Obligations and Contracts Case Digests

OBLIGATIONS AND CONTRACTS CASE DIGESTS (THIRD TERM, SCHOOL YEAR 2012-2013)
JOHN RAFAEL P. ATIENZA

ARTICLE 1164
ADORABLE V COURT OF APPEALS
FACTS:
Private respondent SaturninoBareng was the registered owner of two parc
els of land,
one of which is Lot No. 661-E. Petitioners were lessees of a 200 sq. m. portion
of one of Lot No.
661-E.
On April 29, 1985, SaturninoBareng and his son, Francisco Bareng, obtained a loa
n from
petitioners amounting to twenty six thousand pesos (P26,000), in exchange for po
ssession and
enjoyment of the fruits of Lot No. 661-E.
On August 3, 1986, Saturnino sold to his son Francisco 18,500 sq. m. of Lot No.
661-D-5A. In turn, Francisco sold on August 27, 1986 to Jose Ramos. The portion of land
being rented to
petitioners was included in the portion sold to Jose Ramos. The deeds
of sale were not
registered in the office of the register of deeds.
As the Barengs failed to pay their loan, petitioners complained to Police Captai
n Rodolfo
Saet.
A Compromise Agreement was executed between Francisco Bareng an
d the Adorables
whereby the former acknowledged his indebtedness of P56,385.00 which he
promised to pay
on or before July 15, 1987. When the maturity date arrived, however,
Francisco Bareng failed
to pay. A demand letter was sent to Francisco Bareng, but he refused to pay.
Petitioners, learning of the sale made by Francisco Bareng to Jose Ra
mos, then filed a
complaint with the Regional Trial Court for the annulment or rescissio
n of the sale on the
ground that the sale was fraudulently prepared and executed.
On February 15, 1991, the trial court rendered judgment dismissing the
complaint for
lack of cause of action, declaring the contract of sale between Francisco Bareng
and Jose Ramos
valid and ordering Francisco Bareng to pay the amount he owed petitioners.
On appeal, the Court of Appeals affirmed the decision of the Regional
Trial Court, with
modification as to the amount of Francisco Bareng's debt to petitioners.
ISSUE:
Whether the petitioners have the right to rescind the contract between
their debtors
and a third party
HELD:
NO. According to the SC, as creditors, petitioners do not have such
material interest as
they only have a personal right to receive payment for the loan; it is not a rea
l right over the lot
subject of the deed of sale.
A personal right is the power of one person to demand of another, as a definite

passive
subject, the fulfillment of a prestation to give, to do, or not to do. On the ot
her hand, a real right
is the power belonging to a person over a specific thing, without a passive subj
ect individually
determined, against whom such right may be personally exercised.
5
In this case, while
petitioners have an interest in securing payment of the loan they extended, the
ir right to seek
payment does not in any manner attach to a particular portion of the patrimony o
f their debtor,
Francisco Bareng.
According to the SC, before a person can impugn the fraudulent actions of a debt
or, the
creditor must first exercise all other rights and actions for the sam
e purpose as stated in Art.
1177 of the Civil Code:
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 pe
rson; they
may also impugn the actions which the debtor may have done to defraud them.
(Emphasis added)
Indeed, an action for rescission is a subsidiary remedy; it cannot be
instituted except
when the party suffering damage has no other legal means to obtain reparation fo
r the same.
ANGELINE B. BUENAVENTURA
ARTICLE 1164
FIDELITY & DEPOSIT V WILSON
FACTS:
On October 17, 1904, the plaintiff filed a complaint against Wilson a
nd The American
Surety Company asking, first, that judgment be rendered against Wilson
for the sum of
$4,464.90, that amount having been paid by plaintiff to the Government under pla
intiff's surety
bond; second, that there be applied to the payment of said judgment
the said sum of $785
found in possession of Wilson and that said plaintiff be preferred in its right
to the said money
and to receive the same; and third, that a depositary be named by the court for
the pu rpose
of caring for and administering said amount during the pendency of the case.
On the same date, October 17, a depositary was named, such depositary taking in
charge
the said $785 on that date, the said sum of money being at this ti
me in the possession of said
depositary.
On October 26, 1904, H.D. Terrell filed a complaint as intervenor in

the case, alleging
that on September 3, of the same year, the defendant Wilson had ceded and trans
ferred to the
said Terrell all of his, the said Wilson's rights in and to the said $785 in pay
ment on account of a
larger sum then owed by said Wilson to the said H.D. Terrell for pro
fessional services already
rendered and to be rendered as attorney for said Wilson, under agreement with th
e same; that
Treasurer Branagan was duly notified on the 17th day of October, 1904
, of this transfer, at
which time the Treasurer had said sum in his care, and this before
the notifications of the
appointment of said depositary in the principal case. Basing his claim
on these facts, Terrell
claims the right of ownership in and to the said sum and asks that the same be d
elivered to him
as the legitimate owner to the exclusion of the other parties in the case.
ISSUE:
Whether or not the claim of Terrell over the $785.00 will prosper
HELD:
The Court is of the opinion that the transfer by itself, and afterwards the noti
fication of
the same of Treasurer Branagan, did not produce nor could it produce the effect
of transfer to
Terrell of the ownership of the funds so transferred and which were then in the
possession of
the said Treasurer. To have this effect, it would have been necessary
that the delivery of the
funds had been made directly Terrell, which fact has not been proved at any time
. There is no
question as to this last point. The funds were in the possession of
Branagan and afterwards
were transferred to the possession of the depositary appointed, by the court whe
re such funds
now are, and this without their ever having been taken possession of the interve
nor Terrell. It
is not alleged, nor it is claimed by Terrell, that the delivery of the funds was
ever made in any
manner recognized by the law. He claims the right of ownership from
the mere fact of having
derived the same, not from the fact of any delivery, but from the very fact of t
he transfer and of
his subsequent notification to Treasurer Branagan, it being, in additio
n, very clear that such
4
notification does not constitute, in any manner, the fact of delivery
as established by articles
1462, 1463, and 1464 of the Civil Code, all of which cover, in full this subject
-matter.
Therefore, in our Civil Code it is a fundamental principle in all matters of con
tracts and a
well-known doctrine of law that "non mudis pactis, sed traditione dominia rerum
transferuntur."
In conformity with said doctrine as established in paragraph 2 of article 609 of
said code, that
"the ownership and other property rights are acquired and transmitted
by law, by gift, by
testate or intestate succession, and, in consequence of certain contrac

ts, by tradition." And as
the logical application of this disposition article 1095 prescribes the followin
g: "A creditor has
the rights to the fruits of a thing from the time the obligation to
deliver it arises. However, he
shall not acquire a real right." (and the ownership is surely such) "until the p
roperty has been
delivered to him." transfer, does not produce the effect by the fact
of the mere consent, but is
acquired by tradition and in the due observance of general precepts."
Therefore, by reason of
the non-delivery Terrell did not acquire the ownership of the property
transferred to him by
Wilson. It is only the jus ad rem, and not the jus in re, that was acquired by T
errell by virtue of
the transfer, made by the consent of the transferor and the transferee but not c
onsummated by
the delivery which never came to pass and which delivery was the object of such
transfer.
5
FELIX Z. CAMERINO
ARTICLE 1167
CHAVES V. GONZALES (32 SCRA 547)
FACTS:
CHAVES (plaintiff) delivered to GONZALES (defendant), who is a typewriter repair
er, a
portable typewriter for routine cleaning and servicing.
A few months later, GONZALES asked from the plaintiff the sum of P6.
00 for the
purchase of spare parts, which CHAVES gave.
GONZALES was not able to finish the job after some time despite CHAV
ES repeated
reminders; GONZALES merely gave assurances, but failed to comply with the same.
Exasperated with the delay, CHAVES asked for the return of the typewriter. GONZA
LES
delivered the typewriter. On reaching home, CHAVES examined the typewri
ter and found the
same unrepaired, in shambles, with parts missing. CHAVES formally deman
ded, by sending a
letter the return of the missing parts and the P6.00. GONZALES return
ed some of the missing
parts and the P6.00.
CHAVES had his typewriter repaired by Freixas Business Machines, and t
he repair job
cost him a total of P89.85, including labor (P58.75) and materials (P31.10).
CHAVES then commenced legal action demanding GONZALES to pay P90.00 as
actual
and compensatory damages, P100.00 for temperate damages, P500.00 for moral damag
es, and
P500.00 as attorneys fees.
The lower court rendered judgment ordering GONZALES to pay CHAVES only
P31.10
and the costs of suit.
CHAVES appealed with the Supreme Court contending that the lower court erred in
that
it awarded only the value of the missing parts of the typewriter, in

stead of the whole cost of
labor and materials that went into the repair of the machine.
On the other hand, GONZALES, posited that he is not liable at all, not even for
the sum of
P31.10, because his contract with plaintiff-appellant did not contain a
period; that, CHAVES
should have first filed a petition for the court to fix the period before GONZAL
ES could be held
liable.
ISSUES:
Whether or not (1) GONZALES should be liable for the entire cost of
labor and
materials; and, whether or not (2) CHAVES should first file a petitio
n for the court to fix the
period.
HELD:
6
The appealed judgment was MODIFIED. GONZALES was ordered to pay CHAVES
the
sum of P89.85, with interest at the legal rate from the filing of t
he complaint. Costs in all
instances against GONZALES.
As to issue (1): According to Article 1167 of the Civil Code, If a
person obliged to do
something fails to do it, the same shall be executed at his cost. This same rule
shall be observed
if he does it in contravention of the tenor of the obligation. Furthermore, it m
ay be decreed that
what has been poorly done be undone. It is clear that GONZALES contravened the te
nor of his
obligation because he not only did not repair the typewriter but returned it in s
hambles. He is
liable under Article 1167 of the Civil Code, jam quot, for the cost of executing
the obligation in a
proper manner. The cost of the execution of the obligation in this case should b
e the cost of the
labor or service expended in the repair of the typewriter, which is
in the amount of P58.75,
bBecause the obligation or contract was to repair it. In addition, GO
NZALES is likewise liable,
under Article 1170 of the Code, for the cost of the missing parts, in the amount
of P31.10, for in
his obligation to repair the typewriter he was bound, but failed or neglected, t
o return it in the
same condition it was when he received it.
As to issue (2): GONZALES invoked Civil Code Article 1197 which calls
for the court to
fix the duration of an obligation that does not fix a period. Howeve
r, because he virtually
admitted non-performance by returning the typewriter that he was oblige
d to repair in a
nonworking condition, with essential parts missing, without demanding th
at he should be
given more time to finish the job, or compensation for the work he had already d
one, the time
for compliance having evidently expired, and there being a breach of
contract by nonperformance, it was academic for the CHAVES to have first petitioned the court t
o fix a period
for the performance of the contract before filing his complaint in th
is case. The fixing of a
period would thus be a mere formality and would serve no purpose than to delay.
7
LOVELY NIKKI A. CARIAGA
ARTICLE 1169
SSS V. MOONWALK DEVELOPMENT AND HOUSING CORPORATION (221 SCRA 119)
FACTS:
Plaintiff SSS approved the application of defendant Moonwalk for a loa
n of
P30,000,000.00 for the purpose of developing and constructing a housing
project. Out of the
P30,000,000.00 approved loan, the sum of P9,595,000.00 was released to
defendant
Moonwalk.A third Amendment Deed of Mortgage was executed for the payment of the
amount
of P9,595,000.00. Moonwalk made a total payment of P23,657,901.84 to S
SS for the loan
principal of P12,254,700.00.After settlement of the account, SSS issued
to Moonwalk the
release of mortgage for Moonwalks mortgaged properties.In letter to Moon
walk, SSS alleged
that it committed an honest mistake in releasing defendantthat Moonwalk
has still 12%
penalty for failure to pay on time the amortization which is in the penal clause
of the contract.
Moonwalks counsel told SSS that it had completely paid its obligation
to SSS and therefore
there is no recovery of any penalty.
ISSUE:
Is the penalty demandable even after the extinguishment of the principal obligat
ion?
HELD:
No. There has been a waiver of the penal clause as it was not demanded before th
e full
obligation was fully paid and extinguished.
Default begins from the moment the creditor demands the performance of
the
obligation. In the case at Bar, although there were late amortizations
, there was no demand
made by SSS for the payment of the penalty; hence, Moonwalk is not in delay in t
he payment of
the penalty. No delay occurred and there was no occasion when the pe
nalty became
demandable and enforceable.
Since there was no default in the performance of the main obligation,
payment of the
loan- SSS was never entitled to recover any penalty.
If the demand for the payment of the penalty was made prior to the extinguishmen
t of
the obligation, which are, as follows: (1) the principal obligation; (2) the int
erest of 12% on the
principal obligation; and (3) the penalty of 12% for late payment for after dema
nd, Moonwalk
would be in delay and therefore liable for the penalty.
TIFFANY KIMBERLY CHING

ARTICLE 1169
BINALBAGAN V. COURT OF APPEALS (219 SCRA 777)
FACTS:
On May 11, 1967, the Puentevellas, through Angelina Echaus (Echaus) as
Judicial
Administrator of the intestate estate of Luis Puentevella, executed a Contract t
o Sell and a Deed
of Sale of forty-two subdivision lots of the Puentevella family, conveying and t
ransferring said
lots to petitioner Binalbagan Tech., Inc. (Binalbagan). In turn, Binalb
agan executed an
Acknowledgment of Debt with Mortgage Agreement, mortgaging said lots in favor of
the estate
of Puentevella.
However, there was a pending case in the Regional Trial Court. In this case, Ech
aus sold
the same fort-two lots to Raul Javellana (Javellana) with the condition that Jav
ellana would not
transfer his rights to the lots without the express consent of the P
uentevellas and that if the
contract is cancelled due to violation of any of the contracts terms, all payment
s made and all
introduced improvements on the property shall be considered as rentals. Javellan
a failed to pay
the installments for five years which resulted in the Puentevellas filing of this
case.
Trial court ruled in favor of the Puentevellas but on December 29, 19
65, spouses de la
Cruz filed an appeal alleging a Deed of Sale was executed in their favor by spou
ses Lopez; thus,
Puentevella was constrained to assert physical possession of the premis
es to counteract the
claim of spouses de la Cruz. The Puentevellas filed a case for injuncti
on and damages with the
trial court who issued an ex-parte writ of preliminary injunction; this was elev
ated to the Court
of Appeals who issued a writ of preliminary injunction ordering the trial court
to refrain from
enforcing the injunction and from issuing any other writs or prohibiti
ons while the case is
pending. Thus, the lots and buildings were restored to the Puentevellas.
The judgment in the civil case was finally executed and enforced and
Binalbagan was
restored to the possession of the lots on May 31, 1982; in summary,

Binalbagan was not in
possession of the lots from 1974 to May 31, 1982.
When Binalbagan was again placed in possession of the subdivision lots
, Echaus
demanded payment from petitioner Binalbagan for the lots, enclosing in the lette
r of demand a
statement of account as of September 1982 representing the price of t
he land and accrued
interest as of that date.
Binalbagan failed to effect payment so Echaus filed on October 8, 1982 a civil c
ase with
the regional trial court who decided in favor of Binalbagan because o
f prescription but the
Court of Appeals reversed said decision.
ISSUE:
Is Echaus barred from claiming payments from Binalbagan due to prescription?
HELD:
No. A party to a contract cannot demand performance of the other par
ty s obligations
unless he is in a position to comply with his own obligations. Simil
arly, the right to rescind a
contract can be demanded only if a party thereto is ready, willing and able to c
omply with his
own obligations there under (Art. 1191, Civil Code).
The prescriptive period within which to institute an action upon a wr
itten contract is
ten years (Art. 1144, Civil Code). In this case, Binalbagan was evicted from the
lots in 1974 by
virtue of a court order in Civil Case No. 293 and reinstated to the
possession thereof only in
1982. During the period from 1974 to 1982, Echaus
warranty against e
viction given to buyer
petitioner was breached though without her fault. During that period, Echaus was
not in a legal
position to demand compliance of the prestation of petitioner to pay
the price of said
subdivision lots. In short, her right to demand payment was suspended
during that period,
1974-1982.
The cause of action of Echaus is based on the deed of sale whereby
she transferred
ownership of the subdivision lots on May 11, 1967. She filed Civil Case No. 1354
for recovery of
title and damages only on October 8, 1982. From May 11, 1967 to October 8, 1982,
more than
fifteen (15) years elapsed. The 10-year prescriptive period seemed to have expir
ed before she
brought her action to recover title. However, the period 1974 to 1982
should be deducted in
computing the prescriptive period because from 1974 to 1982, Echaus wa

s not in a legal
position to initiate action against Binalbagan.
The execution of the judgment in Civil Case No. 7435 was stopped by
the writ of
preliminary injunction issued in Civil Case No. 293. It was only when
Civil Case No. 293 was
dismissed that the writ of execution in Civil Case No. 7435 could be
implemented and
petitioner Binalbagan restored to the possession of the subject lots.
Deducting eight years (1974 to 1982) from the period 1967 to 1982, o
nly seven years
elapsed. Consequently, Civil Case No. 1354 was filed within the 10-year prescrip
tive period.
1
0
ARNIBELLE M. DORIA
ARTICLE 1169
MARCELO AGCAOILI VS. GSIS (165 SCRA 1)
FACTS:
The Government Service Insurance System (GSIS) approved an application
of Agcaoili
for the purchase of a house and lot in the GSIS Housing Project at
Nangka Marikina, Rizal,
subject to the condition that the latter should forthwith occupy the house.Agcao
ili lost no time
in occupying the house. However, he could not stay in it and had to
leave the very next day
because the house was nothing more than a shell, in such a state of
incompleteness that
civilized occupation was not possible: ceiling, stairs, double walling,
lighting facilities, water
connection, bathroom, toilet kitchen, drainage, were inexistent. Agcaoili
did however ask a
homeless friend, a certain Villanueva, to stay in the premises as som
e sort of watchman,
pending completion of the construction of the house. Agcaoili thereafte
r complained to the
GSIS, to no avail. The GSIS asked him to pay the monthly amortizatio
ns and other fees.
Agcaoilipayed the first installment and other fees, but refused to mak
e further payments until
and unless the GSIS completed the housing unit and made it habitable.
GSIS refused to do so,
opting instead to cancel the award and demanded that Agcaoili vacate
the premises. Agcaoili
sued GSIS in the Court of First Instance of Manila for specific perf
ormance with damages.
Having ruled in favor of Agcaoili, the case was appealed to this Court by the GS
IS.
GSISs arguments:
1. Agcaoili had no right to suspend payment of amortizations on accou
nt of the
incompleteness of his housing unit, since said unit had been sold in
the condition and

state of completion then existing and he is deemed to have accepted
the same in the
condition he found it when he accepted the award;
2. Perfection of the contract of sale between GSIS and Agcaoili being condition
ed upon the
latter s immediate occupancy of the house subject thereof, and the latter having
failed to
comply with the condition, no contract ever came into existence between them;
3. Agcaoili s act of placing his homeless friend, Villanueva, in possession, wi
thout the prior
or subsequent knowledge or consent of GSIS, operated as repudiation by Agcaoili
of the
award and a deprivation of the GSIS at the same time, of the reasonable rental v
alue of
the property.
ISSUE:
WON Agcaoili incurred delay in fulfilling his obligations, making the
cancellation by
GSIS of the award in favorof him just and proper?
HELD:
No. It is axiomatic that "in reciprocal obligations, neither party incurs in del
ay if the other
does not comply or is not ready to comply in a proper manner with
what is incumbent upon
him."Since GSIS did not fulfillits obligation, and was not willing to
put the house in habitable
1
1
state, it cannot invoke Agcaoili s suspension of payment of amortizations as cau
se to cancel the
contract between them.
There was then a perfected contract of sale between the parties; ther
e had been a
meeting of minds upon the purchase by Agcaoli of a determinate house and lot fro
m GSIS at a
definite price which is payable in amortizations and from that moment the partie
s acquired the
right to reciprocally demand performance. Hence, it was the duty of t
he GSIS, as seller, to
deliver the thing sold in a condition suitable for its enjoyment by the buyer, i
n other words, to
deliver the house subject of the contract in a reasonably livable sta
te. However, it sold an
uninhabitable house to Agcaoili, and required him to immediately occupy
it under pain of
cancellation of the sale. Under the circumstances there can hardly be any doubt
that the house
contemplated was one that could be occupied for purposes of residence in reasona
ble comfort
and convenience. There would be no sense to require the awardee to immediately o
ccupy and
live in a shell of a house, a structure consisting only of four walls with openi
ngs, and a roof, and
to theorize, as the GSIS does, that this was what was intended by the parties, s
ince the contract
did not clearly impose upon it the obligation to deliver a habitable
house, is to advocate an
absurdity, the creation of an unfair situation.
The Court AFFIRMED the decision of the lower court insofar as it inv
alidates and sets
aside the cancellation by GSIS of the award in favor of Agcaoili of the lot at M
arikina, Rizal, and
orders GSIS to respect the aforesaid award and to pay damages in the amounts spe
cified. Said
judgment is however MODIFIED by deleting the requirement for GSIS to complete th
e house in
question so as to make the same habitable, and instead it is hereby ORDERED that
the contract
between the parties be modified by adding to the cost of the land a
nd the house in its
unfinished state both as of the time of perfection of the contract, and correspo
ndingly adjusting
the amortizations to be paid by Agcaoili.
2
MARVIN P. FRANCISCO
ARTICLE 1169
ENRIQUEZ VS. RAMOS (73 SCRA 116)
FACTS:
In Rodrigo Enriquez, et al. vs. Socorro A. Ramos (G.R. No. L18077, Sep
tember 29, 1962),
the plaintiffs-appellants averred that on November 24, 1958 they sold
to the defendantappellee Socorro A. Ramos 20 subdivision lots in Quezon City for the sum of P235
,056 of which
only P35,056 had been paid. The balance of P200,000 was to be liquid
ated within two years
from the date of the execution of the deed of sale, with interest at six percent
for the first year
and twelve percent thereafter until fully paid. To secure the payment
of that balance, the
defendant-appellee executed in the same document a deed of mortgage in favor of
the vendors
on several parcels of land variously situated in Quezon City, Pampanga and Bulac
an. The deed
of mortgage embodies certain stipulations which the plaintiffs-appellants invoke
d, thus:
During the term and existence of this mortgage, the Mortgagor shall d
uly pay and
discharge, at her expense, and on their maturity, all lawful taxes or
assessments levied
or assessed upon the mortgaged property: in default thereof the Mortga
gee may pay
and discharge such taxes of assessments and insure the security of th
e property, and
any and all sums so paid by the Mortgagee shall be repayable on demand with inte
rest
at per annum and be a lien or the property herein mortgaged.
If for any reason the mortgage cannot be registered, then the whole
obligation
shall immediately become due and demandable.
According to the plaintiffs-appellants in L-18077, the defendant-appellee
violated the
terms of their agreement in the following respects:
1. Inspite of repeated demands, the defendant-appellee refused to pay
the sum of
P200,000 within the stipulated period;
2. The mortgage, on the Bulacan property was never registered and
3. The realty tax for 1959 on the lots mortgaged were not paid by
the defendantappellee.
The Court upheld the findings and conclusions of the trial court whic
h ruled that the
actual price of the lots sold to the defendant-appellee was only P185,056 instea
d of P235,056,
and that only if and when the roads shall have been constructed pursuant to the
ordinances of
Quezon City "may the period of two years specified in the contract begin to run.
"
These conclusions arrived account of a private deed entitled "Explanation" in wh
ich the
plaintiffs-appellants certified that of the consideration of P235,056 appearing
in the questioned
deed of sale for mortgage, P50,000 "represent contribution of his Soco
rro A. Ramos for the
construction of roads, which we will undertake in accordance with the
provisions of the City
Ordinances of Quezon City."
ISSUES:
1. Whether or not the condition, which was the completion
was already
fulfilled when the plaintiff-appellants (Enriquez, de
appealed the case
from the decision dated 08 October 1963.
OBLIGATIONS AND CONTRACTS CASE DIGESTS (THIRD TERM, SCHOOL
3
2. Whether or not there is a previous notice and
letion of the roads in
question from the plaintiffs-appellants.
of road construction,
Dizon, and Dizon)
YEAR 2012-2013)
demand of the comp
HELD:
1. Yes. At the trial, the plaintiffs-appellants adduced the testimonies
of two witnesses, Oscar
Delfin and Atty. Gelacio L. Dimaano (plaintiffs-appellants counsel). De
lfin testified that he
was a construction superintendent of Wendel Construction Co., Inc. whic
h was contracted
to open up roads on the lots in question; that his outfit undertook
the building of the said
roads in accordance with the ordinances of Quezon City, having laid o
ut "type B gutters,
concrete curbs, pavement made of Vituminous macadam asphalt;" that cons
truction
commenced on November 2, 1959 and was completed on May 9, 1960.
2. Yes, there is a previous notice and demand from the plaintiffs-app
ellants. The filing of the

case is sufficient notice to the defendant-appellee of the completion of the roa
ds in question
and of the plaintiffs-appellee s desire to be paid the purchase price
of the questioned lots.
The effect of such demand retroacts to the day of the constitution o
f the defendantappellee s obligation. Thus, Article 1187 provides the "The effects of
a conditional
obligation to give, once the condition has been fulfilled, shall retro
act to the day of the
constitution obligation..." The contacted obligation of the defendant-app
ellee under the
facts of the case at bar was to pay the balance of P200,000 within two years fro
m the date
the roads in question are completed.
Accordingly the order of the court a quo dated December 3, 1963 is
set aside, and
judgment is hereby rendered ordering the defendant- appellee to pay to
the plaintiffsappellants, within ninety (90) days from the finality of this decision, the foll
owing :
1. The sum of P200,000 representing the unpaid balance of her contrac
tual
obligation;
2. Interest thereon, as stipulated in the deed of sale with mortgage, at the rat
e of 6%
per annum from May 9, 1960 up to May 9, 1961, and, thereafter, 12%
interest per annum
until the principal amount shall have been fully paid;
3. An amount equivalent to 5% of the mortgage indebtedness of attorney s fees; a
nd
4. The costs.
1
4
ANDREA MAE D. GATCHALIAN
ARTICLE 1170
BARZAGA V COURT OF APPEALS( FEBRUARY 12, 1997)
FACTS:
On January 19, 1990 the wife of the petitioner died; one of her dying wish was t
o be laid
to rest before Christmas day to spare her family from keeping vigil
over her remains. The
petitioner scheduled the burial on December 24 however, due to the ev
ents that occurred
which is presented in the case it caused the plans not be followed.
On December 21, went to the hardware of respondent Angelito Alviar to
inquire about
the availability of the materials to used for the construction of his wifes niche
and asked if they
could be delivered at once. The storekeeper, Marina Boncales, told the
petitioner that she had
yet to verify if the store had pending deliveries and if so, petitio
ners order would have to be
delivered the next day. With that reply, the petitioner decided to pu
rchase the materials the
following day, December 22 after Boncales has agreed to deliver it on
the time stated by him.

He paid P2,110.00, the full amount of the price.
No delivery of the materials happened that day despite the several follow up of
Barzaga.
In the end, the petitioner decided to dismiss his laborers. He then
decided to file a complaint
against Alviar. When he returned to the store, he saw the truck but
the materials he ordered
were not being loaded. Barzaga decided to cancel his transaction and b
ought the materials he
needed in another store. With the materials purchased from another store, he dec
ided to start
the construction on December 23 but he already knew that the niche w
ould not be finish in
time for the scheduled burial on December 24. The laborers could only
resume work on
December 26. On that same day, the niche was finish and the petitioners wife was
laid to rest.
On January 21, 1991, Barazga wrote to Alviar demanding recompense for
the damage
he suffered. Alviar did not respond. Consequently, petitioner sued him before th
e RTC.
Alviar contended no legal delay happened because no specific time of
deliver was
agreed upon between them. There was no stipulation in the invoices ev
idencing the sale. In
addition, the delivery truck suffered a flat tire on the way to the store to pic
k up the materials.
When the delivery arrived, Barzaga refused to accept the materials whi
ch the respondent
points to be reason of the delay.
The RTC ruled in favor of
Barzaga and ordered Alviar to pay for d
amages and refund
the purchase price. However, the Court of Appeals reversed the decisio
n and took into
consideration the respondents arguments.
ISSUE:
Whether or not the respondent was negligent which caused the delay on the delive
ry of
the purchased materials?
HELD:
YES. We sustain the trial courts decision.
5
The record convinces the court that Alviar was negligent and incurred
in delay the
performance of his contrutual obligation. This sufficiently entitles petitioner
Ignacio Barzaga to
be indemnified for the damage he suffered as a consequence of delay
or a contractual breach.
The law expressly provides that those who in the performance of their
obligation are guilty of
fraud, negligence, or delay and those who in any manner contravene the tenor the
reof, are liable
for damages.
There was a specific time agreed upon for the delivery to the cemete
ry. The petitioner
was told on December 21 that his purchase would have to be delivered
the following day
because of the pending deliveries. He purchased the material on the 2
1th after being assured
that the delivery would be made the same day. The argument that the
re was no specific date
indicated in the invoice must fall; there was a positive verbal commi
tment of the Boncales. It
was no longer necessary to indicate in the invoice the exact time th
e materials would be
delivered to the place agreed. In addition, Alviars contentment of fort
uitous event cannot be
accepted. The nature of private respondent s business requires that he
should be ready at all
times to meet contingencies of this kind.
Private respondent had no right to manipulate petitioner s timetable an
d substitute it
with his own. Petitioner had a deadline to meet. A few hours of delay was no pid
dling matter to
him who in his bereavement had yet to attend to other pressing family concerns.
Despite this,
respondent s employees still made light of his earnest importuning for an immedi
ate delivery.
Lastly, Bonacales Statement that the delivery truck will come from Cavi
te was taken
into account. If this statement was told to the petitioner at the time of the ne
gotiation and this
may result to the delay of the delivery of the materials, the petiti
oner would have not
purchased from them and would had looked for another store that could meet his d
emand. The
deliberate suppression of this information by itself manifests a certai
n degree of bad faith on
the part of Boncales.
The appellate court appears to have belittled petitioners submission tha
t under the
prevailing circumstances time was of the essence in the delivery of t
he materials to the grave
site.
This case is clearly one of non-performance of a reciprocal obligation. In their
contract
of purchase and sale, petitioner had already complied fully with what
was required of him as
purchaser, i.e., the payment. It was incumbent upon respondent to imme
diately fulfill his
obligation to deliver the goods otherwise delay would attach.
1
6
ALFREDO KHONG HUN
ARTICLE 1172
BELGIAN OVERSEAS CHARTERING AND SHIPPING VS. PFI (JUNE 5 2002)
FACTS:
CMC Trading A.G. shipped on board the M/V Anangel Sky at Hamburg, Ge
rmany 242
coils of various Prime Cold Rolled Steel sheets for transportation to
Manila consigned to the
Philippine Steel Trading Corporation. On July 28, 1990, M/V Anangel Sky arrived
at the port of
Manila and, within the subsequent days, discharged the subject cargo.
Four (4) coils were
found to be in bad order. Finding the four (4) coils in their damag
ed state to be unfit for the
intended purpose, the consignee Philippine Steel Trading Corporation dec
lared the same as
total loss. Philippine First Insurance paid the claim of Philippine Steel and wa
s thus subrogated.
Philippine First then instituted a complaint for recovery of the amount paid to
the consignee as
insured. Belgian claims that the damage and/or loss was due to pre-sh
ipment damage, to the
inherent nature, vice or defect of the goods, or to perils, danger and accidents
of the sea, or to
insufficiency of packing thereof, or to the act or omission of the s
hipper of the goods or their
representatives. Belgian further argued that their liability, if there
be any, should not exceed
the limitations of liability provided for in the bill of lading and
other pertinent laws. Finally,
Belgian averred that, in any event, they exercised due diligence and f
oresight required by law
to prevent any damage/loss to said shipment. The RTC dismissed the co
mplaint.The CA
reversed and ruled that Belgian were liable for the loss or the dama
ge of the goods shipped,
because they had failed to overcome the presumption of negligence impo
sed on common
carriers. As to the extent of Belgians liability, the CA held that th
e package limitation under
COGSA was not applicable, because the words "L/C No. 90/02447" indicat
ed that a higher
valuation of the cargo had been declared by the shipper..
ISSUE:
Whether the package limitation of liability under COGSA is applicable.
(Belgian
contends that assuming that they are liable their liability should be
limited to US$500 per
package as provided in the Bill of Lading and by Section 4(5)of COGS.
HELD:
YES. In this case, there was no stipulation in the Bill of Lading l
imiting the carrier s
liability. Neither did the shipper declare a higher valuation of the goods to be
shipped. This fact
notwithstanding, the insertion of the words "L/C No. 90/02447 cannot b
e the basis for
Belgians liability. Belgian failed to rebut the prima facie presumption
of negligence. As stated
in the Bill of Lading, Belgian received the subject shipment in good
order and condition in
Germany. Prior to the unloading of the cargo, an Inspection Report pr
epared and signed by
representatives of both parties showed the steel bands broken, the met
al envelopes ruststained and heavily buckled, and the contents thereof exposed and rusty. Bad Ord
er Tally Sheet
issued by Jardine Davies Transport Services stated that the four coils
were in bad order and
condition. Normally, a request for a bad order survey is made in case there is a
n apparent or a
1
7
presumed loss or damage. The Certificate of Analysis stated that, base
d on the sample
submitted and tested, the steel sheets found in bad order were wet with fresh wa
ter. Belgian,in
a letteraddressed to the Philippine Steel admitted that they were aware of the c
ondition of the
four coils found in bad order and condition.
1
8
ROLAN JEFF A. LANCION
ARTICLE 1173
SYQUIA VS CA (217 SCRA 624)
FACTS:
Corazon, Juan, Carlota and Anthony Syquia filed a complaint for damag
es against Manila
Memorial Park Cemetery.
The Syquia family and the Management of Manila Memorial Park executed a deed of
sale to
inter the remains of the deceased named Juan Syquia.
The plaintiff-appellants discovered that the concrete vault had a hole which wa
ter can come
inside the vault and upon the discovery the family became agitated and upset.
The Syquia family alleged that there is alleged unlawful and maliciou
s breach of contract
because the management failed to deliver the vault with its protection to the co
ffin.
The Trial court held that the contract between the parties did not
guarantee that the
cement vault would be waterproof.
It was also promulgated by the RTC that there could be no quasi-del
ict because the
defendant was not guilty of any fault or negligence, and because ther
e was a pre-existing
contractual relation between the Syquias and defendant Manila Memorial
Park Cemetery,
Inc.
The Court of Appeals affirmed the judgment made by the RTC and a m
otion for
reconsideration was also denied
ISSUE:
Whether or not the Manila Memorial Park Cemetery Inc breached its contract with
the
Syquia family?
Whether or not private respondent was guilty of tort?
HELD:
It was promulgated that there is no negligence on the part of manag
ement of manila
Memorial Park.
It was held that contracts should be interpreted according to their
literal meaning and

should not be interpreted beyond their obvious intendment.
If the terms of the contract are clear and leave no doubt upon the
intention of the
contracting parties, the literal meaning of its stipulations shall control.
Private respondent has exercised the diligence of a good father of a family in
preventing the
accumulation of water inside the vault which would have resulted in the caving i
n of earth
around the grave filling the same with earth.
The Supreme court affirmed the decision in Toto of the RTC and Court of Appeals
.
9
MICHAEL ANTHONY PHILIPPE L. LEACHON
ARTICLE 1173
PNB VS CA 315 SCRA 309
FACTS:
October 23, 1990 Lily S. Pujol opened an account with the petitioner
PNB(Mandaluyong
branch.) She applied for a combo account under her business name Pujol Trading. This
account is a combination of a savings and current account wherein if there are i
nsufficient
funds in the current account of the owner then the funds of the sav
ings fund will be used.
PNB thereafter, issued a passbook with the words: Combo Deposit Plan in the cover
.
On October 23, 1990 Lily issued a check worth 30,000 php to her da
ughter in law, Dr.
Charisse M. Pujol. Even though she had sufficient funds in her saving
account the bank
dishonored the check for insufficiency of funds and charger her 250php as penalt
y.
On October 24, 1990 Lily again issued another check (she still has
sufficient funds)
amounting to 30000 php to her daughter Ms. Venus P. De Ocampo. The
bank again
dishonored the check and charged her a penalty of 250 php.
On November 4, 1990 realizing their mistake petitioner PNB accepted t
he 2
nd
check and
recredited the 250php penalty to her account.
Respondent filed a complaint for moral and exemplary damages to RTC of Pasig be
cause of
dishonoring her checks even if she had sufficient money.
On September 27, 1994 the RTC issued a decision ordering PNB to pay her moral d
amages
of 100000php and 20000php for attorney fees.
Petitioner erred and argued that at that time she was missing some
important documents
that is why her account was not yet activated.
ISSUE:
W/N PNB is liable for damages.
HELD:
It is immaterial. The facts that PNB gave her a passbook with the
words Combo Deposit
Account mislead her to believe that her account was already active.
The courts said that the bank is under obligation to treat the accounts of its
depositors with
meticulous care whether such accounts consists only of a few hundred or million
pesos.
Responsibility arising from negligence in the performance of every kin
d of obligation is
demandable.
Given the social standing of the respondent the award for damages is deemed jus
t.
WHEREFORE, petition is DENIED. Award of 100000php for moral damages and 20000ph
p
for attorneys fees affirmed by RTC of Pasig. In favor of private resp
ondent Lily S. Pujol.
AFFIRMED
0
FREDERICK XAVIER R. LIM
ARTICLE 1173
SAMSON V. COURT OF APPEALS (238 SCRA 397)
FACTS:
The object of contention is a commercial unit the respondent Santos i
s leasing from
Susana Realty Corporation. In this case, the respondent has been operati
ng a store in the said
unit for the past twenty years on a yearly basis the lease contract is renewed a
nnually.
In June 1984, Susana Realty informed the private respondent that the
lease contract
(which is due to expire on July 31) will not be renewed anymore.
The private respondent did not leave the before the said date. The l
ease contract was
then extended until December 1984. Even then, the private respondent s
till occupied the unit
beyond such period.
On February 1985, the respondent was notified by Susana Realty stating
that pending
the renewal of his lease contract until the arrival of Ms. Madrigal (one of the
owners of Susana
Realty), a retroactive increase in rent will be implemented beginning January 19
85.
Petitioner approached private respondent offering to buy the store and
his right to
lease the premises the store was on. Respondent replied with a counte
roffer stating that the
contract of lease was impliedly renewed and that it will be formally renewed tha
t same month
when Ms. Madrigal would arrive and that the petitioner would agree to pay off th
e obligations
of the store as of the end of February 1985. The petitioner accepted the same.
The consideration for the sale was P300k. Petitioner paid P150k for t
he existing
improvements to the store. The remaining balance was agreed to be pai
d upon the formal
renewal of the lease contract. The latter condition is also a condition preceden
t for the transfer
of the leasehold right of the respondent to the petitioner.
Petitioner occupied the premises on March 1985. On July 1985, he rece
ived a letter
from Susana Realty addressed to respondent directing the latter to vac
ate the premises
because the lease contract was not renewed. He was forced to vacate that same mo
nth.
Petitioner then filed for damages against the respondent imputing fraud
and bad faith
against the respondent on the latters statement that the lease had been impliedly
renewed.
The trial court rendered a decision in favor of the petitioner by awarding the s
ame with
reimbursement with damages.
On appeal, the Court of Appeals modified
the decision to only
reimbursement of the P150k.
ISSUE:
W/N private respondent committed fraud or bad faith in representing to petitione
r that
his lease over the subject premises had been impliedly renewed by Susana Realty.
2
1
HELD:
Petition Denied.
Bad faith is a state of mind operating with some motive of ill-will
and imports a
dishonest purpose and conscious doing of wrong. It is akin to fraud an
d involves a design to
deceive another, prompted by some interested or sinister motive.
The kind of fraud that will vitiate consent in contracts is causal f
raud which is a
deception employed by one party prior to or simultaneous to the contr
act in to secure the
consent of the other. In alleging fraud, it must be proven with clear and convin
cing evidence.
Petitioner insists that private respondent acted in bad faith in assur
ing him that his
lease contract with Susana Realty has been impliedly renewed and would be formal
ly renewed
upon the arrival of Ms. Madrigal.
Private respondent was neither guilty of fraud nor bad faith in claiming that th
ere was
implied renewal of his contract of lease with Susana Realty. It was clear that S
usana Realty had
no intention to renew the lease contract of private respondent for an
other year. However,
Susana Realty sent petitioner a letter notifying him of the retroactive
increase as well as the
pendency of the renewal of the contract until the arrival of Ms. Madrigal.
The letter led private respondent to believe that his lease contract
was impliedly
renewed and that formal renewal thereof would be made upon the arrival of Tanya
Madrigal. It
was known to both parties that, regarding the agreement regarding the
transfer of private
respondent s leasehold right to petitioner was concerned, the object thereof rel
ates to a future
right. It is a conditional contract recognized in civil law,
the efficacy of which depends upon an
expectancy the formal renewal of the lease contract.
Private respondent s lawyer also informed him that he could sell the
improvements
within the store for he already owned them but the sale of his leas
ehold right over the store
could not as yet be made for his lease contract had not been actually renewed by
Susana Realty.
The efficacy of the contract between the parties was thus made dependent upon th
e happening
of this suspensive condition.
The Court of Appeals was correct when it faulted petitioner for faili
ng to exercise
sufficient diligence in verifying the status of private respondent s le
ase.
Petitioner had every
opportunity to verify the status of the lease contract of respondent with Susana
Realty.
The rule caveat emptor requires the purchaser to be aware of the suppo
sed title of the
vendor and he who buys without checking the vendor s title takes all
the risks and losses
consequent to such failure. In the case at bench, the means of verifying for him
self the status of
private respondent s lease contract with Susana Realty was open to petitioner. N
onetheless, no
effort was exerted by petitioner to confirm the status of the subject lease righ
t. He cannot claim
that he was deceived.
2
VICTOR ANTONIE M. LIM
ARTICLE 1173
CUSI V PNB (90 SCRA 357)
FACTS:
Spouses Cusi attended a birthday party in Paranaque, Rizal. After the
party which
broke up at about 11 o clock that evening, the spouses proceeded home in
their Vauxhall car
with Victorino Cusi at the wheel. Upon reaching the railroad tracks,
finding that the level
crossing bar was raised and seeing that there was no flashing red light, and hea
ring no whistle
from any coming train, Cusi merely slack ened his speed and proceeded to cross t
he tracks. At
the same time, a train bound for Lucena traversed the crossing, resulting in a c
ollision between
the two.
This accident caused the spouses to suffer deformities and to lose the ea
rnings they
used to enjoy as successful career people.
The defense is centered on the proposition that the gross negligence of Victor
ino Cusi
was the proximate cause of the collision; that had he made a full stop
before traversing the
crossing as required by section 56(a) of Act 3992(Motor Vehicle Law), he could h
ave seen and
heard the approach of the train, and thus, there would have been no collision.
ISSUE:
W/N Victorino Cusi was negligent and such was the proximate cause of the collisi
on
HELD:.
Negligence has been defined by Judge Cooley in his work on Torts as
"the failure to
observe for the protection of the interests of another person that de
gree of care, precaution,
and vigilance which the circumstances justly demand, whereby such other
person suffers
injury."
All that the law requires is that it is always incumbent upon a perso
n to use that care
and diligence expected of reasonable men under similar circumstances.
Undisputably, the warning devices installed at the railroad crossing we
re manually
operated; there were only 2 shifts of guards provided for the operation thereof
one, the 7:00
A.M. to 3:00 P. M. shift, and the other, the3:00 P.M. to 11:00 P.M. shift. On th
e night of
Lucena was on an unscheduled trip after 11:00 P.M. During that precise hour, the
warni
ng devices were not operating for no one attended to them. Also, asobserved by
the lower
court, the locomotive driver did not blow his whistle, thus: "... he simply sped
on without taking
an extra precaution of blowing
his whistle. That the train was running at full speed is attested to by the fact
thatnotwithstandi
2
3
ng the application of the emergency brakes, the train did not stopuntil it reach
ed a distance of
around 100 meters."
Victorino Cusi had exercised all the necessary precautions required of
him as to avoid
injury to -himself and to others. We find no need for him to have made a full st
op; relying on his
faculties of sight and hearing, Victorino Cusi had no reason to antic
ipate the impending
dangerThe record shows that the spouses Cusi previously knew of the existence of
the railroad
crossing, having stopped at the guardhouse to ask for directions before proceedi
ng to the party.
At the crossing, they found the level bar raised, no warning lights f
lashing nor warning bells
ringing, nor whistle from an oncoming train. They safely traversed the crossing.
On their return
home, the situation at the crossing did not in the least change, exc
ept for the absence of the
guard or flagman. Hence, on the same impression that the crossing was
safe for passageas
before, plaintiff-appellee Victorino Cusi merely slackened his speed and proceed
ed to cross the
tracks, driving at the proper rate of speed for going over railroad crossings
2
4
BIANCA ALANA H. LIMJUCO
ARTICLE 1173
CHINA AIRLINES V CA (211 SCRA 897)
FACTS:
Private respondent Manuel J. Ocampo bought a round-trip ticket for Man
ila-San
Francisco-Manila from petitioner China Airlines Limited ("CAL").
Ocampo sought to make special arrangements, through Ultraman Travel Age
ncy, with
CAL Manila for a change in schedule. The travel agency was assured t
hat the necessary
adjustments would be made and that Ocampo could definitely take the C
AL flight from San
Francisco on 18 May 1979. Ocampo even sent his private secretary to the office
of CAL Manila
to have the ticket changed. There, the secretary was handed a typewri
tten note purporting to
show a revised schedule for the different sectors of the return trip
from San Francisco to
Manila with the corresponding flight numbers.
Ocampo was asked to reconfirm his return flight with CAL San Francisc
o which would
alter the ticket by attaching a sticker on it showing the adjusted f
lights and departure dates.
The revised schedule was also entered into Ocampo s reservation card o
n file in the office of
CAL Manila.
Ocampo left for San Francisco s on 9 May 1979 and arrived in San Francisco also
on the
same day, San Francisco local time. Next day, he proceeded to CAL Sa
n Francisco office to
confirm his revised return flight schedule. CAL San Francisco, however, declined
to confirm his
return flight, since the date indicated on the ticket was not 18 May
1979 but rather 24 May
1979. Ocampo, however, apprised CAL San Francisco about the special ar
rangement that he
had requested from CAL Manila. CAL San Francisco contacted CAL Manila
by telex requesting
verification of the revised schedule for Ocampo. CAL San Francisco, ho
wever, received a
negative reply from CAL Manila. Ocampo persisted in his efforts to book himself
on the CAL San
Francisco-Honolulu flight on 18 May 1979. By telephone, he contacted his privat
e secretary in
Manila to make the necessary inquiry and verification at CAL Manila.
His secretary later
telephoned back to inform him that CAL Manila would forthwith send a communicati
on to CAL
San Francisco to correct the situation. With that information, Ocampo proceeded
once more to
CAL San Francisco and left his telephone number and address where he
could be contacted
upon receipt of confirmation from CAL Manila. CAL San Francisco never
sent any notice to
Ocampo. On the morning of 18 May 1979, respondent went to CAL San F
rancisco s office to
check again on the status of his return flight; there he was apparently informed
that CAL Manila
had not responded. Respondent was accordingly constrained to take a Philippine A
irlines flight
which left San Francisco on 20 May 1979, the earliest available retur
n flight which Ocampo
could secure after 18 May 1979.
Upon arrival in Manila, respondent demanded an explanation from CAL Manila. He w
as
told candidly that a mistake had been committed by an employee of CAL Manila who
had sent a
negative reply to CAL San Francisco s request for confirmation without
first consulting
Ocampo s passenger reservation card. Another employee or representative
of CAL Manila
offered private respondent compensation for actual expenses incurred by
him due to his
inability to board the CAL 18 May 1979 flight from San Francisco. Re
spondent asked that the
2
5
offer be reduced to writing; however, nothing in writing emanated from
CAL Manila and
nothing further happened.
On appeal by respondent, the Court of Appeals (CA) reversed the trial court s de
cision.
The CA found petitioner CAL guilt of bad faith in not allowing respondent to boa
rd the 18 May
1979 CAL flight in San Francisco despite messages from CAL Manila con
firming the change in

schedule and the availability of seats for the different sectors of the flight f
rom San Francisco to
Manila. The CA awarded, in addition to the US$601 that the trial court had order
ed CAL to pay
to respondent, the sum of P200,000.00 as moral damages, another P200,0
00.00 as exemplary
damages and attorney s fees of P50,000.00.
ISSUE:
Whether the CA erred when it concluded that the petitioner CAL was guilty of bad
faith.
HELD:
Yes. We consider that respondent was able to show that petitioner CAL
had indeed
confirmed a seat for Ocampo on the 18 May 1979 flight from San Fran
cisco-Honolulu (and all
the way to Manila). We agree, therefore, with the CA that petitioner
CAL had breached its
contract of carriage with respondent by such failure or refusal to board him on
that flight.
We are not, however, persuaded that that breach of contractual obligat
ion had been
attended by bad faith or malice or gross negligence amounting to bad faith. To t
he contrary, it
appears to the Court that petitioner CAL had exercised diligent effort
s to effect the change of
schedule which it apparently had earlier stated to private respondent
(prior to his departure
from Manila) it would carry out. There was clearly a concerted effort among the
involved CAL
offices as shown by the flow of telexes from one to the others. If
at the outset, petitioner CAL
simply did not intend to comply with its promise to private responden
t that it would
accommodate his requested change of schedule, it would not have taken
the trouble of
composing and transmitting all those telexes between its several offices.
CAL San Francisco was obviously aware of the limitations on a GV-10 CAL ticket a
nd its
employee(s) who bad refused to accede summarily to Ocampo s request for confirma
tion of his
revised schedule, cannot be held guilty of bad faith; the procedure a
dopted of seeking
verification from CAL Manila was one taken in the usual course of business and w
as not in itself
unreasonable or arbitrary.
There responsible officer(s) of CAL Manila
admitted that it had
initially sent an erroneous message to CAL San Francisco concerning au
thorization for early
departure of private respondent from San Francisco. While the CAL Manila employe
e who had
sent a mistaken telex message was negligent, there was no evidence either of del
iberate malice
or of gross negligence.. Again, however, we do not believe that respo
ndent had convincingly
shown that the employees of petitioner CAL were motivated by personal malice or
bad faith, or
that there was patently negligence so gross as to amount to bad faith. Bad faith
under the law is
not presumed; it must be established by clear and convincing evidence. Private r
espondent has
not adduced that kind of evidence in the instant case. There was no
pretense that any of the
employee of any of the CAL offices involved knew respondent from Adam.
Clearly, the law distinguishes a contractual breach effected in good f
aith from one
attended by bad faith. Where in breaching the contract, the defendant
is not shown to have
acted fraudulently or in bad faith, liability for damages is limited
to the natural and probable
2
6
consequences of the breach of the obligation and which the parties ha
d foreseen or could
reasonably have foreseen; and in that case, such liability would not
include liability for moral
and exemplary damages.Under Article 2232 of the Civil Code, in a cont
ractual or quasicontractual relationship, exemplary damages may be awarded only if the d
efendant had acted
in "a wanton, fraudulent, reckless, oppressive or malevolent manner." W
e are unable to so
characterize the behavior here shown of the employees of CAL Manila a
nd of CAL San
Francisco. Thus, we believe and so hold that the damages recoverable by Ocampo a
re limited to
the peso value of the Philippine Airlines ticket it had purchased for
his return flight from San
Francisco; and reasonable expenses occasioned to private respondent by reason of
the delay in
his return San Francisco-Manila trip exercising the Court s discretion,
we believe that for
such expenses, US$1,500.00 would be a reasonable amount plus attorney
s fees in the
amount of P15,000.00, considering that Ocampo was ultimately compelled to litiga
te his claim
against petitioner.
WHEREFORE, the Decision of the Court of Appeals dated 25 July 1990 i
s hereby
REVERSED and SET ASIDE. A new judgment is hereby ENTERED requiring pe
titioner to pay
private Ocampo the Philippine Peso equivalent of US$2,101.00, at the r
ate of exchange
prevailing at the time of payment thereof, as reasonable compensatory
damages, plus
attorney s fees in the amount of P15,000.00 and costs. Petitioner s counterclaim
before the trial
court is hereby DISMISSED.
7
RODEL S. MANALANG JR.
ARTICLE 1174
NAKPIL V COURT OF APPEALS (144 SCRA 596)
FACTS:
This is a petition to set aside the Order, dated September 22, 1982,
of the respondent
judge. The prayer is premised on the allegation that the questioned O
rder was issued with
grave abuse of discretion.
In Civil Case No. 133528 of the defunct Court of First Instance of
Manila, DANIEL E.
ROXAS, doing business under the name and style of United Veterans Sec
urity Agency and
Foreign Boats Watchmen, sued the NATIONAL POWER CORPORATION (NPC) and
two of its
officers in Iligan City. The purpose of the suit was to compel the NPC to restor
e the contract of
Roxas for security services which the former had terminated.
After several incidents, the litigants entered into a
tober
14, 1981, and they asked the Court to approve
ision was rendered on
October 30, 1981, which states, among others: 3. The
the contract
of security services under the same terms and
ous contract effective
upon the signing thereof;
Compromise Agreement on Oc
it. Accordingly, a Dec
parties shall continue with
conditions as the previ
On May 14, 1982, the NPC executed another contract for security services with Jo
sette L.
Roxas whose relationship to Daniel is not shown. At any rate Daniel
has owned the contract.
The NPC refused to implement the new contract for which reason Daniel
filed a Motion for
Execution.
Acting on the Mion, the respondent judge issued a writ f execution for the en
forcement
of the aforesaid portion of its decision. .
ISSUE:
Had the contract been novated upon the issuance of the Order?
HELD:
There was no novation. The said contract was executed precisely to im
plement the
compromise agreement. It is elementary that novation is never presumed; it must
be explicitly
stated or there must be manifest incompatibility between the old and
the new obligations in
every aspect. Thus the Civil Code provides: Art. 1292. In order that
an obligation may be
extinguished by another which substitutes the same, it is imperative t
hat it be so declared in
unequivocal terms, or that the old and the new obligations be on every point inc
ompatible with
each other.
In the case at bar there is nothing in the May 14, 1982, agreement
which supports the
petitioner s contention. There is neither explicit novation nor incompat
ibility on every point

