. (1291a)
Article 1382. Payments made in a state of
insolvency for obligations to whose fulfillment the
debtor could not be compelled at the time they were
effected, are also rescissible. (1292)

Article 1383. The action for rescission is subsidiary;

it cannot be instituted except when the party
suffering damage has no other legal means to obtain
reparation for the same. (1294)

Article 1384. Rescission shall be only to the extent

I. Kinds of Contracts as to Validity

115

necessary to cover the damages caused. (n)

In addition to these presumptions, the design to

defraud creditors may be proved in any other
manner recognized by the law of evidence. (1297a)

Article 1385. Rescission creates the obligation to

return the things which were the object of the
contract, together with their fruits, and the price
Article 1388. Whoever acquires in bad faith the
with its interest; consequently, it can be carried out things alienated in fraud of creditors, shall indemnify
only when he who demands rescission can return the latter for damages suffered by them on account
whatever he may be obliged to restore.
of the alienation, whenever, due to any cause, it
should be impossible for him to return them.
Neither shall rescission take place when the things
which are the object of the contract are legally in the
If there are two or more alienations, the first acquirer
possession of third persons who did not act in bad shall be liable first, and so on successively. (1298a)
faith.
Article 1389. The action to claim rescission must
In this case, indemnity for damages may be
be commenced within four years.
demanded from the person causing the loss. (1295)
For persons under guardianship and for absentees,
Article 1386. Rescission referred to in Nos. 1 and 2the period of four years shall not begin until the
of Article 1381 shall not take place with respect to termination of the former's incapacity, or until the
contracts approved by the courts. (1296a)
domicile of the latter is known. (1299)

Article 1387. All contracts by virtue of which the

debtor alienates property by gratuitous title are
presumed to have been entered into in fraud of
creditors, when the donor did not reserve sufficient
property to pay all debts contracted before the
donation.

Article 1191. The power to rescind obligations is

implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent
upon him.

The injured party may choose between the

fulfillment and the rescission of the obligation, with
Alienations by onerous title are also presumed
the payment of damages in either case. He may also
fraudulent when made by persons against whom seek rescission, even after he has chosen fulfillment,
some judgment has been issued. The decision or if the latter should become impossible.
attachment need not refer to the property alienated,
and need not have been obtained by the party
seeking the rescission.
The court shall decree the rescission claimed, unless
there be just cause authorizing the fixing of a period.

116

This is understood to be without prejudice to the

And when the action refers to contracts entered into
rights of third persons who have acquired the thing,by minors or other incapacitated persons, from the
in accordance with Articles 1385 and 1388 and the time the guardianship ceases. (1301a)
Mortgage Law. (1124)
Article 1392. Ratification extinguishes the action to
annul a voidable contract. (1309a)
ii.

Voidable Contracts Arts.

1390-1402, 1327-1328, 1330

Article 1393. Ratification may be effected

expressly or tacitly. It is understood that there is a
Article 1390. The following contracts are voidable tacit ratification if, with knowledge of the reason
or annullable, even though there may have been nowhich renders the contract voidable and such reason
damage to the contracting parties:
having ceased, the person who has a right to invoke
it should execute an act which necessarily implies an
(1) Those where one of the parties is incapable of
intention to waive his right. (1311a)
giving consent to a contract;

Article 1394. Ratification may be effected by the

(2) Those where the consent is vitiated by mistake,
guardian of the incapacitated person. (n)
violence, intimidation, undue influence or fraud.

These contracts are binding, unless they are

annulled by a proper action in court. They are
susceptible of ratification. (n)

Article 1391. The action for annulment shall be

brought within four years.

This period shall begin:

Article 1395. Ratification does not require the

conformity of the contracting party who has no right
to bring the action for annulment. (1312)

Article 1396. Ratification cleanses the contract

from all its defects from the moment it was
constituted. (1313)

Article 1397. The action for the annulment of

contracts may be instituted by all who are thereby
obliged principally or subsidiarily. However, persons
In cases of intimidation, violence or undue influence,who are capable cannot allege the incapacity of
those with whom they contracted; nor can those
from the time the defect of the consent ceases.
who exerted intimidation, violence, or undue
influence, or employed fraud, or caused mistake
In case of mistake or fraud, from the time of the
base their action upon these flaws of the contract.
discovery of the same.

