nd

2 compilation
(3RD to 10TH CASE DIGESTS)

Page Number (temporary)

C. KINDS OF OBLIGATIONS p.12

CONDITIONAL p. 13

OBLI W/ A PERIOD P. 53

ALTERNATIVE AND PACULTATIVE p. 79

JOINT & SOLIDARY p. 88

DIVISIBLE & INDIVISIBLE p.113

OBLI W/ A PENAL CLAUSE p.127

EXTINGUISHENTOF OBLIGATIONS p.134

CONTRACTS p.210

Update: as of April 2, 2017

 RIZAL COMMERCIAL BANKING CORPORATION vs
PEDRO P. BUENAVENTURA
G.R. No. 176479 October 06, 2010
Topic: Article 1176 - Receipt of Principal and Later Installments

FACTS:
This is a petition for Review on Certiorari under Rule 45 of the Rules of Court. Petitioner
Rizal Commercial Banking Corp. (RCBC) assails the decision dated November 21, 2006 and the
resolution dated January 30, 2007 of the Court of Appeals (CA) in CA-G.R. CV No. 82079.

Respondent Pedro P. Buenaventura and his first wife (now deceased) owned a townhouse
unit in Casa Nueva Manila Townhouse, Quezon City. On December 27, 1994, they obtained a
loan from petitioner. As security for the loan, they mortgaged the townhouse to petitioner. Under
the loan agreement, respondent was to pay RCBC a fixed monthly payment with adjustable
interest for five years. For this purpose, respondent opened an account with RCBCs Binondo
branch from which the bank was to deduct the monthly amortizations.

On April 19, 1999, respondent received a Notice of Public Auction of the mortgage
townhouse unit on which RCBC had emerged as the highest bidder on May 25, 1999. The sale
was registered September 28, 2000. Because of this, respondent filed a suit against petitioner on
September 18, 2001 praying that the extra-judicial foreclosure and public sale to be annulled and
cancel the Certificate of Sale as well as award for damages. RTC ruled in favor of respondent
Buenaventura; they found that the respondent made regular payments of the monthly
amortizations as they fell due, as evidenced by his passbooks and the various deposit slips
acknowledged by RCBC. The RTC also found that RCBCs own computer-generated
amortization schedule showed that no balance was due respondent after his last payment on
March 27, 2000.

RCBC appealed the decision to the CA, which affirmed the decision of the RTC to which
it noted that September 1996, RCBC sent respondent a letter informing the latter of past due
accounts since January 27, 1996, which would warrant the application of the acceleration clause.
The CA, however, deemed the same to have been "cured" by a subsequent Amortization
Schedule given by the bank to respondent stating that, as of March 27, 2000, he no longer had an
unpaid balance on his loan. The CA said this clearly suggests the uninterrupted receipt by RCBC
of the installments, thus, negating the claim that respondent was in default.. Thus, this petition
in the SC.

ISSUE:
W/N RCBCs petition holds merit that the extra-judicial foreclosure of the property was
made lawfully.

HELD:
The Supreme Court affirmed the decision of the RTC and CA; noting that the
respondents passbooks indicate that RCBC continued to receive the respondents payments even
after it made demands for him to pay his past due accounts, and even after the auction sale. To
which Article 1176 of the Civil Code will apply, xxx The receipt of a later installment of a debt
without reservation as to prior installments, shall likewise raise the presumption that such
installments have been paid.
 GOLD STAR MINING COMPANY, INC. vs MARTA LIM-JIMENA, et al
G.R. No. L-25301 October 26, 1968
Topic: Article 1177

FACTS:
In 1937, Ananias Isaac Lincallo entered into a contract to deliver to Victor Jimena one-
half (1/2) of the proceeds from all mining claims that he would acquire using the money to be
advanced by the latter. In 1939, the contract was modified, adding the proceeds from several
mining claims, which was already purchased by Lincallo, amounting to Php 5,800.00. This was
provided by Jimena and included the lands comprising the same, binding their heirs, assigns, or
legal representatives. However, the mining rights on the claims were assigned by Lincallo to
Gold Star Mining Co. Inc. prior to World War II as the corporation paid him Php 5,000.00 as a
quitclaim for pre-war royalties in 1950. Subsequently, the mining claims were made the subjects
of agreements entered by Lincallo under his name and for his benefit only.