2
8
between the "old" and the "new" agreements. WHEREFORE, the petition is
denied for lack of
merit with costs against the petitioner.
2
9
RYLE SCOTT MANCIA
ARTICLE 1174
TANGUILIG VS. COURT OF APPEALS (JANUARY 2, 1997)
FACTS:
On April 1987, petitioner Jacinto M. Tanguilig doing business under the name a
nd style
J.M.T. Engineering and General Merchandising proposed to respondent Vice
nte Herce Jr. to
construct a windmill system for him. The parties agreed for a conside
ration of P60,0000.00
with a one-year guaranty from the date of completion and acceptance b
y Herce Jr. Herce Jr
made a down payment of P30,000.00 and an installment of P15,000.00, l
eaving a balance of
P15,000.00.
On March 14 1988, due to the refusal and failure of payment by the respondent
to pay
for the balance, the petitioner filed a complaint. The respondent answ
ered that he paid San
Pedro General Merchandising Inc. for the construction of the deep well
which is connected to
the wind mill. Herce Jr. also stated that balance of P15,000.00 should be offset
by the defects in
windmill system after being hit by strong wind.
Petitioner contended that the deep well was not part of the contrac
t. He also said that
he delivered the windmill in a good working condition. He stated that the collap
se was because
of a typoon, a force majure, which relieved him of any liability.
Trial Court held that the deep well was not part of the contract and there was
no defect
in the windmill. However, the CA reversed the decision of the trial court. Deep
well part of the
contract and the petitioner is obligated to reconstruct the windmill.
ISSUE:
Whether or not the petitioner has the obligation to reconstruct the windmill.
HELD: Yes.
The court held that in order for a party to claim exemption from
liability by reason of
fortuitous event under Art. 1174 of the Civil Code the event should b
e the sole and proximate
cause of the loss or destruction of the object of the contract. In Nakpil vs. Co
urt of Appeals, four
(4) requisites must concur: (a) the cause of the breach of the obligation must b
e independent of
the will of the debtor; (b) the event must be either unforeseeable or unavoidabl
e; (c) the event
must be such as to render it impossible for the debtor to fulfill h
is obligation in a normal
manner; and, (d) the debtor must be free from any participation in or aggravatio
n of the injury
to the creditor.
The petitioner failed to prove that the collapse of the windmill wa
s due solely to a
fortuitous event. It also does not show in the evidences that the collapse of wi
ndmill happened
during a typhoon. It only says strong wind. The court said that places
with a
strong wind
should be present in places where windmills are constructed, otherwise the windm
ills will not
turn.
3
0
FRESHIELA MONERA-MARAMOT
ARTICLE 1174
SIA VS. CA (222 SCRA 24)
FACTS:
Petitioner Luzan Sia leased a safety deposit box from private respondent Securit
y Bank
and Trust Company (SBTC) to store his stamp collection. The safety deposit box lea
sed to him
was located at the lowest level of boxes so that during the flood that occurred
in the years 1985
and 1986, flood water entered into SBTCs premises and seeped into the
safety deposit boxes
particularly that of Sias.
The floodwater caused the destruction of S
ias stamp collection,
leaving it wet, moldy and badly damaged.
Sia then claimed compensati
on for his damaged
stamp collection but SBTC contended that the destruction of the stamp collection
was due to a
calamity beyond obligation of the bank to notify Sia of the flood th
at inundated SBTCs
premises. The regional trial court ruled in favor of Sia, finding that SBTC had
failed to exercise
the required diligence expected of a bank in maintaining the safety d
eposit box.
SBTC then
appealed the trial courts decision with public respondent Court of Appe
als (CA).
The CA
reversed the trial courts decision and dismissed Sias complaint. The CA found tha
t there is no
concrete evidence to show that SBTC failed to exercise the required d
iligence in maintaining
the safety deposit box.
The CA also affirmed that SBTC cannot be h
eld responsible for the
destruction or loss of the stamp collection because the flooding was a fortuitou
s event and that
there was no showing of the banks participation in the aggravation of
the loss or injury.
It
stated the provisions of Article 1174 of the Civil Code which provide
s: Except in cases
expressly specified by the law, or when it is otherwise declared by
stipulation, or when the
nature of the obligation requires the assumption of risk, no person shall be hel
d responsible for
those events which could not be foreseen, or which, though foreseen, were inevit
able. The CA
also stated that the essential characteristics (requisites) of fortuitou
s event, particularly that

there was no participation by the bank in the aggravation of the los
s or injury was present.
Hence, this petition by Sia
ISSUE:
Whether or not SBTC may be held liable for the destruction or loss
of the stamp
collection.
HELD:
Yes, SBTC may be held liable.
The Supreme Court (SC) granted the petition, setting aside the CAs decis
ion and
reinstating the trial courts decision.
The SC held that SBTC was guilty of negligence and this negligence a
ggravated the
injury or damage to the stamp collection.
The SC stated that SBTC w
as aware of the floods of
1985 and 1986 and of the floodwaters that seeped into the safety deposit box. T
hus, it should
have lost no time in notifying the petitioner in order that the box
could have been opened to
retrieve the stamps and save them from further deterioration and loss. In this
respect, it failed
to exercise the reasonable care and prudence expected of a good fathe
r of a family, thereby
3
1
becoming a party to the aggravation of the injury or loss. Accordingl
y, the aforementioned
fourth characteristic of a fortuitous event is absent. Article 1170 of the Civi
l Code reads: Those
who in the performance of their obligation are guilty of fraud, negli
gence, or delay, and those
who in any manner contravene the tenor thereof, are liable for damage
s.
The destruction or
loss of the stamp collection caused the petitioner pecuniary loss; hen
ce he must be
compensated therefore.
3
2
RUFINO GERARD G. MORENO
ARTICLE 1174
VICTORIAS PLANTERS ASS., INC., ET AL. VS. VICTORIAS MILLING CO., INC. (97 PHIL 3
18)
FACTS:
The petitioners Victorias Planters Association, Inc. and North Negros P
lanters
Association, Inc. and therespondentVictorias Milling Co., Inc entered in
to a milling contract
whereby they stipulated a 30-year period within which the sugar cane
produced by the
petitioner would be milled by the respondent central. The parties also
stipulated that in the
event of force majuere, the contract shall be deemed suspended during
this period. The
petitioner failed to deliver the sugar cane during the four years of the Japanes
e occupation and
the two years after liberation when the mill was being rebuilt or a total of six
years.
ISSUE:
Can the petitioners be compelled to deliver sugar cane for six more
years after the
expiration of the 30-year period to make up for what they failed to deliver to t
he respondent?
HELD:
No. Fortuitous event relieves the obligor from fulfilling the contractual obliga
tion under
Article 1174 of the Civil Code. The stipulation in the contract that in the even
t of force majeure
the contract shall be deemed suspended during the said period does no
t mean that the
happening of any of those events stops the running of the period agreed upon. It
only relieves
the parties from the fulfilment of their respective obligations during
that time the petitioner
from delivering the sugar cane and the respondent central from milling
. In order that the
respondent central may be entitled to demand from the petitioner the fulfilment
of their part in
the contracts, the latter must have been able to perform it but failed or refuse
d to do so and not
when they were prevented by force majeure such as war. To require the petitioner
s to deliver
the sugar cane which they failed to deliver during the six years is
to demand from them the
fulfilment of an obligation, which was impossible of performance during
the time it became
due. Nemoteneturedimpossibilia. The respondent central not being entitled
to demand from
the petitioners the performance of the latters part of the contracts under those
circumstances
cannot later on demand its fulfillment. The performance of what the law has writ
ten off cannot
be demanded and required. The prayer that the petitioners be compelled
to deliver sugar
cannot for six years more to make up for what they failed to delive
r, the fulfillment of which
was impossible, of granted, would in effect be an extension of the t
erms of the contracts
entered into by and between the parties.
3
ABEGAIL B. RAMOS
ARTICLE 1174
ACE-AGRO DEVELOPMENT CORP. VS. COURT OF APPEALS (JANUARY 21, 1997)
FACTS:
Ace-Agro had been cleaning soft drink bottles and repairing wooden sh
ells for Cosmos
within its company premises in San Fernando, Pampanga.
On April 25, 1990, fire broke out in the Cosmos plant. As a result
, Ace-Agros work was
stopped.
On Ma 15, 1990, Ace-Agro requested Cosmos to resume its services but they were
advised
that on account of the fire destroying nearly all the bottles and sh
ells, Cosmos was
terminating their contract.
Ace-Agro requested Cosmos to reconsider its decision but upon receivin
g no reply, they
informed its employees of the termination of their employment, which led the emp
loyees to
file a complaint for illegal dismissal before the Labor Arbiter agains
t both Ace-Agro and
Cosmos.
Ace-Agro sent another letter for reconsideration to Cosmos, to which they repli
ed that they
could resume work but outside the company premises.
Ace-Agro refused the offer, claiming to wok outside would make them
incur additional
costs for transportation. Cosmos then advised Ace-Agro that they could resume wo
rk inside
the company premises which Ace-Agro rejected citing the pending labor case.
Ace-Agro brought a case against Cosmos for breach of contract and da
mages in the RTC,
complaining that termination was illegal and arbitrary and stood to lose profits
and be held
liable to its employees for backwages, damages and separation pay.
The labor court found Ace-Agro liable for the claims of its employee
s and they were
ordered to reinstate the employees and pay them backwages.
The RTC, however, found Cosmos guilty of breach of contract and ordered it to p
ay damages
though Ace-Agros claim for reimbursement of what it had paid in the l
abor case was
denied.
Cosmos appealed to the CA which reversed the trial courts decision, f
inding that the
petitioner had been the one to refuse to resume work after failing to secure ext
ension of its
contract.
ISSUE:
WON there was a valid cause for the termination for Cosmos unilateral
ly terminating
the contract on account of a force majeure
HELD:
The reason given by Cosmos for unilaterally terminating its contract was that t
he prestation
or the object of their agreement had been lost and destroyed in the fire.
What they wanted was for this situation to fall within obligations e
xtinguished by the
happening of unforeseen events, under whose influence the obligations w
ould never have
been contracted, because in such cases, the very basis upon which the
existence of the
3
4
obligation is founded would be wanting. However, there were still other bottles
and shells;
therefore, the suspension of the work is at best temporary.
Cosmos reconsidered its decision to terminate the decision by trying

to accommodate the
petitioner albeit outside the company premises. However, Ace-Agro unjust
ifiably refused
because it wanted an extension of the contract to make up for the period of inac
tivity. They
were without legal ground to refuse resumption of work on the basis of it being
outside the
company premises and could not legally insist to work inside the property it did
not own or
lease.
The second time they refused resumption of work, in spite of it bei
ng inside company
premises, was not because of the pending labor but because Ace-Agro r
eally wanted an
extension of the period or duration of the contract to cover the period of inact
ivity. But the
suspension of the work due to the fire does not merit an automatic extension.
The stipulation that in the event of fortuitous event or force majeu
re the contract shall be
deemed suspended during the said period does not mean that it stops
the running of the
period the contract has been agreed upon to run.
The suspension of work under the contract was brought by force majeu
re. Therefore, the
period during which work was suspended did not justify an extension o
f the term of the
contract. For the fact is that the contract was subject to a resolutory period
which relieved
the parties of their respective obligations but did not stop the running of the
period of their
contract.
3
5
JERVIX JAE M. RAYNES
ARTICLE 1174
REPUBLIC VS. LUZON STEVEDORING CORPORATION (21 SCRA 279)
FACTS:
Aug. 17, 1960, barge L-1892 being towed by tugboats "Bangus" and "Barbero" all o
wned
by Luzon Stevedoring Corporation rammed one of the wooden piles of th
e Nagtahan Bailey
Bridge. The river was swollen and its current was swift due to the
heavy downpour from
previous days (Aug. 15 & 16). The Republic sued Luzon Stevedoring for
actual and
consequential damages caused by the actions of its employees. The defe
ndant, Luzon
Stevedoring Corporation, claimed that (1) it had exercised due diligenc
e in the selection and
supervision of its employees, (2) the damages to the bridge were caused by forc
e majeure, (3)
plaintiff has no capacity to sue, and (3) the Nagtahan bailey bridge
is an obstruction to
navigation.
ISSUES:
Whether or not the collision of appellants barge with supports or piers of the
Nagtahan bridge in law caused by fortuitous event or force majeure.
HELD:
There is negligence on the part of the employees of Luzon Stevedori
ng Corporation.
First, the heavy downpour in the area has already set an assumption of risk (Ar
t. 1174) on the
operations of the company prior to the incident. Second, the bridge i
tself is stationary and
cannot be regarded as an obstruction to marine navation. Thus, it is not enough
that the event
should not have been foreseen or anticipated. It must be impossible to foresee o
r to avoid. The
mere difficulty to foresee the event is not impossibility to foresee
and avoid the same. It is
assumed that Luzon Stevedoring knew the risks posed by the swollen st
ream and its swift
current but still chose to operate despite the obvious danger. Therefo
re as held by the lower
court and the Supreme court, it must be held liable for damages.
6
CIEDELLE EIREEN RIGOR
ARTICLE 1175
PHILIPPINE NATIONAL BANK, VS. COURT OF APPEALS (263 SCRA 766)
FACTS:
As payments for the purchase of medicines, the Province of Isabela is
sued several
checks drawn against its account with petitioner Philippine National Bank (PNB)
in favor of the
seller, Lyndon Pharmaceuticals Laboratories, a business operated by priv
ate respondent
Ibarrola. The checks were delivered to the seller s agents who turned
them over toIbarrola,
except 23 checks amounting to P98,691.90. For her failure to receive the full p
ayment for the
medicines, Ibarrola filed "action for a sum of money and damages," agai
nst the Province of
Isabela, its Treasurer, the two agents and PNB.
The trial court orde
red to "jointly and
solidarily" pay Ibarrola several amounts, among which is P98, 691. 90 with int
erest thereon at the
legal rate from the date of the filing of the complaint until the e
ntireamount is fully
paid. The Court did not specify whether the legal rate of interest referred to
in the judgment is
6% or12%.
At the execution stage, the sheriff computed the interest
mentioned in the
judgment at the rate of 12% which PNB opposed insisting that the rat
e should only be 6%.
Ibarrola sought clarification from the same RTC which promulgated the d
ecision. On August
4,1994 said court issued an order clarifying that the rate is 12%. PNB s direct
appeal from that

order was referred to the CA which affirmed the RTC order.
ISSUES:
(1) whether in an action for damages, the legal rate of interest is
6% as provided by Article
2209 of theNew Civil Code or 12% as provided by CB Circular 416 series of 1974,
(2) whether such rate shall be computed from the filing of the complaint until f
ully paid
HELD:
The proper rate of interest referred to in the judgment under executi
on is only 6%.
When an obligation arises "from a contract of purchase and sale and not from a c
ontract of loan or mutuum,"
the applicable rate is "6% per annum as provided in Article 2209 of th
e NCC and not the rate of
12% per annum as provided in (CB) Cir.No. 416. The rate of 12% inter
est referred to in Cir.
416 applies only to:[L]oan or forbearance of money, or to cases where
money is transferred
from one person to another and the obligation to return the same or a portion th
ereof is adjudged.
This interest according to Eastern Shipping shall be computed from the time of t
he filing
of the complaint considering that the amount adjudged (P98,691.90) can
be established with
reasonable certainty. However, once the judgment becomes final and exec
utory, the interim
period from the finality of judgment awarding a monetary claim and un
til payment thereof,
is deemed to be equivalent to a forbearance of credit." The rate of 12% p.a. sh
ould be imposed,
and to be computed from the time the judgment became final and executory until f
ully satisfied.
7
MARCO CARLO S. SANA
ARTICLE 1175
EASTERN SHIPPING LINES, INC. V. COURT OF APPEALS (234 SCRA 78)
FACTS:
An action against appellant shipping company, arrastre operator and broker-for
warder
custody, file
for damages sustained by a shipment while in appallants
d by insurer-subrogee
who paid the consignee the value of such losse/damages.
On December 4, 1981, two fiber drums of riboflavin were shipped fro
m yokohama,
Japan for delivery vessel SS Eastern Comet owned by Eastern Shipping
lines under a Bill of
Lading. Upon arrival of the shipment in Manila on December 12, 1981,
it was discharge unto
the custody od defendant Metro Port Service, Inc. the latter excepted to one dru
m, said to be in
bad order, which damage was unknown to insurer. On January 7, 1982,
Allied Brokerage
Corporation received the shipment from defendant Metro Port service, in
c. one drum opened
and without seal. Allied Brokerage Corporation made deliveries of the
shipment to the
consignee s warehouse, with the latter excepting one drum which contained spilla
ges, while the
rest of the contents was adulterated/fake.
Insurer-subrogee contended that due to the losses/damages sustained by
said drum,
they suffered losses totaling P19,032.95, due to the fault and negligence of app
ellant. The Court
of Appeals ordered the aforementioned amount with legal interest of 12% per ann
um be paid
from the date of the filing of the complaint.
ISSUE:
Whether the grant of interest on the claim should only be 6% per ann
um commencing
from the date of the decision and not 12% from the date of the filing of the com
plaint.
HELD:
With regard particularly to an award of interest in the concept of a
ctual and
compensatory damages, the rate of interest, as well as the accrual th
ereof, is imposed as
follows: when the obligation is breached, and it consists in then pay
ment of a sum of money,
i.e., a loan or forbearance of money, the interest due should be tha
t which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal int
erest from the time
it is judicially demanded. In the absence of stipulation, the rate of
interest shall be 12% per
annum to be computed from default, i.e., from judicial or extrajudicia
l demand under and
subject to the provisions of Article 1169 of the Civil Code. Where t
he demand is established
with reasonable certainty, the interest shall begin to run from the t
ime the claim is made
judiccialy or extrajudicially (Art. 1169, Civil Code) but when such ce
rtaintity cannot be so
reasonably established at the time the demand is made, the interest s
hall begin to run only
from the date the judgement of the court is made.
3
8
NORMAN KENNETH V. SANTOS
ARTICLE 1176
MANILA TRADING AND SUPPLY CO. V. MEDINA (2 SCRA 549)
FACTS:
Mariano
ng and
Co. with
The note
t will
Medina had an account prior to May 7, 1956 with Manila Tradi

Supply
an amount of P60,000 for which Medina executed a promissory note.
provided that upon failure to pay the installments, the remaining amoun
immediately become due and payable at the option of the holder of th

e note with 33.33%
amount due for attorneys fees and expenses of collection.
On January 8, 1957, Manila Trading & Co. filed a complaint against Medina for fa
ilure to
pay installments from September 1956 to January 7, 1957. Medina filed
an answer admitting
allegations but said the 33.33% for attorneys fees were exorbitant and
unconscionable. He
pleaded that on January 24, 1957, an additional P4,000 was paid so that he will
not be sued and
allowed to pay the balance. Upon petition of plaintiff, a writ of at
tachment was issued and
levied upon eleven of defendant s buses.
His counterclaim was damages for the loss of his earnings. Plaintiff d
enied the defense
and counterclaim. Plaintiff provided evidence of 21 payments made by defendant f
rom June 6,
1956 to Jan. 21, 1957. The defendant testified that he has 10 other payments wit
h receipts but
the dates and serial numbers are unclear for it was eaten by anay. De
fendant claims that his
payment on Jan. 1957 gives rise to the presumption that prior installments have
been paid.
ISSUE:
Are the presented receipts genuine to raise the presumption that prior
installments
were paid?
HELD:
No. Appellant avers that the genuine receipts dated January, 1957 rais
e the
presumption that prior installments were paid. This might be true if such receip
ts recited that
they were issued for the installments corresponding to the month of J
anuary, 1957; but
nowhere does that fact appear. And even if such recital had been mad
e, the resulting
presumption would only be prima facie, and the evidence before us is clear that
the payments
made do not correspond to the installments falling due on the dates of the genui
ne receipts. As
pointed out by the trial court, it is highly suspicious that these r
eceipts should be mutilated
precisely at the places where the serial numbers and the year of issu
e must appear, while the
receipts for intervening payments recognized by the plaintiff remained
intact. In addition, the
numbers that Medina attributed to them are not in sequence. It is di
fficult to believe that a
trading company should issue receipts numbered at random, since it wou
ld make auditing
control impossible.
3
9
AIDA MAY P. SILVA
ARTICLE 1176
BASTIDA V. DY BUNCIO (93 PHIL 195)
FACTS:
Bastida and Dy Buncio agreed on a contract of lease of the latters factory, for t
wo years
with the option to buy, to be exercised within the same period for
the lease.
Bastida later on
assigned this right (option to buy) to Ysmael, his business partner.
Dy Buncio rejected the assignment stating that he did not consent to
this.
But Bastida
communicated his decision to exercise the option himself.
Dy Buncio
in response said that
before discussing his offer to exercise the option, he should first pay the rent
al for that month.
Although Bastida found the statement excessive by P100, he tendered to Dy Buncio
the
sum demanded in full settlement of the account, if only to expedite the desired
sale. Dy Buncio
issued a receipt, which Bastida rejected because of a statement includ
ed therein to the effect
that the receipt was to be without prejudice to the rescission of the lease agre
ement. As a result
the payment was not carried out.
Dy Buncio subsequently informed Bastida of the rescission of the lease
due to the
alleged failure to pay the rental for that pertinent month, asking hi
m to return the leased
property.
HELD:
The option to buy the factory was given to Bastida, and when the la
tter assigned his
right to Ysmael and the latter gave notice of his desire to exercise
the option, Dy Buncio
changed his mind and refused to perform the sale alleging as his reason the fact
that the option
was given to Bastida and not to any other person.
The contract does not contain any stipulation forbidding Bastida from
assigning the
option or requiring Dy Buncio s consent for the assignment. Nor was t
he option given to
Bastida in consideration of his personal qualifications. On the contrar
y, there is enough
evidence to show that the intention was just opposite. It appears that, at the t
ime the authority
was given, the manifest purpose of Dy Buncio was to have Bastida offer the prope
rty for sale to
Ysmael. The intention was not to sell it exclusively to Bastida, as now claimed
by Dy Buncio, so
much so that he previously gave Bastida an authority to sell the pro
perty for P300,000 to any
interested person. There is therefore no impediment on the part of Bastida to tr
ansfer his right
under the option, and this he did either under the contract or under
the law. Thus, "All rights
acquired by virtue of an obligation are transmissible in accordance wi

th law if the contrary is
not stipulated" (Article 1112, Pld Civil Code.)
0
IRIS ANTHONNIETTE SUNGA
ARTICLE 1179
PAY VS. VDA. DE PALANCA (57 SCRA 618)
FACTS:
George Pay is a creditor of the Late Justo Palanca who died in Man
ila on July 3, 1963. The
claim of the petitioner is based on a promissory note dated January 30, 1952, wh
ereby the
late Justo Palanca and Rosa Gonzales Vda. de Carlos Palanca promised
to pay George Pay
the amount of P26,900.00, with interest thereon at the rate of 12% per annum.
Pay is now basking that Segundina Chua vda. de Palanca, surviving spouse of the
late Justo
Palanca, be appointed as administratrix of a certain piece of property which is
a residential
dwelling in the name of Justo Palanca, assessed at P41,800.00. The id
ea is that once said
property is brought under administration, George Pay, as creditor, can file his
claim against
the administratrix."
The petition could not prosper as there was a refusal on the part
of Vda. dePalanca to be
appointed as administratrix; that the property sought to be administere
d no longer
belonged to the debtor, the late Justo Palanca; and that the rights of petitione
r-creditor had
already prescribed.
ISSUE:
W/N the action has prescribed though there was no date stipulated in the contrac
t.
HELD:
The promissory note, dated January 30, 1962, is worded thus: " For
value received from
time to time since 1947, we [jointly and severally promise to] pay to Mr. [Georg
e Pay] at his
office at the China Banking Corporation the sum of [Twenty Six Thousa
nd Nine Hundred
Pesos] (P26,900.00), with interest thereon at the rate of 12% per ann
um upon receipt by
either of the undersigned of cash payment from the Estate of the late Don Carlos
Palanca or
upon demand . . . . As stated, this promissory note is signed by Vd
a. de Carlos Palanca and
Justo Palanca."
After which, came the ruling that the wording of the promissory note being "upo
n demand,"
the obligation was immediately due. Since it was dated January 30, 19
52, it was clear that
more "than ten (10) years has already transpired from that time until
to date. The action,
therefore, of the creditor has definitely prescribed."
It is undeniable is that on August 26, 1967, more than fifteen year
s after the execution of
the promissory note on January 30, 1952, this petition was filed. Art
icle 1179 of the Civil
Code provides: "Every obligation whose performance does not depend upon
a future or
uncertain event, or upon a past event unknown to the parties, is demandable at o
nce."
OBLIGATIONS AND CONTRACTS CASE
1
The obligation being due
ling of the suit after
fifteen years was much too
ode, which is based on
Section 43 of Act No. 190, the
t of ten years.
DIGESTS (THIRD TERM, SCHOOL YEAR 2012-2013)
and demandable, it would appear that the fi

late. For again, according to the Civil C
prescriptive period for a written contract is tha
Case dismissed.
2
KAREN G. SUPAPO
ARTICLE 1179
CORONEL V. COURT OF APPEALS (OCTOBER 7, 1996)
FACTS:
The Coronels agreed to sell their inherited house and lot to Ramona
Alcaraz for
P1,240,000.00. The parties agreed that the Coronels will transfer the
title of their inherited
property to their names upon receipt of P50,000.00 down payment, and that upon t
he transfer
in their names of the subject property, the Coronels will execute the
deed of absolute sale in
favor of Ramona and the latter will pay the former the whole balance of P1,190,0
00.00. On the
same date, Concepcion, mother of Ramona paid the down payment. Then, the parties
executed
a document entitled Receipt of Down Payment as evidence for the receipt
of P50,000.00 as
part of the purchase price including the stipulations agreed upon by the parties
.
On February 6, 1985, the property originally registered in the name o
f the Coronels
father was transferred in their names. However, the Coronels sold the
property to Catalina
Mabanag for P1,580,000.00 after the latter has paid P300,000.00.
For
this reason, Coronels
cancelled and rescinded the contract with Ramona by depositing the dow
n payment paid by
Concepcion in the bank in trust for Ramona Patricia Alcaraz.
Catalina caused the annotation of a notice of adverse claim covering the same pr
operty with the
Registry of Deeds of Quezon City. The Coronels executed a Deed of Ab
solute Sale over the
subject property in favor of Catalina and a new title over the subject property
was issued in her
name.
Ramona filed a complaint against Coronels for specific performance. The
Trial Court
granted the petition and ordered the Coronels to execute a deed of absolute sale
. Ramona was
ordered to pay the whole balance of the purchase price. The TCT issu
ed to Catalina was
cancelled and declared to be without force and effect. The CA affirmed the decis
ion of the trial
court.
The Coronels argued that what the document signified was a mere executory contra
ct to
sell, subject to certain suspensive conditions, and because of the absence of Ra
mona P. Alcaraz,
who left for the United States of America, said contract could not possibly ripe
n into a contract
of absolute sale.
ISSUE:
Whether or not the argument of Coronels was tenable
HELD:
No. The Court held that the contract entered into by the parties was
not a contract to
sell subject to a suspensive condition but a conditional contract of
sale; and that such
suspensive condition was deemed fulfilled.
The Court explained that in a conditional contract of sale, upon the
fulfillment of the
suspensive condition, the sale becomes absolute and this will definitel
y affect the sellers title
4
3
thereto. In fact, if there had been previous delivery of the subject
property, the sellers
ownership or title to the property is automatically transferred to the buyer suc
h that, the seller
will no longer have any title to transfer to any third person.
What is clearly established by the plain language of the subject document is tha
t when the said
Receipt of Down Payment was prepared and signed by the Coronels, the parties had a
greed to
a conditional contract of sale, consummation of which is subject only to the suc
cessful transfer
of the certificate of title from the name of petitioners father, Const
ancio P. Coronel, to their
names.
The Court significantly notes that this suspensive condition was, in f

act, fulfilled on
February 6, 1985. Thus, on said date, the conditional contract of sale between
petitioners and
private respondent Ramona P. Alcaraz became obligatory, the only act r
equired for the
consummation thereof being the delivery of the property by means of the executio
n of the deed
of absolute sale in a public instrument, which petitioners unequivocally committ
ed themselves
to do as evidenced by the Receipt of Down Payment.
4
JUSTO PAULO TORRES
ARTICLE 1179
RILLO VS CA (274 SCRA 461)
FACTS:
EmilianoRillo procured a property 61.5 sq. m. from CORB Realty amoun
ting to
P150000. The agreement made was to have a downpayment of half which
is P75000 and the
other half payable in 12 monthly installments of P7092. Said outstandi
ng balance was to be
subject to 24% interest per annum and 1.5% liquidated penalty thereof. Mr. Rillo
was unable to
furnish sufficient payment for succeeding months but was able to provi
de P60000 at once
eventually. However, this was already subject to scrutiny since there
was already a claim for
rescission of contract by CORB. This was not applied by the court which stated t
hat agreement
is a contract to sell and cannot be entertained as such as provided by law. Also
, the agreement
being bereft and arriving at a compromise agreement instead, claim by p
etitioner cannot be
held tenable as well with regard to novation. For the first issue it was held, In
a contract to sell
real property on installments, the full payment of the purchase price
is a positive suspensive
condition, the failure of which prevented the obligation of the vendor
to convey title from
acquiring any obligatory force; There can be no rescission of an obli
gation that is still nonexistent, the suspensive condition not having happenned. Second,Novation i
s never
presumed, and in the absence of an express agreemewent, novation takes place onl
y when the
old and new obligations are incompatible on every point; A compromise
agreement clarifying
the total sum owed by a buyer, with a view that he would find it
easier to comply with his
obligations under the Contract To Sell does NOT novate the CTS. Finall
y, Rillos petition for
certiorari seeks relief for at least 50% of payments received if not the two oth
er issues tackled.
ISSUE:
W/N CORB Realty is entitled to rescission of contract?
If not, W/N Rillos current obligation to Corb amounts to P62000 only
inclusive of accrued
interests? EmilianoRillo is entitled to the full amount of P158,184 from
payments rendered to
the CORB Realty?
HELD:
The decision appealed from is hereby AFFIRMED with MODIFICATION that
the refund
of 50% amounting to P158184 or P79092 in favor of petitioner Emiliano
Rillo is deleted. No
costs.
This modification has basis provided by law since Mr. Rillo was not able to co
mply with
at least two years of actual payment in installments which is the bare minimum t
o avail of said
refund. In the event of non-compliance the foregoing applies:
Sec.4 xxx the seller shall give the buyer a grace period of not less than sixty d
ays from the date
the installment became due. If the buyer fails to pay the installment
s due at the expiration of
the grace period, the seller may cancel the contract after thirty days from rece
ipt by the buyer
of the notice of cancellation or the demand for rescission of the contract by a
notarial act.
4
5
MICHELLE LAE A. VELASCO
ARTICLE 1181
PARKS V TARLAC
Facts
On October 18, 1910, Concepcion Cirer and James Hill, the owners of
a parcel of land,
donated the same perpetually to the municipality of Tarlac, Province o
f Tarlac, under certain
conditions specified in the public document in which they made the do
nation. The donation
was accepted by Mr. Santiago de Jesus, municipal president, on behalf of the mun
icipal council.
The land was later registered in the name of the donee, the municipality of Tarl
ac.
On January 15, 1921, Concepcion Cirer and James Hill sold this parcel
to the plaintiff
George L. Parks. On August 24, 1923, the municipality of Tarlac trans
ferred the parcel to the
Province of Tarlac.
The plaintiff alleges that the conditions of the donation had not been complied
with and
invoking the sale of the land brought this action against the Province of Tarlac
, the municipality
of Tarlac, Concepcion Cirer and James Hill. He prays that he be decl
ared the absolute owner
entitled to the possession of the land. He contends that the condition precedent
imposed in the
donation was not complied with, and thus the donation never became ef
fective. The lower
court dismissed the complaint.
ISSUE:
WON the plaintiff is the rightful owner of the parcel of land in vi
rtue of the condition
precedent which was not complied with by the municipality.
Held
No
The condition imposed was that one of the parcels donated was to be
used absolutely
and exclusively for the erection of a central school and the other for a public
park, the work to
commence in both cases within the period of six months from the date of the rati
fication by the
parties of the document evidencing the donation. It is true that this
condition has not been
complied with. The allegation, however, that it is a condition precede
nt is erroneous. The
characteristic of a condition precedent is that the acquisition of the
right is not effected while
said condition is not complied with or is not deemed complied with. For this sit
uation, nothing
is acquired and there is only an expectancy of right. When a conditi
on is imposed, the
compliance of which cannot be effected except when the right is deeme
d acquired, such
condition cannot be a condition precedent.
In the present case the condition that a public school be erected and a public p
ark made
of the donated land, work on the same to commence within six months
from the date of the
ratification of the donation by the parties, could not be complied with except a
fter giving effect
4
6
to the donation. The donee could not do any work on the donated land if the dona
tion had not
really been effected, because it would be an invasion of another s title, for th
e land would have
continued to belong to the donor so long as the condition imposed was not compli
ed with.
Doctrine
The characteristic of condition precedent is that acquisition of the r
ight is not effected while
said condition is not complied with or is not deemed complied with.
7
ELEAZAR M. VICENTE
ARTICLE 1181
INTEGRATED CONSTRUCTION SERVICES, INC., ET AL. VS. RELOVA (DECEMBER 29, 1986)
FACTS:
Petitioners sued the respondent MWSS formerly NAWASA, breach of contrac
t.
Meanwhile, the parties submitted the case to arbitration. The Arbitrati
on Board, released the
decision-award which ordered MWSS to pay petitioners P15,518,383.61 - l
ess P2,329,433.41,
to be set aside as a trust fund to pay creditors of the joint vent
ure in connection with the
project - or a net award of P13,188,950.20 with interest. Subsequently
, however, petitioners
agreed to give MWSS some discounts in consideration of an early payment of the a
ward. Upon
MWSS request, the petitioners signed their "Conforme" to the said let
ter-agreement, and
extended the period to pay the judgment less the discounts. MWSS, how
ever, paid only on
December 22, 1972, the amount stated in the decision but less the re
ductions provided for in
the letter-agreement. Three years thereafter, after the last balance of
the trust fund had been
released and used to satisfy creditors
claims, the petitioners filed
a motion for execution
against MWSS for the balance due under the decision-award. Respondent
MWSS opposed
execution setting forth the defenses of payment and estoppels.
ISSUE:
Whether or not petitioners are now in estoppel to question the subsequent agreem
ent,
suffice it to state that petitioners never acknowledged full payment.
HELD:
No. Petitioners refused MWSS request for a conforme or quitclaim. Acc
ordingly, the
award is still subject to execution by mere motion, which may be availed of as a
matter of right
any time within (5) years from entry of final judgment in accordance with Sectio
n 5, Rule 39 of
the Rules of Court
8
DIANA JEAN T. VILLAFUERTE
ARTICLE 1182
LAO LIM V. CA (191 SCRA 150)
FACTS:
The private respondent, Benito Dy, entered into a contract of lease
with petitioner,
Francisco Lim for a period of 3 years that is from 1976 to 1979.
After the stipulated term, the respondent refused to vacate the premises.
The petitioner filed an ejectment suit against the former in the Cit
y Court of Manila. The
case was terminated by a judicially approved compromise agreement of t
he parties
providing in part:
3. That the term of the lease shall be renewed every three years retroacting
from October 1979 to October 1982; after which the abovenamed rental
shall be
raised automatically by 20% every three years for as long as defendant needed th
e
premises and can meet and pay the said increases, the defendant to g
ive notice of
his intent to renew sixty (60) days before the expiration of the term;
By reason of the said compromise agreement the lease continued from 1979 to 198
2, then
from 1982 to1985.
On April 17, 1985, petitioner advised private respondent that he would no longe
r renew the
contract effective October, 1985. However, on August 5, 1985, private respondent
informed
petitioner in writing of his intention to renew the contract of lease
for another term,
commencing November, 1985 to October, 1988.
On January 15, 1986, the petitioner again filed another ejectment sui
t at the Metropolitan
Trial Court of Manila. On September 24, 1987 said court dismissed the complaint
on on the
grounds that (1) the lease contract has not expired, being a continuo
us one the period
whereof depended upon the lessee s need for the premises and his ability to pay
the rents;
and (2) the compromise agreement entered into in the aforesaid case c
onstitutes res
judicata to the case before it.
Petitioner appealed to the Regional Trial Court (RTC)of Manila which,
in its decision of
January 28, 1988, affirmed the decision of the lower court.
Petitioner then appealed to Respondent Court of Appeals affirmed in f
ull said decision of
the RTC June 30, 1988.
Petitioner s motion for reconsideration having been denied by responden
t Court of
Appeals, hence this present petition.
ISSUE:
4
9
Whether or not the stipulation in the compromise agreement which allows the less
ee to
stay on the premises as long as he needs it and can pay rents is valid.
HELD: No.
Contrary to the ruling of respondent court, the disputed stipulation
"for as long as the
defendant needed the premises and can meet and pay said increases" is
a purely
potestative condition because it leaves the effectivity and enjoyment o
f leasehold rights to
the sole and exclusive will of the lessee. It is likewise a suspensi
ve condition because the
renewal of the lease, which gives rise to a new lease, depends upon said conditi
on. It should
be noted that a renewal constitutes a new contract of lease although
with the same terms
and conditions as those in the expired lease. It should also not be
overlooked that said
condition is not resolutory in nature because it is not a condition that termina
tes the lease
contract. The lease contract is for a definite period of three (3) years upon th
e expiration of
which the lease automatically terminates.
The continuance, effectivity, and fulfillment of a contract of lease cannot be
made to depend
exclusively upon the free and uncontrolled choice of the lessee betwee
n continuing
payment of the rentals or not, completely depriving the owner of any
say in the matter.
Mutuality does not obtain in such a contract of lease and no equalit
y exists between the
lessor and the lessee.
The interpretation made by respondent court cannot, therefore, be upheld. Parag
raph 3 of
the compromise agreement, read and interpreted in its entirety, is actually to t
he effect that
the last portion thereof, which gives the private respondent sixty (60
) days before the
expiration of the term the right to give notice of his intent to re
new, is subject to the first
portion of said paragraph that "the term of the lease shall be renew
ed every three (3)
years," thereby requiring the mutual agreement of the parties. The use of the wo
rd "renew"
and the designation of the period of three (3) years clearly confirm
that the contract of
lease is limited to a specific period and that it is not a continui
ng lease. The stipulation
provides for a renewal of the lease every three (3) years; there cou
ld not be a renewal if
said lease did not expire, otherwise there is nothing to renew.
Resultantly, the contract of lease should be and is hereby construed
as providing for a
definite period of three (3) years and that the automatic increase of
the rentals by twenty
percent (20%) will take effect only if the parties decide to renew the lease.
The decision of the Court of Appeals is REVERSED AND SET ASIDE. Benito Dy is or
dered to
immediately vacate and return the possession of the premises and pay the monthly
rentals
due thereon in accordance with the compromise agreement until he shall
have actually
vacated the same. This Judgment is immediately executory.
0
MARY ANTONETTE YU
ARTICLE 1182
OSMEA V. RAMA (14 PHIL 99)
FACTS:
On November 15, 1890, Doa Cenona Rama promised to deliver sugar

o pay
interest at a rate of cuartillo per month in consideration of
received from Don
Victoriano Osmea. Subsequently, he further loan an amount of P70.
hich, P50 were
borrowed by Evaristo Peares. In consideration of the P20 received
ama, shell deliver
sugar on January next year.
and t
P200
Of w
by R
Upon the death of Victoriano Osmea, the disputed contract was transferr
ed to
Agustina Rafols. Later, Rafols cede the rights to the plaintiff, Tomas Osmea.
Osmea presented the contract for delivery to the respondent. Upon her
acknowledgment of the debt, she promise to pay only if her house in Pagina is so
ld. Due to nonpayment, a complaint was filed for the execution and delivery of the contract. T
he Court of First
Instance ruled in favor of the plaintiff, ordering the respondent to pay P200 at
a rate of 18.75%
starting from November 15, 1890 and to pay P20 at the same rate sta
rting from October 27,
1891.
ISSUE:
W/N the proof during the trial of the cause was sufficient to support the findin
gs of the
lower court?
HELD:
Yes, the proof presented was sufficient. If the statement to pay the obligation
upon the
sale of the house is regarded as a condition, the obligation will be considered
as null and void
because it depended upon her exclusive will as provided in Article 1115 of the C
ivil Code.
In addition, it was sufficient to prevent the statute of limitation f
rom barring the action upon
the original contract.
1
ARTICLE 1182
TRILLANA VS. QUEZON COLLEGE, INC (93 PHIL. 383)
FACTS:
Deceased DamasaCrisostomo sent a letter to defendant regarding to her subscripti
on to
shares of capital stock in QC, Inc. Before payment was made, Damasa died. QC, I
nc. presented a
claim in her testate proceeding for collection of sum of 20,000, repr
esenting the value of
subscription to capital stock. However, the administrator of the Estate
refuses to make
payment. Based on the letter of Damasa, the following were stated:
1. It did not enclose initial payment
2. It stated babayarankonglahatpagkataposmanghulingisda
ISSUE:
WON there was a valid obligation.
HELD:
No. According to the SC, in view of proposal of Damasa to pay value of subscript
ion after
he has harvested fish is a condition obviously dependent upon her sole will and
therefore void
in accordance to Art. 1182.
2
ARTICLE 1182
LIEBNOW V PHIL. VEGETABLE OIL CO. (39 PHIL 60)
FACTS:
The purpose of the proceeding is to recover a sum of money to which
the plaintiff
considers himself entitled by way of a bonus in addition to the sala
ry earned by him while in
the employment of the defendant company as superintendent of its facto
ry in the district of
Nagtahan, city of Manila. The contract under which the plaintiff rendered the se
rvice to which
reference has been made is expressed in a letter of March 17, 1914, written by t
he president of
the Philippine Vegetable Oil Company to Liebenow as follows:
We hereby confirm conversation had on yesterday by our Mr. Vorster and yo
urself
to the effect that this company engages your services as superintendent of its f
actory at
Nagtahan for the period of one year from April 1st, 1914, at a monthly compensat
ion of
P500 (five hundred pesos) and living quarters and such further amount
in the way of
bonus as the board of directors may see fit to grant you.
In conformity with this agreement, the plaintiff entered upon the disc
harge of his duties as
superintendent of the factory aforesaid on April 1, 1914, and continued to rende
r service in this
capacity not only for the period of one year specified in the contra
ct, but for an additional
period of four months, or until August 1, 1916, when his services te
rminated. At some time
during the course of this employment, the exact date of which does n
ot appear, the monthly
salary of P500 was raised to P750, but the contract was not otherwis
e changed. After the
employment ceased the defendant company continued to deliver to the plai
ntiff each month a
check for P750, the equivalent of the salary he had been receiving.
These payments were
continued until the total sum of P4,500 had been thus paid.
The plaintiff alleges in his complaint that by reason of his skill and
ability the defendant s
plant was made much more productive and its profits thereby enormously
increased. It is not
denied that the service rendered was satisfactory to the company, and
the court found that
during the time the plaintiff was employed as superintendent the outpu
t of the plant had
increased and the cost of operation had diminished, with consequent pr
ofit to the defendant
company.
ISSUE:
Whether or not the stipulated amount of the bonus is legal.
HELD:
The solution of the case makes it necessary to consider the legal ef
fect of the stipulation
inserted in the contract in question to the effect that the plaintiff
should be entitled to such
further amount in the way of bonus as the board of directors might see fit to gr
ant.
5
3
The court sees no reason to doubt that a promise of th
is character creates a legal
obligation binding upon the promisor, although in its actual results i
t may not infrequently
prove to be illusory. Such a promise is not, in our opinion, nugatory, under art
icle 1115 of the
Civil Code, as embodying a condition dependent exclusively upon the wi
ll of the obligor. Nor
can it be held invalid under article 1256 of the same Code, which declares that
the validity and
performance of a contract cannot be left to the will of one of the
contracting parties. The
uncertainty of the amount to be paid by way of bonus is also no obstacle to the
validity of the
contract (article 1273, Civil Code); since the contract itself specifie
s the manner in which the
amount payable is to be determined, namely, by the exercise of the judgment and
discretion of
the employer.
The validity of the promise being conceded, the question
which arises next is: What is
necessary to satisfy it? Upon this point it must be obvious that the
obligation can only be
satisfied when something has been paid as a bonus by or with the ap
proval of the board of
directors. In the case before the court, the promise to pay a bonus
is absolute and
unconditional. The payment is not conditioned upon satisfactory service, nor upo
n the duration
of the service, nor upon the profits which may accrue to the employer from the e
fficiency of the
employee. All these elements might and naturally would operate upon the minds an
d discretion
of the directors in fixing the amount of the bonus, but they are wh
olly unconnected with the
legal right of the plaintiff to receive something as a bonus.
The amount of the bonus, it will be observed, is left by the contract
to the discretion of the
board of directors. Now, when that discretion has once been exercised
and a bonus has been
paid by the directors or by the officers of the company, with the approval, expr
ess or implied, of
the directors, can that discretion be judicially reviewed? The court i
s of the opinion that it
cannot. The parties stipulate that the discretion to be exercised was the discre
tion of the
directors; and there would be a very manifest infringement of the con
tract, if the court
were to substitute in place of the discretion of the directors the d
iscretion of any other
person or body whomsoever.
4
FELIX Z. CAMERINO
ARTICLE 1182
PATENTE V. OMEGA (93 SCRA 218)
FACTS:
OMEGA sold his agricultural land to PATENTE, under a pacto de retro sale.
OMEGA executed a promissory note promising to pay his indebtedness amo
unting to
1,600 pesos , to her, her heirs, assigns and successors as soon as possible or a
s soon as he has
the money. That, he will pay the whole amount before he exercises hi
s right of repurchase of
his agricultural land.
On the promissory note, no definite term is fixed, its performance appearing to
be at the
will of the debtor.
ISSUE:
If the term of payment of as soon as possible or as soon as I have
money set by the
debtor is invalid condition.
HELD:
Yes. Where the potestative condition of an obligation depends solely upon the wi
ll of the
debtor, the condition obligation shall be void. The remedy of the creditor in su
ch a case is to go
to court to ask for fixing the term of payment.
5
ARTICLE 1182
NAGA TELEPHONE COMPANY V. THE COURT OF APPEALS (230 SCRA 351)
FACTS:
Petitioner Naga Telephone Co., Inc. (NATELCO) is a telephone company rendering l
ocal
as well as long distance telephone service in Naga City while private respondent
Camarines Sur
II Electric Cooperative,Inc. (CASURECO II) is a private corporation established
for the purpose
of operating an electric power service in the same city. Theparties e
ntered into a contract for
the use by petitioners in theoperation of its telephone service, the electric li
ght posts ofprivate
respondent in Naga City. In consideration therefore,petitioners agreed to instal
l, free of charge,
ten (10) telephoneconnections for the use by private respondent.
The contract provided, that the term or period of this contract shall
be as long as
theparty of the first part has need for the electric light posts of theparty of
the second partit
being understood that this contractshall terminate when for any reason whatsoeve
r, the party
of thesecond part is forced to stop, abandonedits operation as a publ
icservice and it becomes
necessary to remove the electric lightpost.
After the contract had been enforced for over ten (10) years,private respondent
filed on
2 January 1989 with the RTC of Naga City against petitioners for ref
ormation of thecontract
with damages, on the ground that it is too one-sided in favor of petitioners. As
second cause of
action, private respondentalleged that starting with the year 1981, pet
itioners have used
319posts in the towns of Pili, Canaman, Magarao and Milaor, CamarinesS
ur, all outside Naga
City, without any contract with it; that atthe rate of P10.00 per po
st, petitioners should pay
privaterespondent for the use thereof the total amount of P267,960.00
from1981 up to the
filing of its complaint; and, that petitioners hadrefused to pay private respond
ent said amount
despite demands. As third cause of action, private respondent complaine
d about thepoor
servicing by petitioners of the ten (10) telephone units whichhad caused it grea
t inconvenience
and damages to the tune of notless than P100,000.00.
The trial court found, as regards private respondent s first causeof action, tha
t while the
contract appeared to be fair to bothparties when it was entered into
by them during the first
year ofprivate respondent s operation and when its Board of Directors
didnot yet have any
experience in that business, it had becomedisadvantageous and unfair to
private respondent
because ofsubsequent events and conditions, particularly the increase in
the volume of the
subscribers of petitioners for more than ten (10)years without the cor
responding increase in
the number of telephoneconnections to private respondent free of charge
. The trial
courtconcluded that while in an action for reformation of contract, it
cannot make another

contract for the parties; it can, however, forreasons of justice and
equity, order that the
contract be reformedto abolish the inequities therein.
As regards the second cause ofaction, the trial court held that for
reason of equity, the
contractshould be reformed by including therein the provision that for
theuse of private
respondent s posts outside Naga City, petitionersshould pay a monthly r
ental of P10.00 per
post, the payment to starton the date this case was filed, or on 2
January 1989, and
5
6
privaterespondent should also pay petitioners the monthly dues on itste
lephone connections
located outside Naga City beginning January, 1989.
With respect to private respondent s third cause ofaction, the trial court found
the claim
not sufficiently proved.
Petitioners appealed to respondent CA. In the decision dated 28 May 1992, respon
dent
court affirmed the decision of thetrial court, but based on different
grounds, to wit: (1) that
Article1267 of the New Civil Code is applicable and (2) that the con
tractwas subject to a
potestative condition which rendered said condition void, thus, this petition.
ISSUE:
Whether or not the contract was subject to a potestative condition which rendere
d said
contract void.
HELD:
Prestations are not purely potestative which would render the contract void.
The SC ruled that the provision in the agreement isinvalid for being
purely potestative
on the part of appellant as itleaves the continued effectivity of the
aforesaid agreement to
thelatter s sole and exclusive will as long as plaintiff is inoperatio
n. A similar provision in a
contract of lease wherein theparties agreed that the lessee could stay
on the leasedpremises
"for as long as the defendant needed the premises and canmeet and pa
y said increases" was
recently held by the SC in Lim v. CA, 191 SCRA 150, citing the much earliercase
ofEncarnacion
v. Baldomar, 77 Phil. 470, as invalid for being "apurely potestative c
ondition because it leaves
the effectivity andenjoyment of leasehold rights to the sole and exclusive will
of thelessee."
A potestative condition is a condition, the fulfillment of whichdepends
upon the sole
will of the debtor, in which case, theconditional obligation is void.

Based on this definition,
respondentcourt s finding that the provision in the contract is a pote
stativecondition, to wit:
(a) that the term or period of this contract shall be as long as theparty of the
first part has need
for the electric lightposts of the party of the second part is corre
ct.However, it must have
overlooked the other conditions in the sameprovision, to wit: xxx it being unders
tood that this
contract shall terminate whenfor any reason whatsoever, the party of the second
part is forced
to stop, abandoned its operation as a publicservice and it becomes ne
cessary to remove the
electric light post; which are casual conditions since they depend on chance, ha
zard, orthe will
of a third person. In sum, the contract is subject to mixedconditions, that is,
they depend partly
on the will of the debtorand partly on chance, hazard or the will of a third per
son, which donot
invalidate the aforementioned provision.
5
7
ARTICLE 1182
ROMERO V. COURT OF APPEALS
FACTS:
Romero and his partners decided to put up a central warehouse in Met
ro Manila.
Ongsiongs land was offered and Romero found it suitable, except for the squatters
in the area.
A deed of conditional sale was entered stating that Php50,000.00 is t
o be paid upon
signing and executing the contract and that if Ongsiong failed to rem
ove the squatters after
sixty days from the date of the signing of the contract, the downpay
ment shall be returned to
Romero.
A complaint for ejectment against the squatters was filed and granted b
ut the decision
was handed beyond the sixty-day period. Thus, Ongsiong wanted to retur
n the Php50,000.00
because she could not get rid of the squatters but Romero refused to
accept it and took it
upon himself to eject the squatters from the lot.
According to Ongsiong, the contract has been rendered null and void due to her f
ailure
to evict the squatters within the agreed sixty days.
However, Romero claims that Ongsiong is precluded from rejecting the c
ontracts
binding effects due to her inability to eject the squatters from the lot during
the agreed period
because the contract does not grant her such option or prerogative sh
ould she fail to comply

with her obligation. Such right is actually granted to him for his p
rotection. Instead of aviling
such right, he took it upon himself to eject the squatters.
ISSUE:
May Ongsiong demand the rescission of the contract due to her own failure to evi
ct the
squatters within the agreed sixty-day period?
HELD:
No. Article 1182 states that 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 conf
ormity with the provisions of
this Code.
In this case, Ongsiong is obligated under the agreement to evict the
squatters from the
property. The ejectment is a condition which sets into motion the per
iod of compliance by
Romero such as paying the balance of the purchase price. Ongsiongs fai
lure to remove the
squatters within the agreed period gives Romero the right to either refuse to pr
oceed with the
agreement or waive the condition.
5
8
The undertaking required of Ongsiong is a mixed condition dependent not on the w
ill of
the vendor alone but also of third persons such as sqatters and gove
rnment agencies. Such
condition is imposed not on the birth of the obligation but on its
fulfillment only, leaving
unaffected the obligation itself.
9
ARNIBELLE M. DORIA
ARTICLE 1182
SECURITY BANK & TRUST COMPANY V. COURT OF APPEALS (OCTOBER 11 1995)
FACTS:
Private respondent Ysmael C. Ferrer was contracted by petitioners Secur
ity Bank and
Trust Company (SBTC) and Rosito C. Manhit to construct the building of SBTC in D
avao City for
the price of P1,760,000. The contract provided that Ferrer would finish the cons
truction in 200
working days. Ferrer was able to complete the construction of the bui
lding within the
contracted period but he was compelled by a drastic increase in the
cost of construction
materials to incur expenses of about P300,000 on top of the original
cost. The additional
expenses were made known to petitioner SBTC thru its Vice-President an
d Supervising
Architect. Ferrer made timely demands for payment of the increased cost. Said de
mands were
supported by receipts, invoices, payrolls and other documents proving the additi
onal expenses.
Later, SBTC thru its Assistant Vice-President and a representative of
an architectural
firm it consulted verified Ferrer s claims for additional cost. A recommendation
was then made
to settle Ferrer s claim but only for P200,000. SBTC, instead of payi
ng the recommended
additional amount, denied ever authorizing payment of any amount beyond
the original
contract price. SBTC likewise denied any liability for the additional
cost based on Article IX of
the building contract which states:
If at any time prior to the completion of the work to be performed hereunder, in
crease in
prices of construction materials and/or labor shall supervene through no fault o
n the part
of the contractor whatsoever or any act of the government and its instrumentalit
ies which
directly or indirectly affects the increase of the cost of the project, OWNER sh
all equitably
make the appropriate adjustment on mutual agreement of both parties.
Ysmael C. Ferrer then filed a complaint for breach
damages. The trial
court ruled for Ferrer and ordered defendants SBTC
it to pay for the
increase in price of labor and materials plus 12%
mages; moral damages;
exemplary damages; attorney s fees equivalent to 25%
amount due; and costs
of suit. On appeal, the Court of Appeals affirmed
cision, thus, this petition for
review.
of contract with
and Rosito C. Manh
interest; actual da
of the principal
the trial court de
SBTC argue that under Article IX of the building contract, any increa
se in the price of
labor and/or materials resulting in an increase in construction cost a
bove the stipulated
contract price will not automatically make them liable to pay for suc
h increased cost, as any
payment above the stipulated contract price has been made subject to
the condition that the
"appropriate adjustment" will be made "upon mutual agreement of both p
arties". It is
contended that since there was no mutual agreement between the parties, SBTCs obl
igation to
pay amounts above the original contract price never materialized.
0
ISSUE:
WON SBTC is liable for the increase in cost of the construction due to drastic i
ncreases
in cost of material?
HELD:
Yes. Petitioners
arguments to support absence of liability for the co
st of construction
beyond the original contract price are not persuasive. Under Article 1
182 of the Civil Code, a
conditional obligation shall be void if its fulfillment depends upon the sole wi
ll of the debtor. In
the present case, the mutual agreement, the absence of which petitione
r bank relies upon to
support its non-liability for the increased construction cost, is in e
ffect a condition dependent
on petitioner bank s sole will, since private respondent would naturall
y and logically give
consent to such an agreement which would allow him recovery of the increased cos
t.
Further, it cannot be denied that petitioner bank derived benefits whe
n private
respondent completed the construction even at an increased cost.Hence,
to allow petitioner
bank to acquire the constructed building at a price far below its actual constru
ction cost would
undoubtedly constitute unjust enrichment for the bank to the prejudice of privat
e respondent.
Such unjust enrichment, as previously discussed, is not allowed by law. The appe
aled decision
of the Court of Appeals is AFFIRMED with modification in the amount of attorney
s fees.
1
MARVIN P. FRANCISCO
ARTICLE 1184
ADDISON VS. FELIX AND TIOCO (38 PHIL 480)
FACTS:
The defendants-appellees spouses Maciana Felix and BalbinoTioco purchased
from
plaintiff-appellant A.A. Addison four parcels of land to which Felix p
aid, at the time of the
execution of the deed, the sum of P3,000 on account of the purchase price. She l
ikewise bound
herself to the remainder in installments, the first of P2,000 on July
15, 1914, the second of
P5,000 thirty days after the issuance to her of a certificate of title under the
Land Registration
Act, and further, within ten years from the date of such title, P10
for each cocoanut tree in
bearing and P5 for each such tree not in bearing that might be growing on said p
arcels of land
on the date of the issuance of title to her, with the condition tha
t the total price should not
exceed P85,000. It was further stipulated that Felix was to deliver t
o the Addison 25% of the
value of the products that she might obtain from the four parcels "from the mome
nt she takes
possession of them until the Torrens certificate of title be issued in her favor
," and that within 1
year from the date of the certificate of title in her favor, Marciana Felix may
rescind the contract
of purchase and sale.
In January 1915, Addison, filed suit in the CFI of Manila to compel Felix to pay
the first
installment of P2,000, demandable, in accordance with the terms of the
contract of sale. The
defendants Felix and her husband Tioco contended that Addison had abso
lutely failed to
deliver the lands that were the subject matter of the sale, notwithst
anding the demands they
made upon him for this purpose. The evidence adduced shows Addison wa
s able to designate
only two of the four parcels, and more than two-thirds of these two
were found to be in the
possession of one Juan Villafuerte, who claimed to be the owner of t
he parts he so occupied.
The trial court held the contract of sale to be rescinded and ordered Addison to
return to Felix
the P3,000 paid on account of the price, together with interest thereo
n at the rate of 10% per
annum.
ISSUE:
Whether or not delivery of the thing sold was made.
HELD:
No. The thing is considered delivered when it is placed "in the hands and posses
sion of
the vendee." It is true that the same article declares that the execution of a p
ublic instrument is
equivalent to the delivery of the thing which is the object of the contract, but
, in order that this
symbolic delivery may produce the effect of tradition, it is necessary that the
vendor shall have
had such control over the thing sold that, at the moment of the sale, its materi
al delivery could
have been made. Symbolic delivery through the execution of a public i
nstrument is sufficient
when there is no impediment whatever to prevent the thing sold passin
g into the tenancy of
the purchaser by the sole will of the vendor. But if, notwithstanding
the execution of the
instrument, the purchaser cannot have the enjoyment and material tenanc
y of the thing and
make use of it himself or through another in his name, because such
are opposed by a third
6
2
persons will, then the delivery has not been effected. In the case at bar, theref
ore, it is evident,
that the mere execution of the instrument was not a fulfillment of t
he vendor s obligation to
deliver the thing sold, and that from such non-fulfillment arises the
purchaser s right to
demand, as she has demanded, the rescission of the sale and the return of the pr
ice.
6
3
ARTICLE 1184
MARTIN VS BOYERO (55 SCRA 760)
FACTS:
Setting up rights derived from Pedro Zorrilla, of whom he is successo
r-in-interest, the
plaintiff has brought this suit upon the ground that the sale price of the undiv
ided two-fifths of
the Espana Estate has become demandable because the defendant has viol
ated the terms of
said contract of sale. The defendant denied all the allegations and contended th
at no violations
were committed. After the court had ordered the submission of several d
ata and statement to
the defendant, the court absolved him on the ground that he has not violated any
terms of the
contract of sale. In addition the court held that the plaintiff is n
ot entitled to demand the
fulfillment of the obligation contracted in the contract.
Both parties, Matin being the successor-in-interest of Zorilla, entered into a c
ontract of
sale. The contract consisted of stipulations regarding how the debt of
Boyero to Zorilla,
amounting to P20,000,
shall be paid depending on the situation that
will take place. Boyero
then entered into a contract of lease with Claudio Aldecoa..
Counsel for the appellant contends that these conditions of the sale
are void unless a
term is fixed for the payment of the P20,000, which according to said conditions
is left entirely
with the defendant, and that, at any rate, even supposing said condit
ions are valid, the
obligation has become demandable under the provisions of article 1119 of the Civ
il Code from
the time the contract of lease, Exhibit B, was executed and the defe
ndant prevented the
fulfillment of the condition.
ISSUE:
Whether or not the contract of lease (Exhibit B) violated or prevented the fulfi
llment of
the contract of sale (Exhibit A)
HELD:
NO.
In executing the contract of lease, Exhibit B, the defendant has not,
in our opinion,
violated the contract of sale, Exhibit A. Not one of the terms included in Exhib
it B nor any other
in the lease violates the contract Exhibit A.
The contract of lease, no doubt, brought about a substantial reduction
in the original
amount of the obligations encumbering the estate.
We are convinced from an examination of the record that the defendant
has made
efforts to satisfy the debts of the estate in question as soon as t
he circumstances have
6
4
permitted; and consequently, as the lower court rightly declared, there is no re
ason for holding
him responsible for the fact that the debts are not yet entirely paid.
Inasmuch as the record does not show that all the debts of the Espana Estate hav
e been
paid, or that the defendant is responsible for their not being paid, the plainti
ff has no cause of
action to ask for the relief prayed for in his complaint.
6
5
ALFREDO KHONG HUN
ARTICLE 1884
TAYAG VS. CA (219 SCRA 480)
FACTS:
Siblings Juan Galicia Sr. and Celerina Labuguin entered into a contract to sell
a parcel of
land in Nueva Ecija to a certain Albrigido Leyva.Three thousand pesos
upon signing of
agreement. Then, Ten thousand pesos ten days after the agreement. Ten
thousand pesos
representing vendors indebtedness to Phil Veterans Bank. The remaining t
wenty seven
thousand pesos which payable within one year from execution of contrac
t.Leyva only paid
parts of the obligation.But even after the grace period for payment m
ade in the contract and
while litigation of such case, the petitioners still allowed Leyva to make payme
nts. With regards
to the obligation payable to the Phil Veterans bank by the vendee, as
they deemed that it was
not paid in full, such obligation they completed by adding extra amou
nt to fulfill such
obligation. This was fatal in their case as this is Leyvas argument t
hat they constructively
fulfilled the obligation which is rightfully due to him. It was Celerina, Juans s
ister, that paid the
bank to complete such obligation. Petitioners claim that they are only OBLIGEES wi
th regards
to the contract, so the principle of constructive fulfillment cannot b
e invoked against them.
Petitioners, being both creditor and debtor to private respondent, in