117

(1302a)

Article 1402. As long as one of the contracting

parties does not restore what in virtue of the decree
of annulment he is bound to return, the other cannot
be compelled to comply with what is incumbent
Article 1398. An obligation having been annulled, upon him. (1308)
the contracting parties shall restore to each other
the things which have been the subject matter of
the contract, with their fruits, and the price with its
interest, except in cases provided by law.
Article 1327. The following cannot give consent to
a contract:
In obligations to render service, the value thereof
shall be the basis for damages. (1303a)

(1) Unemancipated minors;

Article 1399. When the defect of the contract

(2) Insane or demented persons, and deaf-mutes
consists in the incapacity of one of the parties, the who do not know how to write. (1263a)
incapacitated person is not obliged to make any
restitution except insofar as he has been benefited
by the thing or price received by him. (1304)
Article 1328. Contracts entered into during a lucid
interval are valid. Contracts agreed to in a state of
drunkenness or during a hypnotic spell are voidable.
Article 1400. Whenever the person obliged by the (n)
decree of annulment to return the thing can not do
so because it has been lost through his fault, he
shall return the fruits received and the value of the
thing at the time of the loss, with interest from the Article 1330. A contract where consent is given
through mistake, violence, intimidation, undue
same date. (1307a)
influence, or fraud is voidable. (1265a)

Article 1401. The action for annulment of contracts

shall be extinguished when the thing which is the
object thereof is lost through the fraud or fault of the
person who has a right to institute the proceedings.

iii.

Unenforceable Contracts Arts.

1403-1408, 1317, 1878

Article 1403. The following contracts are

unenforceable, unless they are ratified:
If the right of action is based upon the incapacity of
any one of the contracting parties, the loss of the
thing shall not be an obstacle to the success of the (1) Those entered into in the name of another
action, unless said loss took place through the fraudperson by one who has been given no authority or
or fault of the plaintiff. (1314a)
legal representation, or who has acted beyond his
powers;

118

(2) Those that do not comply with the Statute of

Frauds as set forth in this number. In the following
cases an agreement hereafter made shall be
unenforceable by action, unless the same, or some
note or memorandum, thereof, be in writing, and
subscribed by the party charged, or by his agent;
evidence, therefore, of the agreement cannot be
received without the writing, or a secondary
evidence of its contents:

a.

b.
c.

Article 1404. Unauthorized contracts are governed

by Article 1317 and the principles of agency in Title
X of this Book.

Article 1405. Contracts infringing the Statute of

Frauds, referred to in No. 2 of Article 1403, are
ratified by the failure to object to the presentation of
oral evidence to prove the same, or by the
acceptance of benefit under them.
An agreement that by its terms is not to be
performed within a year from the making
thereof;
Article 1406. When a contract is enforceable under
A special promise to answer for the debt,
the Statute of Frauds, and a public document is
default, or miscarriage of another;
necessary for its registration in the Registry of
An agreement made in consideration of
Deeds, the parties may avail themselves of the right
marriage, other than a mutual promise to
under Article 1357.
marry;

d.

Article 1407. In a contract where both parties are

An agreement for the sale of goods, chattels
or things in action, at a price not less than
incapable of giving consent, express or implied
five hundred pesos, unless the buyer accept
ratification by the parent, or guardian, as the case
and receive part of such goods and chattels,
may be, of one of the contracting parties shall give
or the evidences, or some of them, of such
the contract the same effect as if only one of them
things in action or pay at the time some part
were incapacitated.
of the purchase money; but when a sale is
If ratification is made by the parents or guardians, as
made by auction and entry is made by the
the case may be, of both contracting parties, the
auctioneer in his sales book, at the time of
the sale, of the amount and kind of property
contract shall be validated from the inception.
sold, terms of sale, price, names of the
purchasers and person on whose account the
Article 1408. Unenforceable contracts cannot be
sale is made, it is a sufficient memorandum;
assailed by third persons.

e.

An agreement of the leasing for a longer

period than one year, or for the sale of real
property or of an interest therein;

f.