On September 19, 1951, Lincallo and Alejandro Marquez, as separate owners of the
mining claims, contracted with Gold Star Mining Co., Inc. with respect to the share of Lincallo
of 45% of the royalties due from the corporation. After four months, Lincallo, Marquez, and
Congressman Panfilo Manguerra leased some mining claims to Jacob Cabarrus, who transferred
his rights through a lease contract to Marinduque Iron Mines Agents, Inc. On February 29, 1952,
43% of the royalties were agreed to be paid to Lincallo by Marinduque Iron Mines Agents, Inc.
From August 1939 to September 1952, Jimena repeatedly informed Gold Star Mining Co., Inc.
and Marinduque Iron Mines Agents, Inc. of his interests over the mining claims leased by
Lincallo. He also demanded the payment of Php 5,800.00 and his one-half share in all the
royalties paid to the latter. However, both corporations paid no attention to the latter. On July 14,
1952, Lincallo promised to settle his obligations for the last time to settle all his pending
liabilities on or before the 30th of the same month.

Nevertheless, Lincallo transferred to Gregorio Tolentino 35% of his share in the royalties
due from Gold Star Mining Co., Inc., thus failing to settle his obligations to Jimena. On
September 2, 1954, Jimena filed a complaint against Lincallo to recover his advances and his
one-half share in the royalties. Gold Star Mining Co., Inc., Marinduque Iron Mines Agents, Inc.
and Tolentino were later on joined as defendants. Unfortunatlely, Jimena and Tolentino died
during the pendency, and were substituted by their widows and children. The trial and appellate
courts ruled that Gold Star Mining Co., Inc. and Lincallo shall be solidarily liable to the Jimenas
the amount of Php 30,691.00 for flagrant violation of the injunction. Hence, this appeal.

ISSUE:
Whether or not Jimena has the right over the mining claims and royalties he seeks to
recover from the petitioners.

HELD:
Yes, the Supreme Court upheld the decisions of trial and appellate courts. In the case,
Jimena made pre-war and post-war demands upon Gold Star for payment of his share of the
royalties. In spite of that, Jimenas appeals were ignored, prompting him to file a complaint
against Gold Star because it refused to recognize his right. Jimena also sought for the accounting
of the royalties paid by Gold Star to Lincallo and for direct payment to himself of his share of the
royalties. Thus, Gold Star shall be joined in the liability due to the attitude it displayed towards
Jimena. Thus, Article 1177 was applied in the case which provides that,

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 (debtor) for the same purpose, save those which are
inherent in his person; they may also impugn the acts which the debtor
may have done to defraud them.

In addition, it is evident in the case that Lincallo acted as Jimenas agent with respect to
Jimenas share in the claims, even without telling Gold Star that Jimena is a co-owner, but has
knowledge over such fact. Under Article 1883,

The principal may sue the person with whom the agent dealt with in his
(agents) own name, when the transaction involves things belonging to the
principal.
 ANCHOR SAVINGS BANK v. HENRY H. FURIGAY, GELINDA C. FURIGAY,
HERRIETTE C. FURIGAY and HEGEM C. FURIGAY
G.R. No. 191178 March 13, 2013
TOPIC: Article 1177

FACTS:
The Anchor Savings Bank (ASB) alleged that the respondents obtained a loan from them,
and subsequently defaulted from their obligation which prompted ASB to file a case against the
respondent spouses. While the case was pending, the respondent spouses donated the properties
registered to their minor children. ASB contended that the transfer should be cancelled because
of the frauds perpetrated by the respondents, and filed a Complaint for Rescission of Deed of
Donation, Title and Damages against the respondent spouses and children. The RTC dismissed
the complaint for failure of ASB to pay the correct docket fees. The Court of Appeals, however,
agreed with ASB that the complaint should not have been dismissed.