accepting piecemeal
payment even after the grace period, are barred to take action through estoppel.
ISSUE:
Whether or not there was constructive fulfillment in the part of the petitioners
that
shall make rise the obligation to deliver to Leyva the deed of sale?
HELD:
Yes. In a contract of purchase, both parties are mutually obligors and also obli
gees, and
any of the contracting parties may, upon non-fulfillment by the other
privy of his part of the
prestation, rescind the contract or seek fulfillment. In short, it is
puerile for petitioners to say
that they are the only obligees under the contract since they are al
so bound as obligors to
respect the stipulation in permitting private respondent to assume the loan with
the Philippine
Veterans Bank which petitioners impeded when they paid the balance of said loan.
As vendors,
they are supposed to execute the final deed of sale upon full paymen
t of the balance as
determined hereafter.
6
ARTICLE 1191
PHILIPPINE AMUSEMENT ENTERPRISE VS NATIVIDAD (21 SCRA 284)
FACTS:
This is an appeal from the Court of First Instance of Davao regardi
ng the lease agreement
entered into by Philippine Amusement Enterprise and Soledad Natividad.
In the case at bar Soledad Natividad was ordered to restore the pho
nograph of Philippine
Amusement Enterprise and to deny its claim for liquated and exemplary damages.
On January 6, 1991, a domestic corporation with main office in Quezo
n City and a branch
office in Davao City, entered into a contract with the defendant Soledad Nativid
ad, owner of
the Irene s Refreshment Parlor in Davao City, whereby the former lease
d to the latter an
automatic phonograph or jukebox.
On July 17,1961, Mariano Natividad the husband of defendant Soledad Natividad r
equesting
the company to return the jukebox of the company.
On a separate notice, the plaintiff wrote a letter against the defen
dant demanding a new
compliance with the lease contract and the payment of damages, and warning them
that it
would file the corresponding action in court if they did not comply with its dem
and.
ISSUE:
Whether or not did the court of First Instance of Davao err in deciding the ca
ses?
HELD:
The power to rescind obligations is implied in reciprocal ones in ca
se one of the obligors
should not comply with what is incumbent upon him. As there is nothing in the co
ntract of
lease empowering the defendants to rescind it without resort to the courts, the
defendants
action in unilaterally terminating the contract is unjustified.
Rescission will be ordered only where the breach complained of is substantial a
s to defeat
the object of the parties in entering into the agreement. It will no
t be granted where the
breach is slight or casual.
The defendants asked the plaintiff to retrieve its phonograph, claimin
g that there were
times when the coins dropped into the slot would get stuck, resulting
in its failure to play
the desired music. But apart from this bare statement, there is nothi
ng in the evidence
which shows the frequency with which the jukebox failed to function properly.
We believe that the defendants actually bought a jukebox only in 1961 after the
y had signed
the lease contract in question, although they might have expressed a desire to b
uy one the
year before, for otherwise they would not have entered into a three-y
ear lease. But
certainly their decision to buy a jukebox and operate it themselves w
as made long before
they ever complained in July, 1961 of any defect in the rented jukebox.
The Supreme Court believes that the decision to buy a jukebox was m
ade because the
defendants found it more profitable to operate one themselves. Their letter of J
uly 17, 1961,
in which they demanded the removal of the rented jukebox from their
premises, with the
warning that they would not be "responsible anymore" for it, and their
other letter of July
6
7
27 of like tenor, betray the haste with which they wanted to get ou
t of their contractual
obligations to the plaintiff.
The judgment a quo is reversed, and the contract of lease between t
he plaintiff and the
defendant Soledad Natividad is hereby rescinded in favor of the plaint
iff. The defendants
are ordered to return to the plaintiff the automatic phonograph subject of the c
ontract, and
to pay the plaintiff liquidated damages in the total amount of P5,850
, plus 6 per cent
interest from the date of the filing of the complaint until the amou
nt shall have been fully
paid, and attorney s fees in the amount of P200. Costs against the defendants.
6
8
ARTICLE 1191
UP VS DELOS ANGELES (35 SCRA 102)
FACTS:
November 2, 1960 UP and ALUMCO entered into a logging agreement wher
eby ALUMCO
was granted exclusive authority to cut, collect and remove timber from the Land
Grant from
date of start of agreement until December 31, 1965, extendable to a
5 years by mutual
agreement.
December 8, 1964 ALUMCO had an unsettled balance of 219,362.94php. De
spite repeated
demands of UP they still did not pay. So UP sent a notice to rescind the logging
agreement.
ALUMCO in return issued and Acknowledgement of Debt and Proposed Manne
r of
Payments. Whereby it was approved by UP President.
The document basically states the incase payments are not sufficient
to liquidate
indebtedness, the balance outstanding after the payments have been made shall be
paid by
the debtor no later than June 30, 1965
In the instance the debtor cannot comply with the requirements it ha
s come to an
agreement that the Logging Contract shall be rescinded without the nec
essity of a judicial
suit.
On July 19, 1965 due to still unpaid account UP informed ALUMCO that it is resc
inding their
contracts and they have already taking steps to have another concession
aire take over the
project.
ALUMCO filed a petition to enjoin UP from bidding. Lower courts approved their
appeal.
ISSUE:
W/N UP can rescind its contract with ALUMCO without judicial proceedings.
HELD:
YES. Art 1191.
The power to rescind obligations is implied in reciprocal ones, in c
ase one of the obligors
should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescissio
n of the obligation,
with the payment of damages in either case. He may also seek rescission, even af
ter he has
chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just
cause authorizing the
fixing of a period.
6
9
ARTICLE 1191
PALAY, INC. V. CLAVE (124 SCRA 638)
FACTS:
Petitioner Palay, Inc. executed in favor of private respondent, Nazario
Dumpit, a
Contract to Sell a parcel of Land in Antipolo, Rizal. The sale price
was P23,300.00 with 9%
interest per annum, payable with a down payment of P4,660.00 and mont
hly installments of
P246.42 until fully paid.
Paragraph 6 of the contract provided for automatic extrajudicial rescission upon
default
in payment of any installment after the lapse of 90 days from the expiration of
the grace period
of one month, without need of notice and with forfeiture of all installments pai
d.
Respondent Dumpit paid the down payment and several installments amount
ing to
P13,722.50. The last payment was made on December 1967 for installment
s up to September
1967.
Almost six (6) years later, private respondent wrote petitioner offering to upda
te all his
overdue accounts with interest, and seeking its written consent to the assignmen
t of his rights.
He followed this up with another letter dated June 1973 reiterating the same req
uest. Replying
petitioners informed respondent that his Contract to Sell had long been rescinde
d pursuant to
paragraph 6 of the contract, and that the lot had already been resold.
Questioning the validity of the rescission of the contract, respondent
filed a letter
complaint with the National Housing Authority (NHA) for reconveyance wi
th an alternative
prayer for refund. In a Resolution, dated July 1979, the NHA, finding the rescis
sion void in the
absence of either judicial or notarial demand, ordered Palay, Inc. to
refund immediately to
Nazario Dumpit the amount of P13,722.50 with 12% interest from the fi
ling of the complaint
on November 1974. Petitioners Motion for Reconsideration of said Resol
ution was denied by
the NHA in its Order dated October 1979.
On appeal to the Office of the President, upon the allegation that t
he NHA Resolution
was contrary to law, respondent Presidential Executive Assistant affirmed the Re
solution of the
NHA on May 1980. Reconsideration sought by petitioners was denied for lack of me
rit.
ISSUE:
W/N the petitioners were justified in rescinding the contract to sell without pr
ior notice
or demand upon respondent in view of paragraph 6 of their contract.
HELD:
MODIFIED. (Ruled in favor of respondent, affirms NHA ruling)
0
Judicial action for the rescission of a contract is not necessary whe
re the contract
provides that it may be revoked and cancelled for violation of any of its terms
and conditions.
However, according to jurisprudential trend, there must at least a wri
tten notice sent to the
defaulter informing him of the rescission.
A stipulation entitling one party to take possession of the land and building if
the other
party violates the contract does not ex propio vigore confer upon the
former the right to take
possession thereof if objected to without judicial intervention and determinatio
n.
Further, extrajudicial rescission only has legal effect where the other
party does not oppose
it. Where it is objected to, a judicial determination of the issue is still nece
ssary.
In other words, resolution of reciprocal contracts may be made extraju
dicially unless
successfully impugned in Court. If the debtor impugns the declaration,
it shall be subject to
judicial determination.
In this case, private respondent has denied that rescission is justified
and has resorted
to judicial action. It is now for the Court to determine whether res
olution of the contract by
petitioners was warranted.
The resolution by petitioners of the contract was ineffective and inop
erative against
private respondent for lack of notice of resolution.
The contention that private respondent had waived his right to be not
ified under
paragraph 6 of the contract is neither meritorious because it was a
contract of adhesion, a
standard form of petitioner corporation, and private respondent had no freedom t
o stipulate. A
waiver must be certain and unequivocal, and intelligently made; such w
aiver follows only
where liberty of choice has been fully accorded. Moreover, it is a ma
tter of public policy to
protect buyers of real estate on installment payments against onerous
and oppressive
conditions. Waiver of notice is one such onerous and oppressive condit
ion to buyers of real
estate on installment payments.
1
ARTICLE 1191
FILOIL MARKETING CORP V IAC (JANUARY 20 1989)
FACTS:
Josefina Alberto de Pabalan sold a parcel of land to Villa Rey Transit. On the d
ay of the
sale, the TCT was delivered by Pabalan to Villarama, president of Vil
la Rey, who caused the
issuance of the new title in his own name. The transfer appeared to be a deed of
sale.
On the same day Villarama mortgaged the lot in behalf of Villa Rey to FilOil as
security
for a loan. Having defaulted the payment, the lot was extrajudicially foreclose
d in which FilOil
won the bidding. However before FilOil could consolidate the ownership,
Pabalan filed a
complaint against Villarama, Villa Rey and FilOil.
The complaint alleged that the sale was conditional and did not transfer the tit
le to the
buyer until full payment of the price. RTC and CA both rendered a j
udgment in favor of
complainant.
ISSUE:
Whether or not there is a violation of contract of sale.
HELD:
It is obvious that the instrument is not a contract to sell as contended by Paba
lan. It is a
deed of sale in which the title was transferred to the vendee as of
the date of the transaction
notwithstanding that the purchase price had not been fully paid at that time.
In stipulation, it is recognized that the vendee may sell the propert
y prior to full
payment of all the amount.
Villarama acted in bad faith when he secured the cancellation of vend
ors title and
replaced it in his own name. Pabalan left the drafting of the deed of sale to Vi
llarama whom she
trusted. This circumstance alone imposed to Villarama the moral if not the legal
responsibility
to explain the meaning and consequence of the contract she was signing.
FilOil also acted in bad faith in accepting the property as security
to the loan without
exercising more vigilance in inquiring with Pabalan, as lessor, into t
he antecedent of the
transfer of title to Villarama.
7
2
ARTICLE 1191
TAN V CA (175 SCRA 656)
FACTS:
The evidence shows that defendants-appellants spouses (private respon
dents herein)
are the owners of a house and lot located at No. 34 Easter Road, B
aguio City, and covered by
T.C.T. No. T-13826, which were then for sale. On June 14, 1984, plaintiff-appell
ee together with
her agent went to see said spouses at their residence regarding the
property. After appellants
had shown appellee around the house and had conversation about the en
cumbrances and/or
liens on the property, the parties finally agreed on the price of Pl,800,000.00,
with appellee to
advance earnest money of P200,000.00 to enable appellants to secure th
e cancellation of the
mortgage and lien annotated on the title of the property and the balance of the
price to be paid
by appellee on June 21, 1984. Forthwith, appellee handed to appellants a check f
or P200,000.00
and thereupon the parties signed a receipt.
The very same day that appellants received the earnest money of P 20
0,000.00, they
started paying their mortgage loan with the Development Bank of the P
hilippines (DBP) to
clear up the title of the subject property. Appellants also paid all the taxes
due and in appears
on the property.
On June 25, 1984, appellee accompanied by her daughter Corazon and her lawyer, A
tty.
Vicente Quitoriano, went to Baguio City to inquire about the status o
f the property and
appellants told her that the Development Bank of the Philippines was
taking some time
processing their payments and preparing the deed of cancellation of th
e mortgage. On that
occasion, the parties agreed on an extension of two (2) weeks for the execution
of the deed of
sale. Here, the parties respective versions on the matter parted ways. Accordin
g to defendantsappellants, it was plaintiff who asked for the extension because she
was not yet ready to pay
the balance of P l,550,000.00. On the other hand, plaintiff said that it was def
endants who asked
for it because the title of the property was not yet cleared.
Immediately, upon execution by the DBP of the deed of cancellation of mortgage o
f July 9, 1984,
appellants tried to contact appellee and/or her daughter Corazon to come to Bagu
io City for the
formal execution of the deed of sale, but to no avail. Instead, appe
llants received a telegram
from Atty. Quitoriano, counsel of plaintiff, cancelling the sale and demanding t
he return of the
P200,000.00 earnest money. Appellants countered with a letter of their
lawyer, Atty.
TiofistoRodes, calling on appellee to perform her part of the contract
because "the title to the
house and lot right now suffers no imperfection or doubt.
Plaintiff filed in court on August 27, 1984 the case for recovery of sum of mone
y with damages.
In her complaint, plaintiff alleged that she gave defendants-appellants
spouses
P200,000.00 upon their assurances that they could transfer to her the
house and lot she was
buying from them free from any liens and encumbrances, including the furnishings
thereof and
the adjacent lot being used as driveway, on June 25, 1984, but that
day had come and passed
without appellants being able to make good their promise, because she
"discovered to her
shock and dismay that she had been dealt with in bad faith by defendants" as the
mortgage on
the property was not released or cancelled and the driveway was still public lan
d and could not
be validly transferred to her as any disposition thereof would yet re
quire approval by the
Secretary of Agriculture and Natural Resources. Hence, the suit against a
ppellants spouses for
recovery of the P200,000.00 earnest money which is, in essence and concept, one
for rescission
with damages.
7
3
ISSUE
Whether the private respondents committed a substantial breach of their obligati
on so
as to warrant petitioner s exercise of her right to rescind the contract of sale
under Article 1191
of the Civil Code.
HELD
After a thorough examination of the allegations contained in the parties pl
eadings, the
Court finds the instant petition to be devoid of any merit.
That the power to rescind obligations is implied in reciprocal ones i
n case one of the
obligors should not comply with what is incumbent upon him is clear
from a reading of the
Civil Code provisions. However, it is equally settled that, in the ab
sence of a stipulation to the
contrary, this power must be invoked judicially; it cannot be exercised solely o
n a party s own
judgment that the other has committed a breach of the obligation. Where there is
nothing in the
contract empowering the petitioner to rescind it without resort to the
courts, the petitioner s
action in unilaterally terminating the contract in this case is unjustified [Phi
lippine Amusement
Enterprises, Inc. v. Natividad, G.R. No. L-12876.September 29, 1967, 21 SCRA 284
].
In this case, petitioner received on July 17, 1984 through her daught
er Cora Tan
Singson, a telegram from private respondent VisitacionSingson advising t
he former that the
papers for the sale of the property are ready for final execution. T
he parties likewise met on
June 25, 1984, the day agreed upon for the full payment of the purchase price, a
nd they agreed
on a further extension of two weeks for the execution of the deed o
f sale. Despite this
agreement, private respondents suddenly received a telegram from Atty.
Quitoriano, counsel
for the petitioner, unilaterally stopping the sale and demanding the r
eturn of the earnest
money paid by petitioner.
Alternatively, petitioner seeks annulment of the contract on the ground
of fraud since
private respondents had misrepresented to her that they could validly
convey title to the
property subject of the contract which however is encumbered with various existi
ng liens.
The alleged breach of the obligation by the private respondents, which

consists in a
mere delay for a few days in clearing the title to the property, cannot be consi
dered substantial
enough to warrant rescission of the contract.
A thorough review of the records clearly indicates that private respon
dents had
substantially complied with their undertaking of clearing the title to
the property which has a
total land area of 886 square meters and private respondents, upon re
ceipt of the earnest
money paid by petitioner, utilized the same to settle its obligations
with DBP thus enabling
them to secure a cancellation of the existing mortgage, which was duly noted in
the title to the
property.
It is a settled principle of law that rescission will not be permitted for a sli
ght or casual
breach of the contract but only for such breaches as are so substant
ial and fundamental as to
defeat the object of the parties in making the agreement.The claim that petitio
ner s consent to
the contract was vitiated by fraud and, therefore, the contract in question is v
oidable is patently
unmeritorious. The contract of sale is not voidable where no evidence was shown
that through
insidious words or machinations under Article 1338 of the Civil Code,
the seller had induced
the buyer to enter into the contract.
7
4
ARTICLE 1191
DE LUNA V ABRIGO (181 SCRA 150)
FACTS:
This is a petition for review on certiorari of the Order dated July 7, 1981 of r
espondent
judge Sofronio F. Abrigo of the Court of First Instance of Quezon, B
ranch IX in Civil Case No.
8624 dismissing the complaint of petitioners on the ground of prescription of ac
tion.
On January 24, 1965, Prudencio de Luna donated a portion of 7,500 sq
uare meters of Lot No.
3707 of the Cadastral Survey of Lucena covered by Transfer Certificate
of Title No. 1-5775 to
the Luzonian Colleges, Inc. The donation, embodied in a Deed of Donat
ion Intervivos was
subject to certain terms and conditions and provided for the automatic reversion
to the donor
of the donated property in case of violation or non-complain. The fou
ndation failed to comply
with the conditions of the donation. On April 9, 1971, Prudencio de
Luna "revived" the said
donation in favor of the foundation, in a document entitled "Revival
of Donation Intervivos"
subject to terms and conditions which among others, required:
3. That the DONEE shall construct at its own expense a Chapel, a Nu

rsery and
Kindergarten School, to be named after St. Veronica, and other constru
ctions and
Accessories shall be constructed on the land herein being donated strictly in ac
cordance
with the plans and specifications prepared by the O.R. Quinto & Assoc
iates and made
part of this donation; provided that the flooring of the Altar and parts of the
Chapel shall
be of granoletic marble.
4. That the construction of the Chapel, Nursery and Kindergarten Schoo
l shall start
immediately and must be at least SEVENTY (70) PER CENTUM finished by t
he end of
THREE (3) YEARS from the date hereof, however, the whole project as
drawn in the
plans and specifications made parts of this donation must be completed within FI
VE (5)
YEARS from the date hereon, unless extensions are granted by the DONOR in writin
g
As in the original deed of donation, the "Revival of Donation Intenri
vos" also provided
for the automatic reversion to the donor of the donated area in case
of violation of the
conditions thereof.
The Foundation accepted and the donation was registered and annotated in the TCT
. By a Deed
of Segregation, the foundation was issued a TCT for area the lot don
ated while the remaining
area was retained by the De Luna.
The children and only heirs of the late De Luna (died after the donation) filed
a complaint with
the RTC for the cancellation of the donation on the ground that the
terms were violated. The
Foundation defended itself by saying that it had partially and substan
tially complied with the
conditions and that the donor granted it an indefinite extension of t
ime to complete
construction.
The RTC dismissed the petition on the ground of prescription (for bei
ng filed after 4
years). The heirs did not file an MR and went straight to the SC.
5
ISSUE:
Whether the action prescribes in 4 years (based on art. 764 NCC-judic

ial decree of
revocation of the donation) or in 10 years (based on art. 1144 enforc
ement of a written
contract)
HELD:
The donation subject of this case is one with an onerous cause.

Under the old Civil Code, it is a settled rule that donations with
an onerous cause are
governed not by the law on donations but by the rules on contract.
On the matter of
prescription of actions for the revocation of onerous donation, it was held that
the general rules
on prescription apply. The same rules apply under the New Civil Code
as provided in Article
733 thereof which provides:
Donations with an onerous cause shall be governed by the rules on co
ntracts, and
remuneratory donations by the provisions of the present Title as regar
ds that portion which
exceeds the value of the burden imposed.
It is true that under Article 764 of the New Civil Code, actions fo
r the revocation of a
donation must be brought within four (4) years from the non-compliance
of the conditions of
the donation. However, said article does not apply to onerous donations in view
of the specific
provision of Article 733 providing that onerous donations are governed
by the rules on
contracts. The rules on prescription and not the rules on donation applies in th
e case at bar.
6
RYLE SCOTT MANCIA
ARTICLE 1191
SONGCUAN VS. INTERMEDIATE APPELLATE COURT (191 SCRA 28)
FACTS:
Victoriano Alviar was the owner of two parcels of land located at
San Fernando, La
Union. On the land stands a building owned by his son, Mariano, and
his wife, Belen. On
September 29, 1966, the Alviars sold these realties to Saturnino Songc
uan for P34,026.09. On
October 10, 1966 Songcuan executed an instrument entitled "Deed of Rep
urchase of Two
Parcels of Land and a Residential-Commercial Building" wherein he gave
the Alviars, or any
one of them or "their respective heirs and assigns, the right and privilege to r
epurchase at the
price of P34,026.09 ... for, during and within the period of 10 year
s counted from the date of
execution of the instrument" provided that the redemptioner also pays
the cost of
improvements.
Sometime in March, 1969 the mentioned building was razed by fire an
d Songcuan
erected another at his own expense. Subsequently, Songcuan had the realties regi
stered in his
name and was issued OCT No. 0-1029 sometime in 1969.
On July 7, 1981, Songcuan filed a complaint with the same Court of First Insta
nce of La
Union for Rescission of Right to Repurchase. Songcuan was of the opin
ion that the Alviars
forfeited their right to repurchase the realties for having failed to redeem the
m within 30 days
from the finality of the decision in Civil Case No. 2621 contrary to the mandate
of Article 1606
of the Civil Code.
On March 19, 1984, the trial court rendered its decision, the dispo
sitive portion of
which reads, to wit:
WHEREFORE judgment is hereby rendered as follows:
1. That defendants exercised (sic) their right of redemption within th
e specific
period of one (1) year, ten (10) months and eighteen (18) days from
March 9,
1981 as provided for in the decision of Civil Case No. 2621;
2. That the Deed of Reconveyance executed by the Clerk of Court and
Ex-Officio
Provincial Sheriff dated July 17, 1981 is valid and cannot be rescinded;
3. That plaintiff is the lessee of the defendant on the entire properties mentio
ned
in the Deed of Reconveyance for a period of twenty-five (25) years to be counted
from July 17, 1981 at the monthly rental of THREE HUNDRED NINETY (P390.00)
PESOS;
4. That the preliminary injunction restraining defendants or any of th
eir
representatives or agents or persons acting on their behalf from committing acts
of dispossession against plaintiff on the premises of this complaint is now made
PERMANENT during the existence of the lease contract, ...;
7
7
5. That defendants shall maintain the plaintiff in the peaceful and a
dequate
enjoyment of the lease for the entire duration of the lease;
6. That defendants shall pay plaintiff the amount of P50,000.00 by wa
y of
attorney s fees as damages with interest at the legal rate of 12% pe
r year until
fully paid; and
7. That defendants pay costs of this suit.
SO ORDERED.
Both parties appealed, Songcuan pressing for rescission while the Alvia
rs disclaiming
any obligation to lease the premises to Songcuan. The Alviars, in the alternativ
e countered, that
if Songcuan was entitled to lease the premises, the lease should cover only 1/3
of the building.
On June 27, 1986 the Court of Appeals rendered its decision modifying that of th
e trial
court s by limiting the area Songcuan is entitled to lease to only 1/3
of the building; declaring
the Alviars entitled to a writ of possession with regard the rest of
the premises; deleting the
award of attorney s fees and ordering the parties to each bear the cost of litig
ation.
ISSUE:
Whether the right may be rescinded under the grounds advanced by Songcuan.
HELD:
No.
The court stated that they do not agree about the right of Alviars to repurcha
se may be
rescinded by Article 1191. Songcuan asserts that the October 10, 1966 contract h
e entered into
with the Alviars created a reciprocal obligation between them for him to reconve
y the subject
premises and for the Alviars to lease the realties to him and the r
efusal of the latter to fulfill
their obligation giving him the right, under Article 1191, to rescind
"the right to repurchase"
the realties.
The court also stated that the mentioned law doest apply in the ca
se at bar. The
obligation at hand cannot be said that it is a reciprocal one. In r
eciprocal obligations the
obligation of one is a resolutory condition of the obligation of the o
ther, the non-fulfillment of
which entitles the other party to rescind the contract. In the case at bar, ther
e are two separate
and distinct obligations, each independent of the other. The obligation of Songc
uan to reconvey
the property is not dependent on the obligation of the Alviars to le
ase the premises to the
former. The obligation of the Alviars is not an essential part of th
e contract. The court also
mentioned that the obligation of Alviars to lease to Songcuan the property arise
s only after the
latter had conveyed the realties to them.
8
ARTICLE 1191
VELARDE VS. CA (11 JULY 2001)
FACTS
Private respondent David Raymundo is the absolute and registered owner of a prop
erty
located at 1918 Kamias St., Dasmarias Village Makati, together with the
house and other
improvements, which was under lease. The sale of the aforementioned pr
operty was
negotiated by Davids father, private respondent George Raymundo with pet
itioners Spouses
Avelina D. Velarde and Mariano Z. Velarde.
A Deed of Sale with Ass
umption of Mortgage was
executed in favor of the Spouses Velarde. Part of the consideration of the sale
was the vendees
(Spouses Velardes) assumption to pay the mortgage obligations of the pr
operty sold in the
amount of P 1,800,000.00 in favor of the Bank of the Philippine Isla
nds (BPI). While the
application for the assumption of the mortgage obligations has not yet
been approved by BPI,
they have agreed to pay the mortgage obligations on the property with the bank i
n the name of
Raymundo. It was further stated that in the event the Spouses Velarde violate any
of the terms
and conditions of the said Deed of Real Estate Mortgage, they agreed
that the downpayment
P800,000.00, plus all the payments made with the BPI on the mortgage loan, shall
be forfeited
in favor of Raymundo, as and by way of liquidated damages, without necessity of
notice or any
judicial declaration to that effect, and Raymundo shall resume total a
nd complete ownership
and possession of the property, and the same shall be deemed automati
cally cancelled.
This
Undertaking was signed by the Spouses Velarde.
Pursuant to said agre
ement, the Spouses
Velarde paid BPI the monthly interest loan for three months but stopped paying t
he mortgage
when they were informed that their application for the assumption of
mortgage was not
approved. Raymundo informed the Spouses Velarde that their non-payment
to the mortgagee
bank constituted non-performance of their obligation and the cancellation and re
scission of the
intended sale. The Spouses Velarde, through their counsel, responded an
d advised Raymundo
that they are willing to pay the balance in cash provided that Raymu
ndo: (1) delivers actual
possession of the property to them not later than 15 January 1987 fo
r their occupancy (2)
causes the release of title and mortgage from the BPI and make the title availab
le and free from
any liens and encumbrances (3) executes an absolute deed of sale in their favor
free from any
liens and encumbrances not later than 21 January 1987.
Subsequently, Raymundo sent the Spouses Velarde a notarial notice of
cancellation/rescission of the intended sale of the subject property allegedly d
ue to the latters
failure to comply with the terms and conditions of the Deed of Sale
with Assumption of
Mortgage and the Undertaking.
Consequently, the Spouses Velarde filed
a Complaint against
the Raymundos for specific performance, nullity of cancellation, writ o
f possession and
damages.
The trial court dismissed the complaint of the Spouses Vela
rde.
However, their
Motion for Reconsideration was granted and the trial court instructed
the Spouses Velarde to
pay the balance of P 1.8 million to the Raymundos, who, in turn were ordered to
execute a deed
of absolute sale and to surrender possession of the disputed property
to the Spouses.
Upon
appeal to public respondent Court of Appeals (CA), the CA upheld the ear
lier decision of the
trial court regarding the validity of the rescission made by the Raymundos. It
explained that it
was agreed by the parties that in case of violation of the mortgage obligation,
the Deed of Sale
with Assumption of Mortgage would be deemed automatically cancelled and of no fu
rther force
7
9
and effect, as if the same had never been executed or entered into.
While it
is true that even if
the contract expressly provided for automatic rescission upon failure t
o pay the price, the
vendee may still pay, he may do so only for as long as no demand for rescission
of the contract
has been made upon him either judicially or by a notarial act (Article 1592, Civ
il Code). In the
case at bar, Raymundo sent the Spouses Velarde a notarial notice date
d 8 January 1987 of
cancellation/rescission of the contract due to the latters failure to c
omply with their
obligation. The rescission was justified in view of the Spouses Velardes failure
to pay the price
(balance) which is substantial and fundamental as to defeat the object of the pa
rties in making
the agreement. Hence, this appeal by the Spouses Velarde.
ISSUE:
Whether or not the rescission of the contract made by Raymundo was valid.
HELD:
Yes, the rescission of the contract made by Raymundo is valid.
The Supreme Court (SC) affirmed the assailed Decision with modification
that the
Raymundos are ordered to return to the Spouses Velarde the amount the
y have received in
advanced payment.
The SC held that Raymundos right to rescind the contract finds basis in Article 1
191 of
the Civil Code, which explicitly provides: The power to rescind obligat
ions 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 fulfillment and the rescis
sion of the obligation,
with the payment of damages in either case. He may also seek resciss
ion even after he has
chosen fulfillment, if the latter should become impossible.
The SC also held that the right of rescission of a party to an obl
igation under Article
1191 of the Civil Code is predicated on a breach of faith by the o
ther party who violates the
reciprocity between them.
The breach contemplated in the said provisi
on is the obligors
failure to comply with an existing obligation. When the obligor canno
t comply with what is
incumbent upon it, the obligee may seek rescission and, in the absence of any ju
st cause for the
court to determine the period of compliance, the court shall decree the rescissi
on. In the given
case, the Raymundos validly exercised their right to rescind the contract, becau
se of the failure
of the Spouses Velarde to comply with their obligation to pay the ba
lance of the purchase
price. Indubitably, the latter violated the very essence of reciprocity

in the contract of sale, a
violation that consequently gave rise to the Raymundos right to rescind
the same in
accordance with law. The SC finally held that considering that the rescission o
f the contract is
based on Article 1191 of the Civil Code, mutual restitution is required to bring
back the parties
to their original situation prior to the inception of the contract. R
escission creates the
obligation to return the object of the contract. It can be carried o
ut only when the one who
demands rescission can return whatever he may be obliged to restore. To rescind
is to declare
a contract void at its inception and to put an end to it as though it never was.
0
ARTICLE 1191
AREOLA V CA (236 SCRA 643)
FACTS:
Prudential Guarantee cancelled Areolas personal accident insurance on the
grounds
that the latter failed to pay his premiums 7 months after issuing th
e policy. Areola was
supposed to pay the total amount of P1,609.65 which included the prem
ium of P1,470.00,
documentary stamp of P110.25 and 2% premium tax of P29.40. The statement of acco
unt had a
stipulation not considering it a receipt. It also reminded the customer to ask f
or a receipt after
payment. There was also a stipulation calling for a demand for a pro
visional receipt after
payment to an agent. A provisional receipt was sent to petitioner tel
ling him that the
provisional receipt would be confirmed by an official one. The company
then cancelled the
policy for non-payment of premiums. After being surprised, Areola confr
onted a company
agent and demanded an official receipt. The latter told him that it was a mistak
e, but never gave
him an official receipt. Areola sent a letter demanding that he be reinstated or
he would file for
damages if his demand was not met. The company then told him that his payments w
erent in
full yet. The company replied to Areola by telling him that there was reason to
believe that no
payment has been made since no official receipt was issued. The compa
ny then told him that
they would still hold him under the policy. The company then confirme
d that he paid the
premium and that they would extend the policy by one year.
Thereby, the company offered to reinstate same policy it had previousl
y cancelled and
even proposed to extend its lifetime on finding that the cancellation was errone
ous and that the

premiums were paid in full by petitioner-insured but were not remitted
by the company s
branch manager, Mr.Malapit.
However, they were too late for Areola already filed an action for breach of con
tract in
the trial court.
The companys defense lay in rectifying its omission; hence, there was
no breach of
contract.
The court ruled in favor of Areola and asked Prudential to pay 250,000
pesos in moral
and exemplary damages. The court held that the company was in bad fa
ith in cancelling the
policy. Had the insured met an accident at that time, he wouldnt be covered by th
e policy.
This ruling was challenged on appeal by respondent insurance company,
denying bad faith in
unilaterally cancelling the policy. The AC absolved Prudential on the
grounds that it was not
motivated by negligence, malice or bad faith in cancelling subject pol
icy. Rather, the
cancellation of the insurance policy was based on what the existing records show
ed. The court
even added that the errant manager who didnt remit the profits was fo
rced to resign. Areola
then filed for a petition in the Supreme Court.
ISSUE:
8
1
1. Did the erroneous act of cancelling subject insurance policy entitl
e petitioner-insured to
payment of damages?
2. Did the subsequent act of reinstating the wrongfully cancelled insu
rance policy by
respondent insurance company, in an effort to rectify such error, obli
terate whatever liability
for damages it may have to bear, thus absolving it?
HELD:
Yes. No. Petition granted.
1. Petitioner alleged that the managers misappropriation of his premium
payments is the
proximate cause of the cancellation of the insurance policy. Subsequent
reinstatement could
not possibly absolve respondent insurance company from liability, due t
o the breach of
contract. He contended that damage had already been done.
Prudential averred that the equitable relief sought by petitioner-insure
d was granted to the
filing of the complaint, petitioner-insured is left without a cause of
action. Reinstatement
effectively restored petitioner-insured to all his rights under the policy.
The court held that Malapit s fraudulent act of misappropriating the p

remiums paid by
petitioner-insured is directly imputable to respondent insurance company. A corp
oration, such
as respondent insurance company, acts solely thru its employees. The l
atters acts are
considered as its own. Malapit represented its interest and acted in
its behalf. His act of
receiving the premiums collected is well within the province of his authority. T
hus, his receipt
of said premiums is receipt by private respondent insurance company who, by prov
ision of law
is bound by the acts of its agent.
Article 1910 thus reads:
Art. 1910. The principal must comply with all the obligations which t
he agent may have
contracted within the scope of his authority.
As for any obligation wherein the agent has exceeded his power, the
principal is not
bound except when he ratifies it expressly or tacitly.
Malapit s failure to remit the premiums he received cannot constitute
a defense for
private respondent insurance company; no exoneration from liability coul
d result therefrom.
The fact that private respondent insurance company was itself defrauded due to t
he anomalies
that took place does not free the same from its obligation to petiti
oner Areola. As held in
Prudential Bank v. Court of Appeals
A bank is liable for wrongful acts of its officers done in the intere
sts of the bank or in
the course of dealings of the officers in their representative capacity but not
for acts outside the
scope of their authority. Accordingly, a banking corporation is liable to innoce
nt third persons
where the representation is made in the course of its business by an
agent acting within the
general scope of his authority even though the agent is secretly abus
ing his authority and
attempting to perpetrate a fraud upon his principal or some other person.
Prudential is liable for damages for the fraudulent acts committed by
Malapit.
Reinstating the insurance policy cannot obliterate the injury inflicted.
A contract of insurance
creates reciprocal obligations for both insurer and insured. Reciprocal
obligations are those
8
2
which arise from the same cause and in which each party is both a debtor and a c
reditor of the
other, such that the obligation of one is dependent upon the obligation of the o
ther.
2. Due to the agreement to enter into a contract of insurance where
Prudential
promised to extend protection to petitioner-insured against the risk in

sured, there was a
debtor creditor relationship between the two parties. Under Article 119
1, the injured party is
given a choice between fulfillmentor rescission of the obligation in case one of
the obligors fails
to comply with what is incumbent upon him. However, said article entitles the in
jured party to
payment of damages, regardless of whether he demands fulfillment or re
scission of the
obligation.
The damages would be nominal because the insurance company took steps
to rectify
the contract . There was also no actual or substantial damage inflict
ed. Nominal damages are
"recoverable where a legal right is technically violated and must be
vindicated against an
invasion that has produced no actual present loss of any kind, or where there ha
s been a breach
of contract and no substantial injury or actual damages whatsoever hav
e been or can be
shown.
3
ABEGAIL B. RAMOS
ARTICLE 1191
CENTRAL PHILIPPINE UNIVERSITY VS. COURT OF APPEALS (246 SCRA 511)
FACTS:
Sometime in 1939, the late Don Ramon Lopez, Sr., who was then a member of the B
oard of
Trustees of the Central Philippine College, executed a deed of donation in favor
of the latter
of a parcel of land with the following conditions:
1. The land described shall be utilized by the CPU exclusively for t
he
establishment and use of a medical college with all its buildings as
part of the
curriculum;
2. The said college shall not sell, transfer or convey to any third party nor i
n any way
encumber said land;
3. The said land shall be called "RAMON LOPEZ CAMPUS", and the said college sha
ll
be under obligation to erect a cornerstone bearing that name. Any net income fro
m the
land or any of its parks shall be put in a fund to be known as t
he "RAMON LOPEZ
CAMPUS FUND" to be used for improvements of said campus and erection of a buildi
ng
thereon.
On May 31, 2989, private respondents, who are the heirs of Don Ramon Lopez, Sr.
, filed an
action for annulment of donation, reconveyance and damages against CPU
alleging that
since 1939 up to the time the action was filed the latter had not
complied with the

conditions of the donation. Private respondents also argued that petiti
oner had in fact
negotiated with the National Housing Authority to exchange the donated
property with
another land owned by the latter.
In its answer petitioner alleged that the right of private respondent
s to file the action had
prescribed
ISSUE:
WON there is a need to fix the period for compliance of the condition
HELD:
NO. The period of time for the establishment of a medical college a
nd the necessary
buildings and improvements on the property cannot be quantified in a
specific number of
years because of the presence of several factors and circumstances involved in t
he erection
of an educational institution, such as government laws and regulations
pertaining to
education, building requirements and property restrictions which are beyond the
control of
the done.
Under Article 1197 of the Civil Code, when the obligation does not fix a period
but from its
nature and circumstance it can be inferred that the period was intended, the cou
rt may fix
the duration thereof because the fulfillment of the obligation itself
cannot be demanded
until after the court has fixed the period for compliance therewith a
nd such period has
arrived. However, this general rule cannot be applied in this case considering t
he different
set of circumstances existing more than a reasonable period of 50 yea
rs has already been
8
4
allowed to petitioner to avail of the opportunity o comply but unfortunately, it
failed to do
so. Hence, there is no need to fix a period when such procedure wou
ld be a mere
technicality and formality and would serve no purpose than to delay or load to u
nnecessary
and expensive multiplication of suits.
Moreover, under Article 1191 of the Civil Code, when one of the obl
igors cannot comply
with what is incumbent upon him, the obligee may seek rescission and
the court shall
decree the same unless there is just cause authorizing the fixing of a period.
In the absence
of any just cause for the court to determine the period of the compliance, there
is no more
obstacle for the court to decree the rescission claimed.
5

ARTICLE 1191
SANTOS VS. COURT OF APPEALS (337 SCRA 67)
FACTS:
The spouses Fortunato and Rosalinda Santos owned a house and lot in
Better Living
Subdivision, Paranaque, Metro Manila. The land together with the house,
was mortgaged with
the Rural Bank of Salinas, Inc., to secure a loan of P150,000. The
bank sent Rosalinda a letter
demanding payment of P16,000 in unpaid interest and other charges. Sin
ce the Santos couple
had no funds, Rosalinda offered to sell the house and lot to Carmen Caseda. Afte
r inspecting the
real property, Carmen and her husband agreed.
Carmen and Rosalinda signed a document that stated P350,000 as the fu
ll price of the
property and P54,100 as partial payment received. As agreed by the parties, it a
lso stated that
Carmen is to pay P135,385.18 remaining balance of the loan with Rural bank, real
estate taxes,
and electric and water bills.
The Casedas complied with the bank mortgage and the bills. However, t
hey failed to
continue paying the former in their bankruptcy. Due to this fact, the Santoses r
epossessed the
property. They then proceeded collecting rent from the tenants. Carmen
approached the
Santoses and offered to pay the balance of the purchase price for the house and
lot. The parties,
however, could not agree, and the deal could not push through because the Santos
es wanted a
higher price.
ISSUE:
Whether or not the non-payment of more than half of the entire purcha
se price
including the non-compliance with the stipulation to liquidate the mortgage loan
on time which
caused grave damage and prejudice to petitioners, constitute substantial
breach to justify
rescission of a contract to sell under Article 1191.
HELD:
The Santoses and Casedas, by law, were bound by a contract to sell
, not a contract of
sale. The latter (sale) constitutes a transfer of ownership from the vendor to t
he vendee subject
to the payment of the price stipulated. Failure to comply, absent all
other legal alternatives,
avails the aggrieved party rescission as a remedy. On the other hand, a contract
to sell reserves
ownership to the vendor and is not passed until the full payment of the price. F
ailure to pay in
this case prevents the vendor from transferring ownership to the vende
e. The vendors
repossession of the property cannot be considered an act of rescission
as he is merely
enforcing the contract.
6
ARTICLE 1192
MANUEL S. CAMUS, VS. PRICE, INC., (5 SCRA 581)
FACTS:
Camus (lessor) entered into a contract of lease with Price, Inc. (lessee) over a
parcel of
land covered by Lots Nos. 15 and 16 situated at No. 60 C. Arellano Street, Mal
abon, Rizal for a
full term of ten years from April 1, 1951 to March 31, 1960 with m
onthly rental of P300 and
P100 for the use of the leased premises, payable when the construction of the fa
ctory is already
finished.
The lessee shall construct a factory building and warehouse
in furtherance of its
business and that building thereon constructed shall be insured with a
competent insurance
company.
Meanwhile, the lessor agreed to make the necessary filling
to the vacant portion of
the lot along the river with an area of 500 square meters and to erect the concr
ete stone walls
with barbed wires on top and all expenses to be borne solely by the lessor. The
lessee filed an
action for specific performance while the lessor filed for unlawful de
tainer.
The Trial Court
ordered the lessee to insure the factory building and warehouse and the lessor t
o fill up the low
portion of the leased premises and enclose the part along the river
with concrete stone walls
topped by barbed wire.
On appeal of lessor, the Court of Appeals d
eclared the contract
extinguished, but the parties were made to bear their own losses and
it ordered the lessee to
compensate the lessor until it vacated the premises. Both parties appealed.
ISSUE:
Whether or not the lessee and lessor are in pari delicto for failure to comply w
ith their
respective obligations
HELD:
The conclusion reached by the Court of Appeals, that the parties are in pari del
icto is not
without foundation or justification. Facts established shows that the Lessor ac
tually started the
fining in and fencing of a portion of 500 square meters thereof, as undertaken b
y him, but did
not completely comply therewith, the fence being only of adobe stone
without barbed wires,
and the filling being 40 centimeters lower than the elevation of the lot under l
ease; that, on the
other hand, notwithstanding the completion of the factory building and warehouse
, the Lessee,
in his turn, failed to secure insurance therefor as stipulated; that the Lessee,
likewise, defaulted
in the payment of the rentals as of February 16, 1953; and that the
Lessor s failure to comply
with its obligation could not be the cause of the Lessee s non-fulfil
lment of its commitments
under the contract.
In this case, it cannot really be determined with definiteness wh
o of the parties
committed the first infraction of the terms of the contract. Under th
e circumstances, the
conclusion reached by the Court of Appeals, that the parties are actually in par
i delicto, must be
sustained, and the contract deemed extinguished, with the parties suffe
ring their respective
losses.
7
MARCO CARLO S. SANA
ARTICLE 1193
DE CORTES V. VENTURANZA (79 SCRA 709)
FACTS:
Original plaintiffs were Felix Ochoa and Noel J. Cortes and original
defendant were
Gregorio Venturanza, Mary Venturanza, Jose Oledan and Erlinda Oledan. D
efendant Gregorio
Venturanza died and was substituted by his surviving spouse and children. Thus,
a petition was
filed and granted changing the name of the case to read: Amparo Joven
de Cortes and Noel J.
Cortes, plaintiffs-appelles, versus Mary Venturanza, etc., Jose Oledan a
nd Erlinda Oledan,
defendants-appellants.
Original plaintiffs filed an action for foreclosure of real estate against the
defendants. It
is alleged that plaintiff Ochoa was the original owner of 9 parcels of land, whi
le plaintiff Cortes
was likewise the owner of 24 parcels of land, all of the land recor
ds of Bulacan. On Oct 24,
1958, plaintiffs sold and delivered to the defendants all of the abov
e mentioned 33 parcels of
land for a total sum of P716,573.90 of which the defendants agreed to pay jointl
y and severally
the sum of P100,000 upon signing and execution of the deed of sale and P40,000 o
n January 1,
1959, leaving a balance of P576,573.90 which the defendant agreed and
bound themselves to
pay within 3 years from January 1, 1959 with interest at the rate of 6% per ann
um. Defendants
also bound themselves to pay the balance of P576,573.90 with a first

mortgage upon the said
33 parcels of land.
Having already paid P140,000, of the unpaid balance owing to plainti
ffs P169,484.24
pertains to Felix Cortes and P407,089.66 pertains to Noel J. Cortes. The mortgag
e obligation fell
due on January 1, 1962, but despite repeated demands for payment, def
endants failed and
refused to pay said balance. In the deed of sale, in the event of default by de
fendants to pay the
obligation secured by the mortgage and a suit is brought for the foreclosure of
the same or any
other legal proceedings is instituted for the enforcement of plaintiffs
right, defendants would
be obligated and bound to pay plaintiffs compensation for attorney s fees fixed
at P50,000.
Defendants Venturanza admit the allotment of payment of the payment
but the said
balance has not yet become due and demandable, thus, no default. Defe
ndants Venturanza, as
an affirmative defense, allege that the document designated as deed of
sale with purchase
money mortgage did not express the true intent and agreement of the parties, as
the plaintiffs
agreed that balance would be paid when the purchase price of the def
endant s hacienda in
Bugo, Cagayan de Oro in the amoutn of P360,000, the object of axprop
riation proceedings
before the Court of First Instance in the said City,
is received.
Moreover, it was agreed that
complete payment would be made upon the consummation of the sale of their hacien
da at Bhi,
Camarines Sur for P837,000. Such negotiations were known to the plaint
iffs, who agreed to
wait for the sale of the same properties by defendants. As a second defense,they
allege that the
deed of sale had been novated by a subsequent agreement regarding the manner and
period of
payment, therefore, the cause of action has not yet accrued.
Defendants Oledan alleged that the deed of sale with purchase money mortgage f
ails to
express the true intent of the parties as far as the nature of the
liability is concerned, the true
intent being to hold them obligated unto plaintiffs only to the exten
t of the portion of their
8
8
share, that their obligation has been extinguished by novation and by
assumption of the
obligation by defendants Venturanza as provided for in the agreement among defen
dants, and
the same was made with plaintiffs full knowledge and consent. A cross-claim and
counter-cross
claim regarding the payment of the balance and shares in the property
was also existent
between the defendants.
ISSUE:
Whether the obligation had become due and demandable? Whether the bala
nce and
interest was to be made dependent upon the consummation of the sale
of the two haciendas,
hence novation being present? Whether novation was present between the defendant
s?
HELD:
With respect to the first issue, there is no dispute that plaintiffs filed the
ir complaint on
December 12, 1962 and under the terms of the contract, the defendants
were given until
January 1, 1962 within which to pay their obligation. When the latter date had
passed without
the defendants having paid the obligation not withstanding repeated dem
ands for payment.
When plaintiffs filed complaint, the effects of default as against the
defendants had already
risen. No less than the defendants Venturanza themselves, in their bri
ef, admitted that they
were delayed in the payment of the balance of their obligation.
With respect to the second issue,
if the intention of the parties
is that the
consummation of the contract should be dependent on the ability of th
e buyer to collect the
purchase price on their two haciendas, the intention should have been
clearly stated in the
contract. The evidence presented by the plaintiffs against this approaches moral
certainty, not
merely preponderance of evidence, hence, defense of novation as to the
period for payment
fails. According to article 1159 of the New Civil Code, obligations a
rising from contracts have
the force of law between the contracting parties and should be complied with in
good faith. The
deed, does not show on its face any of the limitations of the freedom of contrac
t under Article
1306 of the same Code, such as law, morals, good custom, public order or public
policy. Hence,
the literal meaning of its stipulations shall control.
With regard the third issue, according to Manresa, novation is the extinguish
ment of an
obligation by the substitution or change of the obligation by a subse
quent one which
extinguishes or modifies the first, either by changing the object or
principal conditions, or by
substituting the person of the debtor, or by subrogating a third pers
on to the rights of the
creditor. Unlike other modes of extinction of obligations, novation is a juridic
al act with a dual
function. It extinguishes an obligation and creates a new one in lieu
of the old. Under the
provisions of Novations, there are two forms of novation by substituti
ng the person of the
debtor, and they are: expromision and delegacion. In the former, the
initiative for the change
foes not come from the debtor and may even be made without his knowledge, since
it consists
in a third person assuming the obligation. As such, it logically requires the co
nsent of the third
person and the creditor. In the latter, the debtor offers and the creditor accpe
ts a third person
who consents to the substitution and assumes the obligation. In these two modes,
the consent
of the creditor in and indispensable requirement. In the case at bar the agreeme
nt relied upon
by defendants Oledans does not show on its face that the plaintiffs
intervened in, much less
gave their consent to, the substitution. As a matter of fact, plainti
ff Cortes vehemently denied
having consented to the transfer of rights from the Oledans to the Venturanzas a
lone. There is a
complete absence of animus novandi, whether express or implied, on the part of t
he creditors.
8
9
ARTICLE 1176
APARRI v. COURT OF APPEALS (31 JANUARY 1997)
FACTS:
On January 15, 1960, private respondent approved the following resoluti
on no. 13,
hereby appointing Mr. Bruno Aparri, as general manager of NARRA, with
all the rights,
prerogatives and compensations to take effect on January 16, 1960.
On March 15, 1962, the board of directors approved resolution no. 24
which stating
therein that the incumbent general manager shall perform his duty up
to the close of office
hour on March 31, 1962. In accordance with the provisions of section
8, sub-section 2 of RA
1160. It hereby fixes the term of office of the incumbent general manager until
March 31, 1962.
Petitioner files a mandamus with preliminary injunction with the Court
of First Instance of
Manila. The petition prays for the annulment of the resolution of NARRA board.
ISSUE:
Whether or not board resolution No. 24 was a removal or dismissal of
petitioner
without cause.
HELD:
Presumably, the Board of Directors of the NARRA expected that such ap
pointment be
given approval by the then President. Lacking such approval by the Pr
esident as required by
the law, the appointment of petitioner was not complete. The petitione
r can, at best, be
classified as a de facto officer. However, such appointment was made complete up
on approval
of Resolution No. 24 wherein the President submitted to the Board his "desire" t
o fix the term
of office of the petitioner up to the close of office hours on March 31, 1962.
It was affirmed that the term of office of petitioner expired on Mar

ch 31, 1962. It is
necessary in each case to interpret the word "Term" with the purview
of the statutes so as to
effectuate the statutory scheme pertaining to the office under examinat
ion. In the case at bar,
the term of office is not fixed by law. However, the power to fix the term is re
sted in the board
of directors subject to the recommendation of the office of economic
coordination and the
approval of the President of the Philippines. Resolution No. 24 speaks
of no removal but an
expiration of the term of office of the petitioner. The statute is undeniably cl
ear. "It is the rule in
statutory construction that if the words and phrases of a statute are not obscur
e or ambiguous.
Its meaning and intention of the legislative must be determined from
the language employed
and where there is no ambiguity in words, there is no room for construction.
The petitioner in this case was not removed before the expiration of his term ra
ther, his right to
hold office ceased by the expiration on March 31, 1962, of his term to hold such
office
9
0
AIDA MAY P. SILVA
ARTICLE 1193
SANTOS V. COURT OF APPEALS (27 MARCH 1984)
FACTS:
Respondent Aurora Gutierrez, an apartment owner, instituted an unlawful detainer
suit
against the Santos Spouses on the ground of delinquency in payment of rentals.
Santos Spouses answered that they are the legitimate tenants of the apartment wi
th the
present rental rate of P250.00 per month on a month-to-month oral con
tract of lease.
They
were not delinquent in payment, only that the collector failed to get
the money and since the
whereabouts of the lessor were unknown they deposited rentals with the
bank.
The mere
sending of a notice to vacate by registered mail which the postal cl
erk refused to deliver to
them for the reason of wrong name cannot be considered sufficient com
pliance with the
requirement of notice.
HELD:
The contract of lease on a month-to-month basis can only mean as pro
viding for a
definite period of lease.
The parties agreed that upon proper notice
, one may terminate the
agreement.
The parties expressly agreed that upon proper notice, one
may terminate the
agreement (Rantael v. Court of Appeals, 97 SCRA 453, 459).
Judicial
ejectment lies when the
lease is for a definite period or when the fixed period has expired (Sec. 1, Art
. 1673, NCC). The

lease in this case having a fixed period, the lessor had the right
to judicially eject Santos
Spouses.
J. Melencio-Herrera dissenting and concurring:
The lease is not for a definite period because the period was not agreed upon by
the parties but
is determined by Art. 1687 of the NCC, to wit:
If the period for the lease has not been fixed, it is understood to
be xxx from
month-to-month, if it (the rent agreed upon) is monthly.
However, the effects of Art. 1687 were suspended by Section 6 of B.P. No. 25 (fo
rmerly Sec. 4 of
P.D. No. 20).
The Rantael case does not apply as that pertains to a conventional
lease, where the
period was fixed in a written agreement.
Thus, the ruling that a l
ease contract on month-tomonth basis provides a definite period and may be terminated at the end of any mo
nth. In this
subject lease which is a legal lease, there was no formal agreement
as the lessor merely
acquiesced to the continued occupation of lessees.
Finally, Santos Spouses should be ejected as even if the month-to-month arrangem
ent is
on a verbal basis, the lease is considered terminated at the end of
the month if statutory
grounds to eject under Section 5 of B.P. No. 25 exist, which in thi
s case are: the arrears in
payment and the need of lessor to make necessary repairs [pars. (e) and (b)].
9
1
ARTICLE 1193
ACE-AGRO DEVELOPMENT CORPORATION VS. CA (JANUARY 21, 1997)
FACTS:
Petitioner Ace-Agro Development Corporation (ACE) and
respondent Cosmo
s Bottling
Corporation (COSMOS) entered into service contracts renewable yearly whe
rein ACE
obligated itself of cleaning soft drink bottles and repairing wooden s
hells for COSMOS
within the company premises in San Fernando, Pampanga.
On January 18, 1990, they signed a contract covering the period Janu
ary 1, 1990 to
December 31, 1990.
On April 25, 1990, fire broke out in COSMOSs plant, destroying the area where AC
E did its
work. As a result, ACEs work was stopped. ACE asked COSMOS to allow
it to resume its
service. COSMOS replied on terminating the contract due to the fire which had prac
tically
burned all old soft drink bottles and wooden shells,. ACE then informe
d its employees of
the termination of their employment. This led the employees to file a
complaint for illegal
dismissal before the Labor Arbiter against ACE and COSMOS.
ACE sent another letter reiterating its request for reconsideration. I
n response COSMOS
granted priority to resume its work under the terms of their agreement outside i
ts premise,
but ACE refused the same on the ground that working outside the respondents plant
would
mean added transportation costs that would offset any profit it would earn.
Thereafter, COSMOS sent a letter stating that ACE can resume work in
accordance with
their existing agreement. But again, ACE refused this offer for the r
eason that there is a
pending settlement of the NLRC case filed against it by its employees.
The RTC found COSMOS guilty of breach of contract and ordered it to
pay damages.
COSMOS appealed to the Court of Appeals, which on December 29, 1994, reversed th
e trial
courts decision and dismissed ACEs complaint. The appellate court found that it wa
s ACE
which had refused to resume work, after failing to secure an extension of its co
ntract. ACE
now seeks a review of the Court of Appeals decision.
ISSUE:
W/N the happening of an unforeseen event extinguish the obligation of a contract
?
Does the suspension of work due to force majeure merit an automatic extension of
the
period of the agreement between the parties?
2
HELD:
The agreement between the parties is with a resolutory period, beginn

ing from January 1,
1990 and ending on December 31, 1990.
When the fire broke out, the
re resulted a
suspension of the ACEs work as per agreement. But this suspension of w
ork due to force
majeure did not merit an automatic extension of the period of the ag
reement between
them.
According to Tolentino:
The stipulation that in the event of a fortuitous event or force majeure the co
ntract shall be
deemed suspended during the said period does not mean that the happening of any
of those
events stops the running of the period the contract has been agreed
upon to run.
It only
relieves the parties from the fulfillment of their respective obligations during
that time. The
court held that there was no cause for terminating the contract but
at most atemporary
suspension of work.
The court thus rejects COSMOS claim that,as a result of the fire, th
e obligation of contract
must be deemed to have beenextinguished. Nonetheless, the Court of App
eals found that
COSMOS hadreconsidered its decision to terminate the contract and tried to accom
modate
the request of ACE.
3
KAREN G. SUPAPO
ARTICLE 1196
ABESAMIS V. WOODCRAFT WORKS, LTD. (30 SCRA 372)
FACTS:
On January 22, 1951, Woodcraft Works, Ltd and East Samar Lumber Mills
, owned by
Jose Abesamis, entered a contract of sale whereby the former would pu
rchase from the
latter1,700,000 board feet of logs. It was stipulated that 1,300,000 b
oard feetof logs would be
sold at P78.00 per thousand and the rest at P70.00.Certain advances which had b
een given by
the Woodcraft to Abesamis, in the aggregate amount of P9,000.00, were
transferred to and
considered as advances on the contract. It was also agreed that the shipment was
to be "before
the end of July, but will not commence earlier than April with the
option to make partial
shipment depending on the availability of logs and vessels."
Of the quantity of logs agreed upon, only two shipments were made, on
e in March and
the other in April, 1951, amounting to 333,832 board feet and 128,825 board feet
, respectively,
or a total of 462,657 board feet.
On May 5, 1951, a typhoonstruck Dolores, Samar that swept away almost
all the logs
then awaiting shipment, amounting to 410,000 board feet, valued at P73,537.77.
On September 13, 1951,Jose Abesamisfiled in the Court of First Instanc
e of Leyte an
action for rescission of the contract and for recovery of damages by
reason of Woodcraft
Works, Ltd.s failure to send a vessel to Dolores, Samar. The lower court granted
the rescission
of the contract and ordered Woodcraft Works, Ltd. to pay for actual
damages including loss
incurred during the storm.

ISSUE:
Whether or not there was a delay when Woodcraft Works, Ltd. failed t
o send a vessel
before a typhoon struck Dolores, Samar.
HELD:
No. When the typhoon struck on May 5, 1951 there was yet no delay
on the part of
Woodcraft Works, Ltd., and Jose Abesamis must shoulder the correspondin
g loss. The Court
pointed out that under the contract, shipment was to be made before the end of J
uly 1951, but
not to commence earlier than April of the same year. The obligation between the
parties was a
reciprocal one, Woodcraft Works, Ltd. to furnish the vessel and Abesamis to furn
ish the logs. It
was also an obligation with a term, which obviously was intended for
the benefit of both
parties, the period having been agreed upon in order to avoid the st
ormy weather in Dolores,
Samar, during the months of January to March. The obligation being re
ciprocal and with a
period, neither party could demand performance nor incur in delay before the exp
iration of the
period.
4
JUSTO PAULO TORRES
ARTICLE 1197
GREGORIO ARANETA, INC. VS PHIL. SUGAR ESTATES DEVT CO. LTD (20 SCRA 330)
FACTS:
Gregorio Araneta was the owner of a parcel of land in Quezon City
which is now the
place of the Sto. Domingo Church and covenant. Upon procurement of sa
id land both parties
agreed upon performance which states, (Plaintiff) Construct streets on t
he NE & NW &SW
sides of the land herein sold so that the latter will be a block surrounded by s
treets on all four
sides; and the street on the NE side shall be named Sto. Domingo Av
enue. However,
performance was hindered specifically on the part of the NE side sinc
e it was currently being
inhabited by squatters in the person of a certain Manuel Abundo which also had a
case pending.
All other streets in question was duly constructed. The sale was made in July 28
, 1950. On May
7, 1958 the respondent filed a complaint stating that performance must
be complied with. On
the 31st of May, 1960 the court ruled, WHEREFORE, judgment is hereby
rendered giving
defendant Araneta, a period of two years from notice hereof, within w
hich to comply with its
obligation under contract, Annex A. Even though, this was not meritorious enough
since article
1197 makes plain that, the courts shall determine such a period as ma
y under the
circumstances have been probably contemplated by the parties.
ISSUE:
Whether or not the fixing of the period of the Lower Court was valid and justifi
ed
HELD:
In view of the foregoing, the decision appealed from is reversed, a
nd the time for the
performance of the obligations of the petitioner Gregorio Araneta, Inc.
is hereby fixed at the
date that all squatters on affected areas are finally evicted therefrom.
The reasonable time being discussed herein is the time when the squatters are fi
nally
out of the areas in question. Going into the deal itself, both parti
es knew full-well of their
hindrance which cannot be negated or have an absolute time frame. Mor
eover, the case
discussed, As the parties must have known that they could not take th
e law into their own
hands, but must resort to legal processes in evicting the squatters, they must h
ave realized that
the duration of the suits to be brought would not be under their control nor cou
ld the same be
determined in advance.--The CA objected to this conclusion that it wou
ld render the date of
performance indefinite. Yet, very indefiniteness is what explains why t
he agreement did not
specify any exact periods or dates of performance.
5
ARTICLE 1197
MILLARE V HERNANO (JUNE 30 1987)
FACTS:
On 17 June 1975, a five-year Contract of Lease was executed between petitioner P
acifica
Millare as lessor and private respondent Elsa Co, married to Antonio
Co, as lessee. Under the
written agreement, which was scheduled to expire on 31 May 1980, the
lessor-petitioner
agreed to rent out to thelessee at a monthly rate of P350.00 the "P
eople s Restaurant", a
commercial establishment located at the corner of McKinley and Pratt S
treets in Bangued,
Abra.
Sometime during the last week of May 1980, the lessor informed them
that they could
continue leasing the People s Restaurant so long as they were amenable
to paying creased
rentals of P1,200.00 a month. Respondents made a counteroffer of P700.00 a month
. Petitioner
allegedly stated that the amount of monthly rentals could be resolved at a later
time since "the
matter is simple among us", which was taken by the spouses Co to me
an that the Contract of
Lease had been renewed.Petitioner, however, flatly denied ever having c
onsidered, much less
offered, a renewal of the Contract of Lease.
On 22 July 1980, Mrs. Millare wrote the Co spouses requesting them to vacate the
leased
premises as she had no intention of renewing the Contract of Lease.
In reply, the Co spouses
reiterated their unwillingness to pay the Pl,200.00 monthly rentals. Th
ey also signified their
intention to deposit the amount of rentals in court, in view of Mrs.
Millare s refusal to accept
their counter-offer. Another letter of demand came from Mrs. Millareon 28 July 1
980, which the
Co spouses responded by depositing the rentals for June and July (at 700.00 a mo
nth) in court.
On 30 August 1980, the Co spouses filed a Complaint against Mrs. Mil
lare and seeking
judgment (a) ordering the renewal of the Contract of Lease at a rental rate of P
700.00 a month
and for a period of ten years, (b) ordering the defendant to collect
the sum of P1,400.00
deposited by plaintiffs with the court, and (c) ordering the defendant
to pay damages in the
amount of P50,000.00. Mrs. Millare filed an ejectment case against the Co spouse
s.
Respondent judge denied the motion to dismiss and ordered the renewal of the
Contract of Lease. Plaintiffs were allowed to deposit all accruing monthly renta
ls in court.
ISSUE:
WON the respondent judge erred in the application of Article 1197 whe
n the court
ordered the renewal of the lease contract to another fixed term of five years.
HELD:
No
Article 1197 of the Civil Code provides:If the obligation does not fix a period,
but from its
nature and the circumstances it can be inferred that a period was intended, the
courts may fix
9
6
the duration thereof.
The courts shall also fix the duration of the period when it depends
upon the will of the
debtor.
In every case, the courts shall determine such period as may, under the circumst
ances,
have been probably contemplated by the parties. Once fixed by the cou
rts, the period
cannot be changed by them.