Article 1317. No one may contract in the name of

A representation as to the credit of a third
another without being authorized by the latter, or
person.
unless he has by law a right to represent him.

(3) Those where both parties are incapable of giving

consent to a contract.

A contract entered into in the name of

another by one who has no authority or legal
representation, or who has acted beyond his
powers, shall be unenforceable, unless it is

119

ratified, expressly or impliedly, by the

person on whose behalf it has been
executed, before it is revoked by the other
contracting party. (1259a)

3. Void or Inexistent Arts. 1409Article 1878. Special powers of attorney are

1422, 1318, 1353, 1378, 1491,
necessary in the following cases:
1898
(1) To make such payments as are not usually
considered as acts of administration;
(2) To effect novations which put an end to
Article 1409. The following contracts are inexistent
and void from the beginning:
obligations already in existence at the time the
agency was constituted;
(1) Those whose cause, object or purpose is contrary
(3) To compromise, to submit questions to
to law, morals, good customs, public order or public
arbitration, to renounce the right to appeal from a
policy;
judgment, to waive objections to the venue of an
action or to abandon a prescription already acquired;
(2) Those which are absolutely simulated or
(4) To waive any obligation gratuitously;
fictitious;
(5) To enter into any contract by which the
(3) Those whose cause or object did not exist at the
ownership of an immovable is transmitted or
time of the transaction;
acquired either gratuitously or for a valuable
consideration;
(4) Those whose object is outside the commerce of
(6) To make gifts, except customary ones for charity
men;
or those made to employees in the business
managed by the agent;
(5) Those which contemplate an impossible service;
(7) To loan or borrow money, unless the latter act be
(6) Those where the intention of the parties relative
urgent and indispensable for the preservation of the
to the principal object of the contract cannot be
things which are under administration;
ascertained;
(8) To lease any real property to another person for
more than one year;
(7) Those expressly prohibited or declared void by
(9) To bind the principal to render some service
law.
without compensation;
These contracts cannot be ratified. Neither can the
(10) To bind the principal in a contract of
right to set up the defense of illegality be waived.
partnership;
(11) To obligate the principal as a guarantor or
surety;
(12) To create or convey real rights over immovable
Article 1410. The action or defense for the
property;
declaration of the inexistence of a contract does not
(13) To accept or repudiate an inheritance;
prescribe.
(14) To ratify or recognize obligations contracted
before the agency;
(15) Any other act of strict dominion. (n)

Article 1411. When the nullity proceeds from the

illegality of the cause or object of the contract, and
the act constitutes a criminal offense, both parties

120

being in pari delicto, they shall have no action

against each other, and both shall be prosecuted.
Moreover, the provisions of the Penal Code relative
to the disposal of effects or instruments of a crime
shall be applicable to the things or the price of the
contract.

delivered for an illegal purpose, the contract may be

repudiated by one of the parties before the purpose
has been accomplished, or before any damage has
been caused to a third person. In such case, the
courts may, if the public interest will thus be
subserved, allow the party repudiating the contract
to recover the money or property.

This rule shall be applicable when only one of the

parties is guilty; but the innocent one may claim
Article 1415. Where one of the parties to an illegal
what he has given, and shall not be bound to comply
contract is incapable of giving consent, the courts
with his promise. (1305)
may, if the interest of justice so demands allow
recovery of money or property delivered by the
incapacitated person.
Article 1412. If the act in which the unlawful or
forbidden cause consists does not constitute a
criminal offense, the following rules shall be
observed:

Article 1416. When the agreement is not illegal per

se but is merely prohibited, and the prohibition by
the law is designated for the protection of the
plaintiff, he may, if public policy is thereby
enhanced, recover what he has paid or delivered.
(1) When the fault is on the part of both contracting
parties, neither may recover what he has given by
virtue of the contract, or demand the performance of
the other's undertaking;
Article 1417. When the price of any article or
commodity is determined by statute, or by authority
of law, any person paying any amount in excess of
the maximum price allowed may recover such
(2) When only one of the contracting parties is at excess.
fault, he cannot recover what he has given by
reason of the contract, or ask for the fulfillment of
what has been promised him. The other, who is not
at fault, may demand the return of what he has
Article 1418. When the law fixes, or authorizes the
given without any obligation to comply his promise. fixing of the maximum number of hours of labor, and
(1306)
a contract is entered into whereby a laborer
undertakes to work longer than the maximum thus
fixed, he may demand additional compensation for
service rendered beyond the time limit.
Article 1413. Interest paid in excess of the interest
allowed by the usury laws may be recovered by the
debtor, with interest thereon from the date of the
payment.
Article 1419. When the law sets, or authorizes the
setting of a minimum wage for laborers, and a
contract is agreed upon by which a laborer accepts a
lower wage, he shall be entitled to recover the
Article 1414. When money is paid or property