ISSUE:
Whether or not Rescission should prosper

RULING:
Rescission should not prosper. It cannot be instituted unless the injured party suffering
the damages has no other legal means to obtain reparation, as it is subsidiary in nature. Article
1777 of the New Civil Code provides that The creditors, after having pursued the property in
possession of the debtor to satisfy their claims, may exercise all rights and bring all the actions of
the latter for the same purpose, save those which are inherent in his person; they may also
impugn the actions which the debtor may have done to defraud them. A creditor would have the
cause of action for rescission if the following successive measures have already been taken: 1)
exhaust the properties of debtor through levying by attachment and execution upon all his
property except those exempted by law; 2) exercise all rights and actions of debtor save those
personal to him; 3) seek rescission of the contracts executed by the debtor in fraud of their rights
(accion pauliana). In accion pauliana, it is required that the ultimate facts constituting the
requisites must all be alleged: 1) plaintiff asking for rescission has credit prior to the alienation,
although demandable later; 2) debtor has made a subsequent contract conveying a patrimonial
benefit to a third person; 3) creditor has no other legal remedy to satisfy his claim but would
benefit by rescission of the conveyance to the third person; 4) act being impugned is fraudulent;
and 4) third person who received the property conveyed, if onerous title, has been an accomplice
in the fraud.

In the case at bar, ASBs complaint failed to allege the ultimate facts constituting the
cause of action and the prerequisites that must be complied before the same may be instituted.
ASB simply undertook the third requisite without having availed of the first and second
remedies- exhausting the properties of respondents, and moved for the annulment of the donation
instead. To answer the issue of rescission, the Court cited the case of Khe Hong Cheng v. Court
of Appeals applying Article 1389 and Article 1150 of the New Civil Code, enunciated that it is
the legal possibility of bringing the action which determines the starting point for computation of
the prescriptive period for the action. Furthermore, in accordance with the provision of Article
1383 which provides that An action for rescission is subsidiary; it cannot be instituted except
when the party determines the party suffering damage has no other legal means to obtain
reparation for the same. It is thus apparent that accion pauliana must be the last resort, having
exhausted all other legal remedies, and having proven futile. For as long as the creditor still has
the remedy at law for the enforcement of his claim against the debtor, the creditor will not have
any cause of action against the creditor for rescission of contracts entered into by and between
the debtor and another person or persons. Lastly, the Court found the allegations of ASB in their
complaints insufficient in establishing its cause of action, and it was incorrect for ASB to argue
that a complaint need not to allege all the elements constituting its cause of action since it would
adduce proof during the trial.
 ELENITA M. DEWARA, represented by her Attorney-in-Fact, FERDINAND
MAGALLANES vs SPOUSES RONNIE AND GINA LAMELA and STENILE ALVERO
G.R. No. 179010 April 11, 2011
Topic: Remedies Available to Creditors for the Satisfaction of Their Claims

FACTS:
Eduardo Dewara (Eduardo) and petitioner Elenita Magallanes Dewara (Elenita) were
married before the enactment of the Family Code. Thus, the Civil Code governed their marital
relations. Husband and wife were separated-in-fact because Elenita went to work in California,
United States of America, while Eduardo stayed in Bacolod City.

On January 20, 1985, Eduardo, while driving a private jeep registered in the name of
Elenita, hit respondent Ronnie Lamela (Ronnie). Ronnie filed a criminal case for serious
physical injuries through reckless imprudence against Eduardo before the Municipal Trial Court
in Cities (MTCC), Branch IV, Bacolod City. The MTCC found Eduardo guilty of the charge and
sentenced him to suffer the penalty of imprisonment of two (2) months and one (1) day to (3)
months, and to pay civil indemnity of Sixty-Two Thousand Five Hundred Ninety-Eight Pesos
and Seventy Centavos (P62,598.70) as actual damages and Ten Thousand Pesos (P10,000.00) as
moral damages. On appeal, the RTC affirmed the decision of the MTCC and it became final and
executory.

The writ of execution on the civil liability was served on Eduardo, but it was returned
unsatisfied because he had no property in his name. Ronnie requested the City Sheriff,
respondent Stenile Alvero, to levy on Lot No. 234-C, Psd. 26667 of the Bacolod Cadastre, with
an area of 1,440 square meters, under Transfer Certificate of Title (TCT) No. T-80054, in the
name of Elenita M. Dewara, to satisfy the judgment on the civil liability of Eduardo. The City
Sheriff served a notice of embargo on the title of the lot and subsequently sold the lot in a public
auction. In the execution sale, there were no interested buyers other than Ronnie. The City
Sheriff issued a certificate of sale to spouses Ronnie and Gina Lamela to satisfy the civil liability
in the decision against Eduardo. Ronnie then caused the consolidation of title in a Cadastral
Proceeding before the RTC, which ordered the cancellation of TCT No. T-80054 in the name of
Elenita and the issuance of a new certificate of title in the name of respondent spouses.