The first paragraph of Article 1197 is clearly inapplicable, since the
Contract of Lease
did in fact fix an original period of five years, which had expired. It is also
clear from paragraph
13 of their Contract of Lease , which states: ..., and this contract of lease may
be renewed after
a period of five (5) years under the terms and conditions as will b
e mutually agreed upon by
the parties at the time of renewal; x xx that the parties reserved t
o themselves the faculty of
agreeing upon the period of the renewal contract. The second paragraph
of Article 1197 is
equally clearly inapplicable since the duration of the renewal period was not le
ft to the will of
the lessee alone, but rather to the will of both the lessor and the
lessee. Most importantly,
Article 1197 applies only where a contract of lease clearly exists. H
ere, the contract was not
renewed at all, there was in fact no contract at all the period of which could h
ave been fixed.
Failure to reach agreement on the terms and conditions of the renewal contract w
ill of
course prevent the contract from being renewed at all. In the instant
case, the lessor and the
lessee conspicuously failed to reach agreement both on the amount of the rental
to be payable
during the renewal term, and on the term of the renewed contract.
Doctrine
Article 1197 of the New Civil Code applies only where a contract clearly exists.
7
ELEAZAR M. VICENTE
ARTICLE 1197
RADIOWEALTH FINANCE COMPANY vs. DEL ROSARIO (335 SCRA 288)
FACTS:
Spouses Vicente & Maria Del Rosario jointly & severally executed, signed and del
ivered
in favor of Radiowealth Finance Company a promissory note for P138,948.
Thereafter, respondents defaulted on the monthly installments. Despite r
epeated
demands, they failed to pay their obligation.
Petitioner filed a complaint for the collection of sum of money before the RTC.
Trial court dismissed the complaint for the evidence presented were merely hears
ay.
CA reversed & remanded the case for further proceedings.
Petitioner claims that respondents are liable for the whole amount of their debt
and the
interest thereon, after they defaulted on the monthly installments. Res
pondents counter that
the installments were not yet due and demandable. They theorize that the action
for immediate
enforcement of their obligation is premature because its fulfillment is
dependent on the sole
will of the debtor. Hence, they consider that the proper court should
first fix a period for

payment, pursuant to Articles 1180 and 1197 of the Civil Code.
ISSUE:
WON the installments had already became due and demandable? YES
HELD:
The act of leaving blank space the due date of the first installment
did not necessary
mean that the debtors were allowed to pay as & when they could. If
this was the intention of
the parties, they should have so indicated in the promissory note. Ho
wever, it did not reflect
any such intention.
While the specific date on which each installment would be due was left blank, t
he note
clearly provided that each installment should be payable each month.
Furthermore, it also provided for an acceleration clause and a late p
ayment penalty,
both of which showed the intention of the parties that the installmen
t should be paid at a
definite date. Had they intended that the debtors could pay as & when they could
, there would
have been no need for these 2 clauses.
The installments had already became due & demandable is bolstered by
the fact that
respondents started paying installments on the promissory note. The obl
igation of the
9
8
respondents had matured & they clearly defaulted when their checks bou
nced. Per the
acceleration clause, the whole debt became due one month after the da
te of the note because
the check representing their first installment bounced.
9
9
ARTICLE 1198
GAITE V. FONACIER (2 SCRA 830)
FACTS:
Defendant-appellant Isabelo Fonacier was the owner and/or holder, either by him
self or in
a representative capacity, of 11 iron lode mineral claims, known as t
he Dawahan Group,
situated in the municipality of Jose Panganiban, province of Camarines Norte.
Gaite was appointed by Fonacier as attorney-in-fact to contract any p
arty for the
exploration and development of mining claims. Gaite executed a deed of
assignment in
favor of Larap Mines Inc., a single proprietorship, owned by him.
For some reasons, Fonacier revoked the agency, which was acceded to by
Gaite, subject to
certain conditions, one of which being the transfer of ores extracted
from the mineral
claims for P75,000, of which P10,000 has already been paid upon signing of the a
greement
and the balance to be paid from the first letter of credit for the
first local sale of the iron
ores. To secure payment of the P65,000 balance, Fonacier delivered to
Gaite a surety
agreement with Larap Mines Inc. and some of its stockholders as sureties.
When this bond was presented to Gaite by Fonacier together with the "Revocation
of Power
of Attorney and Contract", Gaite refused to sign said contract unless
another bond under
written by a bonding company was put up by defendants to secure the
payment of the
P65,000.00 balance of their price of the iron ore in the stockpiles
in the mining claims.
Hence, a second bond, was executed by the same parties to the first
bond, with the Far
Eastern Surety and Insurance Co. as additional surety, but it provided
that the liability of
the surety company would attach only when there had been an actual sale of iron
ore by the
Larap Mines Inc. for an amount of not less then P65,000.00, and that
, furthermore, the
liability of said surety company would automatically expire on December 8, 1955.
When the the Far Eastern Surety and Insurance bond expired, no sale
of the iron ore had
been made by the Larap Mines Inc., nor had the P65,000.00 balance of the price o
f said ore
been paid to Gaite by Fonacier and his sureties payment of said amount, on the t
heory that
they had lost right to make use of the period given them when their
bond, Far Eastern
Surety and Insurance bond automatically expired. And when Fonacier and
his sureties
failed to pay as demanded by Gaite, the latter filed the present com
plaint against them in
the Court of First Instance of Manila for the payment of the P65,000.00 balance
of the price
of the ore, consequential damages, and attorney s fees.
ISSUE:
Whether appellants, Fonacier and his sureties, still have the right to
insist that Gaite
should wait for the sale or shipment of the ore before receiving payment.
HELD:
1
00
The Court of First Instance of Manila held and the Supreme Court af
firmed that the
appellant have forfeited the right to compel Gaite to wait for the s
ale of the ore before
receiving payment of the balance of P65,000.00, because of their failure to rene
w the bond
of the Far Eastern Surety Company or else replace it with an equival
ent guarantee. The
expiration of the bonding company s undertaking on December 8, 1955 su
bstantially
reduced the security of the vendor s rights as creditor for the unpaid P65,000.0
0, a security
that Gaite considered essential and upon which he had insisted when he executed
the deed
of sale of the ore to Fonacier. The case squarely comes under paragraphs 2 and 3
of Article
1198 of the Civil Code of the Philippines:

"ART. 1198. The debtor shall lose every right to make use of the period:
(1) . . .
(2) When he does not furnish to the creditor the guaranties or secu
rities which he has
promised.
(3) When by his own acts he has impaired said guaranties or securit
ies after their
establishment, and when through fortuitous event they disappear, unless
he immediately
gives new ones equally satisfactory.
Appellants
failure to renew or extend the surety company s bond upon
its expiration
plainly impaired the securities given to the creditor (appellee Gaite),
unless immediately
renewed or replaced.
All the alternatives, therefore, lead to the same result: that Gaite
acted within his rights in
demanding payment and instituting this action one year from and after
the contract was
executed, either because the appellant debtors had impaired the securities origi
nally given
and thereby forfeited any further time within which to pay; or because the term
of payment
was originally of no more than one year, and the balance of P65,000.
00 became due and
payable thereafter.
1
01
MARY ANTONETTE YU
ARTICLE 1198
SORIANO V. ABALOS (84 PHIL 206)
FACTS:
The respondents, herein Juliana and Carolina Abalos, sold a parcel of
land to Felipe
Maneclang and the petitioner, Modesto Soriano for P750. The land is s
ubject to an option to
repurchase at anytime they have the money. Due to war, the offer to r
epurchase made was
not carried on. After ceding all the rights of Felipe Maneclang to Modesto Soria
no, another offer
was made in which Soriano subsequently refused. Juliana and Carolina t
hen consigned the
P750 with the court and filed a complaint for repurchase.
Upon the death of Juliana, it was discovered that the land is also partly owned
by Mercedes
and Encarnacion Abalos. The Court of First Instance ruled, which the Court of Ap
peals affirmed,
ordering the reconveyance of the land to the respondents, the collection of the
consigned P750
and the payment of P3200 as sum of the fruits obtained in 1944.
The petitioner invoked that the land cannot be repurchased since it has lapsed.
There being
no express stipulation as to the time, the period to exercise such right is four
years as provided
in par.1 of Article 1508 of the Civil Code (now Article 1606). Also, he invoked
the damages were
equal with the Japanese war notes.
ISSUE:
W/N the respondents have a right to repurchase the property?
HELD:
Yes, the respondents have the right to repurchase the property. At any time they
have the
money is considered as an express agreement as to its time. Therefore,
this would fall under
Par.2 of Article 1508 of the Civil Code (now Article 1606), which provides for 1
0 years.
The petitioner is liable to pay the damages of P35.55/year starting M
ay 1944 using the
Ballantine scale of values. As of December 1, 1944, the value of Jap
anese military notes in
relation to peso is 90 to 1.
02
ARTICLE 1231
SAURA IMPORT & EXPORT CO., INC. VS. DEVELOPMENT BANK OF THE PHIL., (44 SCRA
445)
FACTS:
SauraInc applied to the RFC-Rehabilitation Finance Corporation (now DBP
Development Bank of the Philippines) for an industrial loan of 500k. However, be
fore the loan
application, Saura had already purchased the machinery it intended to buy using
the 500k loan
on the strength of a letter of credit extended by Prudential. It therefore asked
for the change of
the terms of the loan as Saura now intends to use the proceeds of
the loan from DBP to be
applied to Prudential. But since the loan did not proceed, Saura was
not able to fulfil its
obligation to Prudential.
DBP passed Resolution No.145 approving the loan application with specif
ications on
how to spend the money (construction, machinery, working capital). DBP
cancelled 300k, in
view of the withdrawal of China Engineers Ltd. (China Engineers was a signatory
to the original
Res145)Saura asked for reinstatement of 500k, with China Engineers as signato
ry. Resolution
No.9083 restored loan to500k with a condition stating there must be a Certificat
ion from Dept
of Agriculture and Natural Resources that the materials that Saura would use mus
t be local raw
materials.However, Saura could not comply with the conditions (local raw
materials were not
available) and that it was already supposed to import the said machinery.
Saura did not pursue and requested DBP to cancel the mortgage. DBP e
xecuted the
corresponding deed of cancellation and delivered it to Ramon Saura (Pr
esident of Saura
Import)
7 years later, Saura applied for another loan with DBP for another project. DBP
denied.
2years later, this action for damages was instituted by Saura against DBP for al
legedly failing to
release the loan proceeds.
ISSUE:
Whether or not Saura was entitled to damages by the alleged breach of contract y
DBP
HELD:
No.
There was mutual desistance
RFC turned down the request in its letter of January 25, 1955 the n
egotiations which
had been going on for the implementation of the agreement. Saura, Inc
. was in no position to
comply with RFC s conditions. Instead of doing so and insisting that
the loan be released as
1
03
agreed upon, Saura, Inc. asked that the mortgage be cancelled, which
was done on June 15,
1955. The action thus taken by both parties was in the nature of mu
tual desistance what
Manresa terms "mutuodisenso" which is a mode of extinguishing obligations. It is
a concept
that derives from the principle that since mutual agreement can create
a contract, mutual
disagreement by the parties can cause its extinguishment.
The subsequent conduct of Saura, Inc. confirms this desistance. It did
not protest
against any alleged breach of contract by RFC, or even point out tha
t the latter s stand was
legally unjustified. Its request for cancellation of the mortgage carri
ed no reservation of
whatever rights it believed it might have against RFC for the latter s non-compl
iance. In 1962 it
even applied with DBP for another loan to finance a rice and corn p
roject, which application
was disapproved. It was only in 1964, nine years after the loan agreement had be
en cancelled
at its own request, that Saura, Inc. brought this action for damages.
All these circumstances
demonstrate beyond doubt that the said agreement had been extinguished
by mutual
desistance and that on the initiative of the plaintiff-appellee itself.
04
ARTICLE 1231
FLORO ENTERPRISES, INC., V. COURT OF APPEALS (249 SCRA 354)
FACTS:
On 25 February 1981, Floro, Inc. and Phil. Rabbit entered into an ag
reement
denominated as "Agreement for Equipment Lease, Service and Maintenance"
whereby Floro,
Inc. agreed to furnish Phil. Rabbit with certain computer equipment in
cluding four (4) Model
85 Visual Display Units or monitors. Appearing on the bottom portion of the Agre
ement was a
handwritten annotation made by Mr. Ernesto P. Lagman, a sales represen
tative of Floro, Inc.,
which read: "After (5) five years, the computer becomes your property."
The Agreement provided for the payment by Phil. Rabbit to Floro, Inc.
of a
downpayment upon signing of the Agreement and certain monthly payments,
plus certain
other amounts upon delivery of the computer equipment.
1
The computer equipment specified
in the Agreement was delivered to Phil. Rabbit on September 1981 exce
pt for the four (4)
Model 85 monitors. In lieu thereof, Floro, Inc. delivered and installed Model 82
monitors. Phil.
Rabbit made several verbal and written demands on Floro, Inc. to deli
ver the Model 85
monitors. Upon assurances made by Floro, Inc. that the Model 85 monit
ors "will be
forthcoming", Phil. Rabbit made several payments in accordance with the
terms of the
Agreement. However, despite the assurances made by Floro, Inc., the Model 85 mon
itors were
never delivered to Phil. Rabbit.
On 10 January 1983, Phil. Rabbit wrote Floro, Inc. asking for the ca
ncellation of the
Agreement alleging that the computers were not placed in full operation due to t
he nondelivery
of the Model 85 monitors. In a letter dated 4 February 1983, Floro,
Inc. expressed its
conformity to the "mutual cancellation" of the Agreement and demanded
the return of the
computer equipment. Phil. Rabbit informed Floro, Inc. that the computer equipmen
t would be
returned only upon the reimbursement of the amount of P295,169.00, whi
ch the former had
already paid the latter.
On 31 May 1983, Floro, Inc. wrote Phil. Rabbit reiterating its demand
for the return of
the equipment and payment of back rentals in the amount of P265,291.50. Phil. Ra
bbit insisted
on the return of the payments it had previously made. On 10 August 1983, Floro,
Inc. proposed
to put the computer systems in operating condition and to start the
"lease contract" all over
again for another sixty (60) months but crediting under the new contr
act the monthly rentals
already paid by Phil. Rabbit. No agreement was reached by the parties.
ISSUE:
Whether the contract entered into by petitioner Floro, Inc. and private responde
nt Phil.
Rabbit was one of sale on installment basis, as found by the CA, or one of lease
, as found by the
RTC?
05
HELD:
The Court does not see any real need for resolving this issue in view of the fac
t that the
parties had agreed to a mutual cancellation of their transaction. As
established by both
respondent appellate court and the trial court, on 10 January 1983 pr
ivate respondent Phil.
Rabbit wrote petitioner Floro, Inc. asking for the cancellation of the
Agreement and the latter,
through a letter dated 4 February 1983, communicated to the former it
s conformity
thereto.
8
Whether the contract is characterized as a sale or a lease, the con
sequences of the
cancellation would be the same. The parties are to be restored to their origina
l positions inter
se as far as practicable.
When petitioner Floro, Inc. failed to deliver the Model 85 monitors, private re
spondent
Phil. Rabbit would have been entitled to refuse to pay the full amou
nt stipulated in the
Agreement. However, private respondent Phil. Rabbit opted to cancel the Agreemen
t, to which
petitioner Floro, Inc. expressed its conformity. In legal effect, the
parties entered into another
contract for the dissolution of the previous one, and they are bound
by that contract. The
dissolution or the cancellation of the original Agreement necessarily involves r
estoration of the
parties to thestatus quo ante prevailing immediately prior to the execution of t
he Agreement i.e.
the computer equipment reverts back to petitioner Floro, Inc. and priv
ate respondent Phil.
Rabbit is reimbursed the amounts it had paid to the former. However, in this cas
e, Phil. Rabbit
cannot reasonably demand reimbursement for the full amount it had paid
to petitioner Floro,
Inc. because it cannot be gainsaid that Phil. Rabbit had utilized the computer e
quipment for its
operations and benefitted from such use. Phil. Rabbit cannot be allowed to unjus
tly enrich itself
at the expense of Floro, Inc.
Hence, respondent appellate court was correct in ordering the parties to restore
to each
other what each of them had received under the contract but taking i
nto account the use by
private respondent Phil. Rabbit of the computer equipment. However, it was not
quite correct
in invoking, in this connection, Article 1385 of the Civil Code. Arti
cle 1385 refers to contracts
that are rescissible for causes specified in Articles 1381 and 1382 of the Civil
Code but it does
not refer to contracts that are dissolved by mutual consent of the
parties.
9
Rather, the mutual restoration is in consonance with the basic principle that w
hen an
obligation has been extinguished or resolved, it is the duty of the court to req
uire the parties to
surrender whatever they may have received from the other so that they may be res
tored, as far
as practicable, to their original situation.
10
Petitioner Floro, Inc. had already been able to recover the computer
equipment through the
writ of replevin issued by the trial court in its favor. Upon the o
ther hand, on the basis of the
records of the case, respondent appellate court ordered Phil. Rabbit to pay peti
tioner Floro, Inc.
the sum of P120,564.00 representing payment for the use of the comput
er equipment for a
period of approximately six (6) months, said amount to be deducted fr
om the sum of
P295,169.00 which had already been paid to the latter. Floro, Inc. wa
s accordingly ordered to
return to Phil. Rabbit the remaining balance of P174,605.00.
06
FELIX Z. CAMERINO JR.
ARTICLE 1231
PEOPLE V. JOSE (71 SCRA 273)
FACTS:
Jaime JOSE (defendant) is charged in a criminal case for robbery, and forcible a
bduction
with rape. JOSE was found guilty of forcible abduction with rape and sentenced t
o death. JOSE
was also ordered to pay the victim, as moral and exemplary damages, the sum of P
6,000.00.
During the pendency of this case, JOSE was sentenced to death and executed as pe
nalty
for another similar capital offense previously committed by him.
The lower court resolved to DISMISS the case against JOSE but only i
nsofar as his
criminal liability is concerned.
ISSUES:
Whether or not civil obligations resulting from the said crime is extinguished a
s a result
of the death of the defendant.
HELD:
According to Article 1231, death of a party is classified as an invo
luntary mode of
extinguishment of obligation in the cases where obligations are personal.
In this criminal case, the SC ruled that:
In view of the death of Jaime Jose during the pendency of this case which was imp
osed
as his penalty for another similar capital offense previously committed by him,
the case against
him is dismissed and said accused is relieved in this case of all p
ersonal and pecuniary
penalties attendant to his crime, his death occurring before rendition of final
judgment herein.
07
ARTICLE 1231
TORRIJOS V. THE COURT OF APPEALS (67 SCRA 394)
FACTS:
WakatDiamnuan and his wife were the registered owners of one-fourth
share of a
parcel of land containing an area of 39.9643 hectares situated in Sit
ioCacuban, Barrio
Gumatdang, Pitogon, Benguet, covered by OCT No. O-36, issued in their
names and in the
names of KangiErangyas, and the heirs of KomisingTagle, who owned the remaining
portions.
On 11 May 1968, WakatDiamnuan and his wife sold their one-fourth shar
e in favor of
petitioner Torrijos for P7,493.00. The Deed of Sale, however, was refused regist
ration because
Torrijos, who produced OCT No. O-36, did not have the copies thereof
held by the other coowners, KangiErangyas and heirs of KomisingTagle.In 1969, the entire property, t
ogether with
the share of WakatDiamnuan and his wife, was sold to Victor de Guia
for P189,379.50. Hence,
Torrijos prosecuted WakatDiamnuan for estafa before the Baguio Court of First In
stance.
On 5 August 1973, the accused died, for which reason his counsel moved to dismis
s the
appeal under paragraph 1 of Article 89 of the Revised Penal Code, wh
ich provides that the
death of a convict extinguishes, not only the personal penalties, but
also the "pecuniary
penalties" as long as the death occurs before final judgment.
Complainant Torrijos opposed the said motion to dismiss appeal on the ground tha
t the
term "pecuniary penalty" should not include civil liability in favor of the off
ended party, which
was decreed by the trial court in this case, as the civil action therefore was n
ot reserved, much
less filed separately from the criminal action.
The respondent CA sustained the motion, which is shared by the Solicitor General
, and
forthwith issued the challenged order dated 20 February 1975 dismissing
the appeal. Hence,
this petition.
ISSUE:
Whether or not the death of herein accused is a valid cause for the
extinguishment of
civil obligations.
HELD:
No.The death of herein accused is not a valid cause for the exting
uishment of civil
obligations.
The extinction of civil liability follows the extinction of the crimin
al liability under
Article 89, only when the civil liability arises from the criminal ac
t as its only basis. The said
principle does not apply in instant case wherein the civil liability
springs neither solely nor
originally from the crime itself but from a civil contract of purchas
e and sale. The estafa or
1
08
swindle existed only after the subsequent sale by the accused of the
same interest in favor of
Victor de Guia. There was no crime of estafa until the accused re-so
ld the same property to
another individual about 5 years after the first sale to Torrijos. If
the accused did not comply
with the sale he executed in favor of Torrijos in 1964, after his r
eceipt of the purchase price
from Torrijos, but before the second sale to Victor de Guia in 1969, there is no
question that the
accused would be merely civilly liable either through an action by To
rrijos for specific
performance with damages or for rescission of contract also with damag
es. If rescission were
pursued by the first vendee, the vendor would be liable to refund the purchase p
rice as well as
be responsible in damages. Consequently, in the case at bar, the civi
l liability of the accused
survives his death; because death is not a valid cause for the extinguishment of
civil obligations.
09
ARTICLE 1231
BIALA v. COURT OF APPEALS (191 SCRA 50)
FACTS:
Lee filed an action for collection of sum of money against Biala bas
ed on several
documents on real estate mortgages and promissory notes executed by Bi
ala in favor of Lee.
Trial court dismissed the complaint on the ground of prescription of all claims,
but the Court of
Appeals reversed the trial courts decision.
According to Biala, Lees action is already barred by laches due to unreasonable d
elay of
nine years before filing an action.
ISSUE:
Is Lees action is barred by laches due to unreasonable delay?
HELD:
No. Laches is the failure or neglect, for an unreasonable length of time to do t
hat which,
by exercising due diligence could or should have been done earlier; it is neglig
ence or omission
to assert a right within a reasonable time warranting a presumption th
at the party entitled to
assert it either has abandoned it or declined to assert it.
The four basic elements of laches are: 1) conduct on the part of the defendant,
or of one
under whom he claims, giving rise to the situation of which complaint
is made and for which
the complainant seeks a remedy; 2) delay in asserting the complainant
s rights, the
complainant having had knowledge or notice of the defendant s conduct
and having been
afforded an opportunity to institute suit; 3) lack of knowledge or no
tice on the part of the
defendant that the complainant would assert the right on which he bases his suit
; and 4) injury
or prejudice to the defendant in the event relief is accorded to the
complainant, or the suit is
not held to be barred.
While the first element is present in this case, all the other eleme
nts are missing. The
lapse of nine years within which respondent Lee had not instituted he
r suit cannot be
considered as unreasonable delay to warrant the application of laches.
In the first place, the
action filed by respondent has not yet prescribed, since it was instituted well
within the period
of ten years from the time the cause of action accrued as provided
by law. The doctrine of
laches, being an equitable principle, should not be applied to supplant what is
clearly stated in
the law, especially if it would defeat and not promote justice.
Moreover, the petitioner, in invoking laches, has not sufficiently shown that sh
e has no
knowledge that respondent Lee would assert her right for the collectio
n of the obligations
which the former owes the latter. On the contrary, petitioner admits
the existence of the real
estate mortgages on the properties and the promissory notes signed by
her in favor of
respondent Lee. Although she raised the defense of payment of all her
debts in her answer
before the trial court, there was no proof presented evidencing paymen
t thereof as correctly
found by the appellate court. Hence, there was more truth to the all
egations of respondent,
1
10
which were not refuted by petitioner, that several demands had been made to the
latter for the
payment of all her debts, and that petitioner had merely given her word and prom
ises to settle
such obligations (p. 13, Brief for Private Respondent). Thus, the doct
rine of laches cannot be
taken against respondent where petitioner is shown to have promised fr
om time to time the
relief sought for.
As to the last element of laches, there is no showing that the peti
tioner would be the
party injured or prejudiced if the suit is not held to be barred. There was sati
sfactory proof that
petitioner owed the respondent several amounts of money and that payme
nt had not been
made thereof. If the suit is allowed to prosper against petitioner and the latte
r adjudged liable,
her liability would be confined merely to the settlement of her due and demandab
le obligations
and the payment of proper interest to respondent for the default incu
rred. Laches, being an
equitable defense, he who invokes it must come to court with clean hands.
11
ARNIEBELLE M. DORIA
ARTICLE 1233
PHILIPPINE NATIONAL BANK vs. COURT OF APPEALS (256 SCRA 44)
FACTS:
Private respondent Loreto Tan is the owner of a parcel of land abutt
ing the national
highway in Bacolod City. Expropriation proceedings were instituted by the govern
ment against
Tan and other property owners before the Court of First Instance of
Negros Occidental. Tan
filed a motion requesting the issuance of an order for the release t
o him of the expropriation
price of P32,480.PNB (Bacolod Branch) was required by the trial court
to release to Tan the
said amount deposited with it by the government. PNB, through its Assistant Bran
ch Manager,
issued a managers check for P32,480.00 and delivered the same to one Sonia Gonzag
a without
Tans knowledge, consent or authority. Sonia Gonzaga deposited it in her account w
ith Far East
Bank and Trust Co. (FEBTC) and later on withdrew the said amount.
Tan subsequently demanded payment in the amount of P32,480from PNB, but the same
was refused on the ground that the amount had already been paid and
delivered to Sonia
Gonzaga on the strength of a Special Power of Attorney (SPA) allegedly executed
in her favor by
Tan.
Tan,thereafter, executed an affidavit stating that he had never executed any SPA
in favor
of Sonia S. Gonzaga;he had never authorized Sonia Gonzaga to receive the amount
from PNB;he
signed a motion for the court to issue an Order to release the said
sum of money to him and
gave the same to Mr.Nilo Gonzaga (husband of Sonia) to be filed in
court. However, after the
Order was subsequently issued by the court, a certain Engineer of the
Highway Engineers
Office issued the authority to release the funds not to him but to Mr. Gonzaga.
When he failed to recover the amount from PNB,

ith the court to
require PNB to pay the same to him. PNB filed
ng that Sonia Gonzaga
presented to it a copy of the order and a SPA
PNB delivered the check to
her.The matter was set for hearing and PNB was directed
the said SPA
thereat. However, petitioner failed to do so.
Tan filed a motion w

an opposition contendi
by virtue of which
by the court to produce
The court decided that there was need for the matter to be ventilated in a separ
ate civil
action and thus Tanfiled a complaint with the RTC of Bacolod City ag
ainst PNB and Juan
Tagamolila, PNBs Assistant Branch Manager, to recover the said amount.In
its defense, PNB
contended that Tan had duly authorized Sonia Gonzaga to act as his a
gent.Tagamolila, in his
answer, stated that Sonia Gonzaga presented a SPA to him but borrowed
it later with the
promise to return it, claiming that she needed it to encash the check.
PNB, likewise, filed a third-party complaint against the spouses Nilo and Sonia
Gonzaga
praying that they be ordered to pay Tan the amount of P32,480.00. Ho
wever, for failure of
petitioner to have the summons served on the Gonzagas despite opportun
ities given to it, the
third-party complaint was dismissed.
The trial court rendered judgment ordering PNB and Tagamolila to pay
Tan jointly and
severally the amount of P32,480with legal interest, damages, and attorneys fees.B
oth PNB and
1
12
Tagamolila appealed the case to the Court of Appeals. The appellate c
ourt dismissed
Tagamolilas appeal for failure to pay the docket fee within the reglementary peri
od. The Court
of Appeals affirmed the decision of the trial court against PNB. Hence, this pet
ition.
ISSUE:
WON payment has been made to Loreto Tan.
HELD:
No. There is no question that no payment had ever been made to private responden
t as
the check was never delivered to him. When the court ordered petition
er to pay private
respondent the amount of P32,480.00, it had the obligation to deliver
the same to him. Under
Art. 1233 of the Civil Code, a debt shall not be understood to have been paid un
less the thing or
service in which the obligation consists has been completely delivered or render
ed, as the case
may be.
The burden of proof of such payment lies with the debtor.In the instant case, ne
ither the
SPA nor the check issued by petitioner was ever presented in court.
The decision of the Court of Appeals is AFFIRMED with the modification that the
award
by the Regional Trial Court of P5,000as attorneys fees is REINSTATED.
13
MARVIN P. FRANCISCO
ARTICLE 1234
LEGARDA HERMANOS VS. SALDANA(55 SCRA 324)
FACTS:
Petition for review of a decision of the Court of Appeals
The action originated as a complaint for delivery of two parcels of
land in Sampaloc,
Manila and for the execution of the corresponding deed of conveyance
after payment of the
balance due on their purchase price.
Saldana
er, for
sale of
per lot
monthly
faulted
th
entered into a contract with LegardaHermanos as subdivision own

the
two lots of 150 square meters each, amounting to PhP 1,500
to be paid in 120
installments of P19.83 with 10% interest per annum. Saldana de
in his 96
installment, but has paid a total of P1,682.28 in principal, worth more than the
value of one lot.
Saldana wrote the petitioners regarding his desire to fullfil his obli
gations, adding that
his desire to build a house on the lot was prevented by Hermanos fai
lure to introduce
improvements to the subdivision.
ISSUES:
1. Whether or not Hermanos has the right to rescind the contract due to Saldanas
default
of payment.
2. Whether or not petitioners have been denied of substantial performance of co
ntractual
obligations.
HELD:
1. No. JM Tuason Ruling applies to the
e granted lesser
benefits, since no rescission of contract
tial compliance
of the obligation entitles him to the transfer
2. No, The Court found that petitioners
case in which Saldana must b

is permitted. Saldanas substan
of ownership of one lot.
have not been denied substant
ial justice, for,

according to Art. 1234 of said Code: If the obligation has been sub
stantially performed
in good faith, the obligor may recover as though there had been a s
trict and complete
fulfillment, less damages suffered by the obligee, " and "that in the interest o
f justice and
equity, the decision appealed from may be upheld upon the authority of Article 1
234 of
the Civil Code."
14
ARTICLE 1234
J.M. TUASON V JAVIER (31 SCRA 829)
FACTS:
A contract was entered by the parties on September 7, 1954
wherein
the plaintiff
agreed to sell, transfer and convey a parcel of land known as Lot N
o. 28, Block No. 356 of the
Sta. Mesa Heights Subdivision, for the total sum of F3,691.20, with interest th
ereon at the rate
of ten (10) per centum a year, payable as follows: P396.12 upon the
execution of the contract
and P43.92 every month thereafter, for a period of ten (10) years. It is stipula
ted in the contract
that failure of the defendant to pay in the provided period, he has
the right to rescind the
contract and declare it to be in no effect as its consequence and may dispose th
e parcels of land
covered by the contract in favor of other persons.
Upon the execution of the contract or until January 5, 1962, the def
endant was able to
pay the necessary installments. From that point thereon, she was not
able to continue her
payment and on May 22, 1964 the plaintiff informed the latter that t
heir contract has been
rescinded. The defendant refused to leave the land. The plaintiff commenced an a
ction against
the defendant in the CFI.
The defendant admitted that she has failed to deliver her payment fro
m January 5
because of unforeseen circumstances. During the pre-trial conference it w
as noted that the
defendant in an attempt to arrive at a compromise agreement with the plaintiff,
offered to pay
all the that she is obligated to do.
The CFI ruled in favor of the defendant. The CFI also ordered the defendant to p
roduce
the necessary deed to transfer to the defendant the title to the par
cel of land in question in
favor to the defendant. The court applied Art. 1592 as its basis for its decisio
n which states:
In the sale of immovable property, even though it may have been stipu
lated that
upon the failure to pay the price at the time agreed upon the resci
ssion of the contract
shall of right take place, the vendee may pay, even after the expira
tion of the period, as
long as no demand for rescission of the contract has been made upon him either j
udicially
or by a notarial act. After the demand, the court may not grant him a new term.
The plaintiff is now appealing to the court contending that the articl
e was erroneously
applied.
ISSUE:
Whether or not the plaintiff suffered injustice when Article 1592 was
applied as the
basis of the lower courts decision.
HELD:
15
NO. The court affirms the decision of the lower court.

The plaintiff was not denied substantial justice in this case, for, according to
Art. 1234 of
the Civil Code:
If the obligation has been substantially performed in good faith, the obligor may
recover
as though there had been a strict and complete fulfillment, less damages suffere
d by the obligee.
In this connection, it should be noted that, apart from the initial installment
of P396.12,
paid upon the execution of the contract, on September 7, 1954, the d
efendant religiously
satisfied the monthly installments accruing thereafter, for a period of almost e
ight (8) years, or
up to January 5, 1962; that, although the principal obligation under the contrac
t was P3,691.20,
the total payments made by the defendant up to January 5, 1962, including stipul
ated interest,
aggregated P4,134.08; that the defendant has offered to pay all of th
e installments overdue
including the stipulated interest, apart from reasonable attorneys fees and the c
osts; and that,
accordingly, the trial court sentenced the defendant to pay all such
installments, interest, fees
and costs.
Thus, plaintiff will thereby recover everything due thereto, pursuant to its con
tract with
the defendant, including such damages as the former may have suffered in consequ
ence of the
latters default. Under these circumstances, We feel that, in the intere
st of justice and equity,

the decision appealed from may be upheld upon the authority of Art. 1234 of the
Civil Code
16
ALFREDO KHONG HUN
ARTICLE 1234
PRESBITERO VS. C.A. (217 SCRA 372)
FACTS:
Ricardo Presbitero, Sr. entered into two (2) written contracts with pr
ivate respondent
Leonardo Caoso. In the first, entitled "Conformity of Agreement," Presbi
tero retained the
services of the later to negotiate with the Land Bank of the Philippines (LBP) a
nd the Ministry
of Agrarian Reform (MAR) in Cotabato City for the sale, under a voluntary offer
arrangement, of
Hacienda Maria which comprises some 270 hectares of land located at B
alogo, Pigcawayan,
North Cotabato and which is owned by the former. The hacienda had be
en placed under
Operation Land Transfer pursuant to Presidential Decree No. 27. The pr
ivate respondent
bound himself "to finish the processing and submission of documents with in (sic
) the period of
One hundred (sic) Twenty Days (120 days) to Manila, by the Land Bank of the Phil
ippines and
Ministry of Agrarian Reform Cotabato City and shall be subjected to the delay of
the approval of
the DBP additional loan negotiated by RICARDO P. PRESBITERO in Bacolod
City . . . ." In the
second contract, denominated as a "Contract of Service,". Presbitero bo
und himself to
compensate the private respondent "for his efforts, services and other
related expenses in
making the necessary follow up (sic) of the preparation, production of
pertinent documents
required," and "to effect the recovery of the proceed (sic) of the land transfer
payment from the
Land Bank of the Philippines," in an amount equivalent to "Twenty Five per cent
(25%) of the
gross total sales of my properties described above which is (sic) sub
ject of Operation Land
Transfer."Before Presbitero s claim with the LBP was approved, a third agreement
was entered
into with the private respondent in Bacolod City under which the latt
er s original fee of 25%
was reduced to 17 1/2%.When his claim was finally approved, Presbitero
sent two (2) letters
to the LBP concerning the release of a part of the proceeds to the private respo
ndent. The first
letter, dated 16 May 1983 and addressed to the LBP President, request
ed that the "amount
equivalent to Seventeen and One Half (17 1/2%) per cent be released in the name
of Leonardo
Caoso, proportionate to (sic) cash and Land Bank Bonds, on every releases (sic) u
ntil the final
release of the claim." The second, dated 14 June 1983,

made reference to the LBP s letter of 6
June 1983 and requested that he (Presbitero) be notified in writing upon receipt
; the latter also
informed the LBP that he will "personally release the cash and bonds
to Mr. Caoso due to
advances made by him during the processing of the documents." However,
when a part of the
proceeds was released, the private respondent was not given his share as agreed
upon. Hence,
the latter filed a complaint against Presbitero before the RTC of Cot
abato City which was
docketed as Civil Case No. 68 and assigned to Branch 15 of the said court. Hence
this petition.
ISSUE:
Whether a breach of contract is substantial depends upon the attending circumsta
nces
1
17
HELD:
No substantial breach was committed by the private respondent sufficien
t enough to
warrant a rescission. From all indications, private respondent was able
to perform his
obligation; this conclusion follows in the wake of the approval of the claim. Un
der Article 1234
of the New Civil Code, if the obligation has been substantially perfo
rmed in good faith, the
obligor (private respondent) may recover as though there had been a s
trict and complete
fulfillment, less damages suffered by the obligee (Presbitero). Moreover
, when the obligee
accepts the performance, as what happened in this case, knowing its i
ncompleteness or
irregularity, and without expressing a protest or objection, the obliga
tion is deemed fully
complied.
18
ARTICLE 1234
TAYAG VS CA (219 SCRA 480)
FACTS
There is a deed of conveyance executed by Juan Galicia and Celerina
Labuguin in favor of
Albrigido Leyva involving the undivided one-half portion of a piece of
land situated at
Poblacion, Guimba, Nueva Ecija for the sum of P50,000.00.
The court of origin which tried the suit for specific performance filed by priv
ate respondent
on account of the herein petitioners reluctance to abide by the covenant while
respondent
court practically agreed with the trial court except as to the amount
to be paid to
petitioners and the refund to private respondent are concerned.
Petitioners asserted that not a single centavo of the P27,000.00 representing t
he remaining
balance was paid to them. Because of the apprehension that the heirs of Juan Gal
icia, Sr. are
disavowing the contract inked by their predecessor, private respondent filed the
complaint
for specific performance.
RTC decided that the petitioners asserted that not a single centavo
of the P27,000.00
representing the remaining balance was paid to them. Because of the apprehension
that the
heirs of Juan Galicia, Sr. are disavowing the contract inked by their
predecessor, private
respondent filed the complaint for specific performance.
Accordingly in what RTC rendered: Ordering the defendants heirs of J
uan Galicia, to
execute the Deed of Sale of their undivided ONE HALF (1/2) portion o
f Lot No. 1130,
Guimba Cadastre, covered by TCT No. NT-120563, in favor of plaintiff AlbrigidoLe
yva, with
an equal frontage facing the national road upon finality of judgment;
The RTC ordered the defendants, heirs of Juan Galicia, jointly and s
everally to pay
attorney s fees of P6,000.00 and the further sum of P3,000.00 for actual and com
pensatory
damages
The RTC ordered the withdrawal of the amount of P18,500.00 now consi
gned with the
Court, and that the amount of P16,870.52 be delivered to the heirs o
f Juan Galicia, Sr. as
payment to the unpaid balance of the sale, including the reimbursement of the am
ount paid
to Philippine Veterans Bank, minus the amount of attorney s fees and damages awa
rded in
favor of plaintiff.
ISSUE
Whether or not the private respondent is stopped in accepting the d
elayed of
payments?
HELD
The RTC and CA are correct in sustaining the claim of private respo
ndent anchored on
estoppel or waiver by acceptance of delayed payments under Article 1235 of the C
ivil Code.
The right to rescind is not absolute and will not be granted where
there has been
substantial compliance by partial payments.
There is no doubt that there is the second installment paid by the
heirs of Juan Galicia to
Josefina Tayag.
1
19
Petitioners must concede that in a reciprocal obligation like a contr
act of purchase both
parties are mutually obligors and also obliges and any of the contracting partie
s may, upon
non-fulfillment by the other privy of his part of the prestation, rescind the co
ntract or seek
fulfilment.
There was no valid tender of payment nor consignation of the sum of
P18,520.00 which
they acknowledge to have been deposited in court on January 22, 1981 five years
after the
amount of P27,000.00 had to be paid. Again this suggestion ignores th
e fact that
consignation alone produced the effect of payment in the case at bar
because it was
established below that two or more heirs of Juan Galicia, Sr. claimed
the same right to
collect.
WHEREFORE, the petition is hereby DISMISSED and the decision appealed
from is hereby
AFFIRMED with the slight modification of Paragraph 4 of the dispositive thereof
which is thus
amended to read:
ordering the withdrawal of the sum of P18,520.00 consigned with the R
egional Trial Court,
and that the amount of P16,870.52 be delivered by private respondent
with legal rate of
interest until fully paid to the heirs of Juan Galicia, Sr. as balan
ce of the sale including
reimbursement of the sum paid to the Philippine Veterans Bank, minus the attorne
y s fees and
damages awarded in favor of private respondent. The excess of P1,649.48 shall be
returned to
private respondent also with legal interest until fully paid by petiti
oners. With costs against
petitioners.
20
ARTICLE 1235
ESGUERRA VS. VILLANUEVA (21 SCRA 1314)
FACTS:
Petitioner Esguerra and respondent de Guzman entered into contract whe
reby Esguerra
leased to de Guzman a portion of his building for a term of 10 years
from July 12 1961 for a monthly rental of P300 up to July 11 1962
and P400 and so on.
DeGuzman failed to pay the rental from February to August 1962. Accum
ulating P1800,
indebtedness. Because of this, respondents mother, Segunda de Guzman executed in
favor
of the Esguerras a promissory note for P2,100 (P1000 first due on Au
gust 12, 1962 and
P1100 not later than August 31 1962, upon completion of the first in
stallment, the entire
value becomes due and demandable).De Guzman failed to pay both install
ments so the
Esguerrascommenced
case against Mrs. De Guzman. They also instituted
a civil case
against de Guzman and writs of attachment were issued. Thereafter, the
parties reached a
compromise agreement wherein defendants admit their indebtedness worth2,2
60php .
This sum was not paid to the Esguerras on or before November 26 1962 as stipulat
ed in the
compromise agreement. DeGuzman however alleges that he had delivered to
Esguerra
through his counsel P800 on December 1962 and P1460 on January 5 196
3 so he filed a
motion for the release of the properties seized. De Guzman maintain a
nd the lower court
held that the receipt of said sums P800 and P1400 by the Esguerras
constituted
acceptance of the in complete and irregular performance of their obligation, havin
g been
made without any protest or objection
ISSUE:
W/N Esguerras issuance of receipt constituted acceptances as to release
de Guzman
from completing his obligation.
HELD:
No. Decision of lower court was reversed. (Art 1235)
The day immediately following the first payment of P800, theEsguerras
asked Judge
Villanueva to issue the corresponding writs of execution in the 2 cas
es. Thus, the Esguerras
patently manifested their dissatisfaction with which necessarily implied
an objection or
protest to- said partial paymentthe law does not require the protest or objectio
n of the creditor
to be made in a particular manner or at a particular time. So long as the acts o
f the creditor at
the time of the incomplete or irregular payment by the debtor, or wi
thin a reasonable time
thereafter, evince that the former is not satisfied with or agreeable
to said payment or
performance, the obligation shall not be deemed fully extinguished
21
ARTICLE 1235
AZCONA V. JAMANDRE (21 SCRA 372)
FACTS:
Petitioner Azcona leased 80 hectares of his indivisible 150-hectare sha
re in Negros
Occidental, to respondent Jamandre. The agreed yearly rental was P7,200.00. The
lease was for
three agricultural years beginning 1960, extendible at the lessee s opt
ion to two more
agricultural years, up to 1965.
The first annual rental was due on or before March 1960, but because the petitio
ner did
not deliver possession of the leased property to the respondent, he "
waived" payment, as he
put it, of that rental. The respondent actually entered the premises only on Oct
ober 1960, after
payment by him to the petitioner of the sum of P7,000.00, which was
acknowledged in the
receipt later offered as Exhibit "B".

On April 1961, the petitioner, through his lawyer, notified the respon
dent that the
contract of lease was deemed cancelled, terminated, and of no further
effect," pursuant to its
paragraph 8, for violation of the conditions specified in the said agreement. Ea
rlier, in fact, the
respondent had been ousted from the possession of 60 hectares of the leased prem
ises and left
with only 20 hectares of the original area.
The reaction of the respondent to these developments was to file a c
omplaint for
damages against the petitioner, who retaliated with a counterclaim. Both the com
plaint and the
counterclaim were dismissed by the trial court finding that the parties were in
pari delicto.
On appeal, the trial court decision was modified by the respondent court in favo
r of the
plaintiff, for which reason the defendant has now come to us in a petition for c
ertiorari.
ISSUE:
W/N there was indeed default due to insufficiency of payment.
HELD:
CA Decision AFFIRMED
The petitioner submits that there was default in the payment thereof by the resp
ondent
because he was P200.00 short of such rental. That deficiency never ha
ving been repaired, the
he concludes, the contract should be cancelled in accordance with its paragraph
8.
Respondent argues that the receipt represented an express reduction
the stipulated
rental in consideration of his allowing the use of 16 hectares of
e leased area by the
petitioner as grazing land for his cattle. Having unqualifiedly accepted the
unt of P7,000.00
as rental for the agricultural year 1961-62, the petitioner should
now be heard to argue
that the payment was incomplete.
22
of
th
amo
not
1
The amount of P7,000.00 paid to by the respondent and received by th

e petitioner
represented payment in full of the rental for the agricultural year 1961-62.
The receipt states as follows: "The amount of SEVEN THOUSAND PESOS (P
7,000.00),
Philippine Currency, as payment for the rental corresponding to crop y
ear 1961-62 ... to the
rental due on or before January 30, 1961, as per contract."
The words "as per contract" are significant as they suggest that the parties wer
e aware
of the provisions of the agreement, which was described in detail elsewhere in t
he receipt. The
rental stipulated therein was P7,200.00. The payment being acknowledged
in the receipt was
P7,000.00 only.
Yet given this, no mention was made in the receipt of the discrepanc
y and, on the
contrary, the payment was acknowledged "as per contract." We read this
as meaning that the
provisions of the contract were being maintained and respected except
only for the reduction
of the agreed rental.
The petitioner does not explain why he did not specify in the receipt that there
was still
a balance of P200.00 and, to be complete, the date when it was to be paid by the
respondent.
Any reservation-if there was one-would have been easily incorporated in the rece
ipt, as
befitted the legal document it was intended to be.
The applicable provision is Article 1235 of the Civil Code, which states:
Art. 1235. When the obligee accepts the performance, knowing its incom
pleteness or
irregularity, and without expressing any protest or objection, the obli
gation is deemed
fully complied with.
The insignificance of the alleged balance does not justify the nullification of
the contract
for its supposed violation. If the petitioner were alert enough to in
voke it now, it is logical to
assume that he would have been alert enough to invoke it in the rec
eipt he willingly signed
after accepting, without reservation and apparently without protest, only P7,000
.00.
23
ARTICLE 1235
PAGSIBIHAN V. CA (221 SCRA 202)
FACTS:
On August 4, 1974, plaintiff-appellee, [petitioner] through her daughter as atto
rney-infact, obtained an agricultural loan from the Planters Development Bank
(formerly Bulacan
Development Bank), in the sum of P4,500.00 secured by a mortgage over
a parcel of land
covered by Transfer Certificate of Title No. T-129603 which loan was l
ater fully paid. Another
loan for the same amount was obtained from the bank on November 3, 1977 [year 19
77 should
read 1976 instead] secured by the same parcel of land. The Promissory
Note for the second
loan stipulated that for a first payment to be made on May 3, 1977
and payments every six
months thereafter at P1,018.14 with 19% interest for unpaid amortizatio
ns. The said
Promissory Note, containing an acceleration clause was not denied by plaintiff-a
ppellee.
Initial payment was made on July 6, 1978 [year 1978 should read 1977
instead]
followed by several payments in the total amount of P11,900.00.However,
only four of these
payments were applied to the loan while the rest were "temporarily lodged to acc
ounts payable
since the account was already past due". On the basis of a Petition for Extrajud
icial Foreclosure
of Mortgage and the statement of Account, the property was foreclosed extrajudic
ially on May
7, 1984 for failure to pay an outstanding balance of P29,554.81. This
resulted in the property
being sold to the bank for P8,163.00, and the bank thereafter claimed
a deficiency of
P21,391.81.
In the action for annulment of sale with damages and writ of prelimi
nary injunction
instituted by plaintiff-appellee, the lower court sustained appellee s [
petitioner] theory of
overpayment as against the propriety of the foreclosure."
ISSUE:
1. Whether or not the foreclosure and auction sale of the property i
s valid and justified
under the circumstances.
2. Whether or not petitioner is entitled to recover damages as well as attorney
s fees as a
result of the foreclosure and auction sale.
HELD:
The court cannot ignore the fact that the respondent bank succeeded i
n taking
advantage of the ignorance of petitioner in transactions such as the one involve
d in the case at
bar by lodging the bulk of petitioner s payment to account payable based on the
flimsy reason
that she had been in default, and then considering the entire debt pu
rsuant to an acceleration
clause as earning interest and penalty charges at an exorbitant rate of 19% each
from the date
of first default up to the date of foreclosure, thus bringing the ob
ligation to an astronomical
amount of P29,554.81. This indicates bad faith on the part of the re
spondent bank. For the
mental anguish, sleepless nights and serious anxiety this has caused petitioner,
the respondent
bank is liable for moral damages which the Court fixes at P50,000.00.
To serve as a deterrent for the respondent bank from repeating similar
acts and to set
an example and correction for the public good, the Court likewise awards exempla
ry damages.
1
24
In view of its nature, it should be imposed in such amount as to s
ufficiently and effectively

deter similar acts in the future 10 by the respondent bank and other banks, whic
h amount this
court fixes at P20,000.00 on top of the forfeiture of whatever balanc
e on the loan which the
respondent may actually have in its favor.
The Court likewise orders the annulment of the foreclosure sale and t
he reconveyance
of the property subject of the real estate mortgage pursuant to the annotation o
f lis pendens in
the certificate of title of the subject property.
25
ARTICLE 1240
ARANAS V TUTAAN (127 SCRA 828)
FACTS
On May 3, 1971 the lower court declared thatPetitioner Luisa Quijencio
(and by her
spouse Jose Araas)was the owner of 400 shares including the stock dividendsthat a
ccrued to
said shares, of respondent Universal Textile Mills, Inc. (UTEX) as def
endant and Gene
Manueland B. R. Castaeda as co-defendants, and subsequently ordered UTEX
to cancel said
certificates and issue new ones in the name of Plaintiff and to deliver all divi
dendsappertaining
to the same, whether in cash or in stocks.UTEX filed a motion for c
larification whether
thephrase to deliver to her all dividends appertaining to thesame, whet
her in cash or in
stocks meant dividends properly pertaining to plaintiffs after the courtsdeclarati
on of plaintiff
ownership of said 400 shares of stock. Defendant UTEX has always main
tained it would
rightfully abide by whatever decision may be rendered since such would
be the logical
consequence after the ruling in respect to the rightful ownership of
said shares of stock. The
motion was granted which ruled against UTEX, ordering it to pay plain
tiff the cash dividends,
which accrued to the stocks in question after rendition of its curren
t decision excluding cash
dividends already paid to Gene Manuel and B. R. Castaeda which accrued
before its decision.
UTEX alleged that the cash dividends had already been paid thereby absolving it
from payment
thereof.
ISSUE:
Was the contention of UTEX, alleging that the cash dividends of stock had alread
y been
paid and thereby absolving it from any further payment, valid?
HELD:
No. The final and executory judgment against UTEX declared petitioners as the ow
ners
of the questioned UTEX shares of stock against its co-defendants. It w

as further made clear in
the motion for clarification that all dividends accruing to the said shares aft
er the rendition of
the decision of Aug. 7, 1971 rightfully belonged to petitioners. If U
TEX nevertheless chose to
pay the wrong parties, notwithstanding its full knowledge and understan
ding of the final
judgment, it was still liable to pay the petitioners as the lawful d
eclared owners of the
questions shares of stocks. The burden of recovering the supposed paym
ent of the cash
dividends made by UTEX to the wrong parties Castaeda and Manuel falls
upon itself by its
own action and cannot be passed by it to the petitioner as the innocent parties.
It is elementary
that payment made by a judgment debtor to a wrong party cannot extin
guish the judgment
obligation of such debtor to its creditor.
26
ARTICLE 1240
PAL V. CA (181 SCRA 557)
FACTS:
Amelia Tan commenced a complaint for damages before the Court of Firs
t Instance
against Philippine Airlines, Inc. (PAL). The Court rendered a judgment
in favor of the former
and against the latter. PAL filed its appeal with the Court of Appea
ls (CA), and the appellate
court affirmed the judgment of the lower court with the modification that PAL is
condemned to
pay the latter the sum of P25, 000.00 as damages and P5, 000.00 as attorneys fee.
Judgment became final and executory and was correspondingly entered in
the case,
which was remanded to the trial court for execution. The trial court upon the mo
tion of Amelia
Tan issued an order of execution with the corresponding writ in favor of the res
pondent. Said
writ was duly referred to Deputy Sheriff Reyes for enforcement. Four months late
r, Amelia Tan
moved for the issuance of an alias writ of execution, stating that the judgment
rendered by the
lower court, and affirmed with modification by the CA, remained unsatisfied. PA
L opposed the
motion, stating that it had already fully paid its obligation to plai
ntiff through the issuance of
checks payable to the deputy sheriff who later did not appear with h
is return and instead
absconded.
The CA denied the issuance of the alias writ for being premature. After two mont
hs the
CA granted her an alias writ of execution for the full satisfaction
of the judgment rendered,

when she filed another motion. Deputy Sheriff del Rosario is appointed
special sheriff for
enforcement thereof.
PAL filed an urgent motion to quash the alias writ of execution stating that no
return of
the writ had as yet been made by Deputy Sheriff Reyes and that judg
ment debt had already
been fully satisfied by the former as evidenced by the cash vouchers signed and
received by the
executing sheriff. Deputy Sheriff del Rosario served a notice of garnishment on
the depository
bank of PAL, through its manager and garnished the latters deposit. He
nce, PAL brought the
case to the Supreme Court and filed a petition for certiorari.
ISSUES:
1. Whether an alias writ of execution can be issued without prior re
turn of the original
writ by the implementing officer.
2. Whether payment of judgment to the implementing officer as directed
in the writ of
execution constitutes satisfaction of judgment.
3. Whether payment made in checks to the sheriff and under his name is a valid
payment
to extinguish judgment of debt.
HELD:
1. Yes. Technicality cannot be countenanced to defeat the execution o
f a judgment for
execution is the fruit and end of the suit and is very aptly called the life of
the law. A judgment
cannot be rendered nugatory by unreasonable application of a strict rule of proc
edure. Vested
1
27
right were never intended to rest on the requirement of a return. So
long as judgment is not
satisfied, a plaintiff is entitled to other writs of execution.
2. No. In general, a payment, in order to be effective to discharge an obligati
on, must be made
to the proper person. Article 1240 of the Civil Code provides: Payment made to th
e person in
whose favor the obligation has been constituted, or his successor in
interest, or any person
authorized to receive it. Under ordinary circumstances, payment by the
judgment debtor in
the case at bar, to the sheriff should be valid payment to extinguish judgment o
f debt.
However, under the peculiar circumstances of this case, the payment to the absco
nding sheriff
by check in his name did not operate as a satisfaction of the judgment debt.
3. No. Article 1249 of the Civil Code provides: The payment of debts in money sh
all be made in
the currency stipulated, and if it is not possible to deliver such c
urrency, then in the currency
which is legal tender in the Philippines. Unless authorized to do so by law or by
consent of the
obligee, a public officer has no authority to accept anything other than money i
n payment of an
obligation under a judgment being executed. Strictly speaking, the acceptance by
the sheriff of
the petitioners checks does not, per se, operate as a discharge of the judgment o
f debt.
It is out of the ordinary that checks intended for a particular payee are made o
ut in the name of
another. The issuance of the checks in the name of the sheriff clear
ly made possible the
misappropriation of the funds that were withdrawn. Petitioner thereby c
reated a situation
which permitted the said Sheriff to personally encash said checks and
misappropriate the
proceeds thereof to his exclusive benefit. For the prejudice that resulted, the
petitioner himself
must bear the fault
Having failed to employ the proper safeguards to protect itself, the judgment de
btor whose act
made possible the loss had but itself to blame.
28
RYLE SCOTT MANCIA
ARTICLE 1240
BANK OF THE PHILIPPINE ISLANDS VS COURT OF APPEALS (232 SCRA 302)
FACTS:
Private Respondents Easter Plywood Corporation (Easter) and Benigno D. Lim (Li
m), an
officer and stockholder of Eastern, held at least one joint account (a
nd/or account) with
Commercial Bank and Trust Co (CBTC), the predecessor-in-interest of pet
itioner Bank of the
Philippine Islands. Sometime in March 1975, a joint checking account with Lim wa
s opened by
Mariano Velasco with the amount of P 120,000.00.
Velasco died on April 7 1977. The outstanding balance of the account would amou
nt to
P 662, 522.87. By virtue of an Indemnity Undertaking executed by Lim
and as President and
General Manager of Eastern withdrew one half of this amount and depos
ited it to one of the
accounts of Eastern with CBTC.
On August 18 1978, Eastern acquired a loan of P 73,000.00 with inter
est at 14% per
annum thru CTBC. The loan was not a secured one. However, Lim and C
TBC executed a
Holdout Agreement which is date on August 18 1978. It states that the loan is secu
red by the
holdout on the said current account no. 23010-011-42 in the joint names of Lim a
nd Velasco.
Meanwhile, a case for the settlement of Velasco s estate was filed with the RTC
of Pasig.
On September 9 1986, the intestate court granted the urgent motion of
heirs of Velasco to
withdraw the deposit under the joint account of Lim and Velasco and
authorized the heirs to
divide among themselves the amount withdrawn.
In the year 1980, CTBC was merged with BPI. By December 2 1987, BPI
filed with the
RTC of Manila a complaint against Lim and Eastern demanding the payment of the p
romissory
note for P73,000.00. The trial court dismissed the case ruling that t
he promissorynote was
subject of the holdout agreement. Court of Appeals affirmed the decision.
ISSUE:
Whether or nor BPI is still liable to the private respondents on the
account subject of
the Holdout agreement after its withdrawal by the heir of Velasco.
HELD:
Yes.
It is said that the account was proved and established to belong to Eastern ev
en if it was
deposited by in the names of Lim and Velasco. The creditor is Easter
n while the debtor is
Velasco with respecto to the joint account of Lim and Velasco. BPI cannot be rel
ieved of its duty
to pay Eastern simply because it already allowed the heirs of Velasco
to withdraw the whole
balance of the account. The petitioner should not have allowed such withdrawal b
ecause it had
admitted in the Holdout Agreement the questioned ownership of the mone
y deposited in the
account.
1
29
The court also said that the ownership of the deposit is remained undetermined.
BPI, as
the debtor with respect thereto, had no right to pay to persons other than those
in whose favor
the obligation was constituted or whose right or authority to receive
payment is indisputable.
The payment of the money deposited with BPI that will extinguish its obligation
to the creditordepositor is payment to the person of the creditor or to one authorized by him o
r by the law to
receive it. BPI s payment was made to the wrong party, heirs of Velasco. It is s
aid in the law that
payment made by the debtor to the wrong party does not extinguish it
s obligation to the
creditor who is without fault or negligence.
30
ARTICLE 1245
FILINVEST VS. PHIL. ACETYLENE (111 SCRA 421)
FACTS:
Defendant-appellant Philippine Acetylene Co., Inc. (PACI) purchased from A
lexander
Lim a Chevrolet motor vehicle.
A Deed of Sale was executed between
the parties which
provides the payment of a down payment of P20,000.00.
The balance o
f P35,247.80 will be
payable, under the terms and conditions of the promissory note, at a
monthly installment of
P1,036.70 for 34 months.
As security for the payment of the promi
ssory note, the appellant