121

deficiency.

settle doubts by the rules established in the

preceding articles, and the doubts refer to incidental
circumstances of a gratuitous contract, the least
transmission of rights and interests shall prevail. If
Article 1420. In case of a divisible contract, if the the contract is onerous, the doubt shall be settled in
illegal terms can be separated from the legal ones, favor of the greatest reciprocity of interests.
the latter may be enforced.

Article 1421. The defense of illegality of contract

not available to third persons whose interests are
not directly affected.

If the doubts are cast upon the principal object of

isthe contract in such a way that it cannot be known
what may have been the intention or will of the
parties, the contract shall be null and void. (1289)

Article 1422. A contract which is the direct result of

Article 1491. The following persons cannot acquire
a previous illegal contract, is also void and
by purchase, even at a public or judicial auction,
inexistent.
either in person or through the mediation of another:

Article 1318. There is no contract unless the

following requisites concur:

(1) The guardian, the property of the person or

persons who may be under his guardianship;

(1) Consent of the contracting parties;

(2) Agents, the property whose administration or

sale may have been entrusted to them, unless the
consent of the principal has been given;

(2) Object certain which is the subject matter of the

contract;
(3) Executors and administrators, the property of the
estate under administration;
(3) Cause of the obligation which is established.
(1261)
(4) Public officers and employees, the property of
the State or of any subdivision thereof, or of any
government-owned or controlled corporation, or
Article 1353. The statement of a false cause in
contracts shall render them void, if it should not be institution, the administration of which has been
proved that they were founded upon another cause intrusted to them; this provision shall apply to
judges and government experts who, in any manner
which is true and lawful. (1276)
whatsoever, take part in the sale;

Article 1378. When it is absolutely impossible to

(5) Justices, judges, prosecuting attorneys, clerks of

122

superior and inferior courts, and other officers and Soledad. Benigno abandoned his wife
Cabaliw, thus the latter filed an action in
employees connected with the administration of
justice, the property and rights in litigation or leviedcourt for support. The Court ordered
upon an execution before the court within whose Benigno to pay her P75 a month. However,
jurisdiction or territory they exercise their respectiveBenigno did not pay and instead sold their
property to his son-in-law Soterro. The
functions; this prohibition includes the act of
acquiring by assignment and shall apply to lawyers,transaction was done without Isidoras
with respect to the property and rights which may consent. Prior to the sale, Soterro already
knew that there was a judgment rendered
be the object of any litigation in which they may
against his father-in-law but proceeded to
take part by virtue of their profession.
buy the property anyway. When Cabaliw
found out, she instituted an action along
with her daughter to recover the
(6) Any others specially disqualified by law. (1459a) properties.

Article 1898. If the agent contracts in the name of issue

the principal, exceeding the scope of his authority,
and the principal does not ratify the contract, it shallIs there a presumption of fraud?
be void if the party with whom the agent contracted
is aware of the limits of the powers granted by the
principal. In this case, however, the agent is liable if
he undertook to secure the principal's ratification. ratio
(n)
Yes. Alienations by onerous title are
presumed fraudulent when made by
persons against whom some judgment has
been rendered or some writ of attachment
has been issued. Benigno was ordered by
Rescissible Contracts
the Court to pay Cabaliw support and he
failed to do so. Instead, he sold his
properties to his son-in-law. The close
relationship between Benigno and Soterro
Cabaliw v. Sadorra (1975)
is a badge of fraud. Soterro knew about the
judgment against Benigno but proceeded
Petitio
Isidora Cabaliw and
to purchase the properties anyway. He
ners
Soledad Sadorra
cannot be said to be a purchaser in good
faith. The presumption of fraud is not
respon
Sotero Sadorra et. al.
overcome by the fact that the transactions
dents
were all made in the nature of public
instruments between Soterro and Benigno.
The properties sold were conjugal
facts of the case
properties. These cannot be sold without
Cabaliws consent.
Cabaliw was the second wife of Benigno.
During their marriage, they bought 2
parcels of land. They had a daughter