executed a chattel mortgage over the same motor vehicle in favor of
said Alexander Lim.
Subsequently, Lim assigned to Filinvest Finance Corporation all his rights, titl
e, and interests in
the promissory note and chattel mortgage by virtue of a Deed of Assignment. Fil
invest Finance
Corporation, as a consequence of its merger with the Credit and Development Corp
oration then
assigned all its rights, title, and interests in the promissory note
and chattel mortgage to the
new corporation, the plaintiff-appellee Filinvest Credit (FCC) Corporation.
The effect of the
foregoing was the payment of the unpaid balance owed by PACI to Lim by FCC. How
ever, PACI
failed to comply with the terms and conditions stipulated in the prom
issory note and chattel
mortgage because it defaulted in the payment of nine successive instal
lments.
FCC sent a
demand letter and in reply thereto, PACI expressed its desire to return the mort
gaged property
the return of which shall be in full satisfaction of its indebtednes
s.
The vehicle was then
returned to FCC together with the document entitled Voluntary Surrender with Spec
ial Power
of Attorney to Sell. FCC, however, failed to sell the motor vehicle a
s there were unpaid taxes
on the same.
FCC requested PACI to update its account by paying th
e installments in arrears
and accruing interest.
FCC offered to deliver back the motor vehicle
to PACI but the latter
refused which constrained FCC to institute an action for collection of
sum of money with
damages.
PACI contended that the delivery of the motor vehicle back
to FCC extinguished its
money obligation as it amounted to a dacion en pago (dation in payment).
ISSUE:
Whether or not the obligation of PACI to FCC was extinguished by dat
ion in payment
when it returned the motor vehicle to the latter.
HELD:
No.
The obligation of PACI to FCC was not extinguished by dation i
n payment when it
returned the motor vehicle to the latter.
The Supreme Court (SC) affirmed in toto the judgment appealed from.
The SC held that the mere return of the mortgaged motor vehicle by
PACI to FCC does
not constitute dation in payment in the absence, express or implied, of the true
intention of the
parties. The SC stated that dation in payment, according to Manresa, is the tra
nsmission of the
ownership of a thing by the debtor to the creditor as an accepted equivalent of
the performance
of obligation. In dation in payment, the debtor offers another thing to the cre
ditor who accepts
1
31
it as equivalent of payment of an outstanding debt. The undertaking r
eally partakes in one
sense of the nature of sale, that is, the creditor is really buying
the thing or property of the
debtor, payment for which is to be charged against the debtors debt.
As such, the essential
elements of a contract of sale, namely, consent, object certain, and cause or co
nsideration must
be present. In its modern concept, what actually takes place in dacio
n en pago is an objective
novation of the obligation where the thing offered as an accepted equ
ivalent of the
performance of an obligation is considered as the object of the contract of sale
, while the debt is
considered as the purchase price. In any case, common consent is an essential pr
erequisite, be
it sale or innovation to have the effect of totally extinguishing the debt or ob
ligation.
The SC further held that the evidence on the record fails to show that FCC conse
nted, or
at least intended, that the mere delivery to, and acceptance by him,
of the mortgaged motor
vehicle be construed as actual payment, more specifically dation in payment. The
fact that the
mortgaged motor vehicle was delivered to him does not necessarily mean
that ownership
thereof, as juridically contemplated by dacion en pago, was transferred
from appellant to
appellee. In the absence of clear consent of appellee to the preferred special m
ode of payment,
there can be no transfer of ownership of the mortgaged motor vehicle
from appellant to
appellee. If at all, only transfer of possession of the mortgaged motor vehicle
took place, for it is
quite possible that appellee, as mortgagee, merely wanted to secure possession t
o forestall the
loss, destruction, fraudulent transfer of the vehicle to third persons,
or its being rendered
valueless if left in the hands of the appellant.
As to the strength of the Voluntary Surrender with Special Power of Attorney To S
ell,
it only authorized FCC to look for a buyer and sell the vehicle in
behalf of the appellant who
retains ownership thereof, and to apply the proceeds of the sale to the mortgage
indebtedness,
with the undertaking of the appellant to pay the difference, if any, between the
selling price and
the mortgage obligation. FCC in essence was constituted as a mere age
nt to sell the motor
vehicle which was delivered not as its property. If it were, he woul
d have full power of
disposition of the property, not only to sell it.
32
ARTICLE 1245
CITIZENS SURETY AND INSURANCE COMPANY VS. COURT OF APPEALS (162 SCRA 738)
FACTS:
On December 4, 1959, the petitioner issued two surety bonds to the defendant toe
nsure
the compliance of the latter while he entered a transaction with Singer SewingMa
chine Co. The
respondent also put up collaterals such as his lumber stock worthP400,
000 and a second real
estate mortgage to reimburse the cost paid by the petitioner incase that the res
pondent will not
comply to the agreement. The respondent failed to complywith his obligations to
Singer Sewing
Machine Co. and the petitioner paid payments as aresult of non-compliance of the
respondent.
The respondent failed to reimburse the petitioner due to the losses he encounter
ed thereby the
petitioner filed a claim of the sum of the money against the estate
of the respondent.
Respondent opposed the money claim bystating that the surety bonds and
the indemnity
agreements had been extinguished by theexecution of the deed of assign
ment. Thus, after the
trial, the lower declared that thecollateral is jointly and severally
liable to the petitioner,
hereby, requiring respondent to paythe required amount with 10% interes
t per annum. The
decision of the lower court wasreversed by the Court of Appeals when
the respondent
appealed.
ISSUE:
Whether or not administrators obligation under the surety bonds agreements had be
en
extinguished through execution of the deed of assignment.
HELD:
Obligation under the surety bonds had not been extinguished by reason on theexec
ution
of deed of assignment. The deed of assignment was intended as a collateralsecurity f
or the
issuance of two (2) surety bonds by the petitioner towards respondent
asevidenced by the
latters subsequent acts. These are partial payments made by respondentaf
ter the execution
the deed of assignment to pay his indebtedness. Moreover, with theexecut
ion of the second
mortgage by respondent, it follows that there is no extinguishmentof o
bligation since
indemnity bonds still existed by virtue of its execution.Thus, upon the failure
of the respondent
to comply with its obligation under the contract if sale of goods to
wards Singer Sewing
Machine Co., the petitioner is still adequately protected by the lumbe
r collateral which worth
P400,000, more than enough to guaranty theobligations. Here, the Suprem
e Court dismissed
the appeal and money claim by the petitioner.
33
ABEGAIL B. RAMOS
ARTICLE 1245
CALTEX (PHILIPPINES), INC. VS. The INTERMEDIATE APPELLATE COURT and ASIA
PACIFIC AIRWAYS, INC. (215 SCRA 580)
FACTS:
On January 12, 1978, private respondent Asia Pacific Airways Inc. ent
ered into an
agreement with petitioner Caltex (Philippines) Inc., whereby petitioner
agreed to supply
private respondent s aviation fuel requirements for two (2) years, covering the
period from
January 1, 1978 until December 31, 1979.
As of June 30, 1980, private respondent had an outstanding obligation to petit
ioner in the
total amount of P4,072,682.13, representing the unpaid price of the fuel supplie
d. To settle
this outstanding obligation, private respondent executed a Deed of Assi
gnment dated July
31, 1980, wherein it assigned to petitioner its receivables or refunds of Specia
l Fund Import
Payments from the National Treasury of the Philippines to be applied
as payment of the
amount of P4,072,683.13 which private respondent owed to petitioner.
On February 12, 1981, pursuant to the Deed of Assignment, Treasury W
arrant No.
B04708613 in the amount of P5,475,294.00 representing the refund to re
spondent of
Special Fund Import Payment on its fuel purchases was issued by the National Tre
asury in
favor of petitioner. Four days later, on February 16, 1981, private r
espondent, having
learned that the amount remitted to petitioner exceeded the amount cov
ered by the Deed
of Assignment, wrote a letter to petitioner, requesting a refund of said excess.
Petitioner, acting on said request, made a refund in the amount of P900,000.00
plus in favor
of private respondent. The latter, believing that it was entitled to a larger am
ount by way of
refund, wrote petitioner anew, demanding the refund of the remaining amount. In
response
thereto, petitioner informed private respondent that the amount not ret
urned
(P510,550.63) represented interest and service charges at the rate of
18% per annum on
the unpaid and overdue account of respondent from June 1, 1980 to July 31, 1981.
Thus, on
September 13, 1982, private respondent filed a complaint against petitioner in t
he Regional
Trial Court of Manila, to collect the sum of P510,550.63.00.
Petitioner (defendant in the trial court) filed its answer, reiteratin
g that the amount not
returned represented interest and service charges on the unpaid and ov
erdue account at
the rate of 18% per annum. It was further alleged that the collectio
n of said interest and
service charges is sanctioned by law, and is in accordance with the terms and co
nditions of
the sale of petroleum products to respondent, which was made with the conformity
of said
private respondent who had accepted the validity of said interest and service ch
arges.
On November 7, 1983, the trial court rendered its decision dismissing the compl
aint, as well
as the counterclaim filed by defendant therein. Private respondent (pla
intiff) appealed to
the Intermediate Appellate Court (IAC). On August 27, 1985, a decision was rende
red by the
said appellate court reversing the decision of the trial court, and o
rdering petitioner to
return the amount of P510,550.63 to private respondent.
1
34
ISSUE:
Whether or not there is a valid dation in payment in this case.
HELD:
The Supreme Court ruled that the Deed of Assignment executed by the
parties on July 31,
1980 is not a dation in payment and did not totally extinguish respon
dent s obligations as
stated therein.
The then Intermediate Appellate Court ruled that the three (3) requisites of da
cion en pago
are all present in the instant case, and concluded that the Deed of
Assignment of July 31,
1980) constitutes a dacion in payment provided for in Article 1245 of the Civil
Code which
has the effect of extinguishing the obligation, thus supporting the cl
aim of private
respondent for the return of the amount retained by petitioner.
The Supreme Court, speaking of the concept of dation in payment, in
the case of Lopez vs.
Court of Appeals, among others, stated: " The dation in payment extinguishes the
obligation
to the extent of the value of the thing delivered, either as agreed upon by the
parties or as
may be proved, unless the parties by agreement, express or implied, o
r by their silence,
consider the thing as equivalent to the obligation, in which case the
obligation is totally
extinguished."
From the above, it is clear that a dation in payment does not nece
ssarily mean total
extinguishment of the obligation. The obligation is totally extinguished
only when the
parties, by agreement, express or implied, or by their silence, consid
er the thing as
equivalent to the obligation. In the instant case, the then Intermedia
te Appellate Court
failed to take into account the express recitals of the Deed of Assignment.
35
ARTICLE 1248
NASSER VS. CUEVAS (188 SCRA 812)
FACTS:
In the proceedings for the settlement of the estate of the late Am
adeo Matute, a
document with a compromise agreement for partition was executed among the heirs
and other
interested parties. It was approved by the court but later rendered m
oot. The agreement
provided for the payment of attorney s fees of Atty. Paterno Canlas o
f P600,000, in property
and in cash (P412,000, the rest in property). The agreement contained the follow
ing clause:
.. However, until after the full payment of the sum of P600,000.00
or P412,000.00, as
the case may be, there shall be established on all the properties of the Estate,
real and personal,
herein adjudicated and other properties not yet adjudicated, a charging lien for
attorney s fees
to secure the payment of said attorney s fees and, by these present,
all the signatories to this
Compromise Agreement expressly agree to the establishment and creation
of the aforesaid
charging lien, provided that upon full payment of the corresponding liability of
a party the lien
on his/her share is extinguished.
Shortly after the approval of the agreement, Atty. Canlas moved for execution,
and it
was granted.
The order, issued by Judge Cuevas, was assailed in certiorari and pro
hibition, on the
ground that the execution was improper in the absence of a written agreement on
the precise
terms of payment of Canlas attorney s fees. Petitioners claim that they are ent
itled to partially
pay Atty. Canlas.
ISSUES:
Whether or not the compromise agreement contemplated partial payment.
HELD:
Petition is not justified. The compromise agreement contemplates upon the prob
ability
that the heirs obliged to pay Canlas fees would pay at different time
s. This denotes nothing
more than that if one of the obligors separately pays his share in
Canlas fees, the lien on his
share of the estate is thereby extinguished. The creditor cannot be co
mpelled partially to
receive the presentations in which the obligation consists" unless "the
re is an express
stipulation to that effect. (Art. 1248)
36

ARTICLE 1249
DEVELOPMENT BANK OF RIZAL V. SIMA WEI (219 SCRA 736)
FACTS:
Sima Wei acquired a loan from Development Bank of Rizal. She executed and deliv
ered
to the former a promissory note, engaging to pay the petitioner Bank
or order the amount of
P1,820,000.00 on or before June 24, 1983 with interest at 32% per an
num.
Sima Wei made
partial payments on the note, leaving a balance of P1,032,450.02. On N
ovember 18, 1983, she
issued two crossed checks payable to petitioner Bank drawn against Chi
na Banking
Corporation, bearing respectively the serial numbers 384934, for the am
ount of P550,000.00
and 384935, for the amount of P500,000. The said checks were allegedl
y issued in full
settlement of the drawers account evidenced by the promissory note. These two ch
ecks were
not delivered to the Development Bank. For reasons not shown, these c
hecks came into the
possession of respondent Lee Kian Huat, who deposited the checks witho
ut the Development
Banks indorsement (forged or otherwise) to the account of respondent Pl
astic Corporation,
made at the Balintawak branch, Caloocan City, of the Producers Bank. Hence, Deve
lopment filed
the complaint for sum of money.
ISSUE:
Whether or not the issuance of checks evidenced by a promissory note
to
meet an
obligation constitutes a valid payment
HELD:
No.
It does not necessarily follow that the drawer Sima Wei is fre
ed from liability to
petitioner Bank under the loan evidenced by the promissory note agreed
to by her.
Her
allegation that she has paid the balance of her loan with the two c
hecks payable to petitioner
Bank has no merit as these checks were never delivered to petitioner Bank. And e
ven granting,
without admitting, that there was delivery to petitioner Bank, the del
ivery of checks in
payment of an obligation does not constitute payment unless they are cashed or t
heir value is
impaired through the fault of the creditor.
None of these exceptions were alleged by
respondent Sima Wei.
Therefore, unless respondent Sima Wei proves tha
t she has been
relieved from liability on the promissory note by some other cause, petitioner B
ank has a right
of action against her for the balance due thereon.
37
MARCO CARLO S. SANA
ARTICLE 1249
TIBJIA, JR. V. COURT OF APPEALS (223 SCRA 163)
FACTS:
A suit for collection of money. A writ of attachment was issued by RTC Br. 15
1 of Pasig,
and the Deputy Sheriff filed a return stating that a deposit made by the Tibajia
spouses in RTC
of Kalookan City amounting to P442,750 in another case had been garni
shed by him. RTC Br.
151 of Pasig rendered a decision in favor of Eden Tan and ordering
the spouses to her
P300,000. The Court of Appeals reduced the moral and exemplary damages
. The decision
having become final, Eden Tan file a motion for execution and the garnished fund
s which were
now on deposit with the cashier of RTC Br. 151 of Pasig, were levied upon.
On 14 December 1990, the spouses delivered to Deputy Sheriff the to
tal money
judgment consisting of Cashier s Check worth P262,750 and Cash worth P
135,733.70. Eden
Tan refused to accept the payment and insisted that the garnished fun
ds be withdrawn to
satisfy the judgment obligation. Spouses filed a motion to lift the w
rit of execution asserting
that the judgment debt had already been paid. It was denied by the
trial court on the ground
that cashier s check is not payment in legal tender, this was upheld
in light of a motion for
reconsideration. Spouses filed a petition for ceritorari, prohibition an
d injunction against the
Court of Appeals which was dismissed by the appellate court, giving the same rat
ionale.
ISSUE:
1) Whether Cashier s Check is Legal Tender and 2) whether the tender
of payment partly in
check and partly in cash may be validly refused.
HELD:
A check, whether a manager s check or ordinary check, is not legal tender, and a
n offer
of a check in payment of a debt is not a valid tender of payment and may be refu
sed receipt by
the obligee or creditor.
38
ARTICLE 1249
GENERAL INSURANCE v. UNION INSURANCE (179 SCRA 530)
FACTS:
Union Insurance and the British Traders Insurance are insurance companies organiz
ed
and existing under the laws of Great Britain, under license to do business in th
e country with its
head office in Hong Kong and branches Manila. The other parties are also insuran
ce companies,
and mere subsidiaries of union insurance.
The respondents and the petitioner entered into a First Surplus Reinsurance Agre
ement
executed by the respondents in London and by the petitioner here in
Manila. The parties
agreed on a reciprocal reinsurance expressed and payable in pounds sterling, com
mencing on 1
January 1959 and ending on 31 December 1961. In the said agreement,
the parties expressly
agreed to settle by arbitration all their differences of whatever natu
re or controversy arising
out of the contract.
The agreement was terminated on 31 December 1960, on which date, General insuran
ce claims
that there was due from Union Insurance under the treaties negotiated between th
em, the sum
of 4,784.51 pounds sterling. However, while the General insurance requested Unio
n insurance
to pay the amount in pounds sterling or in Philippine pesos at the e
xchange rate prevailing at
the time of payment, union insurance refused to pay the amount in pe
sos. Due to this refusal,
the general insurance made written formal demand upon petitioner to pr
oceed with
arbitration of the controversy in the manner provided for in the agreement.
They informed Union insurance that they had appointed Mr. TB Turvey o
f Victory
Insurance co. as arbitrator in their behalf. Union insurance refused t
o proceed with the
arbitration, contending that there was no controversy or dispute existi
ng between them, thus
they filed a petition with the CFI of Manila, praying to declare tha
t there is no controversy
between the parties. The CFI, now called the RTC, declared that there
is no controversy
between the parties that is subject to arbitration under their express agreement
s and ordering
petitioner to comply with the terms and conditions of the arbitration
clause in the said
agreements. Union Insurance also filed a similar case against other parties alle
ging that there is
no controversy existing between them, as can be gleaned from the Retr
ocession Quota Share
Fire Agreement.
In this agreement, as similar arbitration procedure is adopted, and wh
en petitioners claimed
that there was due from respondent a sum of 1,035.2.7 pounds sterling, union ins
urance again
refused to pay in the stipulated currency. An arbitrator was chosen by the other
party, to which
respondent counters that there is no use for an arbitrator as there
is no genuine controversy
between them, thus another case was filed with the CFI of Manila, wh
ich consolidated the 2
cases and declared that there is a genuine controversy between the par
ties and the petitioner
was ordered to submit to arbitration.
39
ISSUE:
Whether or not a controversy or dispute exists under the circumstance

to warrant an
order compelling the parties to submit to arbitration.
HELD:
Yes. A cursory reading of the petitions will readily reveal that inde
ed a valid
controversy exists between the parties, which are a proper subject for arbitrati
on. The decision
of the trial court is affirmed.
The 2 civil cases brought by herein respondents allege that there was still some
amount
payable to it in pounds sterling from herein petitioner. This was denied by the
petitioner. As to
the amounts the parties owe each other, the same is a proper subject of arbitrat
ion. Petitioners
invocation of
RA 529, which declares that as against public policy,
and null and void,
provisions in agreements which purports to give the obligee the right
to require payment in
gold or in a particular kind of coin or currency other than Philippine currency,
as a defense was
raised only in its memorandum. While petitioner agreed to pay its obl
igations in pounds
sterling or in US dollars, RA 529 does not invalidate the right to
demand payment in gold or
other foreign currencies. What it declares as null and void is the p
rovision to such effect. The
transaction or contract subsists. At most, what could be demanded is
to pay the obligation in
Philippine currency. In the case at bar, in accordance with establishe
d jurisprudence, the
exchange rate shall be that prevailing at the time of payment, as the contract
or agreement was
entered into after the enactment of RA 529. If it was incurred prior to the Act,
the exchange rate
is that rate at the time the obligation was incurred. The language of the reinsu
rance contract on
arbitration of any dispute between the parties which may arise before or after t
he termination
of the agreement is clear. The retrocession agreement is also clear in stating t
hat all differences
of whatever nature arising out of the agreement shall be submitted to a court of
arbitration. No
restriction as to time is contemplated. The provision of arbitration is the reme
dy by which the
parties may resort to for disputes arising from the agreements. While
the 2 agreements have
been terminated, the provision requiring arbitration remains as a remed
y to settle any
dispute/controversy arising from the agreements. The court has previousl
y ruled that where
there is an agreement to arbitrate and one party puts up a claim which the other
disputes, the
need to arbitrate is imperative.
40
AIDA MAY P. SILVA
ARTICLE 1249
FAR EAST BANK V. DIAZ REALTY (23 AUGUST 2001)
FACTS:
Diaz Realty loaned from Pacific Banking Corporation P720,000.00 secured
by a real
estate mortgage. Sometime in December 1986, appellant Far East Bank purchased t
he credit of
Diaz & Company in favor of Pacific Bank.
Diaz tendered to Far East Bank the amount of P1,450,000.00 through an
Interbank
check in order to prevent the imposition of additional interests, penalties and
surcharges on its
loan.
Far East Bank did not accept it as payment.
Instead, Diaz
was asked to deposit the
amount with the Davao City Branch Office. Subsequently, Far East Bank told him
to change the
P1,450,000.00 deposit into a money market placement, which he did.
T
he money market
placement has already expired and there was still no news from Far E
ast whether or not it
would accept his tender of payment.
When Far East refused to release the mortgage, Diaz instituted filed s
uit to compel the
bank to acknowledge the tender of payment, accept payment and cancel the mortgag
e.
ISSUE:
Far East Bank argues that the obligation is not settled as the check
tendered could not
be considered legal tender.
HELD:
True, jurisprudence holds that, in general, a check does not constitute legal te
nder, and
that a creditor may validly refuse it. It must be emphasized, however, that thi
s dictum does not
prevent a creditor from accepting a check as payment.
In other word
s, the creditor has the
option and the discretion of refusing or accepting it.
In the present case, petitioner bank did not refuse respondent s check. On the c
ontrary,
it accepted the check which, it insisted, was a deposit. The check proved to be
fully funded and
was in fact honored by the drawee bank. Moreover, petitioner was in possession
of the money
for several months.
By accepting the tendered check and converting it into money, Far East is presu
med to
have accepted it as payment. To hold otherwise would be inequitable and unfair t
o the obligor.
41
ARTICLE 1249
NAMARCO VS.FEDERATION OF UNITED NAMARCO DISTRIBUTORS, INC. (49 SCRA 238)
FACTS:
On November 16, 1959, the NAMARCO and the FEDERATION entered into a Contract of
Sale
stipulating Two Million One Thousand Thirty One Dollars ($2,001.031.00).
To insure payment of the goods by the FEDERATION, the NAMARCO accept
ed three
domestic letters of credit which is an accepted draft and duly execut
ed trust receipt
approved by the Philippine National Bank.
Upon arrival of the goods in Manila in January, 1960, the NAMARCO b
illed FEDERATION
Statement of Account for P277,357.91. Subsequently, it was received by
FEDERATION on
January 29, 1960.
However, on March 2, 1960 FEDERATION filed a complaint against Namarco for unde
livery
of some items contained in the contract of sale.
On May 19, 1960 the domestic letters of credit were subsequently dis
honored by the
Philippine National Bank compelling NAMARCO to send on June 7, 1960 a letter of
demand
for payment to FEDERATION which the latter received on July 5, 1960,
but which it
apparently ignored and because of such inaction NAMARCO therefore sued
FEDERATION
for payment on January 25, 1961.
FEDERATION refuses to pay acknowledge the domestic letters of credit until full
delivery is
done by NAMARCO.
ISSUE:
W/N FEDERATION should be obliged to pay the amount of the merchandise even if
there was still incomplete delivery of items by NAMARCO.
HELD:
The right of the NAMARCO to the cost of the goods existed upon delivery of the
said goods
to the FEDERATION which, under the Contract of Sale, had topay for them.
The mere delivery by the FEDERATION of the domestic letters of credi
t to NAMARCO did
not operate to discharge the debt of the FEDERATION. As shown by the appealed ju
dgment
NAMARCO accepted the three letters of credit "to insure the payment of those goo
ds by the
FEDERATION ... ." It was given therefore as a mere guarantee for the
payment of the
merchandise.
The delivery of promissory notes payable to order, or bills of excha
nge or drafts or other
mercantile document shall produce the effect of payment only when real
ized, or when by
1
42
the fault of the creditor, the privileges inherent in their negotiable
character have been
impaired. The clause of Article 1249 relative to the impairment of the negotiabl
e character
of the commercial paper by the fault of the creditor, is applicable
only to instruments
executed by third persons and delivered by the debtor to the creditor, and does
not apply to
instruments executed by the debtor himself and delivered to the creditor.
In the case at bar it is not even pretended that the negotiable character of t
he sight drafts
was impaired as a result of the fault of NAMARCO. The fact that NAM
ARCO attempted to
collect from the Philippine National Bank on the sight drafts is of
no material significance.
As heretofore stated they were never taken, in the first instance as payment. Th
ere was no
agreement that they should be accepted as payment. The mere fact that
NAMARCO
proceeded in good faith to try to collect payments thereon, did not
amount to an
appropriation by it of the amounts mentioned in the sight drafts so as to releas
e its claims
against the FEDERATION. A mere attempt to collect or enforce a bill or note from
which no
payment results is not such an appropriation of it as to discharge the debt.
43
KAREN G. SUPAPO
ARTICLE 1250
VELASCO V. MANILA ELECTRIC CO. (42 SCRA 556)
FACTS:
Velasco filed a motion to reconsider the decision of the Court dated
August 6, 1971
regarding damages awarded to him, as they are allegedly inadequate con
sidering the present
high cost of living. He invoked Article 1250 of the Civil Code (extr
aordinary inflation or
deflation of the currency) and the doctrines laid down in People v.
Pantojato be applicable in
his case.
ISSUE:
Whether or not Article 1250 is applicable to damages
HELD:
No. The Court explained, from the employment of the words "extraordinary inflati
on or
deflation of the currency stipulated" in Article 1250 of the new Civi
l Code, it can be seen that
the same envisages contractual obligations where a specific currency is selected
by the parties
as the medium of payment; hence it is inapplicable to obligations arising from t
ort and not from
contract. Besides there being no showing in the case at bar that the
factual assumption of the

article has come into existence. As to the Pantoja ruling, the regard
paid to the decreasing
purchase of the peso was considered a factor in estimating the indemn
ity due for loss of life,
which in itself is not susceptible of accurate estimation. It should
not be forgotten that the
damages awarded to herein appellant were by no means full compensatory damages,
since the
decision makes clear that appellant, by his failure to minimize his d
amages by means easily
within his reach, was declared entitled only to a reduced award for
the nuisance sued
upon.Lastly, the amount granted him had already taken into account the
changed economic
circumstances.
44
JUSTO PAULO TORRES
ARTICLE 1250
COMMISSIONER OF PUBLIC HIGHWAYS VS BURGOS (96 SCRA 831)
FACTS:
Victoria Amigable is an owner of a parcel of land in Cebu city wi
th a total land area of
6167 sq. m. that is now known as Mango Avenue and Gorordo Avenue. On February 6,
1959 she
filed in the court of first instance and was duly amended on April 17,1959 award
ed damages in
the sum of P50000 for the alleged illegal occupation of the land by
the government, moral
damages to the tune of P25000, and attorneys fees in the sum of P5000. In a decis
ion rendered
on July 29, 1959 by Judge Amador E. Gomez, the plaintiffs complaint w
as dismissed on the
grounds relied upon by the defendants therein. The plaintiff appealed
the decision to the
Supreme Court where it was reversed, and the case was remanded to the court of
origin
for the determination of the compensation to be paid plaintiff-appellan
t as owner of the land
inclusive attorneys fees. It was found out through the Bureau of Records Manageme
nt that the
going rate for the land in question, which was known then as Banilad Friar Lands
was pegged
at P2.37 per square meter. On the other hand, Ms. Amigable then pres
ented a copy of the
Manila Times suggesting that the rate be pegged at P6.775 instead. On January 9,
1973 the court
ruled on the instant petition directing the Republic of the Philippines to pay V
ictoria Amigable
the sum of P49459.34 as the value of the property taken, plus P14541
0.44 representing
interest at 6% on the principal amount of P49459.34 from the year 1924 up to the
date of the
decision, plus attorneys fees of 10% of the total amount due to Ms. Amigable, or
a grand total
of P214356.75. However, there was controversy with concern to ruling a

s to if there was an
agreement and whether it was contractual in nature. The following article provid
es:
ART. 1250. In
ncy stipulated
should supervene,
lishment of the
shall be the basis
case extra-ordinary inflation or deflation of the curre

the value of the currency at the time of the estab
obligation
of payment, unless there is an agreement to the contrary.
It is clear that the foregoing provision applies only to cases wher

e a contract or
agreement is involved. It does not apply where the obligation to pay
arises from law,
independent of contract. The taking of private property by the Government in its
exercise of its
power of eminent domain does not give rise to a contractual obligation.
ISSUE:
Whether or not the provision of Article 1250 of the New Civil Code
is applicable in
determining the amount of compensation to be paid to private respondent Amigable
for the
property taken.
45
HELD:
Wherefore, the judgment appealed from is hereby reversed as to the

basis in the
determination of the price of the land taken as just compensation for
its expropriation, which
should be the value of the land at the time of taking, in 1924. Ac
cordingly, the same is hereby
fixed at P14615.79 at P2.37 per square metre, with interest thereon at 6% per an
num, from the
taking of the property in 1924, to be also paid by the Government t
o private respondent,
Victoria Amigable, until the amount due is fully paid, plus attorneys fees of P50
00.
Moreover, there was a dissenting opinion made by former Chief Justic
e Teehankee
stating that the misinterpretation of 1250 was merely obiter dicta. Pe
rhaps it should also be
noted as well as stated in case that , a penalty is always visited
upon one for his inaction,
neglect or laches in the assertion of his rights allegedly withheld f
rom him, or otherwise
transgressed by another.
46
ARTICLE 1250
FILIPINO PIPE & FOUNDRY CORP. V NAWASA (161 SCRA 32)
FACTS:
On June 12, 1961, National Waterworks and Sewerage Authority (NAWASA)
entered
into a contract with Filipino Pipe and Foundry Corp. (FPFC) for the
latter to supply it with
pressure pipes worth P270,187.50, which was paid in installments on va
rious dates. Having
completed the delivery of the pipes, FPFC demanded payment from the defendant of
the unpaid
balance worth P135,507.50 (excluding interest). NAWASA failed to pay, a
nd FPFC filed a
collection suit on March 16, 1967, docketed as Civil Case No. 66784.
On November 23, 1967, the trial court rendered judgment ordering the
defendant to
pay the unpaid balance in NAWASA negotiable bonds. NAWASA, however, fa
iled to satisfy the
decision.
On February 18, 1971, the defendant filed another complaint seeking an adjustmen
t of
the unpaid balance in accordance with the value of the Philippine pes
o when the decision in
Civil Case No. 66784 was rendered. They allege a supervening extraordi
nary inflation of the
Philippine peso which has reduced the value of the bonds paid citing
Article 1250 of the Civil
Code, which provides:
In case an extraordinary inflation or deflation of the currency stipula
ted should
supervene, the value of the currency at the time of the establishment of the obl
igation shall be
the basis of payment, unless there is an agreement to the contrary
The court suggested that they present expert testimony to help it in
deciding whether
the economic conditions then, and still prevailing, would justify the applicatio
n of Article 1250
of the Civil Code. The plaintiff presented voluminous records and stat
istics showing that a
spiralling inflation has marked the progress of the country from 1962
up to the present.
Indeed, there has been a rise on price index of commodities, which is the usual
evidence of the
value of the currency.
The trial court pointed out, however, than this is a worldwide occure
nce, but hardly
proof that the inflation is extraordinary in the sense contemplated by Article 1
250 of the Civil
Code. They dismissed the complaint.
ISSUE:
WON there exists an extraordinary inflation of the currency justifying an adjust
ment of
defendants unpaid judgment obligation to the plaintiff.
HELD:
No.
47
Extraordinary inflation exists "when there is a decrease or increase i

n the purchasing
power of the Philippine currency which is unusual or beyond the commo
n fluctuation in the
value said currency, and such decrease or increase could not have reasonably for
eseen or was
manifestly beyond contemplation the parties at the time of the establishment of
the obligation.
An example of extraordinary inflation is the following description of what happe
ned to
the Deutschmark in 1920:
More recently, in the 1920 s Germany experienced a case of hyperinflat
ion. In early
1921, the value of the German mark was 4.2 to the U.S. dollar. By May of the sam
e year, it had
stumbled to 62 to the U.S. dollar. And as prices went up rapidly, so that by Oct
ober 1923, it had
reached 4.2 trillion to the U.S. dollar! (Bernardo M. Villegas & Vict
or R. Abola, Economics, An
Introduction [Third Edition]).
While it was proved that there has been a decline in the purchasing
power of the
Philippine peso, this downward fall of the currency cannot be considered "extrao
rdinary." It is
simply a universal trend that has not spared the country.
Doctrine
Decline in the purchasing power of the Philippine peso cannot be considered extra
ordinary as
contemplated in Article 1250 of the Civil Code.
48
ELEAZAR M. VICENTE
ARTICLE 1250
SIMEON DEL ROSARIO VS. SHELL (164 SCRA 556)
FACTS:
The parties entered into a Lease Agreement whereby the plaintiff lease
d a parcel of
landto the defendant at a monthly rental of Two Hundred Fifty Pesos
(P250.00).President
Diosdado Macapagal promulgated Executive Order No. 195
titled "Changin
g the Par Value of
the Peso from US$0.50 to US$0.2564103 (U.S. Dollar of the Weight and
Fineness in Effect on
July 1, 1944).By reason of this E.O. No. 195, plaintiff demanded from
the defendant alleged
increase in the monthly rentals from P250.00 a month to P487.50 a mo
nth. Plaintiff filed a
complaintpraying that defendant be ordered to pay the monthly rentals as increas
ed by reason
of E.O. 195 and further prayed that plaintiff be paid the following
amounts: The difference
between P487.50 and P250.00 from noon of November 8, 1965 until such
time the defendant
begins to pay the adjusted amount of P487.50 a month; the sum of P2
0,000.00 as moral
damages; the sum of P10,000.00 as exemplary damages; and the sum of
P10,000.00 as
attorney s fees and the costs. The trial court in dismissing the comp
laint by saying that:
Executive Order No. 195, contrary to the contention of the plaintiff, has not of
ficially devalued
the Philippine peso but merely modified the par value of the peso fr
om US$.50 to
US$0.2564103. Said Executive Order certainly does not pretend to change the gold
value of the
Philippine peso as set forth in Sec. 48 of the Central Bank Act (R.
A. 265), which is 7-13/21
grains of gold, 0.900 fine. Indeed, it does not make any reference at all to the
gold value of the
Philippine peso.
ISSUE:
Whether or not the trial court erred in holding that Executive Order
No. 195 has not
officially devalued the Philippine peso.
HELD:
The CA judgment is REVERSED and SET ASIDE. It will be noted that de
valuation is an
official act of the government (as when a law is enacted thereon) an
d refers to a reduction in
metallic content; depreciation can take place with or without alleged
official act, and does not
depend on metallic content (although depreciation may be caused currency devalua
tion).In the
case at bar, while no express reference has been made to metallic content, there
nonetheless is
a reduction in par value or in the purchasing power of Philippine cu
rrency. Even assuming
there has been no official devaluation as the term is technically und
erstood, the fact is that
there has been a diminution or lessening in the purchasing power of
the peso, thus, there has
been a depreciation" (opposite of "appreciation"). Moreover, when laymen
unskilled in the
semantics of economics use the terms "devaluation" or "depreciation" th
ey certainly mean
them in their ordinary signification decrease in value. Hence as contemp
lated currency the
parties herein in their lease agreement, the term "devaluation" may be
regarded as
synonymous with "depreciation," for certainly both refer to a decrease
in the value of the
currency. The rentals should therefore by their agreement be proportionately inc
reased.
49
ARTICLE 1250
SANGRADOR V. VALDERAMA (168 SCRA 556)
FACTS:
On April 11, 1983 defendant spouses Valderrama obtained a P500,000 lo
an from Manuel
Asencio payable on or before April 12, 1984 secured by a real estate mortgage. F
oreseeing
that they would not be able to redeem their property upon maturity o
f the loan, they
scouted for money lenders.
Through the help of a loan broker, Wilson Jesena, they were able to obtain on A
pril 6, 1984
a P1,000,000 loan from the plaintiff Teresita Sangrador, who is an au
nt of Jesena, on the
security of the same property which they redeemed from Asencio.
The loan is evidenced by a Deed of Real Estate Mortgage and a promiss
ory note providing
for the payment of P1,400,000. Furthermore, the said documents
includ
e an escalation
clause:
The makers of this note, jointly and severally undertake that in the event tha
t an
extraordinary inflation of the Philippine Peso should supervene between
now and
eight (8) months after date, then the value of the Philippine Peso at the time o
f the
establishment of this obligation, shall be the basis of payment pursuant to Art.
1250
of the Civil Code of the Philippines, and for this purpose, we hereb
y acknowledge
the official exchange rate of the Philippine Peso to the US Dollar a
t P14.002 to $1.
The corresponding adjustment in the value of the Philippine Peso shall be made
in
the event that at the time of the maturity of this obligation, the rate of excha
nge will
have changed as a result of the supervening inflation. We further agr
ee that the
official rate of exchange as set by the Central Bank of the Philippi
nes for private
transactions, shall be the basis of this adjustment.
When the defendants failed to pay the sum of P1,400,000 stated in the promissor
y note on
December 6, 1984 despite the plaintiffs written demands, a complaint
for judicial
foreclosure of the real estate mortgage was filed against them.
The defendants in their answer denied that the loan was P1,400,000.
They alleged that it
was only P1,000,000.00 as received by them and that the additional P400,000 repr
esented
usurious interest.
The Trial Court ordered the defendants to pay the mortgage obligation
in the amount of
P1,400,000.00 plus the sum of P569,718.61 pursuant to the escalation c
lause contained in
the Deed of Real Estate Mortgage.
Upon appeal of the defendants, the Court of Appeals modified the app
ealed decision by
ordering the defendants, within (90) days from date of service of this decision,
to pay to the
plaintiffs the principal loan of P1,000,000 with 12% interest per annum from Apr
il 6,1984
until fully paid.
The Court of Appeals nullified the escalation clau
se in the Deed of Real
Estate Mortgage and promissory note.

1
50
Hence, Petitioners invoke that the Court of Appeals erred in finding the princi
pal loan to be
P1,000,000, instead of P1,400,000 and in nullifying the escalation clause in the
Deed of Real
ISSUES:
1) Whether or not the Court of Appeals erred in finding the principa
l loan to be P1,000,000,
instead of P1,400,000.
2) Whether or not the Court of Appeals erred in nullifying the escal
ation clause Deed of Real
HELD:
1) No. The principal amount is P1,000,000. The disputed amount (P400,0
00) was a hidden
interest that the petitioners had required the defendants to pay at the maturity
of the loan.
As can be gleaned from the evidence, the said amount was not received or deliver
ed to the
respondents. This conclusion is strengthened by the fact that the prom
issory note and the
Deed of Real Estate Mortgage did not have any stipulation as to the
rate of
interest. The
rate of interest for loans or forbearance of money, in the absence of express co
ntract as to
such rate of interest shall be at 12% per annum. Thus, since no express stipulat
ion as to the
rate of interest, the Court fixed the amount at 12% (of P1,000,000) per annum.
2) No. Escalation clause should be nullified. Since petitioners failed
to prove the supervening
of extraordinary inflation between 6 April 1984 and 7 December 1984no
proofs were
presented on how much, for instance, the price index of goods and se
rvices had risen
during the intervening periodan extraordinary inflation cannot be assumed
;
consequently, there is no reason or basis, legal or factual, for adju
sting the value of the
Philippine Peso in the settlement of respondents obligation.
51
MARY ANTONETTE YU
ARTICLE 1253
RAPANUT V. COURT OF APPEALS (246 SCRA 323)
FACTS:
Rapanut (petitioner) andFlunker (respondent) entered into a Deed of Con
ditional Sale
with Mortgage. Private respondent agreed to sell the land for P42,840,
payable in monthly
installments of P500 to be paid not later than 5

th
day of the month and in semi-annual
installments of P1000 to be paid on June 30 and December 31, with in
terest of 10% per
annum on the remaining balance until the full amount is paid.
Subsequently, a Supplemental Agreement was made. Monthly installments sh
all be
made starting January 1986 without need of demand. And failure to pay
any monthly
installments due for three months shall constitute as a cause of rescission.
Petitioner had been making the P500 monthly installments for four year
s until he
received a letter informing that failure to pay P500 plus 10% interes
t will rescind the
agreements.
The respondent filed for the rescission of the contracts in the RTC
of Pasay. The trial
court ruled ordering the petitioner to payP5000 as acceptance fee, 100
0 as attorneys fee and
2000 as actual damages plus costs. The Court of Appeals modified the decision by
deleting the
actual damages and attorneys fee.
Both parties have different views as to the payment of interest. For
the petitioner, the
P500 monthly installment includes the 10% interest. While for the resp
ondent, a separate
payment for interest should be made. Otherwise, rescission will take place.
ISSUE:
W/N rescission upon the two contracts will took effect?
HELD:
No, the respondent is estopped from exercising his right to rescind a
fter his continued
acceptance of the installment payments for four years. In a contract
involving installment
payment with interest chargeable against the remaining balance of the obligation
, it is the duty
of the creditor to inform the debtor of the amount of interest that
falls due and that he is
applying the installment payments to cover the said interest. Otherwise
, the creditor cannot
apply the payments to the interest and then hold the debtor in defau
lt for non-payment of
installments on the principal.
.
52
ARTICLE 1253
CARLOS ANG GOBONSENG, JR VS. HON. COURT OF APPEALS (246 SCRA 472)
FACTS:
In 1982, spouses Carlos A. Gobonseng, Jr. and TheresitaMimie P. Gobons
eng filed with
the State Investment House, Inc. an application for a P2-million loan.
Accordingly, the
Gobonsengs constituted a Real Estate Mortgage over their three (3) par
cels of land in
Dumaguete City.
On January 19, 1983, the parties agreed to reduce the amount of the
loan from P2million to P900,000.00
Later, the Gobonsengs again applied for an additional loan of P800,000
.00. SIHI
approved the application under the same terms and conditions as the f
irst loan but with an
additional collateral.
Pursuant to their Credit Agreement, SIHI granted the Gobonsengs credit
lines for such
amounts which they desire to avail of.
On January 21, 1983, the Gobonsengs availed of the full amount of P9
00,000.00 which
they renewed from time to time. With respect to the loan of P800,000
.00, the Gobonsengs
obtained various amounts in installments. The term of each loan granted has an a
verage of 60
days. For each renewal, a corresponding promissory note was executed b
y the Gobonsengs.
Their last availment of P900,000.00 was on March 15, 1984 payable on May 2, 1984
. As to the
loan of P800,000.00 their last availment thereof was on March 2, 1984 payable al
so on May 2,
1984.
Claiming that the Gobonsengs failed to pay the two loans on their du
e date on May 2,
1984 and that despite demands, failed to remit the payment due, SIHI
instituted an
extrajudicial foreclosure proceedings
Cobonseng testified that on 23 March 1987 when he went to the head office of SI
HI in
Binondo, Manila, the officer-in-charge of the Branch Department showed
him a folder
pertaining to his credit line availment which disclosed that his approved loan a
pplications was
for six years with interest of 15.5% per annum.
Subsequently, the Cobonseng pays the corresponding interest. On 1984, SIHI issu
ed an
Official Receipt stating that the payment by Cobonseng was applied to the princi
pal.
ISSUE:
WON there was payment of interest when there is an issuance of receipt for the p
rincipal.
53
HELD:
Yes. The SC interpreted the the credit line granted to the Gobonsengs to be for
a period
longer than sixty days but is not six years as asserted by the Gobo
nsengs. The credit line was
availed of by promissory notes with interest duration of, normally, si
xty days, and that for as
long as the interests were paid, roll-overs of the promissory notes within the t
erm of the credit
line were automatic since it was SIHI itself which filled up for the
purpose the unfilled
promissory notes signed by the Gobonsengs.
It was duly established by the Gobonsengs that interests on the last
renewal of the
P800,000.00 and the P900,000.00 loan evidenced by the promissory notes dated 2 M
arch 1984
to be due on 2 May 1984and 15 March 1984 to be due also on 2 May 1984, respecti
vely, were
duly paid by them. As a matter of fact, an amount of P7,417.86 was credited to t
he principal in
the promissory note per Official Receipt dated 2 May 1984. This parti
al payment for the
principal clearly proves that the interest due had been paid. Article
1253 of the Civil Code
provides that if the debt produces interest, payment of the principal
shall not be deemed to
have been made until the interests have been covered. Consequently, automatic re
newal of the
loans by way of promissory notes for the succeeding interest period was unavoida
ble.
Likewise, there is no evidence that the Gobonsengs had made any payme
nt on the
interest and on the unpaid balance of the principal even after the filing of Civ
il Case No. 8428.
The payment therefor has long become overdue.
1
54
ARTICLE 1253
MAGDALENA ESTATES, INC. VS. ANTONIO A. RODRIGUEZ (18 SCRA 967)
FACTS:
The appellants bought from the appellee a parcel of land in Quezon City known as
Lot 7K-2-G, Psd-26193. In view of an unpaid balance of P5,000.00 on account of the pu
rchase price
of the lot, the appellants executed on January 4, 1957.
On
nd
the
ly,
June 20, 1958, when the obligation of the appellants became due a
demandable,
Luzon Surety Co., Inc. paid to the appellee the sum of P5,000.00. Subsequent
the appellee
demanded from the appellants the payment of P655.89 corresponding to t

he alleged
accumulated interests on the principal of P5,000.00. Due to the refusal of the a
ppellants to pay
the said interest, the appellee started this suit in the Municipal Co
urt of Manila to enforce the
collection thereof.
Appellants claim that the pleadings do not show that there was demand
made by the
appellee for the payment of accrued interest and what could be deduced therefrom
was merely
that the appellee demanded from the Luzon Surety Co., Inc., in the c
apacity of the latter as
surety, the payment of the obligation of the appellants, and said app
ellee accepted
unqualifiedly the amount of P5,000.00 as performance by the obligor an
d/or obligors of the
obligation in its favor. It is further claimed that the unqualified acceptance o
f payment made by
the Luzon Surety Co., Inc. of P5,000.00 or only the amount of the p
rincipal obligation and
without exercising its (appellee s) right to apply a portion of P655.89 thereof
to the payment of
the alleged interest due despite its presumed knowledge of its right
to do so, the appellee
showed that it waived or condoned the interests due, because Articles
1235 and 1253 of the
Civil Code provide:
ART. 1235. When the obligee accepts the performance, knowing its incom
pleteness or
irregularity, and without expressing any protest or objection, the obli
gation is deemed
fully complied with.
ART. 1253. If the debt produces interest, payment of the principal shall not be
deemed
to have been made until the interests have been recovered.
ISSUE:
Whether or not the interests due were waived and condoned.
HELD:
The court does not agree with the contention of the appellants. It i
s very clear in the
promissory note that the principal obligation is the balance of the purchase pri
ce of the parcel
of land known as Lot 7-K-2-G, Psd-26193, which is the sum of P5,000.
00, and in the surety
bond, the Luzon Surety Co., Inc. undertook "to pay the amount of P5,
000.00 representing
1
55
balance of the purchase price of a parcel of land known as Lot 7-K2-G, Psd-26193, . . . ." The
appellee did not protest nor object when it accepted the payment of P5,000.00 be
cause it knew
that that was the complete amount undertaken by the surety as appearing in the c
ontract. The
liability of a surety is not extended, by implication, beyond the terms
of his contract.1 It is for

the same reason that the appellee cannot apply a part of the P5,000.
00 as payment for the
accrued interest. Appellants are relying on Article 1253 of the Civil
Code, but the rules
contained in Articles 1252 to 1254 of the Civil Code apply to a per
son owing several debts of
the same kind of a single creditor. They cannot be made applicable t
o a person whose
obligation as a mere surety is both contingent and singular; his liab
ility is confined to such
obligation, and he is entitled to have all payments made applied exclusively to
said application
and to no other. Besides, Article 1253 of the Civil Code is merely directory, a
nd not mandatory.
Inasmuch as the appellee cannot protest for non-payment of the interest when it
accepted the
amount of P5,000.00 from the Luzon Surety Co., Inc., nor apply a par
t of that amount as
payment for the interest, the court cannot now say that there was a waiver or co
ndonation on
the interest due.
56
ARTICLE 1256
SOCO V. MILITANTE (123 SCRA 160)
FACTS:
Soledad SOCO leased her commercial building and lot to Regino FRANCISC
O, Jr. for P
800.00 per month for a period of 10 years renewable for another 10 years at the
option of the
lessee.
FRANCISCO sub-leased a portion thereof at P 3000.00 per month. Feeling that she
was
on the losing end of the lease agreement, SOCO tried to look for ways and means
to terminate
the contract.
Alleging non-payment of rent, SOCO sent notice to FRANCISCO to vacate
the premises
leased. FRANCISCO answered, indicating that all rental payments due
we
re in fact paid by
Commercial Bank and Trust Company through the Clerk of Court of the City Court.
Despite this
explanation, SOCO filed this instant case of Illegal Detainer.
The Court holds that there was in fact a tender of payment of the
rentals. And, since
these payments were not accepted by SOCO evidently because of her int
ention to evict
FRANCISCO, by all means, FRANCISCO was impelled to deposit the rentals
with the Clerk of
Court of the City Court of Cebu.
SOCO was notified of this deposit by virtue of letters through FRANCISCOs attorne
y, as
well as in the answer of FRANCISCO to the civil case. SOCO was furt
her notified of these
payments by consignation in a letter.

The City Court ruled that the consignation was not valid. The Court of First Ins
tance, on
the other hand, held that there was substantial compliance with the r
equisites of the law on
consignation.
ISSUE:
Whether the consignation of the rentals was valid or not.
HELD:
The decision of the Court of First Instance is REVERSED and the deci
sion of the City
Court is reinstated, with costs in favor of the petitioner.
In order that consignation may be effective, the debtor must first co
mply with certain
requirements prescribed by law. The debtor must show (1) that there was a debt d
ue; (2) that
the consignation of the obligation had been made because the creditor
to whom tender of
payment was made refused to accept it, or because he was absent or incapacitated
, or because
several persons claimed to be entitled to receive the amount due (Art
. 1176, Civil Code); (3)
that previous notice of the consignation had been given to the person
interested in the
performance of the obligation (Art. 1177, Civil Code); (4) that the amount due w
as placed at the
disposal of the court (Art. 1178, Civil Code); and (5) that after the consignati
on had been made
the person interested was notified thereof (Art. 1178, Civil Code). Fa
ilure in any of these
1
57
requirements is enough ground to render a consignation ineffective. (Jo
se Ponce de Leon vs.
Santiago Syjuco, Inc., 90 Phil. 311).
In order to be valid, the tender of payment must be made in lawful
currency. While
payment in check by the debtor may be acceptable as valid, if no pr
ompt objection to said
payment is made (Desbarats vs. Vda. de Mortera, L-4915, May 25, 1956)
the fact that in
previous years payment in check was accepted does not place its credi
tor in estoppel from
requiring the debtor to pay his obligation in cash (Sy vs. Eufemio,
L-10572, Sept. 30, 1958).
Thus, the tender of a check to pay for an obligation is not a vali
d tender of payment thereof
(Desbarats vs. Vda. de Mortera, supra). See Annotation, The Mechanics of Consign
ation by Atty.
S. Tabios, 104 SCRA 174-179.
Thus, the SC found and ruled that the lessee has failed to prove te
nder of payment
(requisite 2); he has failed to prove the first notice to the lessor prior to co
nsignation (requisite
3); he has failed to prove the second notice after consignation (requisite 5); a
nd he has failed to
pay the rentals for the months of July and August, 1977 as of the time the comp
laint was filed
for the eviction of the lessee. The SC holds that the evidence is clear, compete
nt and convincing
showing that the lessee has violated the terms of the lease contract
and he may, therefore, be
judicially ejected.
1
58
ARTICLE 1231
ALFONSO V. THE COURT OF APPEALS (168 SCRA 545)
FACTS:
Plaintiffs-spouses Danilo and Luzviminda C. Basco are the owners of an
apartment
building located in Grace Park, Caloocan City, having acquired it by
purchase from
PacificoVibar and Antonia MapayVibar. A unit (fourth door) of the aforesaid apar
tment bearing
the number 275 was being rented out by the former owners to Roland
Alfonso at a monthly
rental of P185.00, while the other suits were being rented out to di
fferent lessees. The new
owners were also the former lessees of a ground floor unit located at the back o
f the apartment
building. After the new owners had purchased the property from the former owners
, or on 19
March 1984, spouses Bascosent to defendant a letter containing, that a
s a new owner of the
property, there is imperative need to make general repairs and renovat
ion of the 4-door
apartment into a purely residential house which is presentable and safe to live
in and that they
are willing to give Alfonso and the other lessees of the other doors
ninety (90) days from
receipt of this letter within which to vacate the premises and delive
r possession thereof,
without paying any rental.
Defendant Alfonso refused to vacate said unit and instead he sent on
30 May 1984 by
registered mail his payment corresponding to the April, 1984 rental, w
hich was rejected by
plaintiffs who proposed to give the defendant a period of one (1) year from 1 Ap
ril 1984 or up
to 31 March 1985 within which to stay at the premises free from ren
tal in exchange for the
voluntary surrender of the premises to the plaintiffs by defendant. Su
ch offer was reflected in
another letter of plaintiff Luzviminda C. Basco. However, defendant sti
ll insisted that he could
not be ejected from subject premises.
On 30 July 1984, the plaintiffs filed a complaint with MTC praying f
or the ejectment of
the defendant from the subject premises based on two (2) grounds: (1) the plaint
iffs intend to
have the premises for their own personal use (residential purposes) an
d (2) delay in the
payment of rentals by defendant.
On 5 November 1984, defendantfiled a motion in court praying that the

rentals from
April, 1984 up to the current month of November, be ordered deposited
in court. On6
November 1984, plaintiffs, filed a Manifestation with the Court stating
, that the deposit of the
unpaid rentals for eight (8) months, April to November, 1984 cannot r
ender ineffective the
provision of Sec. 5(b) of Batas PambansaBlg. 25 which allows the ejectment of a
lessee in case
of arrears in payment of rent for three (3) months at one time, provided, that i
n case of refusal
by the lessor to accept payment of the rental agreed upon, the lesse
e shall either deposit by
way of consignation, the amount in Court or in a bank in the name
of and with notice to the
lessor.
On 14 January 1986, the respondent trial court rendered the assailed
decision which
was reversed by the RTC on appeal declaring that defendant cannot be
ejected for nonpayment of rentals as he had never failed to pay the rent. The resp
ondent appellate court
1
59
however overruled the findings of the RTC by reinstating the judgment of the tri
al court, hence,
this petition.
ISSUE:
Whether or not the RTCerred in ruling that defendant-petitioner did
not incur any
default and that the respondent MTC had no jurisdiction to determine the ejectme
nt case.
HELD:
The tenor of the
espectively, shows
that the free rent
ndant who rejected
tendering his payment
y refusing to
vacate the premises.
two letters dated 19 March 1984 and May, 1984, r

offer was merely a proposal of plaintiffs to defe
it by
corresponding to the April, 1984 rental and by consistentl
Such rejection rendered the proposal of free rental without force and effect. De
fendant
therefore was duty bound to pay the rentals as they fall due in ord
er to abort any ejectment
proceedings against him. If the lessor refuses to accept the payment,
as in the case at Bar,
defendant had a remedy provided for by law, namely consignation in court or depo
sit in a bank
in the lessor s name with due notice to the lessor. Unfortunately, it is of reco
rd that defendant
did not avail of such remedy so that when plaintiffs filed the ejectment proceed
ings against him
on 30 July 1984, the rentals corresponding to the month of April to July 1984 ha
d not yet been

paid by defendant. Tender of payment is not enoughconsignation must fol
low in order to
extinguish the debt. Otherwise failure to comply with the requirements provided
for under Sec.
5, paragraph (b) Batas PambansaBlg. 25 is a ground for ejectment. Del
ayed consignation or
deposit will not do.
When defendant filed his Motion to Consign Rentals in November, 1984, he was alr
eady
eight (8) months delayed in the payment of his rentals. Furthermore, said motion
simply states
that the counsel for the defendant "is requesting the court to act and/or resolv
e the Motion to
Deposit Rentals immediately upon receipt thereof."
Demand to vacate the premises was made upon defendant as early as Ma
rch, 1984, as
evidenced by plaintiff DaniloBasco s letter and reiterated in the letter dated M
ay, 1984. The fact
that the decision of the MTC in favor of plaintiffs was based on the
ground of non-payment of
rentals and not based on personal need cannot deprive the court of i
ts jurisdiction over the
ejectment case.
60
ARTICLE 1256
THE MANILA REMNANT CO., INC. V. COURT OF APPEALS (231 SCRA 272)
FACTS:
Manila Remnant Co., Inc. (MRCI) owned parcels of land which A.U. Valencia and Co
., Inc.
(AUVCI), as MRCIs agent, converts into a subdivisions, manage the sale
of the lots, execute
contracts, and issue official receipts to the lot buyers. At the time
of the agreement, Valencia
was the president of both MRCI and AUVCI.
AUVCI executed two contracts to sell over two lots in favor of spous
es Ventanilla
payable monthly in ten years. After ten days,
Valencia resold the s
ame lots to Crisostomo
without any consideration and without the knowledge of spouses Ventanil
la. Additionally,
spouses Ventanilla continued paying their monthly installments but they
were remitted to
MRCI as Crisostomos payments. Eventually, MRCI terminated their agreement
with AUVCI
because of discovered discrepancies in its collections and remittances and remov
ed Valencia as
its president.
Spouses Ventanilla learned of the sale to Crisostomo filed an action
for specific
performance, annulment of deeds, and damages; the trial court declared the contr
acts valid and

subsisting and annulling the contract to sell in favor of Crisostomo
which the CA and SC
sustained.
Spouses Ventanilla filed with the trial court a motion for the issuan
ce of a writ of
execution but MRCI alleged that the properties could not be delivered becaus
e they were sold
to Marquez while the case was pending. MRCI offered to reimburse the
amount paid by them
including legal interest plus damages. Spouses accepted the amount for damages a
nd attorneys
fees but opposed the reimbursement.
ISSUE:
What is the remedy of spouses Ventanilla?
HELD:
Against the unjustified refusal of MRCI to accept payment of the balance of the
contract
price, the remedy of the spouses is consignation, conformably to Art. 1256 which
states that if
the creditor to whom tender of payment has been made refuses without just cause
to accept it,
the debtor shall be released from responsibility by the consignaiton of the thin
g or sum due.
Thus, upon consignation by the spouses of the sum due, the trial cou
rt may enter
judgment canceling the title of MRCI over the property and transferrin
g the same to the
spouses. This judgment shall have the same force and effect as convey
ance duly executed in
accordance with the requirements of the law.
61
ARNIEBELLE M. DORIA
ARTICLE 1256
ADELFA PROPERTIES, INC. vs. COURT OF APPEALS (240 SCRA 565)
FACTS:
Private respondents and their brothers, Jose and Dominador Jimenez, wer
e the
registered co-owners of a parcel of land consisting of 17,710 square meters, si
tuated in Barrio
Culasi, Las Pias, Metro Manila.Jose and Dominador Jimenez sold their share consis
ting of onehalf (eastern part) of said parcel of land, to AdelfaProperties pursua
nt to a
"KasulatansaBilihanngLupa."Thereafter, Adelfa expressed interest in buying
the western
portion of the property from private respondents. Accordingly, an "Excl
usive Option to
Purchase"
was executed between Adelfa and private respondents, fixing the selling price of
the
property, an option moneyto be credited as partial payment upon the c
onsummation of the
sale, and stating that in case of default on the part of Adelfa to pay said bala
nce, the option shall
be cancelled.
The owner s copy of the certificate of title issued to Salud Jimenez waslost, a
petition for
the re-issuance of a new copy of was filed in court through Adelfas
counsel, who acted as
private respondents counsel. Eventually, a new owner s copy was issued but it r
emained in the
possession of Atty. Bernardo until he turned it over to Adelfa Properties, Inc.
Before Adelfa could make payment, it received summons, together with a
copy of a
complaint filed by the nephews and nieces of private respondents again
st the latter. As a
consequence, Adelfa informed private respondents that it would hold pay
ment of the full
purchase price and suggested that private respondents settle the case with their
nephews and
nieces. Salud Jimenez refused to heed the suggestion and attributed the suspensi
on of payment
of the purchase price to "lack of word of honor."Private respondents
informedAtty. Bernardo
that they were cancelling the transaction. Atty. Bernardo made offers but they w
ere all rejected
by private respondents.
The RTC of Makati dismissed the civil case. A few days later, privat
e respondents
executed a Deed of Conditional Salein favor of Emylene Chua over the same parcel
of land. Atty.
Bernardo wrote private respondents informing them that in view of the
dismissal of the case
against them, Adelfa was willing to pay the purchase price, and reque
sted that the
corresponding deed of absolute sale be executed.This was ignored by private resp
ondents.
Private respondents counsel sent a letter to Adelfa enclosing therein
a check for
P25,000.00 representing the refund of fifty percent of the option mone
y paid under the
exclusive option to purchase, and requested Adelfa to return the owner s duplica
te copy of the
certificate of title of respondent Salud Jimenez.Adelfa failed to surrender the
certificate of title,
hence private respondents filed a civil case in the RTC of Pasay City, for annu
lment of contract
with damages. The RTC held that the agreement entered into by the pa
rties was merely an
option contract, and declared that the suspension of payment by herein petitione
r constituted a
counter-offer which, therefore, was tantamount to a rejection of the o
ption. On appeal, the

Court of Appeals affirmed in toto the decision of the court a quo.
62
ISSUE:
WON Article 1590 is applicable, making valid the suspension of payment of the pu
rchase price
by Adelfa.
HELD:
Yes. The CA refused to apply Article 1590 on the erroneous assumption
that the true
agreement between the parties was a contract of option. The Supreme C
ourtruled that what
was truly in force was not an option contract but a perfected contract to sell.
Verily, therefore,
Article 1590 would properly apply.
Both lower courts, however, are in accord that since the civil case
filed against the
parties herein involved only the eastern half of the land, it did not, therefore
, have any adverse
effect on private respondents title and ownership over the western ha
lf of the land which is
covered by the contract subject of the present case.
Such being the case, Adelfa was justified in suspending payment of th
e balance of the
purchase price by reason of the aforesaid vindicatory action filed aga
inst it. The assurance
made by private respondents that Adelfa did not have to worry about
the case because it was
pure and simple harassment is not the kind of guaranty contemplated u
nder the exceptive
clause in Article 1590.
The validity of the suspension of
that private
respondents may no longer be compelled
to petitioner
for two reasons, that is, (1) Adelfas
the purchase price
after the disturbance had ceased;
o sell had been validly
rescinded by private respondents.
payment notwithstanding, the SCheld

to sell and deliver the subject property
failure to duly effect the consignation of
and(2) the fact that the contract t
When Adelfa caused its exclusive option to be annotated anew on the certificate
of title,
it already knew of the dismissal of the civil case filed against the private res
pondents. However,
it was months after that Adelfa, wrote private respondents expressing its willin
gness to pay the
balance of the purchase price upon the execution of the corresponding deed of ab
solute sale. At
most, that was merely a notice to pay. There was no proper tender o
f payment nor
consignation in this case as required by law.
The mere sending of a letter by the vendee expressing the intention to pay, with
out the
accompanying payment, is not considered a valid tender of payment. Besides, a me
re tender of
payment is not sufficient to compel private respondents to deliver the property
and execute the
deed of absolute sale. It is consignation which is essential in order
to extinguish petitioner s
obligation to pay the balance of the purchase price. The rule is dif
ferent in case of an option
contract or in legal redemption or in a sale with right to repurchas
e, wherein consignation is
not necessary. This is because the provisions on consignation are not applicabl
e when there is
no obligation to pay. A contract to sell, as in this case, involves
the performance of an
obligation, not merely the exercise of a privilege of a right. Conseq
uently, performance or
payment may be effected not by tender of payment alone but by both tender and co
nsignation.
1
63
MARVIN P. FRANCISCO
ARTICLE 1256
BADAYOS VS. COURT OF APPEALS (13 March 1992)
FACTS:
On 9 March 1973, petitioner executed in favor of private respondents spouses a D
eed of
Sale With The Right to Repurchase over her undivided half portion of
Lot No. 3493 located at
Tabunok, Talisay, Cebu for a consideration of Seven Thousand Four Hund
red Pesos
(P7,400.00); the sale was made subject to the following stipulation:
That it is the essence of this contract that the vendor, Clara Badayo
s has the
right to repurchase the above described property after two (2) years from and af
ter the
execution of this contract for the same amount of SEVEN THOUSAND FOUR
HUNDRED
PESOS (P7,400.00).
Two (2) years after the execution of the document in question, or sp
ecifically on 17
April 1975, private respondents filed with the the Regional Trial Cour
t of Cebu an action to
consolidate ownership over the property in question; it is alleged the
rein that "the two years
(sic) period from March 9, 1973 had already elapsed but defendant never repurcha
sed the said
property in violation of the contract ofpacto de Retro Sale."
On 11 August 1975, petitioner filed a manifestation informing the tria
l court that on 4
August 1975, she consigned the amount of P7,400.00 with the Clerk of
Court in favor of the
private respondents as payment of her obligation and/or redemption of
the property in
question; thus, the case has become moot and academic and should be dismissed.
ISSUE:
Whether or not petitioner was able to repurchase the property in qu
estion within the
period stipulated in the deed of sale with right to repurchase.
HELD:
Yes. While the counting of the four-year period shall begin from th
e execution of the
contract, where the right is suspended by agreement until after a cer
tain time, event or
condition, the period shall be counted from the time such right could
be exercised, but not
exceeding ten (10) years from the execution of the contract. Applying the provis
ion to the case,
the period to repurchase the property must be deemed to be four (4) years from 9
March 1975
or until 9 March 1979. Since petitioner consigned the repurchase price on 11 Aug
ust 1975, a fact
private respondents did not deny, the Court declares that this consignation ope
rated as a valid
offer or tender of the redemption price. It must be emphasized that
consignation was not
necessary for the reason that the relationship that existed between pe
titioner and private
respondents, in respect to the right of redemption, was not one of d
ebtor-creditor. Petitioner
was exercising a right, not discharging an obligation, hence a mere t
ender of payment is
sufficient to preserve the right of a vendor a retro. The petition is GRANTED.
1
64
ARTICLE 1256
DE MESA V CA (317 SCRA 24)
FACTS:
Petitioner Dolores Ligaya de Mesa owns several parcels of land which were mortga
ged to
the Development Bank of the Philippines (DBP) as security for a loan
she obtained from the
bank. Failing to pay her mortgage debt, all her mortgaged properties were forec
losed and sold
at public auction held on different days. In all the said auction, DBP was the w
inning bidder.
In a letter dated May 29, 1978, petitioner requested DBP that she be allowed to
repurchase
her foreclosed properties. On October 23, 1978, petitioner, under a Dee
d of Sale with
Assumption of Mortgage, sold the foreclosed properties to private respondent OSSA
under the
condition that the latter was to assume the payment of the mortgage debt by the
repurchase of
all the properties mortgaged on installment basis, with an initial pay

ment of P90,000.00
representing 20% of the total obligation. OSSA remitted to DBP payments.
On February 22, 1979, DBP granted petitioners request to repurchase the
foreclosed
properties such that in March 1979 a Deed of Conditional Sale was exec
uted under which
DBP agreed to sell the said properties to the petitioner. Private respondent OSS
A paid DBP the
first to eight quarterly installments in the total amount of P137,595.
31, which installment
payments were applied to petitioners obligation with DBP pursuant to the Deed of
Conditional
Sale.
On March 11, 1981, petitioner de Mesa notified private respondent OSSA
that she was
rescinding the Deed of Sale with Assumption of Mortgage she executed in favor of
the latter on
the ground that OSSA failed to comply with the terms and conditions of their agr
eement. OSSA
offered to pay the amount but the petitioner refused to accept such
payment. With this, OSSA
brought a Complaint for Consignation against the petitioner, and at th
e same time, deposited
the amount of P34,363.08 with said court.
DBP also refused to accept the 9th quarterly installment paid by OSSA
, prompting the
latter to file against DBP and the petitioner for specific performance
and consignation while
depositing to the court the said installment. The cases were consolidated for de
cision.
In addition, the lower court allowed OSSA to deposit with the Court
a quo by way of
consignation, all future quarterly installments without need of formal tenders
of payment and
service of notices of consignation. Correspondingly and over the period
of time stipulated,
OSSA deposited with the lower court the 10
th
to the 20th installments.
In terms of the consignation made by OSSA, the lower court and Court
of Appeals both
ruled in favor of OSSA insofar as declaring the consignation proper and valid.
De Mesa is now contending that the court erred in ruling that the
mandatory
requirements of the civil code on consignation can be waived by the trial court.
65
ISSUE:
Whether or not the requirements of Articles 1256 to 1261 can be relax

ed or
substantially complied with.

HELD:
YES.
Petitioner argues that there was no notice to her regarding OSSAs cons
ignation of the
amounts corresponding to the 12
th
up to the 20
th
quarterly installments. The records, however,
show that several tenders of payment were consistently turned down by
the petitioner, so
much so that the respondent OSSA found it pointless to keep on makin
g formal tenders of
payment and serving notices of consignation to petitioner.
Moreover, in a motion dated May 7, 1987, OSSA prayed before the lower court that
it be
allowed to deposit by way of consignation all the quarterly installmen
ts, without making
formal tenders of payment and serving notice of consignation, which prayer was g
ranted by the
trial court in the Order dated July 3, 1982.
The motion and the subsequent court order served on the petitioner i
n the
consignation proceedings sufficiently served as notice to petitioner of OSSAs wil
lingness to pay
the quarterly installments and the consignation of such payments with the court.
For reasons of equity, the procedural requirements of consignation are
deemed
substantially complied with in the present case
It is also thus beyond cavil that the OSSA tendered the correct amou
nt, the tender of
which was in case and not by check, as theorized by petitioner.
1
66
ALFREDO KHONG HUN
ARTICLE 1256
TAYAG VS. C.A. (219 SCRA 480)
FACTS:
Siblings Juan Galicia Sr. and Celerina Labuguin entered into a contract to sell
a parcel of
land in Nueva Ecija to a certain Albrigido Leyva.Three thousand pesos
upon signing of
agreement. Then, Ten thousand pesos ten days after the agreement. Ten
thousand pesos
representing vendors indebtedness to Phil Veterans Bank. The remaining t
wenty seven
thousand pesos which payable within one year from execution of contrac
t.Leyva only paid
parts of the obligation.But even after the grace period for payment m
ade in the contract and
while litigation of such case, the petitioners still allowed Leyva to make payme
nts. With regards
to the obligation payable to the Phil Veterans bank by the vendee, a
s they deemed that it was
not paid in full, such obligation they completed by adding extra amou
nt to fulfill such
obligation. This was fatal in their case as this is Leyvas argument t
hat they constructively
fulfilled the obligation which is rightfully due to him. It was Celerina, Juans s
ister, that paid the
bank to complete such obligation. Petitioners claim that they are only OBLIGEES wi
th regards
to the contract, so the principle of constructive fulfillment cannot b
e invoked against them.
Petitioners, being both creditor and debtor to private respondent, in
accepting piecemeal
payment even after the grace period, are barred to take action through estoppel.
ISSUE:
Whether or not there was a valid tender of payment.
HELD:
Yes. The fact that consignation alone produced the effect of payment i
n the case at bar
because it was established below that two or more heirs of Juan Gali
cia, Sr. claimed the same
right to collect. Petitioners accepted Leyvas delayed payments not only
beyond the grace
periods but also during the pendency of the case for specific performance. Indee
d, the right to
rescind is not absolute and will not be granted where there has been substantial
compliance by
partial payments. By and large, petitioners actuation is susceptible of but one c
onstruction
that they are now estopped from reneging from their commitment on account of acc
eptance of
benefits arising from overdue accounts of private respondent.
67
ARTICLE 1260
GAMBOA VS TAN (4 SCRA 40)
FACTS:
Augusto G. Gamboa deposited with the Manila court of first instance, the sum of
P16,450.00
even as he requested that Agustin A. Cancio be required to take it a
s full settlement of the
latter s share or interest in the enterprise known as Gamboa s Manila, Inc.
Cancio said he had previously refused to receive the money as full s
ettlement, because his
share was worth P51,256.45 at least, and that Gamboa had agreed to pa
y the said amount
for such share.
Before Cancio had filed his answer Gamboa changed his mind and he moved for per
mission
to withdraw the sum he had deposited; and the court granted such permission.
ISSUE:
Is the court erred in their decision to redeposit the amount that Gamboa got?
HELD
Such right is clear in this case, because the statement of the creditor came la
te, and, what is
more, the acceptance was partial.
This last consideration renders it unnecessary to discuss the effect
of failure to give the
creditor any notice of the withdrawal, since Cancio s statement was pr
actically a rejection
of the offer of payment.
68
ARTICLE 1262
FEDERATION OF UNITED NAMARCO DISTRIBUTORS V. NATIONAL MARKETING
CORPORATION (4 SCRA 867)
FACTS:
Due to escalating prices. The President directed NAMARCO to purchase and distri
bute such
commodities in short supply, with a special non-recurring dollar allocation from
the Central
Bank. However, the workers of NAMARCO were on strike which threatened
the plan to
force down the prices of commodities. Thus NAMARCO was allowed to import commodi
ties
through various associations composed of regular NAMARCO distributors and/or ret
ailers,
by way of trade assistance, pursuant to the issuance of Resolution No. 524.
On November 16, 1959, NAMARCO and the FEDERATION entered into a Contract of Sal
e for
the importation of USD2M worth of controlled goods. The contract also
stated that the
FEDERATION shall pay NAMARCO the procurement cost plus 5% and that all handling
and
storage costs shall be for the account of the FEDERATION. Three days
later, the Board of
Directors of NAMARCO approved Resolution No. 530
Beginning December, the goods arrived in Manila and FEDERATION proceed
ed to pay to
the NAMARCO all through the months of December and January the full
value of the
merchandise that had been arriving. However, a new set of BoD and General Manage
r took
over the management of NAMARCO, who sought to discontinue compliance u
nder the
contract when delivery of the goods was a little over halfway complet
ed, alleging that the
contract was not formally approved by the BoD because its terms were
different from the
conditions laid down in the previous Resolutions of the BoD. On March
2, 1960, the
FEDERATION filed a complaint to compel NAMARCO to deliver the remaining goods.
On March 26, 1960, the trial court, upon motion of the FEDERATION, ordered the
release to
the FEDERATION 2,400 cases of mandarin oranges provided they are in good conditi
on, or
only so much thereof that are in good condition" against payment alre
ady made by the

FEDERATION to the NAMARCO. Only 445 cases of the oranges ordered were
in good
condition and were delivered as allowed by the trial court.
to the
FEDERATION were in
good condition, the trial court allowed the FEDERATION to take delivery of such
445 cases
only, and made the corresponding adjustments in the application of the payments
made by
the FEDERATION to the NAMARCO.
ISSUES: (There are 3)
1. Whether or not the contract of sale was valid.
2. Whether or not the trial court erred in allowing FEDERATION to take delivery
of 445 cases
of oranges only, instead of 2,400 cases, in effect, charging NAMARCO
for the loss of 1,955
cases.
3. Who should bear the storage charges from the date of filing of t
he complaint of
FEDERATION?
OBLIGATIONS AND CONTRACTS CASE DIGESTS (SCHOOL YEAR 2013-2014) 169
HELD:
(1) Yes. The Contract of Sale was valid. Because at the time the ne
w BoD refused to recognize the
validity of the contract of sale, more than half of the goods had already been d
elivered by NAMARCO to
the FEDERATION, and for which NAMARCO has accepted partial payments
(2)
No, NAMARCO should bear the loss. While FEDERATION did get an
injunction to restrain
NAMARCO from distributing the goods to other distributors/retailers, it
was willing to accept
deliveries, but NAMARCO refused to deliver. Delivery was only done upon order of
the trial court. Thus
NAMARCO must bear the loss of the oranges that got spoiled during that period.
(3)
NAMARCO should be charged the storage costs. While, it is true that und
er the contract of sale
the handling and storage charges of the commodities covered thereby ar
e for the account of
FEDERATION, the storage charges that became due from the date the goo
ds had to remain in the
warehouse because of the refusal of NAMARCO to deliver the same to t
he FEDERATION which had
been demanding the surrender thereof to it cannot be charged to the FEDERATION,
but to NAMARCO
because they have been guilty of delay in the delivery of the goods subject matt
er thereof.
ARTICLE 1266
PEOPLE v. FRANKLIN (39 SCRA 363)
FACTS:
Natividad Franklin was charged with estafa. Upon a bail bond posted b
y the Asian Surety &
Insurance Company, Inc. in the amount of P2,000.00, she was released from custod
y.
The Court of First Instance set her arraignment but she failed to appear. The ar
raignment was
postponed upon motion of counsel for the surety company. The accused failed to a
ppear again.
The court granted the surety company a period of thirty days within
which to produce and
surrender the accused, with the warning that upon its failure to do so the bail
bond posted by it would
be forfeited. The bail was subsequently forfeited when the surety comp
any failed to produce the
accused yet again.
The surety company filed a motion for a reduction of bail alleging t
hat the reason for its
inability to produce and surrender the accused to the court was the
fact that the Philippine
Government had allowed her to leave the country and proceed to the United States
.
The motion for reduction of bail was denied. The surety company s motion for rec
onsideration
was also denied by the lower court.
Appellant contends that the lower court should have released it from all liabili
ty under the bail
bond posted by it because its failure to produce and surrender the accused was d
ue to the negligence
of the Philippine Government itself in issuing a passport to said accused, there
by enabling her to leave
the country. Article 1266 of the New Civil Code is invoked.
ISSUE:
W/N the appellant company should be released from liability under Arti
cle 1266 of the Civil
Code due to the prestation of the obligation becoming impossible without its fau
lt.
HELD:
AFFIRMED (petition denied)
The abovementioned legal provision does not apply to its case, because the same
speaks of the
relation between a debtor and a creditor, which does not exist in the case of a
surety upon a bail bond,
on the one hand, and the State, on the other.
In the eyes of the law a surety becomes the legal custodian and jai
ler of the accused, thereby
assuming the obligation to keep the latter at all times under his su
rveillance, and to produce and
surrender him to the court upon the latter s demand.
That the accused in this case was able to secure a Philippine passport which ena
bled her to go
to the United States was, in fact, due to the surety company s fault
because it was its duty to do
everything and take all steps necessary to prevent that departure. This could ha
ve been accomplished
by seasonably informing the Department of Foreign Affairs and other ag
encies of the government of
the fact that the accused for whose provisional liberty it had posted a bail bon
d was facing a criminal
charge in a particular court of the country. Had the surety company
done this, there can be no doubt
that no Philippine passport would have been issued to Natividad Franklin.
ARTICLE 1266
IMMACULATA V NAVARRO (160 SCRA 211)
FACTS:
The petitioner filed a Motion for Reconsideration of the decision of the court d
ated November
26, 1986 asks to consider a point inadvertently missed by the Court the matter o
f legal redemption
of a parcel of land previously obtained by petitioner Lauro Immaculata
thru a free patent. The
reconsideration of the issue is GRANTED.
While res judicata may bar questions on the validity of the sale in view of alle
ged insanity and
intimidation (and this point is no longer pressed by counsel for the petitioner)
still the question of the
right of legal redemption has remained unresolved.
It is
noted that a civil action was filed on March 24, 1975 befor
e the defunct Court of First
Instance of Rizal, petitioner presented an alternative cause of action or prayer
just in case the validity
of the sale would be sustained. And this alternative cause of action
or prayer is to allow petitioner to
legally redeem the property.
ISSUE:
Whether or not there is a right of legal redemption.
HELD:
The Court grant said alternative cause of action or prayer. While the
sale was originally
executed sometime in December, 1969, it was only on February 3, 1974
when, as prayed for
by
private respondent, and as ordered by the court a quo, a "deed of conveyance" wa
s formally executed.
Since offer to redeem was made on March 24, 1975, this was clearly within the fi
ve-year period of legal
redemption allowed by the Public Land Act.
The allegation that the offer to redeem was not sincere, because there
was no consignation of
the amount in Court is devoid of merit. The right to redeem is a R
IGHT, not an obligation, therefore,
there is no consignation required to preserve the right to redeem.
ARTICLE 1266
PNCC VNLRC (193 SCRA401)

FACTS:
On 22 May 1979, private respondent, Romeo Buan, was hired by petitioner, Philipp
ine National
Construction Corporation ("PNCC") to work as Civil Engineer III in Saudi Arabia
for a period of two (2)
years with a monthly salary of US$1,024.00. While in Saudi Arabia, respondent wa
s assigned to work
in the Saudi Government s Mecca Stormwater Drainage Project where petitioner was
a sub-contractor
of Saudi Research and Development Corporation ("REDEC"), the main contr
actor.After private
respondent had served the full term of his two-year contract, he ente
red into another two-year
contract of employment with petitioner under which he was hired as Se
nior Engineer at a higher
monthly salary of US$1,350. This new contract of employment provided, among othe
r things, that:
All expenses for entry visas to Saudi Arabia or residence permits the
reof of the EMPLOYEE
shall be borne by the COMPANY. The COMPANY shall assist the employee in the rene
wal of his
Residence permit during the term of this contract. Should the renewal
of the said permit be
denied by the concerned authorities for any reason, this contract shal
l be cancelled as of the
end of the residence period without prejudice to the rights of the e
mployee, benefits or
privileges accrued at the time of the cancellation of this Agreement.
On 21 August 1981, private respondent arrived in Saudi Arabia on a re-entry visa
sponsored by
REDEC. On 1 September 1981, however, private respondent s Residence and
Work Permit ("Iqama")
expired. Petitioner transmitted to the project manager of REDEC a lett
er requesting extension of
private respondent s Residence and Work permit. However, this request w
as returned by one Mr.
ZiadYamut with the notation "returned without renewal" together with a handwritt
en note stating
"having been dissatisfied with the performance BUAN we suggest that you send him
back on the
reason that REDEC has refused to renew the IQAMA." As a result, private responde
nt was repatriated
on 26 November 1981.
Respondent then filed a complaint against petitioner PNCC before public responde
nt Philippine
Overseas Employment Administration ("POEA") for breach of contract or i
llegal dismissal. In a
decision dated 15 April 1986, POEA ordered petitioner to pay private
respondent his salary
corresponding to the unexpired term of the second contract of employme
nt in the total amount of
US$28,080.00, or its equivalent in Philippine currency at the time of
actual payment, plus attorney s
fees.Petitioner appealed, the decision of the POEA was affirmed by the
National Labor Relations
Commission ("NLRC") with some modifications in respect of the award gr
anted.Thus thisPetition for
Certiorari with prayer for temporary restraining order.
ISSUE
Whether NLRC abused its discretion in holding petitioner liable for brea
ch of contract despite
the fact that termination of the overseas contract was due to force
majuere and events not
foreseen by the parties.
HELD:
Yes. We are unable to agree with public respondent NLRC. While it may be true th
at under our
labor laws petitioner is the employer of private respondent, it must
be noted that the employment
contract entered into by private respondent is an overseas employment contract t
o be implemented in
Saudi Arabia and which implementation must comply with Saudi Arabian l
aw. It is not disputed that
petitioner had no official standing in Saudi Arabia being only a sub-contractor
of REDEC, the principal
contractor. Indeed, the NLRC conceded that "under the Saudi Arabian law it is on
ly REDEC which can
sponsor the renewal of private respondent s work permit." Under Saudi Arabian la
w, REDEC was to be,
in effect, the employer of private respondent.
Appraising the second employment contract between petitioner and private
respondent in
terms of Philippine law, there are three (3) reasons why petitioner c
annot be held liable under that
contract for breach thereof under the circumstances of this case. The first reas
on relates to paragraph
13 of the second contract, quoted earlier. It will be seen that the
renewal of private respondent s
Residence and Work permit constituted a condition to his continued employment in
Saudi Arabia. That
condition was resolutory in nature, that is, the non-renewal of privat
e respondent s permit had the
effect of resolving, or rendering cancellable, that contract.
The second reason is found in the rule that an obligor shall be rel
eased from his obligation
when the prestation has become legally or physically impossible without
fault on his part.The
supervening impossibility of performance, based upon some factor indepen
dent of the will of the
obligor, releases the obligor from his obligation after restitution of what he m
ay have received, if any,
in advance from the other contracting party;
8
the obligor incurs no liability for damages for his
inability to perform. In the case at bar, the failure of refusal of REDEC to spo
nsor the renewal of private
respondent s Residence and Work permit had rendered it legally impossible for pe
titioner to continue
to implement its contract of employment in Saudi Arabia of private re
spondent. There is no dispute
that REDEC was not subject to the control of petitioner; indeed, it
was petitioner which was wholly
subject to the control and even the whims of REDEC. To insist that
petitioner should pay for private
respondent s wages under the second contract of employment under the circumstanc
es of this case, is
to impose an unfair burden upon the latter and to sanction the unjus
t enrichment of private
respondent at the expense of petitioner. To require petitioner to reta
in the services of private
respondent in Saudi Arabia would be to require petitioner to violate the labor l
aws of its host country.
So to require, would be to impose an intolerable burden upon petitioner.
There is a third and final reason why private respondent cannot hold
petitioner liable for
breach of the second contract of employment. Paragraph 13 of the seco
nd contract expressly
envisaged the possibility that renewal of the Residence and Work permit of priva
te respondent could
"be denied by the concerned authorities for any reason," in which cas
e, the contract would be
"cancelled." Private respondent was, of course, aware that his original
permit was about to expire
when he left for Saudi Arabia the second time. He must or should have been also
alerted by the second
contract of employment to the possibility of non-renewal of his Reside
nce and Work permit and the
ensuing cancellability of the contract. Petitioner did not, in other words, conc
eal the legal and practical
situation from private respondent. We find no bad faith on the part of petitione
r.
ACCORDINGLY, the Court Resolved to GRANT due course to the Petition f
or Certiorari and to
REVERSE and SET ASIDE the Decision dated 21 April 1987 of the NLRC
in POEA. The Temporary
Restraining Order earlier issued by this Court is hereby made PERMANENT.
ARTICLE 1266
PNCC V CA (272 SCRA 183)
FACTS:
This petition for review on certiorari has its roots in Civil Case No.
53444, which was sparked
by petitioner s refusal to pay the rentals as stipulated in the contract of leas
e
1
on an undivided portion
of 30,000 square meters of a parcel of land owned by private respondents.
On 18 November 1985, private respondents and petitioner entered into a contract
of lease of a
parcel of land owned by the former. The terms and conditions of said contract of
lease are as follows:
a) the lease shall be for a period of five (5) years which begins
upon the issuance of permit by the
Ministry of Human Settlement and renewable at the option of the lesse
e under the terms and
conditions, b) the monthly rent is P20, 000.00 which shall be increas
ed yearly by 5% based on the
monthly rate; and,nc) the rent shall be paid yearly in advance, and
d) the property shall be used as
premises of a rock crushing plan.
On January 7, 1986, petitioner obtained permit from the Ministry which was to be
valid for two
(2) years unless revoked by the Ministry. Later, respondent requested the paymen
t of the first annual
rental. But petitioner alleged that the payment of rental should commence on the
date of the issuance
of the industrial clearance not on the date of signing of the contract. It then
expressed its intention to
terminate the contract and decided to cancel the project due to finan
cial and technical difficulties.
However, petitioner refused to accede to respondents request and reitera
ted their demand for the
payment of the first annual rental. But the petitioner argued that it
was only obligated to pay P20,
000.00 as rental for one month prompting private respondent to file a
n action against the petitioner
for specific performance with damages before the RTC of Pasig.
On 12 April 1989, the trial court rendered a decision ordering petiti
oner to pay private
respondents the amount of P492,000 which represented the rentals for two years,
with legal interest
from 7 January 1986 until the amount was fully paid, plus attorney s fees in the
amount of P20,000 and
costs. Petitioner then appealed to the Court of Appeals alleging that the trial
court erred in ordering it
to pay private respondent the amount of P492,000 and in denying it t
he right to be heard. Upon the
affirmation of the trial court s decision and the denial of its motion
for reconsideration, petitioner
came to this Court ascribing to respondent Court of Appeals the same
alleged errors and reiterating
their arguments.
ISSUE:
Should the petitioner be released from the obligatory force of the contract of l
ease because the
purpose of the contract did not materialize ? Could the petitioner in
voke Art. 1266 the principle
of rebus sic stantibus?
HELD:
No.
It is a fundamental rule that contracts, once perfected, bind b
oth contracting parties, and
obligations arising there from have the force of law between the parties and sho
uld be complied with
in good faith. But the law recognizes exceptions to the principle of
the obligatory force of contracts.
One exception is laid down in Article 1266 of the Civil Code, which reads: The d
ebtor in obligations to
do shall also be released when the prestation becomes legally or phys
ically impossible without the
fault of the obligor.
Petitioner cannot, however, successfully take refuge in the said articl
e, since it is applicable
only to obligations "to do," and not to obligations "to give." An oblig
ation "to do" includes all kinds of
work or service; while an obligation "to give" is a prestation which
consists in the delivery of a
movable or an immovable thing in order to create a real right, or for the use of
the recipient, or for its
simple possession, or in order to return it to its owner.
Article 1267 of the New Civil Code provides that when the service has become so
difficult as to
manifestly beyond the contemplation of the parties, the obligor may also be rele
ased from it, in whole
or in part. This article, which enunciates the doctrine of unforeseen events, is
not, however an absolute
application of the principle of rebus sic stantibus, which would endan
ger the security of contractual
relations. The parties to the contract must be presumed to have assum
ed the risks of unfavorable
developments. It is therefore only in absolutely exceptional chances of
circumstances that equity
demands assistance for the debtor. The principle of rebus sic stantibus neither
fits in with the facts of
the case. Under this theory, the parties stipulate in the light of certain preva
iling conditions, and once
these conditions cease to exist, the contract also ceases to exist.
In this case, petitioner averred that three (3) abrupt change in the
political climate of the
country after the EDSA Revolution and its poor financial condition ren
dered the performance of the
lease contract impractical and inimical to the corporate survival of the petitio
ner. However, as held in
Central Bank v. CA, mere pecuniary inability to fulfill an engagement does not d
ischarge a contractual
obligation, nor does it constitute a defense of an action for specific performan
ce.
RYLE SCOTT MANCIA
ARTICLE 1267
LAGUNA TAYABAS BUS COMPANY VS. MANABAT (58 SCRA 650)
FACTS:
On January 20, 1956, a contract was executed whereby the Bian Transpor
tation Company
leased to the Laguna-Tayabas Bus Company at a monthly rental of P2,50
0.00 its certificates of public
convenience over the lines known as Manila-Bian, Manila-Canlubang and Sta. Rosa-M
anila, and to the
Batangas Transportation Company its certificate of public convenience over the l
ine known as ManilaBatangas Wharf, together with one "International" truck, for a period
of five years, renewable for
another similar period, to commence from the approval of the lease co
ntract by the Public Service
Commission. On the same date the Public Service Commission provisionall
y approved the lease
contract on condition that the lessees should operate on the leased l

ines in accordance with the
prescribed time schedule and that such approval was subject to modific
ation or cancellation and to
whatever decision that in due time might be rendered in the case.
Sometime after the execution of the lease contract, the plaintiff Bian Transpor
tation Company
was declared insolvent in Special Proceedings No. B-30 of the Court o
f First Instance of Laguna, and
Francisco C. Manabat was appointed as its assignee. From time to time, the defen
dants paid the lease
rentals up to December, 1957, with the exception of the rental for August 1957,
from which there was
deducted the sum of P1,836.92 without the consent of the plaintiff. T
his deduction was based on the
ground that the employees of the defendants on the leased lines went on strike f
or 6 daysin June and
another 6 days in July, 1957, and caused a loss of P500 for each strike, or a to
tal of P1,000.00; and that
in Civil Case No. 696 of the Court of First Instance of Batangas, B
ranch II, judgment was rendered in
favor of defendant Batangas Transportation Company against the Bian Tran
sportation Company for
the sum of P836.92. The assignee of the plaintiff objected to such deduction, cl
aiming that the contract
of lease would be suspended only if the defendants could not operate the leased
lines due to the action
of the officers, employees or laborers of the lessor but not of the
lessees, and that the deduction of
P836.92 amounted to a fraudulent preference in the insolvency proceedin
gs as whatever judgment
might have been rendered in favor of any of the lessees should have
been filed as a claim in said
proceedings. The defendants neither refunded the deductions nor paid the rentals
beginning January,
1958, notwithstanding demands therefor made from time to time. At first, the def
endants assured the
plaintiff that the lease rentals would be paid, although it might be delayed, bu
t in the end they failed to
comply with their promise.
On February 18, 1958, the Batangas Transportation Company and LagunaTayabas Bus
Company separately filed with the Public Service Commission a petition
for authority to suspend the
operation on the lines covered by the certificates of public convenience leased
to each of them by the
Bian Transportation Company. The defendants alleged as reasons the reduc
tion in the amount of
dollars allowed by the Monetary Board of the Central Bank of the Philippines for
the purchase of spare
parts needed in the operation of their trucks, the alleged difficulty encountere
d in securing said parts,
and their procurement at exorbitant costs, thus rendering the operation of the l
eased lines prohibitive.
The defendants further alleged that the high cost of operation, couple
d with the lack of passenger
traffic on the leased lines resulted in financial losses. For these r
easons they asked permission to
suspend the operation of the leased lines until such time as the ope
rating expenses were restored to
normal levels so as to allow the lessees to realize a reasonable margin of profi

t from their operation.
Plaintiff s assignee opposed the petition on the ground that the Public Servic
e Commission had
no jurisdiction to grant the relief prayed for as it should involve
the interpretation of the lease
contract, which act falls exclusively within the jurisdiction of the ordinary co
urts; that the petitioners
had not asked for the suspension of the operation of the lines cover
ed by their own certificates of
public convenience; that to grant the petition would amount to an imp
airment of the obligation of
contract; and that the defendants have no legal personality to ask fo
r suspension of the operation of
the leased lines since they belonged exclusively to the plaintiffwho is the gran
tee of the corresponding
certificate of public convenience. Aside from the assignee, the Commiss
ioner of the Internal Revenue
and other creditors of the Bian Transportation Company, like the Standa
rd Vacuum Oil Co. and
Parsons Hardware Company, filed oppositions to the petitions for suspension of o
peration.
On October 15, 1958, the Public Service Commission overruled all opp
ositions filed by the
assignee and other creditors of the insolvent, holding that upon its approval of
the lease contract, the
lessees acquired the operating rights of the lessor and assumed full responsibil
ity for compliance with
all the terms and conditions of the certificate of public convenience.
The Public Service Commission
further stated that the petition to suspend operation did not pertain
to any act of dominion or
ownership but only to the use of the certificate of public convenienc
e which had been transferred by
the plaintiff to the defendants, and that the suspension prayed for was but an i
ncident of the operation
of the lines leased to the defendants. The Public Service Commission further rul
ed that being a quasijudicial body of limited jurisdiction, it had no authority to interpret contract
s, which function belongs
to the exclusive domain of the ordinary courts, but the petition did
not call for interpretation of any
provision of the lease contract as the authority of the Public Service Commissio
n to grant or deny the
prayer therein was derived from its regulatory power over the leased
certificates of public
convenience.
ISSUE:
Whether or Not Laguna Bus Company is entitled to a reduced amount of rentals o
n the subject
matter of the lease was allegedly not used by them as a result of th
e suspension of operations on the
lines authorized by the Public Service Commission
HELD:
No.
The court stated where a person by his contract charges himself with an obliga
tion possible to
be performed, he must perform it, unless the performance is rendered impossible
by the act of God, by

the law, or by the other party, it being the rule that in case the
party desires to be excused from the
performance in the event of contingencies arising, it is his duty to
provide therefor in his contract.
Hence, performance is not excused by subsequent inability to perform,
by unforeseen difficulties, by
unusual or unexpected expenses, by danger, by inevitable accident, by
breaking of machinery, by
strikes, by sickness, by failure of a party to avail himself of the benefits to
be had under the contract, by
weather conditions, by financial stringency or by stagnation of busines
s. Neither is performance
excused by the fact that the contract turns out to be hard and impr
ovident, unprofitable, or
impracticable, ill-advised, or even foolish, or less profitable, unexpectedly bu
rdensome.
The court also said that the petitioner s option to suspend operation was mali
cious and it was
done so that it
would have less operation cost which would result
to a higher profit. Thus the
petitioner does not have the right to reduced the rentals.
ARTICLE 1245
OCCENA VS. JABSON (73 SCRA 637)
FACTS:
Private respondent Tropical Homes, Inc. (THI) filed a complaint for modification o
f the terms
and conditions of its subdivision contract with petitioners Spouses Jes
us V. Occena and Efigenia C.
Occena who owns a 55,330 square meter land in Davao City. The contract guarante
es, as the Spouses
Occenas fixed and sole share and participation, an amount equivalent to
40% percent of all cash
receipts from the sale of the subdivision lots.
THI made the
allegations that costs of development
has risen to levels which are unanticipated, unimagined and not within the remot
est contemplation of
the parties at the time the contract was entered into. THI further alleged that
performance by THI of
the contract will result in the unjust enrichment of the Spouses Occe
na at the expense of the former
and will cause an iniquitous distribution of proceeds from the sales of subdivid
ed lots. THI prayed of
the Rizal Court of First Instance that the court render judgment modifying the t
erms and conditions of
the contract by fixing the proper shares that should pertain to the
parties out of the gross proceeds
from the sales of subdivided lots of subject subdivision. The Spouses Occena mo
ved for the dismissal
of the complaint for lack of cause of action which was then denied
by the court.
Upon elevation to
public respondent Court of Appeals (CA), the CA dismissed the appeal on the ground
of Article 1267
of the Civil Code which provides: When the service has become so difficult as to
be manifestly beyond
the contemplation of the parties, the obligor may also be released th
erefrom, in whole or in part.

Hence, this petition by the Spouses Occena.
ISSUE:
Whether or not THI may demand modification of the terms of the contract on the g
round that
the service has manifestly come beyond the contemplation of the parties.
HELD:
No, THI may not demand modification of the terms of the contract on
the ground that the
service has manifestly come beyond the contemplation of the parties.
The Supreme Court (SC) reversed the resolution of the respondent CA
a
nd the petition for
certiorari is granted and THIs complaint in the lower court is ordered dismissed
for failure to state a
sufficient cause of action.
The SC held that if THIs complaint were to be released from having t
o comply with the
subdivision contract, assuming it could show at the trial that the service under
taken contractually by it
had "become so difficult as to be manifestly beyond the contemplation of the par
ties", then respondent
court s upholding of THIs complaint and dismissal of the petition would be justif
iable under the cited
codal article. Without said article, THI would remain bound by its co
ntract under the theretofore
prevailing doctrine that performance therewith is not excused "by the fact that
the contract turns out
to be hard and improvident, unprofitable, or unexpectedly burdensome", since in
case a party desires
to be excused from performance in the event of such contingencies ari
sing, it is his duty to provide
therefore in the contract.
The SC further held that THI s complaint seeks not release from the
subdivision contract but
that the court "render judgment modifying the terms and conditions of
the contract by fixing the
proper shares that should pertain to the herein parties out of the g
ross proceeds from the sales of
subdivided lots of subject subdivision". The cited article does not gr
ant the courts this authority to
remake, modify or revise the contract or to fix the division of shar
es between the parties as
contractually stipulated with the force of law between the parties, so as to sub
stitute its own terms for
those covenanted by the parties themselves. THI s complaint for modific
ation of contract manifestly
has no basis in law and therefore states no cause of action. Under
the particular allegations of
respondent s complaint and the circumstances therein averred, the courts cannot
even in equity grant
the relief sought.
ARTICLE 1267
NAGA TELEPHONE CO., INC., vs. COURT OF APEALS (230 SCRA 351)
FACTS:
NATELCO and CASURECO entered into a contract wherein NATELCO will be
using CASURECO
electric light posts in Naga in operating its telephone services. In r
eturn, former will install 10 phone
connections for the use of the latter free of charge. Term/period will be as lo
ng as NATELCO needs to
use the CASURECOs posts. Contract will be terminated if the latter wil
l forced to stop, abandon its
operation as a public service & it becomes necessary to remove the p
osts. Contract was prepared by
Atty. Maggay, member of the CASURECO Board of Directors & legal counsel of NATEL
CO.
After 10 yrs of enforcing the contract, CASURECO filed for reformati
on of the contract
w/damages to abolish inequalities based on the ff grounds:
1. It was too one-sided in favor of NATELCO
2. It was not in accordance w/the National Electrification Administrati
on (NEA) guidelines w/c
provides that the reasonable compensation for the use of posts should be P10/pos
t/month.
3. Telephone cables strung on the posts have become much heavier & worsened by
linemen who
bore holes thru the posts w/c resulted into posts broken during typho
ons w/c posts cost P2,630.00
each.
CASURECO likewise alleged that since 1981, NATELCO used 319 of their
posts outside Naga
w/o any contract and latter company should pay P10.00/post amounting t
o P267,960.00 w/c the
latter refused to pay despite demands. 3rd cause of action: Former al
so complained that the latter
provided poor service causing great inconvenience & damages amounting to not les
s than P100k.
NATELCOs answer prayed for the dismissal of the 1st cause of action
since it does not
sufficiently state a cause of action, and its barred by estoppel & pr
escription. They claim that they
could not have caused the deterioration of CASURECOs posts since theyve used them
for 11 yrs. Also,
their expenses for the 10 free phones lines are far in excess of th
e amounts claimed by CASURECO.
They refused to pay the amount specified in the 2nd cause of action because what
is due to them from
CASURECO is more than latters claim against them. WRT the 3rd cause of
action, they claim that the
National Telecommunication Corporation (NTC) classified their service as
very high & of superior
quality.
Both companies presented witnesses to support their allegation. Atty. M
agay testified supporting
NATELCOs claims.
Trial Court: contract has become disadvantageous to CASURECO due to
increase in volume of
NATELCOs subscribers. Contract should be reformed to abolish the inequit
ies. NATELCO should pay
for the use of CASURECOs posts at P10.00/post while the latter should
pay the monthly bills for the
use of formers phone lines in Naga. Amount should be computed from th
e date of filing of the

complaint. Same has been held for the 2nd cause of action. While the
3rd cause of action was not
sufficiently proven.
CA: affirmed trial court decision based on the ff grounds:
1. New Civil Code Art. 1267 . Although the contract was fair to bot
h parties at the time of its
execution (then, NATELCO still had very limited capability), supervening
circumstances (NATELCOs
expansion) have made the contract too one-sided in favor of NATELCO t
o the great disadvantage of
CASURECO. Continued enforcement of the contract has gone beyond the co
ntemplation of the latter,
thus it should be released therefrom. Equity demands certain economic
equilibrium between the
prestationthe counter-prestation& does not permit the unlimited impoverishment o
f one party for the
benefit of the other by the excessive rigidity of the principle of the obligator
y force of contracts.
2. Contract was subject to a potestative condition w/c rendered the condition v
oid.
ISSUES AND HELD:
1. WON Art. 1267 is applicable. -YES
NATELCO claims its not since contract in this case doesnt involve rendi
tion of service/personal
prestation and its not for future service w/future unusual change. It
invokes Occena vs. Jabson.
And the article was never raised by CASURECO.
The provision speaks of service (meaning performance of the obligation)
w/c has become so
difficult. It doesnt require that the contract be for future service w/future unu
sual change. Rather,
it speaks of unforeseen events or the discredited theory of rebus sic stantibusi
n public international
law wherein parties stipulate in the light of certain prevailing condi
tions & once these conditions
cease to exist the contract also ceases. Equity & good faith demand that when ba
sis of the contract
disappears, the prejudiced party has a right to relief.
Fact that this provision was not raised by the parties in their pleadings & was
never subject of trial
is immaterial. Court has discretion to consider an unassigned error th
at is closely related to an
error properly assigned as long as the consideration is necessary in arriving at
a just decision. The
material allegations of fact in the complaint & not the legal conclus
ion made or the prayer that
determines the relief to w/c the plaintiff is entitled and plaintiff is entitled
to as much relief as the
facts warrant although that relief is not specifically prayed for. NAT
ELCO was given the
opportunity to present its evidence WRT this matter when they were gi
ven the chance to answer
the issue of WON the contract has become too one-sided in its favor&
too iniquitous, unfair &
disadvantageous to CASURECO.
2. WON the ruling in Occena is applicable. NO.

Case provides that Art. 1267 doesnt authorize the courts to remake,
modify or revise the
contract or to fix the division of shares between the parties as contractually s
tipulated w/the force of
law between the parties. Complaint for the modification of contract was dismisse
d for failure to state a
cause of action.
In this case, CASURECOs complaint & evidence it presented sufficiently
made out a cause of
action under Art. 1267.
Parties are released from their correlative obligations under the con
tract. But taking into
account the possible consequences of merely releasing the parties from the contr
act, the SC decided to
uphold the trial court ruling WRT payment for use of post and the p
hone lines so as not disrupt the
basic & essential services being rendered by both companies and to av
oid unjust enrichment by
NATELCO at the expense of CASURECO.
3. Cause of action has not yet prescribed since CC Art. 1144 provide
s that an action upon a
written contract must be brought w/in 10yrs from the time the rt of
cause of action accrues. In this
case, cause of action arose when CASURECO asked its counsel to review
the contract w/c was in
1982/83. Case was filed in 1989, thus, 10 yrs has not lapsed.
4. Prestations are not purely potestative. Conditions do not depend so
lely on the will of either
party.
CA, in ruling that the term/period (3rd bullet, Facts part)
of the contract is potestaive,
overlooked the condition that the contract will be terminated when CASURECO will
be forced to stop,
abandon its operation as a public service & it becomes necessary to
remove the electric light post.
They are actually casual conditions w/c depend on chance, hazard or will of a 3r
d person. The contract
is subject to mixed conditions w/c dont invalidate the contract stipulations.
Holding: Petition denied. CA decision affirmed.
ABEGAIL B. RAMOS
ARTICLE 1267
MAGAT VS. COURT OF APPEALS (337 SCRA 298)
FACTS:
Private respondent Santiago A. Guerrero was President and Chairman of
"Guerrero Transport
Services", a single proprietorship. Sometime in 1972, Guerrero Transport
Services won a bid for
the operation of a fleet of taxicabs within the Subic Naval Base, in
Olongapo. As highest bidder,
Guerrero was to "provide radio-controlled taxi service within the U.S.
Naval Base, Subic Bay,
utilizing as demand requires . . . 160 operational taxis consisting o

f four wheel, four-door, four
passenger, radio controlled, meter controlled, sedans, not more than one year .
. . "
On September 22, 1972, with the advent of martial law, President Fer
dinand E. Marcos issued
Letter of Instruction No. 1.
On September 25, 1972, pursuant to the aforequoted Letter of Instruction, the R
adio Control Office
issued Administrative Circular No. 4: Subject: Suspending the acceptance
and processing of
applications for radio station construction permits and for permits to
own and/or possess radio
transmitters or transceivers. Guerrero and Victorino D. Magat, as Genera
l Manager of Spectrum
Electronic Laboratories, a single proprietorship, executed a letter-contr
act for the purchase of
transceivers at a quoted price of US$77,620.59, FOB Yokohoma. Victorino
was to deliver the
transceivers within 60 to 90 days after receiving notice from Guerrero
of the assigned radio
frequency, "taking note of Government Regulations. The contract was sign
ed and Victorino
contacted his Japanese supplier, Koide & Co., Ltd. and placed an order for the t
ransceivers.
On September 29, 1972, Navy Exchange Officer, A. G. Mason confirmed that Guerre
ro won the bid
for the commercial transportation contract. On October 4, 1972, middle ma
n and broker Isidro Q.
Aligada of Reliance Group Engineers, Inc. , wrote Victorino, informing
him that a radio frequency
was not yet assigned to Guerrero and that government regulations might
complicate the
importation of the transceivers. However, in the same letter, Victorino
was advised to advise his
supplier "to proceed (with) production pending frequency information." V
ictorino was also
assured of Guerrero s financial capability to comply with the contract.
On October 6, 1972,
Guerrero informed Aligada of the frequency number assigned by Subic Na
val Base authorities.
Aligada was instructed to "proceed with the order thru Spectrum Electr
onics Laboratories." On
October 7, 1972, Aligada informed Magat of the assigned frequency numb
er. Aligada also advised
Victorino to "proceed with the order upon receipt of letter of credit
." On January 10, 1973,
Guerrero applied for a letter of credit with the Metropolitan Bank an
d Trust Company. This
application was not pursued.
On March 27, 1973, Victorino, represented by his lawyer, Atty. Sinesi
o S. Vergara, informed
Guererro that the order with the Japanese supplier has not been cancele
d. Should the contract be
canceled, the Japanese firm would forfeit 30% of the deposit and char
ge a cancellation fee in an
amount not yet known, Guerrero to bear the loss. Further, should the
contract be canceled,
Victorino would demand an additional amount equivalent to 10% of the contract pr
ice. Unable to
get a letter of credit from the Central Bank due to the refusal of the Philippin
e government to issue
a permit to import the transceivers, Guerrero commenced operation of t
he taxicabs within Subic
Naval Base, using radio units borrowed from the U.S. government. Victo
rino thus canceled his
order with his Japanese supplier.
On May 22, 1973, Victorino filed with the Regional Trial Court, Maka
ti a complaint for damages
arising from breach of contract against Guerrero. On June 7, 1973, Guerrero move
d to dismiss the
complaint on the ground that it did not state a cause of action. On
June 16, 1973, the trial court
granted the motion and dismissed the complaint. On July 11, 1973, Vic
torino filed a petition for
review on certiorari with this Court assailing the dismissal of the complaint.
On April 20, 1983, the Supreme Court ruled that the complaint suffic
iently averred a cause of
action. The Court set aside the order of dismissal and remanded the
case to the trial court for
further proceedings. On November 27, 1984, the trial court ordered tha
t the case be archived for
failure of Victorino to prosecute. On March 11, 1985, petitioners, Oli
via, Dulce, Ma. Magnolia,
Ronald and Dennis Magat, moved to reinstate the case and to substitut
e Victorino in its
prosecution. Apparently, Victorino died on February 18, 1985. On April
29, 1985, the trial court
granted the motion.
On July 12, 1991, the trial court decided in favor of the heirs of Victorino an
d ordered Guerrero to
pay temperate, moral and exemplary damages, and attorney s fees. On Augu
st 21, 1991, Guerrero
appealed to the Court of Appeals. However it was dismissed. On Octobe
r 26, 1995, the heirs of
Victorino filed with the Court of Appeals a motion for reconsideration
. On March 12, 1996, the
Court of Appeals denied the motion for reconsideration.
ISSUE:
WON there is a breach of contract
HELD:
NO. The contract was not breached.
Affirming the validity of the contract, the law provides that when t
he service (required by the
contract) has become so manifestly beyond the contemplation of the parties, the
obligor may also
be released there from in whole or in parts. Here, Guerreros inability
to secure a letter of credit
and to comply with his obligation was a direct consequence of the den
ial of the permit to import.
For this, he cannot be faulted.
Even if the Court assumes that there was a breach of contract, dama
ges cannot be awarded.
Damnum absque injuria comes into the fore.

ARTICLE 1270
YAM VS. COURT OF APPEALS (303 SCRA 1)
FACTS:
Parties enter into a solidary loan agreement. Petitioners received a first loa
n of P500,000 from
respondents, Industrial Guarantee and Loan Fund. IGLF secured the loan
by chattel mortgage on
petitioners printing machinery. Petitioners paid this first loan.
Petitioners obtained a second IGLF loan of P300,000. Second contract p
rovided 14% annual
interest, 2% monthly penalty, 1% monthly service charge, and 10% attor
neys fees. Deed of chattel
mortgage was amended correspondingly.
IGLF was then placed under receivership. Ricardo Lirio and Cristina Destajo were
appointed as
receiver and in-house examiner, respectively.
Petitioners made a partial payment of P50,000 on the second loan. They then wrot
e a letter to
respondent containing an offer to settle the obligation. Respondents replied wi
th a counter-offer with
a reduction of penalty charges up to P140,000, payable on or before July 30, 198
6.
As of July 31, 1986, petitioners total liability was
P295,469.47 on
principal, P165,385 in interest, P254,820.55 in
3 for service charges.
Petitioners paid P410,854.47 in check, covering
interest, acknowledged by
Destajo with a voucher stating: full payment of IGLF
P727,001.35: broken down to

penalties, and P11,326.3
only the principal and
LOAN.
Respondent sent two demand letters to petitioners for the balance of

P266,146.88. When
petitioners did not respond, respondent filed suit for the balance plus interest
s, penalties, and service
charges or the foreclosure of the mortgaged machineries.
In reply, petitioners claimed to have fully paid their obligation. They contende
d that some time
after receiving respondents counter-offer petitioners met with Carlos Sob
repeas, president of IGLF.
The latter agreed to waive the penalties and service charges, provided
petitioners paid the principal
and interest less their earlier partial payment. Petitioners added that
this fact is reflected in the
voucher.
ISSUE:
Whether petitioners are liable for the payment of the penalties and se
rvice charges on their loan
which, as of July 31, 1986, amounted to P266,146.88.

HELD:
There is no condonation in this case. As provided by Art. 1270, Expre
ss condonation shall
comply with the forms of donation. which is supplemented by Art. 748
that donations exceeding
P5,000 shall be made in writing, otherwise, the donation shall be void
. Petitioners voucher stating
full payment of IGLF loan merely states intention in making the payment
and is no more than
acknowledgement of the actual payment. Lastly, Sobrepeas has no authorit
y to condone debts in
IGLFs receivership as it suspends the authority of a corporations directors and of
ficers over its affairs.
ARTICLE 1271
TRANS-PACIFIC INDUSTRIAL SUPPLIES, INC V. COURT OF APPEALS and ASSOCIATED BANK
(235
SCRA 494)
FACTS:
Sometime in 1979, petitioner applied for and was granted several finan
cial accommodations
amounting to P1,300,000.00 by respondent Associated Bank. The loans wer
e evidenced and secured
by four (4) promissory notes, a real estate mortgage covering three p
arcels of land and a chattel
mortgage over petitioner s stock and inventories. Unable to settle its obligatio
n in full, petitioner was
granted by respondent bank, a restructuring of the remaining indebtedne
ss which then amounted to
P1,057,500.00, as all the previous payments made were applied to penal
ties and interests. To secure
the re-structured loan of P1,213,400.00, three new promissory notes were execute
d by Trans-Pacific.
The mortgaged parcels of land were substituted by another mortgage cov
ering two other parcels of
land and a chattel mortgage on petitioner s stock inventory. The relea
sed parcels of land were then
sold and the proceeds amounting to P1,386,614.20, according to petition
er, were turned over to the
bank and applied to Trans-Pacific s restructured loan. Subsequently, res
pondent bank returned the
duplicate original copies of the three promissory notes to Trans-Pacific with th
e word "PAID" stamped
thereon.
On December 12, 1985, Associated Bank demanded from Trans-Pa
cific payment of the
amount of P492,100.00 representing accrued interest.
According to the
bank, the promissory notes
were erroneously released.
Petitioner initiated an action before the
Regional Trial Court for specific
performance and damages which rendered a decision that plaintiff s obli
gations to defendant have
been already fully paid. Decision was reversed on appeal.
ISSUE:
Whether or not petitioner has indeed paid in full its obligation to respondent
bank
HELD:
Article 1271 of the Civil Code raises a presumption, not of payment, but of the
renunciation of
the credit where more convincing evidence would be required than what normally w
ould be called for
to prove payment. The rationale for allowing the presumption of renunc
iation in the delivery of
a private instrument is that, unlike that of a public instrument, there
could be just one copy of the
evidence of credit. Where several originals are made out of a private document,
the intendment of the
law would thus be to refer to the delivery only of the original orig
inal rather than to the
original duplicate of which the debtor would normally retain a copy. The presum
ption created by the
Art. 1271 is not conclusive but merely prima facie. If there be no e
vidence to the contrary, the
presumption stands. Conversely, the presumption loses its legal efficacy
in the face of proof or
evidence to the contrary. In the case before us, we find sufficient
justification to overthrow the
presumption of payment generated by the delivery of the documents evid
encing petitioners
indebtedness. The presumption was successfully rebutted by private respondent.
MARCO CARLO S. SANA
ARTICLE 1275
CHITTICK V. COURT OF APPEALS (166 SCRA 219)
FACTS:
Appellee and appellant, both American citizens, are spouses. They cam
e to the Philippines in
1924 and resided in Manila. Their marital relation became strained and
they entered into an
agreement of separation. The appellant-husband agreed that he will pay
his wife- appellee P550 a
month for the care, maintenance and support of her and their four ch
ildren. The payment shall
continue until such time as the youngest child arrives at the age of
majority, provided, that the wife
does not remarry. Should the later occur the payment shall be reduced
by 20%. The conjugal assets,
worth P22,500, shall also be divided equally and shall be delivered u
pon a final decree of divorce
secured by the wife.
Appellant-husband complied faithfully with the monthly payments. When
the war broke out,
the spouses and their children were interred in UST concentration camp by the Ja
panesse. During the
period of interment, Husband-defendant paid a total of P4,716.00 to wife- appell
ee, which was a loan

obtained from borrowing from the former s friends. From May 9, 1945 to January 1
2, 1951, when the
youngest child reached the age of majority, a total of $8, 145 had
been paid. Wife- appellee contends
that, during the same period, the total amount due to her was $18,71
7.71, leaving a balance of
$10,572.71.
On April 25, 1964, wife- appellee died in Los Angeles, California. Counsel for
wife- appellee filed
a motion for substitution by her heirs, her surviving second spouse a
nd the legitimate children. On
April 13, 1977, appellant-husband also died in Makati, Metro Manila.
ISSUE:
Whether the case for money claim can survive the death of both parties.
HELD:
Since the Chittick children as heirs of respondent-creditor, wife- appellee, are
also the heirs of
petitioner-debtor, appellant-husband, the obligaiton sued upon had been
extinguished by the merger
in their persons of the character of creditor and debtor of the same obligaiton
(Art. 1275, Civil Code).
ARTICLE 1278
GAN TION v. COURT OF APPEALS (28 SCRA 235)
FACTS:
Ong Wan Sieng was a tenant in certain premises owned by Gan Tion. In 1961 the la
tter filed an
ejectment case against the former, alleging non-payment of rents for A
ugust and September of that
year, at P180 a month, or P360 altogether. The Ong Wan Sieng denied the allegati
on and said that the
agreed monthly rental was only P160, which he had offered to but was refused by
Gan Tion. Gan Tion
obtained a favorable judgment in the municipal court of Manila, but u
pon appeal the Court of First
Instance, on July 2, 1962, reversed the judgment and dismissed the complaint, an
d ordered him to pay
the defendant the sum of P500 as attorney s fees.
On October 10, 1963 Gan Tion served notice on Ong Wan Sieng that he was increasi
ng the rent
to P180 a month, effective November 1st, and at the same time demand
ed the rents in arrears at the
old rate in the aggregate amount of P4,320.00, corresponding to a period from Au
gust 1961 to October
1963.lwphi1.et
In the meantime, over Gan Tion s opposition, Ong Wan Sieng was able
to obtain a writ of
execution of the judgment for attorney s fees in his favor. Gan Tion went on cer
tiorari to the Court of
Appeals, where he pleaded legal compensation, claiming that Ong Wan Si
eng was indebted to him in
the sum of P4,320 for unpaid rents. The appellate court accepted the
petition but eventually decided
for the respondent, holding that although "respondent Ong is indebted
to the petitioner for unpaid

rentals in an amount of more than P4,000.00," the sum of P500 could
not be the subject of legal
compensation, it being a "trust fund for the benefit of the lawyer, which would
have to be turned over
by the client to his counsel." In the opinion of said court, the requisites of l
egal compensation, namely,
that the parties must be creditors and debtors of each other in thei
r own
and that each one of them
must be bound principally and at the same time be a principal creditor of the ot
her, are not present in
the instant case, since the real creditor with respect to the sum of P500 was th
e defendant s counsel.
ISSUE:
Whether or not there has been legal compensation between petitioner Ga
n Tion and
respondent Ong Wan Sieng.
HELD:
Yes. The award is made in favor of the litigant, not of his counsel
, and is justified by way of
indemnity for damages recoverable by the former in the cases enumerated in Artic
le 2208 of the Civil
Code. It is the litigant, not his counsel, who is the judgment credi
tor and who may enforce the
judgment by execution. Such credit, therefore, may properly be the sub
ject of legal compensation.
Quite obviously it would be unjust to compel petitioner to pay his debt for P500
when admittedly his
creditor is indebted to him for more than P4,000.
AIDA MAY P. SILVA
ARTICLE 1278
PNB V. ONG (148 SCRA 166)
FACTS:
Isabela Wood Construction desposited with PNB on March 9, 1979 P2M. The ACEROS
Gloria
G. Vda. de Ong Acero, Arnolfo Ong Acero and Soledad Ong Acero-Chua,
judgment creditors of the
Isabela Construction seek to enforce against said savings account the
final and executory judgment
rendered in their favor by the CFI. The PNB, however, claims that since ISABELA
was at some point in
time both its debtor and creditor-ISABELA s deposit being deemed a loa
n to it (PNB)-there had
occurred a mutual set-off between them, which effectively precluded the
ACEROS recourse to that
deposit.
ISSUE:
Can a bank apply a depositors savings account to satisfy the latters d
ebt to the bank?
And,
what if there is also a notice of garnishment against these savings?
HELD:
Article 1278 of the Civil Code does indeed provide that "Compensation
shall take when two
persons, in their own right, are creditors and debtors of each other"
.
Also true is that compensation
may transpire by operation of law, as when all the requisites therefo
r, set out in Article 1279, are
present. Nonetheless, these legal provisions can not apply to PNB s advantage s
ince it has not proven
by competent evidence that it is a creditor of ISABELA.
Even if it be assumed that the alleged assignment had been
PNB had been really
authorized to apply the P2M deposit to the satisfaction of ISABELA s
s to it, the application
attempted by PNB only on February 26, 1980 was ineffectual
that time, the deposit was
already in custodia legis, notice of garnishment thereof having been
NB on January 9, 1980.
made, and
indebtednes
because at
served on P
Lastly, on the assumption that the P 2M deposit was in truth assigne