123

because there were no leviable assets of

Pauli that could be located. Unknwon to
HSBC, Pauli purchased from the Philippine
National Bank (PNB) a sugar cane
plantation Hacienda Riverside. Pauli did not
register the deed of sale. 6 years later, he
fraudulently sold the hacienda to his
daughter and her husband spouses
Garganera.
HSBC v. Pauli (1988)
appella
nt

HSBC

appelle
e

Ralph Pauli and Spouses Sally

Garganera
and
Mateo
Garganera

summa
ry

HSBCs theory that the 4 year

period commenced to run
from the date when it
obtained actual knowledge of
the fraudulent sale of Paulis
land to the Gargarenas
(sometime in 1969) and
hence, the 4 year period did
not yet expire when it filed
the case on Feb 17, 1971, is
NOT acceptable. That theory
would diminish public faith in
the integrity of torrens titles
and
impair
commercial
transactions
involving
registered lands for it would
render
uncertain
the
computation of the period for
the prescription of such
actions.

facts of the case

This case stemmed from 3 other
cases:
Case 1 (CFI Manila)
HSBC filed a complaint against
Pauli to collect P258,964.15. Judgment was
rendered for HSBC. On appeal, SC upheld
the decision of the lower court. The writs of
execution
were
returned
unsatisfied

Case 2 (CFI Negros Occidental)

At the instance of Warner Barnes &
Co. another creditor of Pauli, the sale to the
Garganera spouses were declared fictitious
for being in fraud of creditors by the CFI. A
compromise agreement was entered into.
Case 3 (CFI Manila)
Having discovered that the sugar
plantation belonged to Pauli, HSBC filed a
complaint for revival of judgment. A writ of
preliminary attachment was issued against
Paulis rights. Under the pretext of
amicably settling the case, Pauli postponed
hearings to enable the spouses to
intervene. Court decreed the revival of
judgment. No appeal was taken.
Current case before the SC
HSBC filed a new complaint in the
CFI of Negros Occidental to annul the
Conditional Sale and Deed of Sale of
Hacienda Riverside to the Garganera
spouses and to annul TCT. Pauli and the
spouses filed a Motion to Dismiss on the
grounds of res judicata, prescription,
waiver and abandonment of claim. The
lower court granted the Motion to Dismiss.
issue
Whether or not the case should be
dismissed on the ground of prescription.
YES
(W/N the action for annulment of sale
already
prescribed
and
when
the
prescription commenced to run from the
registration of the sale or from discovery)

Ratio
When the transaction involves a
parcel of land, the 4 year period fixed in

124

Art. 1391 within which to bring an action

for annulment of deed shall be computed
from the registration of the conveyance
(March 5, 1963) on the familiar theory that
the registration of the document is
constructive notice of the conveyance to
the whole world.

HSBCs theory that the 4 year

period commenced to run from the date
when it obtained actual knowledge of the
fraudulent sale of Paulis land to the
Gargarenas (sometime in 1969) and hence,
the 4 year period did not yet expire when it
filed the case on Feb 17, 1971, is NOT
acceptable. That theory would diminish
public faith in the integrity of torrens titles
and impair commercial transactions
involving registered lands for it would
render uncertain the computation of the
period for the prescription of such actions.