d as some sort of
"collateral" to PNB, the agreement postulated by PNB that it had been authorized
to assume ownership
of the fund upon the coming into being of ISABELA s indebtedness is
void ab initio, it being in the
nature of a pactum commisoruim proscribed as contrary to public policy (Art. 208
8, NCC).
ARTICLE 1278
FRANCIA VS. INTERMEDIATE APPELLATE COURT (162 SCRA753)
FACTS:
EngracioFrancia is the registered owner of a residential lot and a t
wo-story house built upon it
situated at District of Sta. Clara, Pasay City. The lot, with an are
a of about 328 square meters, is
described and covered by Transfer Certificate of Title No. 4739 (37795).
On October 15, 1977, a 125 square meter portion of Francia s propert
y was expropriated by the
Government for the sum of P4,116.00 representing the estimated amount
equivalent to the
assessed value of the aforesaid portion.
Since 1963 up to 1977, Francia failed to pay his real estate taxes.
Thus, on December 5, 1977, his
property was sold at public auction by the City Treasurer of Pasay C
ity in order to satisfy a tax
delinquency of P2,400.00. Fernandez was the highest bidder for the property.
On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P f
iled by Fernandez,
seeking the cancellation of TCT No. 4739 (37795) and the issuance in his name of
a new certificate
of title. The auction sale and the final bill of sale were both annotated at the
back of TCT No. 4739
(37795) by the Register of Deeds.
On March 20, 1979, Francia filed a complaint to annul the auction s
ale. He later amended his
complaint on January 24, 1980.
On April 23, 1981, the lower court dismissed the amended complaint a
nd orderedThe Register of
Deed to issue a new TCT in favor of the defendant Ho Fernandez.
Francia contends that his tax delinquency of P2,400.00 has been extin
guished by legal
compensation. He claims that the government owed him P4,116.00 when a portion of
his land was
expropriated on October 15, 1977. Hence, his tax obligation had been set-off by
operation of law as
of October 15, 1977.
ISSUE:
W/N Respondent IAC committed grave error of law in not holding petitioners obliga
tion to pay
P2,400.00 for supposed tax delinquency was set-off by the amount of P4,116.00 wh
ich the government
is indebted to the former.
HELD:
There is no legal basis for the contention of Francia. By legal compensation, o
bligations of persons,
who in their own right are reciprocally debtors and creditors of each other, ar
e extinguished. The
circumstances of the case do not satisfy requirements provided by Article 1279,
that, (1) each one
of the obligors be bound principally and that he be at the same tim
e a principal creditor of the
other; and (3) the two debts be due.
Courts have consistently ruled that there can be no off-setting of tax
es against the claims that the
taxpayer may have against the government. A person cannot refuse to pay a tax on
the ground that
the government owes him an amount equal to or greater than the tax being collect
ed.
A claim for taxes is not such a debt, demand, contract or judgment as is allowe
d to be set-off under
the statutes of set-off, which are construed uniformly, in the light
of public policy, to exclude the
remedy in an action or any indebtedness of the state or municipality
to one who is liable to the
state or municipality for taxes.
Neither are they a proper subject of recoupment since they do not a
rise out of the contract or
transaction sued on. "The general rule based on grounds of public policy is well
-settled that no setoff admissible against demands for taxes levied for general or local
governmental purposes. The
reason on which the general rule is based, is that taxes are not in the nature o
f contracts between
the party and party but grow out of duty to, and are the positive
acts of the government to the
making and enforcing of which, the personal consent of individual taxpayers is n
ot required. ..."
KAREN G. SUPAPO
ARTICLE 1279
REPUBLIC V. DE LOS ANGELES (98 SCRA 103)
FACTS:
Mr. and Mrs.Farin obtained a loan from Marcelo Steel Corporation (MSC)
, and as security
therefor, mortgaged their parcel of land where Doa Petra building is s
ituated. MSCsought for the
extrajudicial foreclosure of the aforesaid mortgage. The auction was postponed
after an order issued
by the court granting the petition of the Farins. While the case was pending, Mr
s. Farin leased portions
of the Doa Petra Building to the Rice and Corn Administration (RCA).
Invoking the mortgage contract, MSC prayed that an order be issued di
recting and/or
authorizing RCA and all other business concerns holding offices at the Doa Petra
Building to channel
or pay directly their rents to them that was granted by the court.
RCA filed a motion praying that it
would be excluded therefrom,claiming, as one of its reasons,that Mrs.
Farin has an outstanding
obligation with the RCA representing rice shortages incurred by her as a bonded
warehouseman under
contract with the RCA amounting to P263,062.40, which should be compen
sated with the rents due
and may be due. On December 23, 1967, the trial court denied the motion.
To enable her to make the necessary repairs on the air conditioning system of th
e Doa Petra
Building,Petra Farin filed an urgent ex parte motion to authorize the
RCA to release the rentals
corresponding to the months of December, 1967, January and February, 1
968, amounting to
P37,500.00stating, among others, that "That RCA is ready, willing and able to re
lease to the petitioners
the rentals mentioned above. The court granted the motion. In addition
, the court ordered that all
succeeding rentals should be delivered to the MSC as previously ordered in the o
rder of December 23,
1967.
The RCA contested said order claiming that "the RCA is ready, willing and able t
o release to the
petitioners the rentals mentioned above is unauthorized and gratuitous,
and the delivery of the
withheld rentals to Petra R. Farin would defeat its claim without giv
ing the corporation its day in
court. However, the court denied it because the records do not show a
ny proof that the plaintiff is

indebted to RCA. And assuming that Petra Farin is really indebted to the RCA, th
e records further does
not show that a case has been filed against her, or a decision has
been rendered against her for the
payment of such obligation."
ISSUE:
Whether or not the court erred in denying the claim of the RCA that compensation
of debts had
taken place.
HELD:
Yes. Proof of the liquidation of a claim, in order that there be compensation of
debts, is proper if
such claim is disputed. But, if the claim is undisputed, as in the case at bar,
the statement is sufficient
and no other proof may be required. In the instant case, the claim
of the RCA that PetraFarin has an
outstanding obligation to the RCA in the amount of P263,062.40 which should be c
ompensated against
the rents already due or may be due, was raised by the RCA in its motion for the
reconsideration of the
order of December 23, 1967. A copy of said motion was duly furnished counsel for
Petra R. Farin and
although the said Petra R. Farin subsequently filed a similar motion
for the reconsideration of the
order of December 23, 1967, she did not dispute nor deny such claim.
Neither did the Marcelo Steel
Corporation dispute such claim of compensation in its opposition to the motion f
or the reconsideration
of the order of December 23, 1967.The silence of Petra R. Farin order of Decembe
r 23, 1967. Although
the declaration is such as naturally one to call for action or comment if not tr
ue, could be taken as an
admission of the existence and validity of such a claim. Therefore, s
ince the claim of the RCA is
undisputed, proof of its liquidation is not necessary. At any rate, i
f the record is bereft of the proof
mentioned by the respondent Judge of first instance, it is because the responden
t Judge did not call for
the submission of such proof. Had the respondent Judge issued an orde
r calling for proof, the RCA
would have presented sufficient evidence to the satisfaction of the court.
JUSTO PAULO TORRES
ARTICLE 1279
SOLINAP VS DEL ROSARIO (123 SCRA 640)
FACTS:
On June 2, 1970 the spouses TiburcioLutero and Asuncion Magalona, ow
ners of Hacienda
Tambal, leased the said hacienda to petitioner Loreto Solinap for a p
eriod of ten years for the
stipulated rental of P50000 a year. It was further agreed upon in th
e lease contract that out of the
aforesaid annual rental, the sum of P25000 should be paid by Solinap to the Phil
ippine National Bank

to amortize the indebtedness of the spouses Lutero with the said bank
. Unfortunately Tiburcio died
and his affairs and the estate was left to his heir JuanitoTiburcio and his wife
Hardivi. The spouses then
paid the remaining P25000 left over by Solinap to settle their own a
ffairs and were claiming
reimbursement then after. However, before this issue could be addressed a batter
y of cases were filed
by both parties. One, by Solinap asking for a total of P71000 which he claims wa
s taken by the spouses
on the 5
th
of April 1974. Second, the Luteros then went after Solinap for unpai
d rental for Hacienda
Tambal to the tune of P125000. Two issues were ascertained:
(1) Whether or not the defendants [Luteros] are indebted to the plaintiff and, i
f so, the amount thereof;
(2) Whether or not the defendants are the owners of one-half [1/2] o
f that parcel of land known as
Hacienda Tambal presently leased to the plaintiff and, therefore, ent
itled to collect from the latter
one-half [1/2] of its lease rentals; and in the affirmative, the amount represen
ting the unpaid rental by
plaintiff in favor of the defendant.
For which it was settled, WHEREFORE, Mr. Loreto Solinap is hereby dire
cted to pay spouses
JuanitoLutero and Hardivi R. Lutero the sum of P25,000.00 with interest at 12% p
er annum from June
17, 1975 until the same shall have been duly paid.
This motion was denied by respondent judge on the ground that, the claim of Loreto
Solinap
against JuanitoLutero in Civil Case No. 12397 is yet to be liquidated
and determined in the said case,
such that the requirement in Article 1279 of the New Civil Code that
both debts are liquidated for
compensation to take place has not been established by the oppositor Loreto Soli
nap."
Petition was not found to be meritorious. Hence, this petition.
ISSUE:
W/N the obligation of petitioner to private respondents may be compens
ated or set-off against the
amount sought to be recovered in an action for a sum of money filed by the forme
r against the latter
HELD:
The petition is devoid of merit. In the case at bar, the petitioner s claim ag
ainst the spouses was
still pending determination by the court. Petitioners claim in the case
could not be categorized as
liquidated credit which may properly be set-off against his obligation. As this
Court ruled in Mialhe vs.
Halili"compensation cannot take place where one s claim against the oth
er is still the subject of court
litigation. It is a requirement, for compensation to take place, that
the amount involved be certain and
liquidated." The petition was dismissed.
The rule is that if both parties are in pari delicto, they shall have no actio
n against each other. Or,

as stated in the legal maxim, in pari delicto meliorest condition defendentes.
ARTICLE 1279
SYCIP V. CA (134 SCRA 317)
FACTS:
On April 1961, Jose K. Lapuz received from Albert Smith 2,000 shares of stock of
the Republic
Flour Mills, Inc., covered by Certificate No. 57 in the name of Dwight Dill. Jos
e K. Lapuz was supposed
to sell his shares at present market value.The accused-appellant approached him
and told him that he
had good connections in the Stock Exchange, assuring him that he coul
d sent them at a good price.
Lapuz made it clear to him that the shares of stock did not belong to him and we
re shortly entrusted to
him for sale.
Lapuz received a letter from the accused-appellant, dated April 25, 19
61 informing him that
"1,758 shares has been sold for a net amount of P29,000.00," but tha
t the transaction could not be
concluded until they received the Power of Attorney duly executed by Dwight Dill
, appointing a person
to endorse the certificate of stock, and a resolution from the Bioche
mical Research Laboratory, Inc.,
authorizing the transfer of the certificate.
Lapuz was able to secure a power of attorney of Dr. Dwight Dill, an
d gave it to the accusedappellant. The power of attorney authorized the sale of 1,758 shares only; the d
ifference of 242 shares
were given back to Biochemical Research Laboratory, Inc.
Of the 1,758
00 at P16.00
share. Lapuz
ent of 758
share.
shares of stock, the accused-appellant sold 758 shares for P12,128.

a
turned over to Albert Smith the sum of P9,981.40 in paym
shares of P14.00 a
On May 30, 1961, Jose K. Lapuz received a letter from the accused-ap
pellant, the latter
informing him that actual delivery has been withheld pending receipt of payment.
Lapuz wrote a letter
to the accused-appellant authorizing accused-appellant to sell 1,000 sha
res of Republic Flour Mills.
Later, the accused-appellant wrote a letter stating that 500 shares out
of the 1,000 shares of the
Republic Flour ... has been sold."
The accused-appellant sold and paid for the other 500 shares of stock, for the p
ayment of which
Lapuz issued in his favor a receipt, dated June 9, 1961.The draft for P8,000.00,
the full value of the 500
shares, was dishonored by the bank, for lack of funds.

Lapuz discovered from the bookkeeper that accused-appellant got the money and he
pocketed
it already. When he found the accused-appellant, the latter gave him
a check in the amount of
P5,000.00, issued by his daughter. This was also dishonored by the bank for lack
of sufficient funds.
Lapuz filed charges against the accused-appellant for the crime of esta
fa, which the trial court
granted and affirmed by the Court of Appeals.
The accused-appellant filed a petition for review on certiorari on which he cont
ends that the CA
erred in not applying the provisions on compensation or setting-off debt under A
rticles 1278 and 1279
of the New Civil Code, despite evidence that Lapuz still owes him an amount of m
ore that P5,000.
ISSUE:
WON compensation applies in this case.
HELD
No
Accused-appellants contention is untenable. Compensation cannot take place in thi
s case since
the evidence shows that Jose K. Lapuz is only an agent of Albert Sm
ith and/or Dr. Dwight Dill.
Compensation takes place only when two persons in their own right are creditors
and debtors of each
other, and that each one of the obligors is bound principally and is at the same
time a principal creditor
of the other. Moreover, as correctly pointed out by the trial court,
Lapuz did not consent to the offsetting of his obligation with petitioner s obligation to pay for the 500 shares
.
Doctrine
Compensation takes place only when two persons in their own right are creditors
and debtors
of each other, and that each one of the obligors is bound principally and is at
the same time a principal
creditor of the other, as required in Article 1279 (1).
ELEAZAR M. VICENTE
ARTICLE 1279
CORAZON PEREZvs. COURT OF APPEALS. (127 SCRA317)
FACTS:
CONGENERIC Development & Finance Corporation is, or was, a company eng
aged in "money
market" operations
On May 8, 1974, CONGENERIC issued what was in effect a promissory note in favor
of Ramon C.
MOJICA, or an entity owned by him. That promissory note, Bill 1298, was to matur
e on August 6, 1974.
On May 15, 1974, CONGENERIC issued another bearer promissory note also in favor
of MOJICA or an
entity owned by him. The note, Bill 1419, was to mature on August 13, 1974.
On June 5, 1974, MEVER Films, Inc. borrowed P500,000.00 from CONGENERI
C, the former
issuing in favor of the latter a negotiable promissory note to mature on August
5, 1974. That note shall
hereinafter be referred to as NCI-0352. What may be stated in connection with th
e note is that it had
no provision for interest, except that, if not paid on due date, it would be sub
ject to interest at 14% per
annum.
On July 3, 1974, CONGENERIC received P200,000.00 from petitioner herein
(CORAZON, for
short), and issued to her, as BEARER 209, a confirmation of sale (CS) numbered 0
366. Under the terms
of CS-0366, CORAZON was to be paid P203,483.33 on August 5, 1974, CO
NGENERIC would make
collection on behalf of CORAZON; and ALL OF CONGENERIC S INTEREST IN
NCI-0352 WAS BEING
TRANSFERRED TO HER. Under this last provision, CORAZON, subject to def
enses, could have sued
MEVER for payment of the full amount of P500,000.00, especially if CONGENERIC sh
ould not object. It
may also be noted that while NCI-0352 was not subject to interest pr
ior to August 5, 1974,
CONGENERIC obligated itself to pay CORAZON interest on August 5, 1974 in the amo
unt of P3,483.33,
or roughly an interest rate of 19% per annum.
On August 5, 1974, MEVER paid P100,000.00 to CONGENERIC on account of NCI-0352.
On the same date, CONGENERIC paid CORAZON the sum of P103,483.33coming from its
own funds.
On August 6, 1974, CONGENERIC paid MOJICA the interest due on Bill 1298, the pri
ncipal being
rolled-over to mature on October 4, 1974. The roll-over was annotated on the ori
ginal of Bill 1298.
On August 13, 1974, CONGENERIC paid MOJICA the interest due on Bill
1419, the principal being
rolled-over to mature on October 11, 1974. The roll-over was annotated on Bill 1
419.
On September 9, 1974, MOJICA assigned Bill 1298 and Bill 1419 to MEVER through a
notarized
deed.
On October
Bill 1419
CONGENERIC,
t of MEVER
3, 1974, MEVER surrendered the originals of Bill 1298 and

to
and asked the latter to compute the balance of the accoun
with
CONGENERIC, taking account of the amounts of the two Bills, which balance MEVER
would then pay.
On October 7,
al Sheriff of
two collection
whose credits
P185,693.78.
OBLIGATIONS AND
1974, MEVER was served with garnishment by the Provinci

Rizal in
cases filed against CONGENERIC by two of its creditors
totaled
CONTRACTS CASE DIGESTS (SCHOOL YEAR 2013-2014) 199
On the same date, CONGENERIC advised MEVER by telephone that of the

original amount of
P500,000.00 of NCI-0352, the sum of P200,000.00 was sold on July 3,
1974 to a third party, but not
naming CORAZON as the third party.
On October 8, 1974, CONGENERIC confirmed in writing to MEVER the prev
ious "sale" of
P200,000.00 out of the P500,000.00 amount of NCI-0352; and advised that it could
not take account of
the assignment to MEVER of Bill 1298 and Bill 1419.
On November 15, 1974, MEVER turned over to the Provincial Sheriff of Rizal (Exhi
bit "5"), the
sum of P79,359.75, which MEVER had computed as the amount it was sti
ll owing CONGENERIC and
which was subject to garnishment.
On October 23, 1974, CONGENERIC filed a Petition for Suspension of Payments in C
ivil Case No.
20212 of the Court of First Instance of Rizal. In that petition, MEVER was liste
d as a debtor.
On November 11, 1974, the Court issued an order enjoining CONGENERIC f
rom making any payment
to creditors.
In subsequent proceedings in Civil Case No. 20212, the Court promulgat
ed an Order, dated
January 24, 1975 (Exhibit "10"), to the effect that MEVER was not a debtor of C
ONGENERIC, and said
Order has become final.
On July 14, 1975, CORAZON filed suit before the Court of First Instance of Rizal
against MEVER
for the recovery of P100,000.00, plus interest, damages, and attorney s
fees. She admits that CS-0366
issued to her by CONGENERIC was a "without recourse" instrument.
The Trial Court rendered judgment in favor of CORAZON and, upon her filing a bon
d, she was able to
have execution pending appeal. MEVER had to pay her P131,166.00 under the Trial
Court s judgment.
On Mever s appeal, the Court of Appeals reversed the judgment of the Trial Court
.
Since, on the respective dates of maturity, specifically, August 6, 19
74 and August 13, 1974,
respectively, Ramon C. Mojica was still the holder of those bills, it can be saf
ely assumed that it was he
who had asked for the roll-overs on the said dates. MEVER was bound
by the roll-overs since the
assignment to it was made only on September 9, 1974. The inevitable

result of the roll-overs of the
principals was that Bill No. 1298 and Bill No. 1419 were not yet due and demanda
ble as of the date of
their assignment by MOJICA to MEVER on September 9, 1974, nor as of October 3, 1
974 when MEVER
surrendered said Bills to CONGENERIC. As a consequence, no legal compe
nsation could have taken
place because, for it to exist, the two debts, among other requisites, must be d
ue and demandable.
"Art. 1279. In order that compensation may be proper, it is necessary:
"(1)
That each one of the obligors be found principally, and that
he be at the same time a principal
creditor of the other;
"(2)
That both debts consist in a sum of money, or if the thing
s due are consumable, they be of the
same kind, and also of the same quality if the latter has been stated;
"(3) That the two debts be due;
"(4) That they be liquidated and demandable;
"(5)
That over neither of them there be any retention or controve
rsy, commenced by third persons
and communicated in due time to the debtor."
ISSUE:
Whether or not legal compensation was made by respondent.
HELD:
NO. The judgment of respondent Appellate Court, dated September 3, 197
9 as well as its
Resolution dated January 16, 1981 is hereby reversed, and that of the
then Court of First Instance of
Manila, Branch XXXI, dated December 27, 1976, hereby reinstated.
What is involved here is a money market transaction. As defined by L
awrence Smith "the
money market is a market dealing in standardized short-term credit ins
truments (involving large
amounts) where lenders and borrowers do not deal directly with each other but th
rough a middle man
or dealer in the open market." It involves "commercial papers" which
are instruments "evidencing
indebtedness of any person or entity . . ., which are issued, endors
ed, sold or transferred or in any
manner conveyed to another person or entity, with or without recourse". The fund
amental function of
the money market device in its operation is to match and bring together in a mos
t impersonal manner
both the "fund users" and the "fund suppliers." The money market is
an "impersonal market", free
from personal considerations. The market mechanism is intended to provide quick m
obility of money
and securities."
ARTICLE 1279
COMPANIA MARITIMA V. CA (135 SCRA 593)

FACTS:
On March 7, 1947, Fernando Froilan purchased from the Shipping Adminis
tration
(representing the government) a boat for the sum of P200,000.00. But, Froilan ha
s defaulted in
spite of demands, in the payment of unpaid balance of the purchase p
rice and the interest.
Hence, on Feb 21, 1949, the title was registered again in the name of Shipping
Admin, thus retransferring ownership to the government.
On Feb 22, 1949, Pan Oriental Shipping Co. (Pan Oriental) offered to charter sai
d vessel
for a monthly rent of P3,000.00. The government accepted Pan Oriental
s offer subject to the
condition that the latter cause repair of the vessel, advancing the cost of labo
r and drydocking.
The vessel was delivered to Pan Oriental. On June 4, 1949, the Shipping Admin an
d Pan Oriental
formalized the charter agreement and signed a bareboat contract with option to p
urchase.
On Sept 6, 1949, the Cabinet revoked the cancellation of Froilan s co
ntract of sale and
restored to him all his rights, on condition that he would give not less than P1
,000.00 to settle
partially as overdue accounts and reimbursement of the expenses incurre
d for the repair and
drydocking of the vessel performed by Pan Oriental. Thus, the formal
bareboat charter with
option to purchase in favor of the Pan Oriental was returned to Shipping Admin w
ithout action.
But, Froilan again failed to comply with the conditions so the Cabine
t resolved to reconsider
the Sept 6 resolution.
On Aug 25, 1950, the Cabinet resolved once more to restore Froilan t
o his rights, on
condition that he shall pay the sum of P10,000.00 upon delivery of t
he vessel to him, said
amount to be credited to his outstanding accounts; that he shall continue paying
the remaining
installments due, and that he shall assume the expenses incurred for the repair
and drydocking
of the vessel.
Pan Oriental protested to this restoration of Froilan s rights under th
e contract of sale,
for the reason that when the vessel was delivered to it, the Shippin
g Admin had authority to
dispose of the said property, Froilan having already relinquished whatever right
s he may have.
Froilan paid the required cash of P10,000.00, and as Pan Oriental ref
used to surrender
possession of the vessel, he filed an action for replevin in the Court of First
Instance of Manila
to recover possession thereof and to have him declared the rightful o
wner of said property.

Upon Froilans filing a bond, the court ordered the seizure of the vessel from Pan
Oriental and
its delivery to Froilan.
The Republic of the Philippines (Republic), having been allowed to
ervene in the
proceeding, also prayed for the possession of the vessel in order
t the chattel mortgage
constituted may be foreclosed. Defendant Pan Oriental resisted said
ervention, claiming to
have a better right to the possession of the vessel by reason of a valid and
sisting contract in
its favor, and of its right of retention, in view of the expenses
had incurred for the repair of
the said vessel.
int
tha
int
sub
it
Subsequently, Compaia Maritima (Compania), as purchaser of the vessel from Froila

n,
was allowed to intervene in the proceedings, said intervenor taking co
mmon cause with the
plaintiff Froilan.
On Sept 28, 1956, the lower court rendered a decision upholding Froil
an s and
Compaias right to the ownership and possession of the boat. On Oct 31,
1964, the Supreme
Court sustained the decision
of the lower court adjudicating the ves
sel to Froilan and its
successor Compania since the intervenor Shipping Admin, representing the
government
practically ratified its proposed contract with Froilan by receiving the full co
nsideration of the
sale to the latter, for which reason the complaint in intervention wa
s dismissed as to Froilan,
and since Pan Oriental has no capacity to question this actuation of
the Shipping Admin
because it had no valid contract in its favor.
However, since it is not disputed that Pan Oriental made said useful
and necessary
expenses on the vessel, the same is entitled to the refund of such
expenses with the light to
retain the vessel until he has been reimbursed. As it is by the con
certed acts of Froilan,
Compania, and Republic that Pan Oriental was deprived of the possessio
n of the vessel over
which Pan Oriental had a lien for its expenses, Froilan, Compaia, and
the Republic are
declared liable for reimbursement to Pan Oriental of its legitimate expenses wit
h legal interest
from the time of disbursement. The case is remanded to the lower cou
rt for further
proceedings in the matter of expenses.
On Aug 27, 1965, the Supreme Court, in resolving a Motion for Reconsideration fi
led by
Froilan and Compania ruled that as Pan Oriental was in actual possess
ion of the vessel from

April 1, 1949 to February 7, 1951, it must be required to pay reaso
nable rental for the use
thereof, at the rate of P3,000.00 a month the same rate specified as rental in t
he imperfected
charter contract which shall be deductible from whatever may be due
and owing the said
party by way of reimbursable necessary expenses and interest. This ren
tal shall commence
from the time defendant Pan Oriental actually operated the vessel, whi
ch date shall be
determined by the lower court.
On June 4, 1975, the lower court orders the intervenors Compaia (plain
tiff Fernando
Froilan s successor-in-interest) and Republic jointly and severally to p
ay defendant Pan
Oriental (a) the sum of P6,937.72 a month from Feb 3, 1951, the dat
e of Pan Orientals
dispossession, in the concept of damages for the deprivation of its right to re
tain the vessel, it
until it is paid its useful and necessary expenses; (b) the sum of P15
,000.00, representing Pan
Orientals deposit with the Republic for the purchase of the vessel with legal int
erest from Jan
16, 1950, the date Pan Oriental paid the same; and (c) the sum of P40,797.54 rep
resenting the
expenses for repairs incurred by Pan Oriental, with legal interest fro
m Feb 3, 1951 until fully
paid, minus the amount of P59,500.00 representing the unpaid rentals d
ue the Republic. The
legal rate of interest is made payable only on the last two amounts (b) and (c).
Upon appeal, the
Court of Appeals affirmed the decision of the lower court.
In its petition for review, Republic impugns the Appellate Court in n
ot holding that
compensation by operation of law took place as between Republic and Pan Oriental
as of Feb 3,
1951, the date of dispossession.
ISSUE:
Whether or not compensation by operation of law took place as between Republic a
nd
Pan Oriental as of Feb 3, 1951, the date of dispossession.
Held: No.
For compensation to take place, one of the elements necessary is that
the debts be
liquidated. In this case, all the elements for Compensation to take place were n
ot present on the
date of dispossession, or on Feb 3, 1951. The amount expended for repairs and im
provements
had yet to be determined by the Trial Court pursuant to the Decision
of the Supreme Court
promulgated on Oct 31, 1964. At the time of dispossession also, Pan Oriental was
still insisting
on its right to purchase the vessel. The obligation of Republic to r
eimburse Pan Oriental for
expenses arose only after the Supreme Court had so ruled. Rentals for the use of
the vessel by
Pan Oriental were neither due and demandable at the time of dispossession but on
ly after the
Supreme Court had issued its Resolution of Aug 27, 1965.
Furthermore, the legal interest payable from Feb 3, 1951 on the sum
of P40,797.54,
representing useful expenses incurred by Pan Oriental, is also still u
nliquidated since interest
does not stop accruing until the expenses are fully paid. Thus, the
Court finds without basis
Republics allegation that Pan Orientals claim in the amount of P40,797.54 was exti
nguished by
compensation since the rentals payable by Pan Oriental amount to P59,5
00.00 while the
expenses reach only P40,797.54. Deducting the latter amount from the former, Rep
ublic claims
that P18,702.46 would still be owing by Pan Oriental to Republic. That argument
loses sight of
the fact that to the sum of P40,797.54 will still have to be added the legal rat
e of interest from
Feb 3, 1951 until fully paid.
MARY ANTONETTE YU
ARTICLE 1279
INTERNATIONAL CORPORATE BANK V. INTERMEDIATE APPELLATE COURT (163 SCRA
296)
FACTS:
In 1980, NatividadPajardo (private respondent) secured a loan from Inve
stment and
Underwriting Corp. of the Philippines and Atrium Capital Corp. (petitio
ners predecessor-ininterest) for an amount of P50M by mortgaging her real properties val
ued at P110M. Only
P20M was approved for release, in which it later applied to other ob
ligations payable to
petitioner.
Private respondent made a money market placement with ATRIUM amounting
to
P1,046,253.77. Meanwhile, respondent failed to pay her mortgaged indebte
dness so the bank
refused to pay the interests earned from the placement and applied it
to the deficiency in the
proceeds of auction sale of the mortgaged property amounting to P6.81M.
Private respondent filed a petition to release in her favor the inter
ests earned in the
money market placement, which was further granted by the court. The court then i
ssued a writ
of execution against the petitioners property consisting of 20 motor ve

hicles. Private
respondent filed an ex parte motion praying that the five branches to
pay the amount of
interests from the money market, which was later granted. Notwithstandi
ng the order,
petitioner failed to comply all orders. Petitioner moved to file a su
pplemental petition on the
ground that the bond filed have material erasures, alterations and/or additions.
ISSUE:
W/N there can be legal compensation?
HELD:
There can be no legal compensation where the person asserting the set
-off is neither
clear nor liquidated. Pending the extra-judicial foreclosure sale in the RTC of
Manila, the debt is
not liquidated and demandable. Therefore, it prevents the legal compens
ation from taking
place under Article 1290 of the Civil Code.
Compensation
e creditors
debtors of
There can
compensation
shall take place when two persons, in their own right, ar

and
each other as provided in Article 1278 of the Civil Code.
be legal
when the two debts are due, liquidated and demandable.
In the case at hand, the petitioner is indebted to private respondent for the pr
oceeds of
the money market placement amounting to P1062,063.83. But whether the private re
spondent
is indebted in the amount of P6.81M is in question.
ARTICLE 1279
FERMIN ONG V. COURT OF APPEALS (177 SCRA 402)
FACTS:
Petitioner Fermin Ong owes private respondent Mariano Ong. Fermin says
it is only
P120,000.00 and was sustained by the trial court. Mariano says it is
P160,000.00 and was
upheld by the CA . Petitioner wants that the decision of the CA be reversed and
that of the trial
court reinstated.
According to the petitioner, he borrowed from the private respondent t
he amount of
only P160,000.00 and secured its payment with three post-dated checks
totaling the same
amount.
On January 23,1979, he issued a fourth check for P40,000.00 in partial settlemen
t of the
loan, which was thereby reduced to P120,000.00.
Fermin says that he stored in Mariano s warehouse a quantity of zippe
rs valued at
P181,000.00. Fermin denies they were intended to guarantee the payment
of his loan and
claims they were merely deposited there because he had nowhere else to place the
m.
When he subsequently tried to get the rest of his zippers, Fermin cl
aims Mariano
refused to release them on the ground of non- payment of the loan. Fermin asked
that Mariano
not to deposit or encash the post-dated checks on maturity as they are not funde
d
Mariano sued Fermin after first sending him a demand for the amount of P160,000.
00.
In his answer, Fermin denied liability. Fermin invoked a set-off, to wi
t, his outstanding
loan against the cost of the zippers, which he said Mariano had unjustly retaine
d.
Mariano claims that the original loan was for P200.000.00 and this wa
s reduced with
the payment of the said check, leaving a balance of P160,000.00. This amount was
equivalent to
the face value of the checks which he could not encash.
ISSUE:
Whether there was compensation of loan between Fermin and Mariano
HELD: NO.
As to the issue of compensation, Fermin claims the balance of his debt is deemed
set off
by the price of the zippers in the possession of Mariano, who had the obligation
to return them
to him. According to the SC, there was no proof that Mariano had a
standing obligation to
Fermin for the said properties. There was no storage fees paid either.
Therefore, Art. 1279 does not apply because the (1) appellant is not
a debtor of
appellee, it is only the latter who is indebted to appellant; (2) the debts, eve
n admitting that the
delivery of the zippers to plaintiff is a debt, do not both consist in a sum of
money nor are they
of the same quality and kind ...
As to the amount of the loan, according to the SC, there was no showing that the
loan of
160,000 has been partially paid as there was no Official Receipt to prove paymen
t nor were the
amount of the post-dated checks reduced. It upheld the CA in its ruling that the
amount of the
original debt is 200,000
ARTICLE 1279
SILAHIS MARKETING V. IAC (180 SCRA 21)
FACTS:
On various dates in October, November and December, 1975, Gregorio de

Leon (De
Leon for short) doing business under the name and style of Mark Indu
strial Sales sold and
delivered to Silahis Marketing Corporation (Silahis for short) various
items of merchandise
covered by several invoices in the aggregate amount of P 22,213.75 payable withi
n thirty (30)
days from date of the covering invoices. Allegedly due to Silahis failure to pa
y its account upon
maturity despite repeated demands, de Leon filed before the then Court
Manila a complaint for the collection of the said accounts including accrued int
erest thereon in
the amount of P 661.03 and attorney s fees of P 5,000.00 plus costs of litigatio
n.
ISSUE:
Whether or not the set-off was proper in this case
HELD:
The court found nothing contained in the records to show that private respondent
obligated himself to set-off or compensate petitioner s outstanding acco
unts with the
alleged unrealized commission from the assailed sale of sprockets in t
he amount of P
111,000.00 to Dole Philippines, Inc.
It must be remembered that compensation takes place when two persons, in their
own
right, are creditors and debtors to each other. Article 1279 of the Civil Code p
rovides that: "In
order that compensation may be proper, it is necessary: [1] that each
one of the obligors be
bound principally, and that he be at the same time a principal credi
tor of the other; [2] that
both debts consist in a sum of money, or if the things due are consumable, they
be of the same
kind, and also of the same quality if the latter has been stated; [3] that the t
wo debts be due; [4]
that they be liquidated and demandable; [5] that over neither of them there be a
ny retention or
controversy, commenced by third persons and communicated in due time to the debt
or.
When all the requisites mentioned in Art. 1279 of the Civil Code are
present,
compensation takes effect by operation of law, even without the consen
t or knowledge of the
creditors and debtors.
5
Article 1279 requires, among others, that in order that legal
compensation shall take place, "the two debts be due" and "they be l
iquidated and
demandable." Compensation is not proper where the claim of the person
asserting the
set-off against the other is not clear nor liquidated; compensation ca
nnot extend to
unliquidated, disputed claim existing from breach of contract.

ARTICLE 1279
PIONEER INSURANCE V. CA, (180 SCRA 126)
FACTS:
PIONEER INSURANCE (petitioner) issued general warehousing bonds in favor
of the
Bureau of Customs for importation of raw materials. The bonds were is
sued on behalf of the
PRIVATE RESPONDENT, Wearever Textile Mills, Inc. PRIVATE RESPONDENT exec
uted
indemnity agreements in favor of the petitioner, securing the later from and aga
inst any and all
harm, damages and losses as a surety upon the bonds.
Failing to comply with their commitments, PRIVATE RESPONDENTS settled d
irectly
with and was granted by Bureau of Customs installment payments of the
ir obligation,
conditioned on an initial payment followed thereafter with staggered mo
nthly amortized
amounts until fully paid. PRIVATE RESPONDENT made only the initial payment putti
ng them in
violation of the said agreement.
Bureau of Customs again demanded from PIONEER INSURANCE payment of its
bonds.
No payment, however, has been made as yet.
A fire at the PRIVATE RESPONDENTs factory destroyed materials insured w
ith
PIONEER INSURANCE. PRIVATE RESPONDENT demanded proceeds from the insurance
policy
but PIONEER INSURANCE refused claiming that said proceeds must be appl
ied as partial
compensation or set-off against its liability with the Bureau of Customs.
The trial court rendered judgment in favor of PRIVATE RESPONDENTS, ord
ering
PIONEER to pay the insurance proceeds plus legal interest.
On appeal, CA affirmed.
ISSUE:
Whether or not the insurance policy proceeds may be applied by PIONEER INSURANCE
as partial legal compensation against PRIVATE RESPONDENTs liability with
the Bureau of
Customs arising from the warehousing bonds.
HELD:
Petition is GRANTED. The decision of the Court of Appealsis ANNULLED. A copy of
this
decision is furnished the Commissioner of Customs for appropriate actio
n to be taken under
the warehousing bonds. Costs against the private respondents.
Compensation shall take place when two persons, in their own right, ar
e creditors and
debtors of each other. (Art. 1278, Civil Code). When all the requisites mention
ed in Art. 1279 of
the Civil Code are present, compensation takes effect by operation of
law, even without the
consent or knowledge of the debtors.
(Art. 1290, Civil Code). Art. 1
279 of the Civil Code
requires among others, that in order that legal compensation shall take place (1
) the two debts
be due
and they be liquidated and demandable. Compensation is (2)
not proper where the
claim of the person asserting the set-off against the other is not c
lear nor liquidated;
compensation cannot extend to unliquidated, disputed claim arising from
breach of contract.
(Compania General de Tabacos v. French and Unson, 39 Phil. 34; Lorenzo & Martine
z v. Herrero
17 Phil. 29).
There is no dispute that PIONEER INSURANCE owes PRIVATE RESPONDENTs th
e
amount representing the proceeds of the insurance policy. At the time
the fire occurred, the
PRIVATE RESPONDENTs together with PIONEER INSURANCE had already incurred liabili
ty on
the warehousing bonds with the Bureau of Customs because of PRIVATE R
ESPONDENTs
inability to comply with the provisions of their undertaking. It is,
therefore, clear that both
PIONEER INSURANCE AND PRIVATE RESPONDENTs were already liable for said amount to
the
Bureau of Customs when the contingency for which compensation is sought, happene
d.
Clearly, PIONEER INSURANCE can demand reimbursement from PRIVATE
RESPONDENTs even before it has actually paid its obligation to the Bureau of Cus
toms. It can,
in principle, be held liable under the warehouse bonds even before ac
tual payment to the
Bureau of Customs. The liability has been fixed. What remains is simp
ly its liquidation. The
PRIVATE RESPONDENTs who defaulted on the agreement to make staggered p
ayments
thereby causing PIONEER INSURANCEs liability to the Bureau of Customs c
annot refuse the
set-off. Consequently, legal compensation can take place between PIONEER
INSURANCE and
PRIVATE RESPONDENT, that is, the PIONEER INSURANCE can partially set-of
f the insurance
proceeds in the amount of P 1,144,744.49 against its liability under
the warehousing bonds
which has been computed in the amount of P 9,031,000.00 as of 1983.
ARTICLE 1285
SESBRENO V. THE HONORABLE COURT OF APPEALS (222 SCRA 466)
FACTS:
On 9 February 1981, Raul Sesbreno made a money market placement in the amount
of
P300,000.00 with the Philippine Underwriters Finance Corporation (PhilFinance),
with a term
of 32 days. PhilFinance issued to Sesbreno the Certificate of Confirma
tion of Sale of a Delta

Motor Corporation Promissory Note
DeliveryReceipt
indicating the sale of the note
in the custody of Pilipinas
Bank, and postdated checks drawn
America for
P304,533.33 payable on 13 March
having been drawn
against insufficient funds.
(2731), the Certificate of Securities

with notation that said security was
against the Insular Bank of Asia and
1981. The checks were dishonored for
Pilipinas Bank never released the note, nor any instrument related thereto, to S
esbreno;
but Sesbreno learned that the security was issued 10 April 1980, maturing on 6 A
pril 1981, has
a face value of P2,300,833.33 with PhilFinance as payee and Delta Mot
ors as maker; and was
stamped non-negotiable on its face. As Sesbreno was unable to collect h
is investment and
interest thereon, he filed an action for damages against Delta Motors and Pilipi
nas Bank.
ISSUE:
Whether non-negotiability of a promissory note prevents its assignment.
HELD:
Only an instrument qualifying as a negotiable instrument under the rel
evant statute
may be negotiated either by indorsement thereof coupled with delivery, or by del
ivery alone if
it is in bearer form. A negotiable instrument, instead of being negotiated, may
also be assigned
or transferred. The legal consequences of negotiation and assignment of
the instrument are
different. A negotiable instrument may not be negotiated but may be a
ssigned or transferred,
absent an express prohibition against assignment or transfer written in
the face of the
instrument. Herein, there was no prohibition stipulated.
ARTICLE 1290
MINDANAO PORTLAND CEMENT CORPORATION v. COURT OF APPEALS (120 SCRA 930)
FACTS:
Atty. Laquihon, in behalf of Pacweld Steel Corporation (PSC), filed a
motion to direct
payment of attoneys fee to himself based on the courts decision where MPCC was adj
udged to
pay PSC P10,000.00 as attorneys fees.
However, MPCC filed an opposition on the ground that said amount is
set-off by a
likesum of P10,000.00 which MPCC has collectible in its favor from PS

C also by way of
attorneys fees which MPCC recovered from the same CFI.
ISSUE:
Are the attorneys fees of PSC and MPCC set-off?
HELD:
Yes. PSC and MPCC are creditors and debtors of each others since the
ir debts to each
other are from the final and executor judgments of the court in two
separate cases. Thus, the
two obligations offset each other, compensation having taken effect by
operation of law and
extinguish bothe debts to the concurrent amount of Php10,000.00.
The appealed order granting Atty. Laquihons motion for amendment of the judgment
to
make the award therein payable directly to himself which had become final and ex
ecutor long
before the issuance opf sa id amendatory order was a void alteration
of judgment. It was a
substantial change or amendment beyond the trial courts jurisdiction and
authority and it
could not defeat the compensation or set-off of the two obligations of the corpo
rations to each
other which had already extinguished both debts by operation of law.
ARNIEBELLE M. DORIA
ARTICLE 1290
PIONEER INSURANCE & SURETY CORPORATION V.. COURT OF APPEALS (180 SCRA 126)
FACTS:
Pioneer Insurance and Surety Corporation issued general warehousing bond
s in favor
of the Bureau of Customs for importation of raw materials. The bonds were issued
on behalf of
private respondents Wearever Textile Mills, Inc., and its president, Vi
cente T. Lim.To secure
Pioneer from and against any and all harm, damages and losses of wha
tever kind and nature
which it may incur as a consequence of its becoming a surety upon the bonds, the
respondents
executed jointly and severally in favor of Pioneer indemnity agreements for said
bonds.
The private respondents failed to comply with their commitment under t
he
warehousing bonds by reason whereof the Bureau of Customs demanded fro
m Pioneer
payment of the value of the said bonds. In the meantime, in response to the Pion
eers demand
letter, the private respondents promised that they will settle their obligations
with the Bureau
of Customs.On representations by private respondents to the Bureau of
Customs, the latter

granted the request of respondents for staggered monthly installment pa
yments of their
obligation on condition that respondents will make an initial payment and therea
fter amortize
the balance monthly until fully paid. Other than the initial payment, however, r
espondents have
not made any other payments thereby violating the terms of the said agreement.As
a result, the
Bureau of Customs again demanded from Pioneer payment of its bonds. No payment,
however,
has been made as yet.
A fire gutted the respondent s factory destroying materials insured wit
h Pioneer.
Respondents demanded from Pioneer payment of the proceeds of the insurance polic
y but the
latter refused to pay claiming that said proceeds must be applied by
way of partial
compensation or set-off against its liability with the Bureau of Custo
ms arising from the
warehousing bonds.
The petitioner s efforts to protect itself from total loss proved frui
tless, the complaint
for compensation was filed.The trial court rendered judgment in favor
of the private
respondents and ordered Pioneer to pay, the insurance proceeds plus le
gal interest until the
whole amount is fully paid.On appeal, the Court of Appeals affirmed t
he trial court s decision,
holding that legal compensation cannot take place because the requisite
s thereof are not
present, namely: that petitioner is not the creditor of private respon
dents; and that the
former s claim against the latter is not due, demandable and liquidated because
its liability on
the warehousing bonds was extinguished when the textile goods covered
by the same were
destroyed by the fire. Therefore, according to the appellate court sin
ce the petitioner and
private respondents are not mutually creditors and debtors to each oth
er, the law on
compensation is inapplicable.
In this petition, Pioneer Insurance alleges that legal compensation or
set-off under
Articles 1278 and 1279 can take place because there is due to privat
e respondents from
Pioneer the amount of P l,144,744.49 as proceeds of the fire insuranc
e policy in the same
manner that the private respondents are bound, jointly and severally,
to reimburse Pioneer
what the latter is liable to pay the Bureau of Customs in the total amount of P
6,390,259.00 and
which, as of the date of the filing of the complaint, had already reached P 9,03
1,000.00. Pioneer
also stresses that even if it has not yet paid the Bureau of Custom
s any amount, the private

respondents have already become indebted to the petitioner pursuant to
the indemnity
agreement which stands as the law between the parties.
ISSUE:
WON legal compensation as viewed in Article 1290 can take place.
HELD:
Yes. Legal compensation can take place between the petitioner and the
private
respondents.There is no dispute that Pioneer owes the private responden
ts the amount
representing the proceeds of the insurance policy. The private responde
nts, however, tried to
negate their liability by questioning the veracity and accuracy of the
Bureau of Customs
demand letters to Pioneer and by claiming that they have no more lia
bility because of the
fortuitous event. At the same time, however, they admit liability when they argu
e that Pioneer
was released from the same upon their agreement with the Bureau of C
ustoms to make
staggered payments. Finally, the private respondents argued that since
Pioneer has not made
any payment yet regarding the amount demanded by the Bureau of Custom
s, there is nothing
for which Pioneer should be reimbursed.
It is needless to emphasize that at the time the fire occurred, the
private respondents
together with Pioneer had already incurred liability on the warehousing bonds wi
th the Bureau
of Customs because of the respondents inability to comply with the p
rovisions of their
undertaking. It is, therefore, clear that as far as the amount of P
9,031,000.00 is concerned,
bothPioneer and respondents were already liable for said amount to the
Bureau of Customs.
Neither can the respondents claim that Pioneer was released from liabi
lity when they made
arrangements with the Bureau of Customs for staggered payments since the facts w
ill bear out
that other than the P 500,000.00 payment by respondents, no further p
ayment was made by
them thus leading the Bureau of Customs to go after Pioneer again. T
he private respondents,
contend, however, that since Pioneer has not made any payment with the Bureau of
Customs, it
cannot demand reimbursement and, thus, petitioner cannot apply legal compensatio
n or set-off
against them because their liability has not yet become due and demandable.
Clearly, Pioneer can demand reimbursement from the respondents even bef
ore it has
actually paid its obligation to the Bureau of Customs. It can, in pr
inciple, be held liable under
the warehouse bonds even before actual payment to the Bureau of Custo
ms. The liability has

been fixed. What remains is simply its liquidation. The respondents wh
o defaulted on the
agreement to make staggered payments thereby causing Pioneers liability
to the Bureau of
Customs cannot refuse the set-off.
MARVIN P. FRANCISCO
ARTICLE 1291
LAND BANK OF THE PHILIPPINES vs. COURT OF APPEALS (181 SCRA 126)
FACTS:
Private respondents were former owners of agricultural
ds were
subjected to Operation Land Transfer of the Government under
s Nos. 2 and
127. As part of the financing support for Operation
e petitioner issued three
(3) Land Bank Interim Bond Certificates registered in
pondents, as partial
payment for their agricultural lands.
lands. Their lan

Presidential Decree
Land Transfer, th
the name of res
These bonds have a maturity of twenty-five (25) years from date of i

ssue and bear
interest at the rate of six per centum (6%) per annum, tax-free and
payable semi-annually on
May 20 and November 20 of each year.
On 17 March 1975, respondents Suarez requested the petitioner to convert their b
onds
from registered bonds to bearer bonds, in preparation for their intended deliver
y or transfer to
third parties. For this purpose, respondents were required to fill up three (3)
sets of LBP Form
No. 64-Request for Transfer/ Redenomination of Bonds. In each of said LBP forms,
respondents
themselves inserted the following notation
NOTE: It is understood that the interest from November 21, 1974 to M
arch 17,
1975 shall accrue to the transferor.
This notation was typed in by a clerk of the petitioner at the exclusive request
of private
respondents. The notation was a discrete gloss by private respondents, not in r
esponse to any
question posed by the LBP Form 64 nor to fill in any blank line required by LBP
Form 64 to be
filled up.
The LBP Forms 64 were processed and signed by the manager of petitio
ner s Cash
Department, Mr. Bajada. Thereafter and upon the surrender by respondents of thei
r registered
bonds, eight (8) new bearer bonds with different. denominations but of
equivalent aggregate
face value were issued by the Land Bank to the respondents Suarez.Sav
e only that they are
payable to the bearer thereof, rather than to a named and registered

owner, the new bonds
have the same terms and conditions as the prior registered bonds. The prior regi
stered bonds
were accordingly retired.
On 20 May 1975, the first interest payment date after the conversion,
private
respondents demanded from the Land Bank the payment of P11,877.24 representing t
hat part
of the accrued interest on the three (3) registered bonds formerly he
ld by them which
corresponded to the period from 21 November 1974 to 17 March 1975. P
etitioner, however,
declined to honor the demand when respondents refused or failed to present the B
earer Bond
Certificates as required by Land Bank Implementing Guidelines and Proce
dures on "The
Processing Payment of Interest on LBP Bonds"
On 10 November 1975, respondents Suarez filed a complaint 8 with the
then Court of
First Instance of Manila, to compel payment by the Land Bank of the claimed amou
nt of interest
on the registered bonds previously held by them. The trial court rendered judgme
nt in favor of
the respondents Suarez.
On appeal, the Court of Appeals affirmed the decision of the trial court.
ISSUE:
Whether or not novation had taken place in respect to respondents bo
nds when they
had their registered bonds converted into bearer bonds.
HELD:
No.It is not easy to understand the thrust of respondents argument
that novation had
taken place in respect of their bonds when they had their registered
bonds converted into
bearer bonds. If respondents mean to suggest that the printed terms o
f the new bearer bonds
were somehow novated by the notation they had inserted in the LBP Forms 64 so as
to obligate
the Land Bank to pay a portion of the November 21, 1974 - May 20,
1975 interest not to the
holder or bearer of such bonds (as required by the terms thereof) bu
t rather to the
respondents, such suggestion must be firmly rejected. None of the requ
irements of novation
either of the subject matter of the bond agreement or of (partial) s
ubrogation of the creditor
obligeethereunder, is visible in the instant case. Of equal importance
is the fact that the
unilateral notation of the respondents was not inserted in the new be
arer bond certificates.
The mischief implicit in the (assumed) suggestion of the respondents is plain to
see.
ARTICLE 1291
REYES V COURT OF APPEALS (264 SCRA 35)
FACTS:
Petitioner assails the respondent court s decision
which sustained the two resolutions
of the respondent Secretary of Justice. Reyes is the president of EUR
OTRUST, while the
respondents of this case are Eleazar, the president of BERMIC and Arm
ed Forces of the
Philippines Mututal Benefit Asso., Inc. (AFP-MBAI).
First Resolution:
Reyes and Eleazar entered into a loan agreement. Eleazar issued 21 postdated che
cks to
cover the loan packages which were eventually dishonored due to stop payment ord
er made by
Eleazar. This prompted Reyes to file a criminal case against Eleazar.
On the other hand, through the investigations of AFP-MBAI, it was fou
nd out that
EUROTRUST, after delivering the securities the former purchased,
Reyes
borrowed the same
securities but failed to return them; the same securities were the on
es that was let to Bermic.
When Eleazar came to know that the funds loaned to her company originally belong
ed to AFPMBA,I she requested for a meeting with EUROTRUST wherein an agreement
was made that
BERMIC would directly settle its obligation with the real owners of t
he funds. This agreement
was formalized into two letters. BERMIC negotiated with the real owner
s of the loan and
settled their payments. However, Eleazar found out that Reyes continued
to collect the post
dated checks contrary to their agreement. With her counsels advice, Eleazar had t
he payment
stopped.
The Office of the Provincial Prosecutor of Rizal issued a resolution
dismissing the
complaints filed by Reyes against Eleazar on the ground that when the
latter assumed the
obligation of Reyes to AFP-MBAI, it constituted novation, extinguishing any crim
inal liability on
the part of Eleazar. Reyes filed for a petition for review which was dismissed b
y the Secretary
of Justice holding that "the novation of the loan agreement prevents
the rise of any incipient
criminal liability since the novation had the effect of canceling the
checks and rendering
without effect the subsequent dishonor of the already cancelled checks."
Second Resolution:
While the case was pending, AFP MBAI filed a separate criminal compla
int against
Reyes. Reyes contended that novation already took place. The Office of
the City Prosecutor
recommended the filing of an information against her. Reyes filed for
a petition for review
which was dismissed by the Secretary of Justice.
ISSUE:
Whether or not the respondent court erred in affirming the two resolutions and
whether or not there was Novation.
HELD:
First Resolution:
The principle of novation by substitution of creditor was erroneously applied in
the first
questioned resolution involving the contract of loan between petitioner
and respondent
Eleazar. Following the requisites of novation, the essential requisites were not
present.
The absence of a new contract extinguishing the old one destroys any
possibility of
novation by conventional subrogation, In concluding that a novation took place,
the respondent
court relied on the two letters which, according to it, formalized pe
titioner s and respondent
Eleazar s agreement. However, these letters only signify an agreement between pe
titioner and
respondent Eleazar only. There was no mention whatsoever of AFP-MBAI s consent t
o the new
agreement between petitioner and respondent Eleazar much less an indicatio
n of AFP-MBAI s
intention to be the substitute creditor in the loan contract. Well settled is t
he rule that novation
by substitution of creditor requires an agreement among the three part
ies concerned the
original creditor, the debtor and the new creditor. It is a new cont
ractual relation based on the
mutual agreement among all the necessary parties, Hence, there is no
novation if no new
contract was executed by the parties. The fact that respondent Eleazar made paym
ents to AFPMBAI and the latter accepted them does not ipso facto result in nova
tion. There must be an
express intention to novate animus novandi
HOWEVER, we must sustain the resolution rendered by the Secretary of
Justice. While
the respondent Secretary of Justice was in error in applying the rule
on novation in the
Resolution, such irregularity, however, does not affect the validity of
the proceedings in the
Department of Justice. Erroneous application of a legal principle canno
t bring a judgment that
has already attained the status of finality to an absolute nullity under the wel
l entrenched rule of
finality of judgment. It took her almost seventeen months to challenge
the Resolution. We find
no plausible explanation nor justifiable reason offered by petitioner f
or the obvious delay or
omission to take a timely action against the questioned resolution. Sh
e is apparently guilty of
laches which bars her from seeking relief in a court of law after s
he intentionally and
unreasonably fails to guard of her rights. Petitioner s omission to assert her r
ight to avail of the
remedies in law within a reasonable time warrants a presumption that
she abandoned it or
declined to assert it.
Second Resolution:
As explained in the first resolution, no novation took place. No hard
evidence was
presented which would expressly and unequivocably demonstrate the intention of r
espondent
AFP-MBAI to release petitioner from her obligation to pay under the c
ontract of sale of
securities. It is a rule that novation by substitution of debtor must
always be made with the
consent of the creditor. The consent of the creditor to a novation b
y change of debtor is as
indispensable as the creditor s consent in conventional subrogation in
order that a novation
shall legally take place. The mere circumstance of AFP-MBAI receiving
payments from
respondent Eleazar who acquiesced to assume the obligation of petitione
r under the contract
of sale of securities, when there is clearly no agreement to release
petitioner from her
responsibility, does not constitute novation, at most, it only creates
a juridical relation of codebtorship or suretyship on the part of respondent Eleazar to the con
tractual obligation of
petitioner to AFP-MBAI and the latter can still enforce the obligation against t
he petitioner
ALFREDO KHONG HUN
ARTICLE 1291
QUINTO VS. PEOPLE (305 SCRA 138)
FACTS:
That on or about the 23rd day of March 1977, in the Municipality of
Makati, Metro
Manila, Philippines and within the jurisdiction of this Honorable Court
, the above-named
accused, received in trust from one Aurelia Cariaga the following pieces of jewe
lry. with a total
value of P36,000.00 for the purpose of selling the same on commission
basis and with the
express obligation on the part of the accused to turn over the proce
eds of sale thereof, or to
return the said jewelries (sic), if not sold, five (5) days after re
ceipt thereof, but the accused

once in possession of the jewelries (sic), far from complying with her obligatio
n, with intent of
gain, gave abuse of confidence and to defraud said Aurelia Cariaga, did then and
there wilfully,
unlawfully and feloniously misappropriate, misapply and convert to her own perso
nal use and
benefit the said jewelries (sic) and/or the proceeds of sale or to return the pi
eces of jewelry, to
the damage and prejudice of the said Aurelia Cariaga in the aforement
ioned amount of P
36,000.00. According to the prosecution, on or about 23 March 1977, L
eonida went to see
Aurelia Cariaga (private complainant) at the latter s residence in Maka
ti. Leonida asked
Aurelia to allow her have some pieces of jewelry that she could show
to prospective
buyers. Aurelia acceded and handed over to Leonida one (1) set of ma
rques
with briliantitos worth P17,500.00, one (1) solo ring of 2.30 karats wo
rth P16,000.00 and one
(1) ros/etas ring worth P2,500.00. Leonida signed a receipt. When the 5-day peri
od given to her
had lapsed, Leonida requested for and was granted additional time with
in which to vend the
items. Leonida failed to conclude any sale and, about six (6) months
later, Aurelia asked that
the pieces of jewelry be returned. She sent to Leonida a demand lett
er which the latter
ignored. The inexplicable delay of Leonida in returning the items spurred the f
iling of the case
for estafa against her. The defense proffered differently. In its vers
ion, the defense sought to
prove that Leonida was engaged in the purchase and sale of jewelry.
She was used to buying
pieces of jewelry from a certain Mrs. Antonia Ilagan who later introd
uced her (Leonida) to
Aurelia. Sometime in 1975, the two, Aurelia and Leonida, started to transact bu
siness in pieces
of jewelry among which included a solo ring worth P40,000.00 which wa
s sold to Mrs.
Camacho who paid P20,000.00 in check and the balance of P20,000.00 in
installments later
paid directly to Aurelia. The last transaction Leonida had-with Mrs. C
amacho involved a
"marques" worth P16,000.00 and a ring valued at P4,000.00. Mrs. Camacho was not
able to pay
the due amount in full and left a balance ofP13,000.00. Leonida broug
ht Mrs. Camacho to
Aurelia who agreed to allow Mrs. Camacho to pay the balance in installments. Le
onida was also
able to sell for Aurelia a 2-karat diamond ring worth P17,000.00 to Mrs. Concord
ia Ramos who,
unfortunately, was unable to pay the whole amount. Leonida brought Mrs
. Ramos to Aurelia
and they talked about the terms of payment. As first payment, Mrs. Ramos gave L
eonida a ring
valued at P3,000.00. The next payment made by her was P5,000.00. Leon
ida herself then
paid P2,000.00. The agreement between petitioner and private complainant
was effectively
novated when the latter consented to receive payment on installments d
irectly from Mrs.
Camacho and Mrs. Ramos. Novation, in its broad concept, may either
be extinctive or modificatory. It is extinctive when an old obligation i
s terminated by the
creation of a new obligation that takes the place of the former; it is merely mo
dificatory when
the old obligation subsists to the extent it remains compatible with
the amendatory
agreement. An extinctive novation results either by changing the object or prin
cipal conditions,
or by substituting the person of the debtor or subrogating a third p
erson in the rights of the
creditor. Under this mode, novation would have dual functions - one t
o extinguish an existing
obligation, the other to substitute a new one in its place requiring
a conflux of four essential
requisites: (1) a previous valid obligation; (2) an agreement of all
parties concerned to a new
contract; (3) the extinguishment of the old obligation; and (4) the b
irth of a valid new
obligation
ISSUE:
Whether or not there was a valid novation or substitution of debtor.
HELD:
No. There was really no substitution of debtors since private complain
ant merely
acquiesced to the payment but did not give her consent to enter into
a new contract. The
extinguishment of the old obligation by the new one is a necessary element of no
vation which
may be effected either expressly or impliedly. Novation, in its broad
concept, may either
be extinctive or modificatory. It is extinctive when an old obligation i
s terminated by the
creation of a new obligation that takes the place of the former; it is merely mo
dificatory when
the old obligation subsists to the extent it remains compatible with
the amendatory
agreement. An extinctive novation results either by changing the object or prin
cipal conditions
(objective or real), or by substituting the person of the debtor or subrogating
a third person in
the rights of the creditor. Under this mode, novation would have dual
functions - one to
extinguish an existing obligation, the other to substitute a new one
in its place requiring a
conflux of four essential requisites: (1) a previous valid obligation;
(2) an agreement of all
parties concerned to a new contract; (3) the extinguishment of the ol
d obligation; and (4) the
birth of a valid new obligation
ARTICLE 1291
AJAX MARKETING VS CA (248 SCRA 222)
FACTS:
Public respondent Court of Appeals affirmed the trial court s judgment
upholding the
validity of the extra-judicial foreclosure of the real estate property of petiti
oners located at
Paco Manila.
Petition for certiorari raised the following arguments like: separate l
oans granted to three
entities into a single loan, erred in not holding that the consolidation loan of
1.0 million was
not accompanied by the execution of a new REM and erred in not decla
ring null and void
the extra judicial foreclosure taken by MetroBank.
Angelita Rodriquez and Antonio Tan obtained a loan in the amount of
250,000 from the
Metropolitan Bank and trust company.
After the partnership had changed its name to Ajax Marketing Company
albeit without
changing its composition, it obtained a loan in the sum of P150,000.0
0 from Metropolitan
Bank and Trust Company.
Ajax Marketing and Development Corporation obtained from Metropolitan Bank and
Trust
Company a loan of P600,000.00, the payment of which was secured by anot
her real estate
mortgage executed by spouses Marcial See and Lilian Tan in favor of
said bank over the
same realty located in the District of Paco, Manila.
Petitioners argue that a novation occurred when their three (3) loans, which ar
e all secured
by the same real estate property were consolidated into a single loan
of P1 million under
Promissory Note No. BDS-3605, thereby extinguishing their monetary oblig
ations and
releasing the mortgaged property from liability.
ISSUE:
Whether or not there is novation on the part of the Management since
it changed its
named?
HELD:
Novation is the extinguishment of an obligation by the substitution o
r change of the
obligation by a subsequent one which extinguishes or modifies the firs
t, either by
changing the object or principal conditions, or by substituting another
in place of the
debtor, or by subrogating a third person in the rights of the creditor.
The provisions of PN No. BDS-3065 yield no indication of the extingu
ishment of, or an
incompatibility with, the three loan agreements secured by the real es
tate mortgages
over TCT No. 105233.
It can be validly contended that there was a change, or substitution
in the persons of
either the creditor (Metrobank) or more specifically the debtors (petitioners) u
pon the
consolidation of the loans in PN No. BDS 3605.

consolidating and expediently making current the three previous loans, the loan
of P1.0
million under PN BDS No. 3605, secured by the real estate property,
was correctly
included in the foreclosure s bid price.
The foreclosure sale included previously incurred unsecured obligations in favo
r of PNB
which were not in the contemplation of the mortgage contract, whereas
in the instant
case, the mortgages were one in providing that the mortgaged real estate propert
y shall
also secure future advancements or loans, as well as renewals or exte
nsions of the
same.
The Supreme Court appealed affirmed in toto.
ARTICLE 1292
FUA VS. YAP (74 PHIL 287)
FACTS:
The plaintiff-appellee, Fua Cam Lu, obtained in Civil Case No. 42125
of the Court of First
Instance of Manila a judgment sentencing the defendants-appellants, Yap
Fauco and Yap
Singco, to pay P1,538.04, with legal interest and costs.
By virtue of a writ of execution, a certain parcel of land belongin
g to the appellants,
assessed at P3,550 and situated in Donsol, Sorsogon, was levied upon
by the provincial
sheriff of Sorsogon
On November, 15 1933 posted in 3 conspicuous places in Sorsogon it
was posted that the
land would be sold on a public auction on December 12, 1933. . On December 16, 1
933, the
appellants executed a mortgage.
It is said that their obligation under the judgment in civil case N
o. 42125 was reduced to
1,200 php which was made payable in four installments of 300 php dur
ing the period
commencing on February 8, 1934, and ending on August 8, 1935.
To secure the payment of the said P1,200, a camarin belonging to th
e appellants and built
on the above-mentioned land, was mortgaged to the appellee; that in c
ase the appellants
defaulted in the payment of any of the installments, they would pay
ten per cent of the
unpaid balance as attorneys fees, plus the costs of the action to be brought by t
he appellee
by reason of such default, and the further amount of P338, representi
ng the discount
conceded to the appellants.
Due to this the sale did not forego. However on March 31, 1934 the sheriff sold
the said land
at a public auction without new notice. The appellee started the present action
in the Court
of Sorsogon against the appellants in because of their refusal to recognize appe

llees title
and to vacate the land. The appellants defenses was that their obligation under
the
judgment in civil case No. 42125 was novated by the mortgage executed by them in
favor of
the appellee and that the sheriffs sale was void for lack of necessary publicatio
n. The lower
court rendered judgment declaring the appellee to be the owner of the land and o
rdering
the appellants to deliver the same to him, without special pronouncement as to c
osts. The
appellants seek the reversal of this judgment.
ISSUE:
W/N by paying the settlement evidenced by mortgage extinguishes the obligation
HELD:
YES. Appellants liability under the judgment in the civil case had been extingu
ished by the
statement evidenced by the mortgage executed by them in favor of appe
llee. Although said
mortgage did not expressly cancel the old obligation, this was implied
ly novated by reason of
the incompatibility resulting from the facts.
Neither may it be pretended that the sale in favor of the appellee
was by virtue of a
mere adjournment, it appearing that it was made pursuant to an alias writ of exe
cution.
Appellees admission has thus destroyed the legal presumption that offici
al duty was
regularly performed.
The appealed judgment is; therefore, reversed and the defendants- appellants, w
ho are
hereby declared to be the owners of the land in question, are absolv
ed from the
complaint, with costs against the appellee. So ordered.
ARTICLE 1292
MILLAR v. COURT OF APPEALS (38 SCRA 642)
FACTS:
Eusebio Millar condemned Antonio Gabriel to pay him the sum of P 1,7
46.98 with
interest at 12% per annum from the date of the filing of the compla
int the sum of P 400 as
attorneys fees and the cost of suit.
The lower court issued the writ of execution applied for the basis of which the
sheriff of
Manila seized the respondents Willy Ford Jeep. Respondent pleaded with
the petitioner to
release the jeep under an arrangement where the respondent agreed to mortgage th
e vehicle in
favor of the petitioner. The petitioner agreed to the arrangement thus
the parties executed a

chattel mortgage on the jeep where payment will be in installments.
Upon failure of the respondent to pay first installment, the petitioner obtained
an alias
writ of execution. Pursuant to the last writ the sheriff levied on c
ertain personal properties
belonging to the respondent and then scheduled them for execution of sale.
The respondent filed an urgent motion for suspension of the execution
sale on the
ground of payment of the judgment obligation. The lower court ordered the suspen
sion of the
execution sale to afford the respondent the opportunity to prove his
allegation of payment of
the judgment debt.
The lower court ruled that novation had taken place and that the part
ies had executed
the chattel mortgage only to secure or get better security for the j
udgment. The respondent
appealed the order to the CA, which set aside the order of execution in a decisi
on holding that
the subsequent agreement of the parties impliedly novated the judgment obligatio
n.
The CA stated that the following circumstances sufficiently demonstrate
the
incompatibility between the judgment debt and the obligation embodied in the dee
d of chattel
mortgage, warranting a conclusion of implied novation:
1. The judgment orders the respondent to pay the petitioner the sum of P 1,746.9
8
with interest at the 12% per annum from the filing of the complainan
t plus
amount of P400 and the cost of suit.
2. The judgment mentions no specific mode of payment of the amount due
to the
petitioner, the deed of chattel mortgage stipulates payment of the sum P 1,700
in two equal installments;
3. The judgment makes no mention of damages, the deed of chattel mor
tgage
obligates the respondent to pay liquidated damages in the amount of P
300 in
case of default on his part;
4. The judgment was unsecured, the chattel mortgage, which may be for
eclosed
extrajudicially in case of default, secured the obligation.
ISSUE:
W/N the subsequent agreement of the parties as embodied in the deed
of chattel
mortgage impliedly novated the judgment obligation.
HELD:
CA decision reversed. (CFI writ of execution AFFIRMED)

There was no substantial incompatibility between the mortgage obligation
and the judgment
liability of the respondent sufficient to justify a conclusion of implied novati
on.
The stipulation for the payment of the obligation under terms of the
deed of chattel
mortgages serves only to provide an express and specific method of extinguishmen
t- payment
in two equal installments.
The defense of implied novation requires clear and convincing proof of
complete
incompatibility between the two obligations. The law requires no specific form f
or an effective
novation by implication.
The test is whether the two obligations can stand together if not incompatibili
ty arises
and the second obligation novates the first. There is no substantial incompatibi
lity between the
two obligations as to warrant a finding of implied novation.
ARTICLE 1292
SANDICO V. PIGUING (42 SCRA 322)
FACTS:
The appellate court s judgment obliges the respondent, Judge Minerva R.
Inocencio
Piguing to do two things: (1) to recognize the easement, and (2) to p
ay the petitioners, Carlos
Sandico Sr. and Teopisto Timbol the sums of P5,000 actual and P500 exe
mplary damages and
P500 attorney s fees, or a total of P6,000. The full satisfaction of
the said judgment requires
specific performance and payment of a sum of money by the respondent.
The parties entered
into an agreement reducing the payment to P4000, and was subsequently paid by re
spondent.
ISSUE:
1. Whether the respondent judge correctly constructed the judgment of
the Court of
Appeals as not requiring the respondent to reconstruct and reopen the irrigation
canal,
and consequently, whether the said respondent judge acted in excess of j
urisdiction or
with grave abuse of discretion in denying the petitioners
motion to
declare the
respondent in contempt of court for failing and refusing to comply wi
th the appellate
court s judgment.
2. Whether the payment by the respondent to the petioners of the amo
unt of P4,000
extinguished the money judgment, and, consequently, whether the responde
nt judge
acted in excess of jurisdiction or with grave abuse of discretion in
ordering the recall

and quashal of the alias writ of execution.
HELD:
Reduction of the amount of money to be paid does not amount to nova
tion. The
payment by the respondent of the lesser amount of P4,000, accepted by the petiti
oners without
any protest or objection and acknowledged by them as "in full satisfa
ction of the money
judgment", completely extinguished the judgment debt and released the r
espondent from his
pecuniary liability.
In the case at hand, the court failed to see what new or modified obligation aro
se out of
the payment by the respondent of the reduced amount of P4,000 and substitute the
monetary
liability for P6,000 of the said respondent under the appellate court s judgment
. Additionally, to
sustain novation necessitates that the same be so declared in unequivocal terms
clearly and
unmistakably shown by the express agreement of the parties or by acts of equival
ent import
or that there is complete and substantial incompatibility between the two obliga
tions.
ARTICLE 1292
NATIONAL POWER CORPORATION, VS. JUDGE ABELARDO M. DAYRIT (125 SCRA 849)
FACTS:
This is a petition to set aside the Order, dated September 22, 1982,
of the respondent
judge. The prayer is premised on the allegation that the questioned O
rder was issued with
grave abuse of discretion.
In Civil Case No. 133528 of the defunct Court of First Instance of
Manila, DANIEL E.
ROXAS, doing business under the name and style of United Veterans Sec
urity Agency and
Foreign Boats Watchmen, sued the NATIONAL POWER CORPORATION (NPC) and
two of its
officers in Iligan City. The purpose of the suit was to compel the NPC to restor
e the contract of
Roxas for security services which the former had terminated.
After several incidents, the litigants entered into a
tober
14, 1981, and they asked the Court to approve
ision was rendered on
October 30, 1981, which states, among others: 3. The
the contract
of security services under the same terms and
ous contract effective
upon the signing thereof;
Compromise Agreement on Oc
it. Accordingly, a Dec
parties shall continue with
conditions as the previ
On May 14, 1982, the NPC executed another contract for security services with Jo
sette L.
Roxas whose relationship to Daniel is not shown. At any rate Daniel
has owned the contract.
The NPC refused to implement the new contract for which reason Daniel
filed a Motion for
Execution.
Acting on the Motion, the respondent judge issued a writ f executi
on for the
enforcement of the aforesaid portion of its decision. .
ISSUE:
Had the contract been novated upon the issuance of the Order?
HELD:
There was no novation. The said contract was executed precisely to im
plement the
compromise agreement. It is elementary that novation is never presumed; it must
be explicitly
stated or there must be manifest incompatibility between the old and
the new obligations in
every aspect. Thus the Civil Code provides: Art. 1292. In order that
an obligation may be
extinguished by another which substitutes the same, it is imperative t
hat it be so declared in
unequivocal terms, or that the old and the new obligations be on every point inc
ompatible with
each other.
In the case at bar there is nothing in the May 14, 1982, agreement
which supports the
petitioner s contention. There is neither explicit novation nor incompat
ibility on every point
between the "old" and the "new" agreements. WHEREFORE, the petition is
denied for lack of
merit with costs against the petitioner.
RYLE SCOTT MANCIA
ARTICLE 1292
CONCHINGYAN, JR VS. R & B SURETY AND INSURANCE CO., INC. (151 SCRA 339)
FACTS:
In November 1963, Pacific Agricultural Suppliers, Inc. (PAGRICO) appli
ed for and was
granted an increase in its line of credit from P400,000.00 to P800,00
0.00 (the "Principal
Obligation"), with the Philippine National Bank (PNB). To secure PNB s approval,
PAGRICO had
to give a good and sufficient bond in the amount of P400,000.00, representing th
e increment in
its line of credit, to secure its faithful compliance with the terms and conditi
ons under which its
line of credit was increased. In compliance with this requirement, PAG
RICO submitted Surety
Bond No. 4765, issued by the respondent R & B Surety and Insurance Co., Inc. (R
& B Surety") in
the specified amount in favor of the PNB. Under the terms of the Surety Bond, PA
GRICO and R &
B Surety bound themselves jointly and severally to comply with the "t
erms and conditions of
the advance line [of credit] established by the [PNB]." PNB had the right under
the Surety Bond
to proceed directly against R & B Surety "without the necessity of first exhaust
ing the assets" of
the principal obligor, PAGRICO. The Surety Bond also provided that R & B Surety
s liability was
not to be limited to the principal sum of P400,000.00, but would also include "a
ccrued interest"
on the said amount "plus all expenses, charges or other legal costs incident to
collection of the
obligation [of R & B Surety]" under the Surety Bond.
When PAGRICO failed to comply with its Principal Obligation to the
PNB, the PNB
demanded payment from R & B Surety of the sum of P400,000.00, the f
ull amount of the
Principal Obligation. R & B Surety made a series of payments to PNB by virtue of
that demand
totalling P70,000.00 evidenced by detailed vouchers and receipts.
R & B Surety in turn sent formal demand letters to petitioners Jos
eph Cochingyan, Jr.
and Jose K. Villanueva for reimbursement of the payments made by it
to the PNB and for a
discharge of its liability to the PNB under the Surety Bond. When petitioners fa
iled to heed its
demands, R & B Surety brought suit against Joseph Cochingyan, Jr., Jo
se K. Villanueva and Liu
Tua Ben in the Court of First Instance of Manila.
Petitioner Joseph Cochingyan, Jr. in his answer maintained that the
Indemnity
Agreement he executed in favor of R & B Surety: (i) did not express
the true intent of the
parties thereto in that he had been asked by R & B Surety to execute the Indemni
ty Agreement
merely in order to make it appear that R & B Surety had complied with the requir
ements of the
PNB that credit lines be secured; (ii) was executed so that R & B Surety could s
how that it was
complying with the regulations of the Insurance Commission concerning b
onding companies;
(iii) that R & B Surety had assured him that the execution of the
agreement was a mere
formality and that he was to be considered a stranger to the transaction between
the PNB and
R & B Surety; and (iv) that R & B Surety was estopped from enforcing the Indemni
ty Agreement
as against him.
Petitioner Jose K. Villanueva claimed in his answer that. (i) he ha
d executed the
Indemnity Agreement in favor of R & B Surety only "for accommodation
purposes" and that it
did not express their true intention; (ii) that the Principal Obligati
on of PAGRICO to the PNB
secured by the Surety Bond had already been assumed by CCM by virtue of a Trust
Agreement
entered into with the PNB, where CCM represented by Joseph Cochingyan, Jr. under
took to pay
the Principal Obligation of PAGRICO to the PNB; (iii) that his obliga
tion under the Indemnity
Agreement was thereby extinguished by novation arising from the change of debtor
under the
Principal Obligation; and (iv) that the filing of the complaint was premature, c
onsidering that R
& B Surety filed the case against him as indemnitor although the PNB
had not yet proceeded
against R & B Surety to enforce the latter s liability under the Surety Bond.
ISSUE:
Whether or not the Trust Agreement had extinguished, by novation, the obligati
on of R
& B Surety to the PNB under the Surety Bond which, in turn, extinguished the obl
igations of the
petitioners under the Indemnity Agreements
HELD:
NO
Novation is not implied when the parties to the new obligation expr
esslly negated the
lapsing of the old obligation.
Novation is the extinguishment of an obligation by the substitution
or change of the
obligation by a subsequent one which terminates it, either by changing
its object or principal
conditions, or by substituting a new debtor in place of the old one,
or by subrogating a third
person to the rights of the creditor. Novation through a change of t
he object or principal
conditions of an existing obligation is referred to as objective (or
real) novation. Novation by
the change of either the person of the debtor or of the creditor is
described as subjective (or
personal) novation. Novation may also be both objective and subjective
(mixed) at the same
time. In both objective and subjective novation, a dual purpose is ac
hieved - an obligation is
extinguished and a new one is created in lieu thereof. If objective novation is
to take place, it is
imperative that the new obligation expressly declare that the old obli
gation is thereby
extinguished, or that the new obligation be on every point incompatible with the
old one.
If subjective novation by a change in the person of the debtor is
to occur, it is not
enough that the juridical relation between the parties to the original
contract is extended to a
third person. It is essential that the old debtor be released from t
he obligation, and the third
person or new debtor take his place in the new relation. If the old
debtor is not released, no
novation occurs and the third person who has assumed the obligation o
f the debtor becomes
merely a co-debtor or surety or a co surety. The Trust Agreement exp
ressly provides for the
continuing subsistence of that obligation by stipulating that "the Trust Agreeme
nt] shall not in
any manner release" R & B Surety from its obligation under the Suret
y Bond. Neither can the
petitioners anchor their defense on implied novation. Absent an unequiv
ocal declaration of
extinguishment of a pre-existing obligation, a showing of complete incompatibili

ty between the
old and the new obligation (and nothing else) would sustain a finding
of novation by
implication. But where, as in this case, the parties to the new obligation expre
ssly recognize the
continuing existence and validity of the old one, where, in other wor
ds, the parties expressly
negated the lapsing of the old obligation, there can be no novation.
ARTICLE 1292
BALILA VS. IAC (155 SCRA 262)
FACTS:
The petition began as an amicable settlement between the petitioner Sp
ouses and the
private respondents Guadalupe C. Vda. De Del Castillo and Waldo del Castillo ove
r 2 parcels of
land situated in Villasis, Pangasinan. The amicable settlement was approved by
the trial court
and was made the basis of its decision ordering the parties to compl
y strictly with the terms
and conditions embodied in said amicable settlement. The salient points
of the amicable
settlement shows that the spouses admitted "having sold under a pacto de retro s
ale the parcels
of land described in the complaint in the amount of P84,000.00" and that they "h
ereby promise
to pay the said amount within the period of 4 months but not later than 15 May 1
5 1981.". The
Spouses was subsequently able to redeem one of the parcels of land. However, th
e Del Castillos
filed a motion for a hearing on the consolidation of the remaining parcels of la
nd alleging that
the trial courts decision remained unenforced.
The Spouses opposed the
same alleging that
they had made partial payments of their obligation through the Del Ca
stillos attorney in fact
and son, Waldo del Castillo, as well as to the Sheriff.
The trial
court affirmed the requested
consolidation.
While the Order of the trial court had not yet been
enforced, the Spouses paid
the Del Castillos the amount of P28,800.00 through the son Waldo del Castillo, t
hus leaving an
unpaid balance of P35,200.00.
A Certification signed by Waldo shows
that defendants were
given a period of 45 days within which to pay the balance. The said Certificati
on supported the
Spouses motion for reconsideration and supplemental motion for reconsideration o
f the order
reconsolidation of title, which motions were both denied by the trial
court, prompting the
Spouses to file a petition for certiorari, prohibition and mandamus with pre inj
unction petition
with the Intermediate Appellate Court (IAC) seeking to annul and set aside the ass
ailed order
and the order denying their motion for reconsideration. However, the IAC susta
ined the trial
court. Hence, this petition by the spouses relying on the argument that the dec
ision based upon
the agreement of the parties was novated upon subsequent amicable sett
lement of the said
parties.
ISSUE:
Whether or not the parties amicable settlement approved by the trial
court novated
the previous agreement of the parties.
HELD:
Yes, the amicable settlement novated the previous agreement of the parties.
The Supreme Court (SC) found merit in the petition and was given due course and th
e
assailed decision was set aside.
The SC held that in Santos vs. Acuna (100 Phil 230, 237), it was c
ontended that a lower court
decision was novated by the subsequent agreement of the parties.
Imp
licit in this Court s
ruling is that such a plea would merit approval if indeed that was what the part
ies intended.
ARTICLE 1292
PEOPLE S BANK AND TRUST COMPANY VS. SYVEL S INCORPORATED, ANTONIO Y. SYYAP
(164 SCRA 247)
FACTS:
This is an action for foreclosure of chattel mortgage executed in favor of the p
laintiff by
the defendant Syvel s Incorporated on its stocks of goods, personal pr
operties and other
materials owned by it and located at its stores or warehouses The ch
attel mortgage was in
connection with a credit commercial line in the amount of P900,000.00
granted the said
defendant corporation, the expiry date of which was May 20, 1966. On
May 20, 1965,
defendants Antonio V. Syyap and Angel Y. Syyap executed an undertaking
in favor of the
plaintiff whereby they both agreed to guarantee absolutely and uncondit
ionally and without
the benefit of exclusion the full and prompt payment of any indebtedn
ess to be incurred on
account of the said credit line. Against the credit line granted the
defendant Syvel s
Incorporated the latter drew advances in the form of promissory notes. In view o
f the failure of
the defendant corporation to make payment in accordance with the terms
and conditions
agreed upon in the Commercial Credit Agreement the plaintiff started t
o foreclose extra
judicially the chattel mortgage. After the filing of this case and du
ring its pendency, Syyap
proposed to have the case settled. Mr.Syyap offered to execute a real
estate mortgage on his
real property located in Bacoor, Cavite. Mr. De las Alas consented, a

nd so the Real Estate
Mortgage was executed by the defendant Antonio V. Syyap and his wife Margarita B
engcoSyyap
on June 22, 1967. In that deed of mortgage, defendant Syyap admitted that as of
June 16, 1967,
the indebtedness of Syvel s Incorporated was P601,633.01. No part of t
he amount has been
paid by either of the defendants. Hence their liabilities cannot be questioned.
ISSUE:
WON the obligation secured by the Chattel Mortgage sought to be forec
losed was
novated by the subsequent execution by Syyap of a real estate mortgage as additi
onal collateral
to the obligation secured by said chattel mortgage.
HELD:
Novation takes place when the object or principal condition of an obligation is
changed
or altered. It is elementary that novation is never presumed; it must
be explicitly stated or
there must be manifest incompatibility between the old and the new ob
ligations in every
aspect.
In the case at bar, there is nothing in the Real Estate Mortgage wh
ich supports
appellants submission. The contract on its face does not show the exis
tence of an explicit
novation nor incompatibility on every point between the "old and the "new" agree
ments as the
second contract evidently indicates that the same was executed as new
additional security to
the chattel mortgage previously entered into by the parties.
Moreover, appellants agreed that the chattel mortgage "shall remain in full for
ce and shall not
be impaired by this (real estate) mortgage."
It is clear, therefore, that a novation was not intended. The real estate mortga
ge was evidently
taken as additional security for the performance of the contract.
ABEGAIL B. RAMOS
ARTICLE 1292
GARCIA VS. COURT OF APPEALS (191 SCRA 493)
FACTS:
On April 15, 1977, Western Minolco Corporation (WMC) secured from the
Philippine
Investments Systems Organization (PISO) two loans amounting to Php 2, 500,000 an
d Php
1, 000,000 to be paid on May 30, 1977.
On the same date, Antonio Gatcia, Jr. and Ernest Kahn executed a surety agreeme
nt binding
themselves jointly and severally for the payment of the Php 2, 5000,000 loan on
due date.
After repeated demands wherein WMC still did not pay the loans, Garcia was sue
d by Lasal
Development Corporation which the credit was assigned to by PISO, for not paying
the loan
as part of the surety agreement.
On May 30, 1983, Garcia moved that the complaint be dismissed on th
e ground that the
principal obligation has been novated.
He claimed that there was novation due to the fact that there was
re-structuring of the
payment scheme and thus, the existing contract has been novated.
The trial court granted the petition of Garcia but it was later reversed by the
CA.
ISSUE:
WON there was indeed novation of the old contract or obligation
HELD:
NO. As a general rule no form of words or writing id necessary to give effect t
o a novation.
Nevertheless, since the parties involved here are corporations, it must first be
proved that
the contracts, assuming they were made, were executed by the persons
possessing the
proper authority to bind their respective principals.
Annexes 1-4 are
a mere exchange of
correspondence between the officers of WMC and DBP.
Although they co
ntain the
provisions and proposals that, according to petitioner, should suffice
to establish that the
original contract between WMC and PISO has been materially altered, th
ey cannot be
considered per se sufficient to give rise to a valid new obligation.
The Supreme Court held that Novation of contract cannot be presumed.
In order that an
obligation may be extinguished by another which substitutes the same, it is impe
rative that
it be so declared in unequivocal terms, or that the old and new obl
igations be on every
point compatible with each other.
In every novation, there are four essential requisites: 1)A previous
valid obligation
2)Agreement of the parties to a new contract 3) Extinguishment of the
old contract
4)Validity of the new one
Novation requires the creation of new contractual relations as well as extingui
shment of the
old. There the creation of the new one. There must be consent of al
l the parties to the
substitution, resulting in the extinction of the old obligation and the creation
of a new valid
one.
The legal doctrine is that an obligation to pay a sum of money is
not novated in a new

instrument by changing the term of payment ad adding other obligations not incom
patible
with the old one.
It is not proper to consider an obligation novated as in the case at bar by the
mere granting
of extension of payment which did not even alter its essence.
The Supreme Court denied the petition of Garcia and affirmed the decision of th
e CA
ARTICLE 1292
GUERRERO VS. COURT OF APPEALS (29 SCRA 791)
FACTS:
Jose Robles borrowed P25,000 from Chan Too. Alto Surety & Insurance Co., Inc. (A
LTO)
bound itself jointly and severally with Robles and executed a bond for P25,000 i
n favor of Chan
Too as guarantor. Robles, Vicente Legarda and petitioner Rodolfo Guerre
ro executed an
"Agreement of Counter-Guaranty with Mortgage and Pledge," undertaking jointly an
d severally
to indemnify ALTO for any damage, loss, payments of whatever kind or
nature, including
attorney s fees, which might be incurred by ALTO as a result of the bond issued.
Robles failed to pay. Chan Too instituted civil case 29357 which lead
the parties to a
compromise agreement requiring Robles to pay a total of P35,750, P25,0
00 of which is still
guaranteed by ALTO plus P300 attorney fees. Robles again defaulted.
ALTO, under the counter-guaranty agreement, sought the recovery of P25,000 paid
with
12% interest rate per annum and 15% of the P300 attorneys fees from
petitioner Guerrero.
Petitioner claims to have been released from his obligation by novation on the e
stablishment of
the new compromise agreement between Robles-ALTO and Too.
ISSUES:
Whether or not the subsequent compromise agreement extinguished by novation the
counterguaranty agreement and released petitioner Guerrero from his solidary liability.
HELD:
There is no novation in this case. Art. 1292 does not apply becaus
e the new and old
obligations are not in any way related to each other and still subsi
sts despite the other.
Petitioner Guerrero is a party only to the counter-guaranty agreement
which solidarily
obligates him, Legarda and Robles to compensate for any expenditures of ALTO as
a guarantor
in the different obligation between Robles and Too. Thus ALTO has every right to
claim against
Guerrero as his solidary debtor.
ARTICLE 1292
FORTUNE MOTORS (PHILS.) CORPORATION VS. THE HONORABLE COURT OF APPEALS (7
FEBRUARY 1997)
FACTS:
On or about August 4, 1981, Joseph L. G. Chua and Petitioner Edgar Lee Rodriguez
a each
executed an undated Surety Undertaking where they absolutely, unconditiona
lly and
solidarily guarantee(d) to Respondent Filinvest Credit Corporation (Filinv
est) and its
affiliated and subsidiary companies the full, faithful and prompt perfor
mance, payment and
discharge of any and all obligations and agreements of Fortune Motors
(Phils.) Corporation
(Fortune) under or with respect to any and all such contracts and any
and all other
agreements.
On April 5, 1982, Petitioner Fortune, Respondent Filinvest
and Canlubang
Automotive Resources Corporation (CARCO) entered into an Automotive Wholesa
le
Financing Agreement (Financing Agreement) under which CARCO will deliver m
otor
vehicles to Fortune for the purpose of resale in the latters ordinary
course of business;
Fortune, in turn, will execute trust receipts over said vehicles and
accept drafts drawn by
CARCO, which will discount the same together with the trust receipts
and invoices and assign
them in favor of Respondent Filinvest, which will pay the motor vehicles for For
tune. Under the
same agreement, Petitioner Fortune, as trustee of the motor vehicles, wa
s to report and remit
proceeds of any sale for cash or on terms to Respondent Filinvest im
mediately without
necessity of demand.
Several motor vehicles were delivered by CARCO to Fortune, and trust receipts co
vered
by demand drafts and deeds of assignment were executed in favor of R
espondent Filinvest.
However, when the demand drafts matured, not all the proceeds of the
vehicles which
Petitioner Fortune had sold were remitted to Respondent Filinvest. Fort
une likewise failed to
turn over to Filinvest several unsold motor vehicles covered by the t
rust receipts. Thus,
Filinvest demanded for the payment of its unsettled account in the am
ount of P1,302,811.00.
Filinvest sent similar demand letters separately to Chua and Rodrigueza
as sureties. Despite
said demands, the amount was not paid. Hence, Filinvest filed in the
Regional Trial Court of
Manila a complaint for a sum of money with preliminary attachment against Fortun
e, Chua and
Rodrigueza. In an order dated September 26, 1984, the trial court declared that
there was no
factual issue to be resolved except for the correct balance of defendants account
with Filinvest
as agreed upon by the parties during pretrial.
Subsequently, Filinvest presented testimonial and documentary evidence. D
efendants
(petitioners herein), instead of presenting their evidence, filed a Moti
on for Judgment on
Demurrer to Evidence anchored principally on the ground that the Surety Undertaki
ngs were
null and void because, at the time they were executed, there was no
principal obligation
existing.
On December 17, 1985, the trial court rendered its decisio
n earlier cited ordering
Fortune, Chua and Rodrigueza to pay Filinvest, jointly and severally, the sum of
P1,348,033.83
plus interest at the rate of P922.53 per day from April 1, 1985 unt
il fully paid, P50,000.00 in
attorneys fees, anotherP50,000.00 in liquidated damages and costs of suit.
ISSUE:
Whether or not there was a novation.
HELD:
There was no novation.
There are only two ways to effect novation
and thereby
extinguish an obligation. First, novation must be explicitly stated and
declared in unequivocal
terms. Novation is never presumed. Second, the old and new obligations must be i
ncompatible
on every point. The test of incompatibility is whether the two obliga
tions can stand together,
each one having its independent existence. If they cannot, they are incompatible
and the latter
obligation novates the first. Novation must be established either by t
he express terms of the
new agreement or by the acts of the parties clearly demonstrating the intent to
dissolve the old
obligation as a consideration for the emergence of the new one. The
will to novate, whether
totally or partially, must appear by express agreement of the parties, or by the
ir acts which are
too clear and unequivocal to be mistaken.
Under the surety undertakings however, the obligation of the sureties
referred to absolutely, unconditionally and solidarily guaranteeing the full, fa
ithful and prompt
performance, payment and discharge of all obligations of Petitioner For
tune with respect to
any and all contracts and other agreements with Respondent Filinvest i
n force at that time or
thereafter made. There were no qualifications, conditions or reservation
s stated therein as to
the extent of the suretyship. The Financing Agreement, on the other hand, merely
detailed the
obligations of Fortune to CARCO (succeeded by Filinvest as assignee).
The allegation of
novation by petitioners is, therefore, misplaced. There is no incompati
bility of obligations to
speak of in the two contracts. They can stand together without conflict.
MARCO CARLO S. SANA
ARTICLE 1292
BROADWAY CENTRUM CONDOMINIUM CORPORATION V. TROPICAL HUT FOOD MARKET,
INC. (224 SCRA 239)
FACTS:
A contract of lease was agreed upon between Broadway, lessor, and T
ropical Hut,
lessee, regarding a 3,042.19 square meter portion of the Broadway Cent
rum Commercial
Complex for a period of 10 years starting January 1981. Basic monthly
rental for the leased
premise is P120,000 during the first 3 years, P140,000 per month during the next
three years,
and 165,000 per month during the last 4 years.
During the first year, no problems occurred. In 1982, however, lesse
e wrote the lessor
stating that rental payments were equivalent to 7.31% of lessee s actu
al sales in 1981, while
gross profit rate was only 10%. The contract was based merely on lesse s project
ion that they
could reach an average sale of P120,000 a day. Lessee s projection fo
r 1982 was only P23M,
meaning a rental rate of 6.08% of sales. For other branches, the normal rate was
1.5% on sales.
Thus, lessee proposed to reduce monthly rentals to P50,000 or 2% of monthly sale
s whichever
is higher.
Lessor responded on April 6, 1982, stating that it believed that the problems
of lessee s
supermarket were within the control of lessee s management. Lessor offe
red 6 suggestions
which, if implemented, should result in increased sales of at least 15% in succe
eding months. In
the meantime, lessor made a counter-proposal consisting of conditional reduction
of rental by
P20,000 for a limited period of 4 months, with the same will be paid back to les
sor and spread
over the last six months of the year should the target of 15% increase be achiev
ed by the fourth
month. However, if after the improvements introduced, sales do not inc
rease by 5%, the
reduction worth P80,000 will not have to be paid. Any reduction in r
ental is merely a
temporary suspension of the original rate not an amendment thereto.
When officers of lessor met with the president of lessee regarding
the temporary
closure of Doa Juana Rodriguez Avenue, a major thoroughfare adjacent to

the Commercial
Complex, it was agreed that with regard to the letter dated April 6, 1982, it is
made formal for a
provisional and temporary agreement to a reduction of month rentals on
the basis of 2% of
gross receipts or P60,000 whichever is higher. Gross receipts should be construe
d as the total
sales and receipts from sublessees
of the area leased. Also agreed
upon was the return of a
portion of
the leased premise totalling 466.56 square meters by the
end of April. The
temporary alteration in rental was conditioned on the implementation of t
he suggestions first
conveyed by lessor.
After the expansion of
Doa Juana Rodriguez Avenue was completed, le
ssor sent a
letter dated December 15, 1982 stating that the provisional reduction
of monthly rentals can
no longer be extended in its present form and it shall increase to P100,000. Thi
s increase shall
be implemented gradually as follows: P80,000 effective Jan. 1983 and P100,000 ef
fective April
1983. Lessee wrote again with the hopes of maintaining the present mo
nthly rental
arrangement, to no avail with lessor expressing that losses in operati
ons incurred were also
being experienced by their corporation. However, lessor, evidently desir
ous of keeping lessee
as a tenant pushed back the implementation of the increase to P100,000 until Jul
y 1983.
Lessee tried once more to lower the monthly rates, but lessor stated that the
matter was
no longer negotiable. Finally, on April 15, 1983, Mr. Mariano Que from lessee co
rporation sent a
letter to the President of lessor corporation stating that, they canno
t agree to an increase in
rentals at this time and to do so would put them in a financial situation worse
than they were in
before the lease agreement. He also stated that lessor cannot arbitrar
ily and unilaterally
increase the rentals, as this is a matter which should be mutually a
greed upon. President of
lessor corporation replied by stating that, they are appalled by the apparent at
tempt to distort
the crystal clear arrangement reached on April 1982 and that
the sa
me was temporary and
provisional.
A week later, lessee corporation filed a complaint before the Region
al Trial Court of
Quezon City, seeking a restraining order or preliminary injunction to
prevent lessor
corporation from invoking and implementing the Lease Contract and that
the rental provided
for in the letter-agreement of April 1982 should subsist while the lo
w volume of sale still
continues.
ISSUE:
Whether the letter-agreement of April 1982 novated the Contract of Lease.

HELD:
Novation is the extinguishment of an obligation by the substitution
of that obligation
with a subsequent one which terminates it., either by changing its ob
ject or principal
conditions or by substitution a new debtor in place of the old one.
If objective novation is to
take place, it is essential that the new obligation expressly declare that the o
ld obligation is to
be extinguished or that the new obligation be on every point incompat
ible with the old one.
The letter-agreement of April 1982 did not constitute a novation whether partial
or total of the
Contract of Lease between Broadway and Tropical Hut.
First, the letter-agreement by its own terms, is a provisional and temporary a
greement
to a reduction of monthly rental. The same letter also referred to t
he reduction of rental as a
temporary alteration of rental which was conditioned upon implementation by Trop
ical of the
6 principal suggestions Broadway conveyed. Second, the formal notarized Lease Co
ntract made
it clear that a temporary and provisional concessional reduction of re
ntals which might be
granted was not be construed as alteration or waiver of any of the
terms therein. Third, the
course of negotiations before the execution of the letter-agreement clearly indi
cated that what
they were negotiating was a temporary and provisional reduction of ren
tals. Lastly, the
discussion in their correspondence shows that the reduction rentals agr
eed upon was not to
persist for the rest of the life of the 10 year Contract of Lease.
ARTICLE 1292
CRUZ v. COURT OF APPEALS (293 SCRA 239)
FACTS:
Delfin I. Cruz and Adoracion Cruz were spouses and their children wer
e Thelma,
Nerissa, Arnel and Gerry Cruz.
Upon the death of Delfin I. Cruz, h
is surviving spouse and
children executed on August 22, 1977 a notarized Deed of Partial Part
ition, each one of them
was given a share of several parcels of registered lands all situated
in Taytay, Rizal. The
following day, Adoracion and children executed a Memorandum Agreement w
hich provided
that the parties hereto are common co-owners pro-indiviso in equal sha
res of the registered
real properties. That despite the execution of this Deed of Partial P
artition and the eventual
disposal or sale of their respective shares, they agreed among them to bind them
selves to one
another that they shall share alike and received equal shares from th
e proceeds of the sale of
any lot or lots allotted to and adjudicated in their individual names

by virtue of this deed of
partial partition.
Subsequently, they caused the consolidation and subdivisions of the lan
ds they
respectively inherited from the late Delfin I. Cruz per Deed of Partial Partitio
n. After that, they
registered the Deed of Partial Partition and subdivision plans and tit
les were issued in their
names.
Meanwhile, the spouses Eliseo and Virginia Malolos filed Civil against
the spouses
Nerissa Cruz-Tamayo and Nelson Tamayo for a sum of money.
The Court
Rizal rendered a decision in favor of Eliseo and Virginia condemning
the spouses Nerissa and
Nelson Tamayo to pay them P126,529.00 with 12% interest per annum fro
m the filing of the
complaint plus P5,000.00 attorneys fee.
The sheriff of the court levied upon the lands inherited by Nerissa
Cruz-Tamayo.
On
June 29, 1983, these properties were sold in an execution sale to th
e highest bidders, the
spouses Eliseo and Virginia Malolos. Adoracion Cruz, and the siblings
of Nerissa entered the
picture by filing in the lower court a motion for leave to intervene and oppose
[the] Maloloses
motion. The Cruzes alleged that they were co-owners of Nerissa Cruz Tamayo over
the lands in
question.
ISSUE:
Whether or not the Memorandum of Agreement revoke, cancel or supersede
the Deed
of Partial Partition.
HELD:
No. In their Memorandum, petitioners insist that the MOA categorically
and
unmistakably named and covenanted them as co-owners of the parcels in
issue and novated
their earlier agreement, the Deed of Partial Partition. The provision
in the MOA does not
novate, much less cancel, the earlier DPP. Novation requires the concurrence of
the following:
(1) there is a previous valid obligation; (2) the parties concerned ag
ree to a new contract; (3)
the old contract is extinguished; and (4) there is a valid new contract. Novatio
n may be express
or implied. Article 1292 of the Code provides: In order that an obligation may b
e extinguished
by another which substitutes the same, it is imperative that it be s
o declared in unequivocal
terms or that the old and new obligations be on every point incompatible with ea
ch other.
The MOA falls short of producing a novation, because it does not express a clear
intent
to dissolve the old obligation as a consideration for the emergence o
f the new one. Likewise,
petitioners fail to show that the DPP and the MOA are materially and
substantially
incompatible with each other.
Petitioners admit that, under the MOA,
they and the Tamayo
spouses agreed to equally share in the proceeds of the sale of the lots. Indeed,
the DPP granted
title to the lots in question to the co-owner to whom they were assigned, and th
e MOA created
an obligation on the part of such co-owner to share with the others the proceeds
of the sale of
such parcels.
There is no incompatibility between these two contracts
. Both documents can
exist together and must be so interpreted as to give life to both.
The Memorandum of Agreement merely created an obligation on the part
of absolute
owner Nerissa Cruz Tamayo to share with the appellees with the procee
ds of the sale of said
properties. The obligation of the owner of a piece of land to share with somebod
y with its fruits
or the proceeds of its sale does not necessarily impair his dominion
over the property much
less make the beneficiary his co-owner thereof.
AIDA MAY P. SILVA
ARTICLE 1292
SECURITY BANK V. CUENCA (341 SCRA 781)
FACTS:
Sta. Ines Melale (Sta. Ines) is a corporation engaged in logging operat
ions.
On 10
November 1980, Security Bank granted appellant Sta. Ines a credit line in the am
ount of P 8M
to assist the latter in meeting the additional capitalization requireme
nts of its logging
operations. Rodolfo M. Cuenca, President of the Sta. Ines, bound himself as sur
ety. Five years
after, Cuenca resigned as President.
On 18 February 1988, Security Bank and Sta. Ines, without notice to or the prior
consent
of Cuenca, agreed to restructure the past due obligations of Sta. Ines.
Sta. Ines defaulted in the payment of its restructured loan obligation
s.
Security Bank
filed a complaint for collection of sum of money.
ISSUE:
Was it unequivocally declared that the second loan shall extinguish the first?
Does this
second loan bind the surety of the first when it did not consent thereto?
HELD:
An obligation may be extinguished by novation, pursuant to Article 129
2 of the Civil
Code.
Security Bank contends that there was no absolute incompatibility between the ol
d and
the new obligations, and that the latter did not extinguish the earlier one. It
further argues that
the 1989 Agreement did not change the original loan in respect to th
e parties involved or the
obligations incurred. It adds that the terms of the 1989 Contract wer
e "not more onerous.
Since the original credit accomodation was not extinguished, it conclud
es that Cuenca is still
liable under the Indemnity Agreement.
The Supreme Court reject these contentions. The requisites of novation
are present in
this case. The 1989 Loan Agreement extinguished the obligation obtained
under the 1980
credit accomodation. This is evident from its explicit provision to "liquidate"
the principal and
the interest of the earlier indebtedness, as the following shows:
"1.02. Purpose. The First Loan shall be applied to liquidate the principal porti
on
of the Borrowers present total outstanding Indebtedness to the Lender (
the
"Indebtedness") while the Second Loan shall be applied to liquidate the past due
interest and penalty portion of the Indebtedness."
Furthermore, several incompatibilities between the 1989 Agreement and th
e 1980
original obligation demonstrate that the two cannot coexist. While the
1980 credit
accommodation had stipulated that the amount of loan was not to exceed P8 milli
on, the 1989
Agreement provided that the loan was P12.2 million. The periods for p
ayment were also
different.
Likewise, the later contract contained conditions, "positive covenants"
and "negative
covenants" not found in the earlier obligation. As an example of a p
ositive covenant, Sta. Ines
undertook "from time to time and upon request by the Lender, [to] pe
rform such further acts
and/or execute and deliver such additional documents and writings as m
ay be necessary or
proper to effectively carry out the provisions and purposes of this Loan Agreeme
nt. Likewise,
Sta. Ines agreed that it would not create any mortgage or encumbrance on any ass
et owned or
hereafter acquired, nor would it participate in any merger or consolidation.
Since the 1989 Loan Agreement had extinguished the original credit acc
ommodation,
the Indemnity Agreement, an accessory obligation, was necessarily extinguished a
lso, pursuant
to Article 1296 of the Civil Code, which provides:
"ART. 1296. When the principal obligation is extinguished in consequenc

e of a
novation, accessory obligations may subsist only insofar as they may b
enefit
third persons who did not give their consent."
Alleged Extension
Petitioner insists that the 1989 Loan Agreement was a mere renewal or extension
of the
P8 million original accommodation; it was not a novation.
This argument must be rejected. To
begin with, the 1989 Loan Agreement expressly stipulated that its purpo
se was to "liquidate,"
not to renew or extend, the outstanding indebtedness. Moreover, respond
ent did not sign or
consent to the 1989 Loan Agreement, which had allegedly extended the
original P8 million
credit facility. Hence, his obligation as a surety should be deemed e
xtinguished, pursuant to
Article 2079 of the Civil Code, which specifically states that "[a]n
extension granted to the
debtor by the creditor without the consent of the guarantor extinguishes the gua
ranty. x x x." In
an earlier case, the Court explained the rationale of this provision in this wis
e:
"The theory behind Article 2079 is that an extension of time given t
o the
principal debtor by the creditor without the suretys consent would deprive the
surety of his right to pay the creditor and to be immediately subrog
ated to the
creditors remedies against the principal debtor upon the maturity date.
The
surety is said to be entitled to protect himself against the continge
ncy of the
principal debtor or the indemnitors becoming insolvent during the exten
ded
period."
ARTICLE 1292
AJAX MARKETING VS CA (248 SCRA 222)
FACTS:
Ylang-Ylang Merchandising Company obtained a loan in the amount of P2
50,000.00 from
the Metropolitan Bank and Trust Company (Metropolitan Bank), and to secure payme
nt of
the same, spouses Marcial See and Lilian Tan constituted a real estate mortgage
in favor of
said bank over their property covered by TCT No. 105233.The mortgage was annotat
ed at
the back of the title.
After the partnership had changed its name to Ajax Marketing Company (AMC), it
obtained
a loan in the sum of P150,000.00 from Metropolitan Bank. Again to secure the loa
n, spouses
See and Tan executed in favor of said bank a second mortgage over the same prope
rty.The
mortgage was again duly annotated at the back of TCT No. 105233.
On February 19, 1979, the partnership (AMC) was converted into a cor
poration as Ajax
Marketing and Development Corporation (AMDC). AMDC obtained from Metropolitan Ba
nk
a loan of P600,000.00, the payment of which was secured by another mor
tgage in favor of
said bank over the same realty. Again, the third mortgage was annotated at the b
ack of TCT
No. 105233.
In December 1980, the three loans with an aggregate amount of P1M w
ere re-structured
and consolidated into one loan and AMCD, represented by Tan as Presid
ent and in his
personal capacity as solidary co-obligor, and Tan as Vice-President/Trea
surer and in her
personal capacity as solidary co-obligor, executed a Promissory Note.
Petitioners then argue that a novation occurred when their three loan
s, all secured by the
same real estate property, were consolidated into a single loan of P1
million under
Promissory Note No. BDS-3605 (PN), thereby extinguishing their monetary obligati
ons and
releasing the mortgaged property from liability.
ISSUE:
W/N the Honorable Court of Appeals erred in holding that the consolidation of th
e three
loans granted separately to three entities into a single loan of P1.0
Million was a mere
restructuring and did not effect a novation of the loan as to extinguish the acc
essory mortgage
contracts.
HELD:
Novation is the extinguishment of an obligation by the substitution or
change of the
obligation by a subsequent one which extinguishes or modifies the first, either
by changing the
object or principal conditions, or by substituting another in place of
the debtor, or by
subrogating a third person in the rights of the creditor.
Novation is never presumed and it will not be allowed unless it is clearly shown
by express
agreement, or by acts of equal import. Thus, to effect an objective novation it
is imperative that
the new obligation expressly declare that the old obligation is thereby extingui
shed, or that the
new obligation be on every point incompatible with the new one.
There is nothing in the records to show the unequivocal intent of the parties to
novate the
three loan agreements through the execution of the PN. Its provisions yield no i
ndication of the
extinguishment of, or an incompatibility with, the three loan agreement
s secured by the real
estate mortgages over the property. It merely restructured and renewed
the three previous
loans to expediently make the loans current.
There was no change in the object of the prior obligations.Neither ca
n it be validly
contended that there was a change, or substitution in the persons of
either the creditor
(Metrobank) or more specifically the debtors (petitioners) upon the consolidatio
n of the loans.
The bare fact of petitioners conversion from a partnership to a corp
oration did not make
petitioner AJAX a third person or new debtor.If at all, petitioner AJAX only bec
ame a co-debtor
or surety. Without express release of the debtor from the obligation, any third
party who may
thereafter assume the obligation shall be considered merely as co-debto
r or surety. Novation
arising from a purported change in the person of the debtor must be clear and ex
press because,
to repeat, it is never presumed.
KAREN G. SUPAPO
ARTICLE 1293
RODRIGUEZ V. REYES (37 SCRA 195)
FACTS:
Jose Dualan successfully bid for a mortgaged lot located in Manila.Bef
ore the auction
sale, the lot evidenced by TCT No. 48979 was already mortgaged with the Developm
ent Bank of
the Philippines (DBP), under which there is allegedly an outstanding b
alance worth
P37,121.76. All prospective buyers and bidders were duly notified about
the mortgaged debt.
Alberto Benipayo and the eleven other co-heirs were the vendors/owners
of the
abovementioned lot.
After the Sheriff had filed his return, the eleven other co-heirs moved for the
approval of
the sale. Commenting on the aforesaid motion,Alberto Benipayo and Jose
Dualan, as part of
their petition, prayed that the Court of First Instance order the paym
ent of the mortgage debt
in favor of DBP be deducted from the proceeds of the auction sale. The
court ruled otherwise.
The Coronels shall clear said property of all encumbrances that were incurred by
them before
the auction sales.
ISSUE:
Can substitution takes place without DBPs consent?
HELD:
No. The Court held that by buying the property covered by TCT No. 48
979 with notice
that it was mortgaged, Dualan only undertook either to pay or else allow the lan
ds being sold if
the mortgage creditor could not or did not obtain payment from the p
rincipal debt when the
debt matured. Nothing else. Certainly the buyer did not obligate himse
lf to replace the debtor
in the principal obligation, and he could not do so in law without the creditors
consent. Article
1293 of the Civil Code governs. Article 1293 explicitly provides: Novat
ion which consists in
substituting a new debtor in the place of the original one, may be
made even without the
knowledge or against the will of the latter, but not without the consent of the
creditor.
JUSTO PAULO TORRES
ARTICLE 1279
GAW VS IAC (220 SCRA 405)
FACTS:
Petition for certiorari, Henry Gaw through his trading firm K. H. Gaw Enterpri
ses made
a dealership agreement with Prime White Cement Corporation (PWCC) on December 12
, 1978
for delivery of construction materials amounting to P200000 which would then be
amounting
to P500000 with the scheme stated in contract. Allocation would equal
6500 bags a month to
increase its loan and enable to be competitive with the market subject to executio
n within 90
days of perfection. On February2, 1979,he made a marketing agreement w
ith Uy Diet Tan
representing Foundation Commercial, a single proprietorship. Contract contains G
aw as one of
four dealers engaged with PWCC. The parties agreed to the following terms.
"1 That the PARTY OF THE SECOND PART (Tan) shall be entitled to get
directly from Prime
White Cement Corporation monthly at least 50% of the allocation of wh
ite cement of the
PARTY OF THE FIRST PART (Gaw) equivalent to at least 3,250 bags a m
onth and shall pay
directly the value of the cement to Prime White Cement Corporation;
2. That the PARTY OF THE SECOND PART shall deposit to Prime White Cement Corpora
tion the
sum of TWO HUNDRED AND FIFTY THOUSAND PESOS (P250,000.00), Philippine Currency,
by
way of deposit and as required in its Contract herein marked as Anne
x A in the name of the
PARTY OF THE SECOND PART and repayment by Prime White Cement Corporation of the
said
amount shall likewise be directly made to the PARTY OF THE SECOND PA
RT at P10,000.00 a
month for 30 months,, beginning the month of March, 1979 as a marketin
g firm of the PARTY
OF THE FIRST PART;
3. That the PARTY OF THE SECOND PART shall pay to the PARTY OF THE FIRST PART th
e sum
of SEVENTY CENTAVOS (P0.70) per bag for every bag of white cement which the PART
OF THE
SECOND PART will withdraw from Prime White Cement Corporation, the sai
d amount to be
due and demandable every first (5) days of the next succeeding months;
4. That the PARTY OF THE SECOND PART shall pay in advance to the P
ARTY OF THE FIRST
PART the sum of FIVE THOUSAND PESOS (P5,000.00), Philippine Currency, upon the s
igning of
this Agreement and said amount shall be immediately deductable from th
e (o.70 per bag
premium paid by the former to the latter until the said amount paid in advance s
hall have been
fully paid;
5. That the PARTY OF THE SECOND PART shall invoice the sale in its own name and
shall pay to
Prime White Cement Corporation the value of the cement also in its own name;
6. All taxes due to the PARTY OF THE SECOND PART on all white ceme
nt withdrawn from
Prime White Cement Corporation shall be the sole responsibility of the said Seco
nd Party;
7. This Contract shall take effect immediately upon signing hereof and
co-terminus with the
herein Contract of the PARTY OF THE FIRST PART with Prime White Ceme
nt Corporation. In
the event that the said Contract will be extended for another five (
5) years by Prime White
Cement Corporation, the duration of this Contract shall Prime White Ce
ment Corporation, the
duration of this Contract shall also extended and co-terminus according
ly with the said
extension."
In accord with such agreement counsel for Gaw executed a letter to
the Executive
Committee of PWCC for his intent to deposit P250000 to comply with terms making
Gaw one of
four exclusive dealers associated with the cement mixers. The letter w
as rejected.
Consequently, Gaw made a deal with Mandee Commercial amounting to P250
000 to deliver
3250 bags of white cement per month for 57 months especially from the duration o
f April 1
st
of
1979 until December 31
st
of 1983 to keep up with prior payments. Since there was a breach
made by Gaw in his misrepresentation of actually being a current dealer in the t
ime of the deal
with Uy Diet Tan, said contract was never conceived. He was then mad
e to pay P100000 for

reasonable actual damages suffered in unrealized profits with interest
until fully settled. Also,
attorneys fees were assessed to the tune of P20000.
ISSUE :
W/N the award of P10000 for unrealized profits is just.
HELD:
WHEREFORE, the decision of the then Intermediate Appellate Court is he
reby
AFFIRMED, subject to the MODIFICATION that the award of P100,000.00 re
presenting the
actual damages suffered by private respondent Uy Diet Tan in the form of unreali
zed profits be
DELETED.
While it is well established that there was an error on the part
of Gaw in terms of his
compliance in his agreement with Tan, the proper remedy should have been going a
fter PWCC
but he was estopped by his action with the former. In the deals following there
was a squabble
with exorbitant figures that were not merited. It is axiomatic that n
ovation is never
presumed.It is well settled then that deals that were subsequently mad
e were to modify the
figures and not circumvent the contract because there was no express
agreement nor do the
terms not meet and coincide on every point stated.
ARTICLE 1302
CHEMPHIL V CA (251 SCRA 257)
FACTS:
On September 1984, Dynetics and Garcia filed a complaint for declarato
ry
relief/injunction against the consortium regarding the validity of the surety ag
reement entered
into by Dynetics and Garcia with the consortium, and to enjoin the l
atter from claiming,
collecting and enforcing any obligations that have been undertaken by
the former in the
agreement.
Then, Bynetics, Garcia and Matrix filed a complaint for declaratory
relief/injunction
against Security Bank and Trust Co. (SBTC case).
But the court gran
ted SBTCS prayer for the
issuance of a writ of preliminary attachment and a notice of garnishm
ent covering Garcias
shares in Chemphil (incl. the disputed shares) was served, such notice
was duly annotated in
the stock and transfer books of Chemphil. The writ of attachment was
lifted but was
subsequently reinstated.
In the consortium case, the preliminary injunction prayed for by Dyn
etics and Garcia
was denied. Hence, in July 1985, after the consortium had filed the
required bond, a writ of
attachment was issued and various real and personal properties of Dyne
tics and Garcia were
garnished, including the disputed shares, such garnishment however, was not anno
tated.
Unsatisfied with the trial courts order, the consortium appealed to t
he Court of
Appeals. During this appeal, Garcia and the consortium entered into a Compromis
e Agreement,
which was approved by the CA.
In July 1988, Garcia transferred to Ferro Chemicals, Inc. (FCI), under a Deed of
Sale, the
disputed shares and other properties for 79M. It was agreed upon that
part of the purchase
price shall be paid by FCI directly to SBTC for whatever judgment credits that m
ay be adjudged
in the latters favor and against Garcia in the aforementioned SBTC case.
In March 1989, FCI (through its Pres, Garci), issued a bank check in favor of SB
TC in the
amount of 35M. SBTC refused the check because it was not sufficient to discharge
the debt. The
check was then consigned by Dynetics and Garcia to the RTC as paymen
t for the debt in the
SBTC case.
FCI assigned some of its shares to petitioner CEIC, which includes th
e disputed shares,
which were registered and recorded in the corporate books of Chemphil in CEICs na
me.
Meanwhile, Garcia, in the consortium case, failed to comply with the
terms of the
compromise agreement. As a consequence, the consortium filed a motion for execut
ion, which
was granted by the court. The properties that were levied upon on ex
ecution include some of
his shares in Chemphil (disputed shares) previously garnished in July
1985.
In Aug 1989, the
consortium acquired the dispute shares of stock at the public auction sale.
CEIC filed a motion to intervene in the consortium case seeking th
e previous order of
the court granting the shares to the latter, for the reason that it
is the rightful owner of the
disputed shares. The disputed shares were previously owned by Garcia b
ut were sold to FCI,
which in turned assigned to CEIC.
The trial court ruled in favor of the CEIC, stating that since neith
er CEIC nor FCI had
notice of the consortiums attachment of July 1985 (the one not annotated), the sh
ares of stock,
legally acquired from Garcia, cannot be levied upon in execution to satisfy his
judgment debts.
The Court of Appeals reversed the decision and ruled for the consortium.
ISSUES:
WON CEIC was subrogated to the rights of SBTC, particularly its attac
hment lien over
the disputed shares.
Held
No
By definition, subrogation is "the transfer of all the rights of the
creditor to a third
person, who substitutes him in all his rights. It may either be lega
l or conventional. Legal
subrogation is that which takes place without agreement but by operati
on of law because of
certain acts; this is the subrogation referred to in article 1302, which states:
Art. 1302. It is presumed that there is legal subrogation:
(1) When a creditor pays another creditor who is preferred, even witho
ut the debtor s
knowledge;
(2) When a third person, not interested in the obligation, pays with the express
or tacit
approval of the debtor;
(3) When, even without the knowledge of the debtor, a person interest
ed in the
fulfillment of the obligation pays, without prejudice to the effects of confusio
n as to the
latter s share.
When FCI issued the BA check to SBTC in the amount of P35,462,869.62 to pay Garc
ia s
indebtedness to the said bank, it was in effect paying with Garcia s
money, no longer with its
own, because said amount was part of the purchase price which FCI ow
ed Garcia in payment
for the sale of the disputed shares by the latter to the former. The money "paid
" by FCI to SBTC,
thus properly belonged to Garcia. It is as if Garcia himself paid hi
s own debt to SBTC but
through a third party FCI.
FCI cannot be considered a third party payor under Art 1302 (2). It
was but a conduit,
merely an agent as defined in Art 1868.
Doctrine
Subrogation means the transfer of the creditor to a third person, who substitute
s him in all his
rights.

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OBLIGATIONS AND CONTRACTS CASE DIGESTS (THIRD TERM, SCHOOL YEAR 2012-2013)

JOHN RAFAEL P. ATIENZA

A personal right is the power of one person to demand of another, as a definite

On October 26, 1904, H.D. Terrell filed a complaint as intervenor in

testate or intestate succession, and, in consequence of certain contrac

it awarded only the value of the missing parts of the typewriter, in

TIFFANY KIMBERLY CHING

restored to the possession of the lots on May 31, 1982; in summary,

computing the prescriptive period because from 1974 to 1982, Echaus wa

the condition and

demand of the comp

ellants. The filing of the

the time stated by him.

literal meaning and

firming the change in

ibility on every point

s event, particularly that

Cosmos reconsidered its decision to terminate the decision by trying

appeal from that

Medina had an account prior to May 7, 1956 with Manila Tradi

immediately become due and payable at the option of the holder of th

acquired by virtue of an obligation are transmissible in accordance wi

DIGESTS (THIRD TERM, SCHOOL YEAR 2012-2013)

and demandable, it would appear that the fi

The Court significantly notes that this suspensive condition was, in f

On November 15, 1890, Doa Cenona Rama promised to deliver sugar

cannot make another

will of the debtor, in which case, theconditional obligation is void.

ould she fail to comply

Petitioners, being both creditor and debtor to private respondent, in

The alleged breach of the obligation by the private respondents, which

3. That the DONEE shall construct at its own expense a Chapel, a Nu

Whether the action prescribes in 4 years (based on art. 764 NCC-judic

The donation subject of this case is one with an onerous cause.

price. Indubitably, the latter violated the very essence of reciprocity

ous and that the

The court held that Malapit s fraudulent act of misappropriating the p

promised to extend protection to petitioner-insured against the risk in

complied with the

JERVIX JAE M. RAYNES

also bound themselves to pay the balance of P576,573.90 with a first

It was affirmed that the term of office of petitioner expired on Mar

. 1673, NCC). The

The agreement between the parties is with a resolutory period, beginn

incurred during the storm.

cannot be changed by them.

first fix a period for

1198 of the Civil Code of the Philippines:

When he failed to recover the amount from PNB,

Tan filed a motion w

entered into a contract with LegardaHermanos as subdivision own

case in which Saldana must b

ial justice, for,

NO. The court affirms the decision of the lower court.

st of justice and equity,

release of the claim." The second, dated 14 June 1983,

receipt later offered as Exhibit "B".

The amount of P7,000.00 paid to by the respondent and received by th

ufficiently and effectively

of the questioned UTEX shares of stock against its co-defendants. It w

of the judgment rendered,

ssory note, the appellant