During the marriage of Maximo Aldon and

Gemina Almorasa, they bought several
pieces of land. The lands were divided into
three lots. Subsequently, Gemina sold the
lots to the spouses Eduardo Felipe and
Hermogena Felipe without the consent of
her husband. Maximo died. Afterwhich, his
heirs, namely Gemina and their children
Sofia and Salvador filed a complaint
against the Felipes alleging that they are
the owners of the lots. The Felipes asserted
that they had acquired the lots from the
plaintiffs by purchase and subsequent
delivery to them. The trial court sustained
the claim of the defendants. The CA
reversed the decision of the trial court.

issue
WON the sale of the lots by Gemina
without the consent of the husband is
defective. YES

ratio
Voidable Contracts

Felipe v. Heirs of Aldon (1983)

peti
tion
ers

Eduardo Felipe, Hermogena Felipe

and Vincent Felipe

res
pon
den
ts

Heirs of Maximo Aldon et. al.

facts of the case

The sale made by Gemina is certainly a

defective conract, that is, a voidable
contract.

According to Art. 1390 of the Civil Code,

among the voidable contracts are "[T]hose
where one of the parties is incapable of
giving consent to the contract." (Par. 1.) In
the instant case-Gimena had no capacity to
give consent to the contract of sale. The
capacity to give consent belonged not even
to the husband alone but to both spouses.

The view that the contract made by

Gimena is a voidable contract is supported

125

by the legal provision that contracts

entered by the husband without the
consent of the wife when such consent is
required, are annullable at her instance
during the marriage and within ten years
from the transaction questioned. (Art. 173,
Civil Code.)

acquired the right to question the defective

contract insofar as it deprived them of their
hereditary rights in their father's share in
the lands. The father's share is one-half
(1/2) of the lands and their share is twothirds (2/3) thereof, one-third (1/3)
pertaining to the widow.

Gimena's contract is not rescissible for in

such contract all the essential elements are
untainted but Gimena's consent was
tainted. Neither can the contract be
classified as unenforceable because it does
not fit any of those described in Art. 1403
of the Civil Code. And finally, the contract
cannot be void or inexistent because it is
not one of those mentioned in Art. 1409 of
the Civil Code. By process of elimination, it
must perforce be a voidable contract.

The petitioners have been in possession of

the lands since 1951. It was only in 1976
when the respondents filed action to
recover the lands. In the meantime,
Maximo Aldon died.

The voidable contract of Gimena was

subject to annulment by her husband only
during the marriage because he was the
victim who had an interest in the contract.
Gimena, who was the party responsible for
the defect, could not ask for its annulment.
Their children could not likewise seek the
annulment of the contract while the
marriage subsisted because they merely
had an inchoate right to the lands sold.

The termination of the marriage and the

dissolution of the conjugal partnership by
the death of Maximo Aldon did not improve
the situation of Gimena. What she could
not do during the marriage, she could not
do thereafter.

The case of Sofia and Salvador Aldon is

different. After the death of Maximo they

Two questions come to mind, namely: (1)

Have the petitioners acquired the lands by
acquisitive prescription? (2) Is the right of
action of Sofia and Salvador Aldon barred
by the statute of limitations?

Anent the first question, We quote with

approval the following statement of the
Court of Appeals:

We would like to state further that

appellees [petitioners herein] could
not have acquired ownership of the
lots by prescription in view of what
we regard as their bad faith. This
bad faith is revealed by testimony
to the effect that defendantappellee Vicente V. Felipe (son of
appellees Eduardo Felipe and
Hermogena V. Felipe) attempted in
December 1970 to have Gimena
Almosara sign a ready-made
document purporting to self the
disputed lots to the appellees. This
actuation clearly indicated that the
appellees knew the lots did not still

126

belong to them, otherwise, why

were they interested in a document
of sale in their favor? Again why
did Vicente V. Felipe tell Gimena
that the purpose of the document
was to obtain Gimena's consent to
the construction of an irrigation
pump on the lots in question? The
only possible reason for purporting
to obtain such consent is that the
appellees knew the lots were not
theirs. Why was there an
attempted improvement (the
irrigation tank) only in 1970? Why
was the declaration of property
made only in 1974? Why were no
attempts made to obtain the
husband's signature, despite the
fact that Gimena and Hermogena
were close relatives? An these
indicate the bad faith of the
appellees. Now then, even if we
were to consider appellees'
possession in bad faith as a
possession in the concept of
owners, this possession at the
earliest started in 1951, hence the
period for extraordinary
prescription (30 years) had not yet
lapsed when the present action
was instituted on April 26, 1976.

As to the second question, the children's

cause of action accrued from the death of
their father in 1959 and they had thirty
(30) years to institute it (Art. 1141, Civil
Code.) They filed action in 1976 which is
well within the period.

WHEREFORE, the decision of the Court of

Appeals is hereby modified. Judgment is
entered awarding to Sofia and Salvador
Aldon their shares of the lands as stated in

the body of this decision; and the

petitioners as possessors in bad faith shall
make an accounting of the fruits
corresponding to the share aforementioned
from 1959 and solidarity pay their value to
Sofia and Salvador Aldon; costs against the
petitioners.

House International v IAC 151 SCRA 703

plainti
ffappelle
e

Gutierrez Hermanos

defend
antappella
nt

Engracio Orense

summa
ry

Orense owned a house and

lot in Albay, which his
nephew, Duran, sold to
herein plaintiff, Gutierrez
Hermanos, under right of
redemption. After the lapse of
the 4-year redemption period,
Orense now refuses to deliver
the property, alleging that he
had not executed any power
of attorney or authorization of
any kind to Duran in order
that the latter may sell the
property. Based on the
evidence, however,
particularly Orenses
testimony in the estafa
case filed by GH where
Duran was acquitted,
Orense had indeed
consented to the sale.
Such statement under
oath confirms and ratifies

127

the sale, and has the

effect of an express
agency. He is bound to
abide by the
consequences of this
agency granted to Duran,
as if it had been given in
writing.

facts of the case

Defendant Engracio Orense owned a
parcel of land in Albay, as well as the
house that stood thereon. On 14 February
1907, Orenses nephew, Jose Duran,
executed a notarial instrument selling both
the house and the lot to plaintiff firm,
Gutierrez Hermanos, for P1,500. The sale
was under right of redemption, which was
to last for four years.

After four years had lapsed, the

defendant Orense refused to deliver the
property to GH and to pay the rental of P30
per month since 14 February 1911. Orense
refused, based on his allegation that he
was the registered owner of the land as per
the property registry, and that he had
neither executed any written power of
attorney in Durans favor nor given any
verbal authorization to Duran to sell the
land. Neither did he perform any act to
induce GH to believe that Duran was
empowered and authorized to carry out the
sale.

The plaintiff thus charged Duran with

estafa for having represented himself as
the owner of the property, when it in fact
belonged to Orense. However, at trial,
Orense was called to the witness stand and

admitted that he had consented to Durans

selling the property to GH under right of
redemption. Thus, the court acquitted
Duran of estafa, and GH sought the
payment of rentals and damages for the
period during which the house and lot were
not yet delivered.

The lower court ruled for GH, directing

Orense to immediately deliver the property
in question and pay them P780 as rentals
and damages. Hence, this appeal.

issue
Whether defendant Orense had ratified the
sale by Duran, which would entitle plaintiff
Gutierrez Hermanos to delivery, rentals,
and damages.YES. He had consented
to the sale of the property; hence, it is
valid.

ratio
In this case, though Duran indeed was
not the owner of the property, Orense had
conferred a verbal, or at least implied,
power of agency upon him, and he had
accepted it impliedly by selling the
property. The principal must therefore
fulfill all the obligations contracted by
the agent actin within the scope of his
authority.

Even granting that the consent was

only given subsequent to the sale, Orense
act can be deemed to have ratified the
sale, which produces the effect of an
express authorization in Durans
favor. Art. 1259 provides, A contract

128

executed in the name of another by one

who has neither his authorization nor legal
representation shall be void, unless it
should be ratified by the person in whose
name it was executed before being revoked
by the other contracting party. Hence,
Orenses sworn statement as a
witness in the estafa case confirms
and ratifies the sale.

Orenses testimony was the basis of

Durans acquittal, and it would be unjust to
let him deny his admission to the prejudice
of plaintiff GH, who had already given
P1,500 in payment of the purchase price of
the property.

It is contended that the authority given

to Duran to make the contract of sale is not

shown to be in writing and signed by

Orense. But the proof on recordproof to
which Orense did not objectshows that
Orense nonetheless consented under oath,
producing the effects of an express agency.
He is thus bound to abide by the
consequences of this agency as though it
had actually been given in writing.

The judgment appealed from is

therefore affirmed.