The levy on execution, public auction, issuance of certificate of sale, and cancellation of
title of the lot in the name of Elenita were done while Elenita was working in California. Thus,
Elenita, represented by her attorney-in-fact, Ferdinand Magallanes, filed a case for annulment of
sale and for damages against respondent spouses and ex-officio sheriff Alvero before the RTC of
Bacolod City. Petitioner claimed that the levy on execution of Lot No. 234-C was illegal because
the said property was her paraphernal or exclusive property and could not be made to answer for
the personal liability of her husband. Furthermore, as the registered owner of the property, she
received no notice of the execution sale.

On the other hand, respondent spouses averred that the subject lot was the conjugal
property of petitioner Elenita and Eduardo. On September 2, 1999, having declared that the
property was the paraphernal property of Elenita, the RTC ruled that the civil liability of
Eduardo, which was personal to him, could not be charged to the exclusive property of his wife.
On appeal, the CA reversed the decision of the RTC. Hence, this petition.

ISSUE:
Whether or not the property may be subject to levy and execution sale to answer for the
civil liability adjudged against Eduardo in the criminal case for serious physical injuries.

HELD:
Yes. The Supreme Court ruled that according to Article 160 of the Civil Code, all
property of the marriage is presumed to belong to the conjugal partnership, unless it be proved
that it pertains exclusively to the husband or to the wife. Registration in the name of the husband
or the wife alone does not destroy this presumption. The separation-in-fact between the husband
and the wife without judicial approval shall not affect the conjugal partnership. In this case, there
is no dispute that the subject property was acquired by spouses Elenita and Eduardo during their
marriage. Their marital relations are governed by the conjugal partnership of gains, since they
were married before the enactment of the Family Code and they did not execute any prenuptial
agreement as to their property relations. Thus, the legal presumption of the conjugal nature of the
property applies to the lot in question. The presumption that the property is conjugal property
may be rebutted only by strong, clear, categorical, and convincing evidence. There must be strict
proof of the exclusive ownership of one of the spouses, and the burden of proof rests upon the
party asserting it.

However, even after having declared that Lot No. 234-C is the conjugal property of
spouses Elenita and Eduardo, it does not necessarily follow that it may automatically be levied
upon in an execution to answer for debts, obligations, fines, or indemnities of one of the spouses.
Before debts and obligations may be charged against the conjugal partnership, it must be shown
that the same were contracted for, or the debts and obligations should have redounded to, the
benefit of the conjugal partnership. Fines and pecuniary indemnities imposed upon the husband
or the wife, as a rule, may not be charged to the partnership. However, according to Article 163
of the Civil Code, if the spouse who is bound should have no exclusive property or if the
property should be insufficient, the fines and indemnities may be enforced upon the partnership
assets only after the responsibilities enumerated in Article 161 of the same code have been
covered.

In this case, it is just and proper that Ronnie be compensated for the serious physical
injuries he suffered. It should be remembered that even though the vehicle that hit Ronnie was
registered in the name of Elenita, she was not made a party in the said criminal case. Thus, she
may not be compelled to answer for Eduardos liability. Nevertheless, their conjugal partnership
property may be held accountable for it since Eduardo has no property in his name. The payment
of indemnity adjudged by the RTC of Bacolod City in favor of Ronnie may be enforced against
the partnership assets of spouses Elenita and Eduardo after the responsibilities enumerated under
Article 161 of the Civil Code have been covered. Therefore, the Court ruled that the conjugal
properties of spouses Elenita Dewara and Eduardo Dewara shall be held to answer for the
judgment of Seventy-Two Thousand Five Hundred Ninety-Eight Pesos and Seventy Centavos
(P72,598.70), plus an interest rate of twelve (12) percent per annum from the date of finality of
the decision of the Regional Trial Court of Bacolod City in Criminal Case No. 7155, after
complying with the provisions of Article 161 of the Civil Code.
 METROPOLITAN BANK and TRUST COMPANY
vs. INTERNATIONAL EXCHANGE BANK
G.R. No. 176008 August 10, 2011
Topic: Article 1178

FACTS:
On September 10, 2001, for the purpose of increasing its capital, SSC entered into a
Credit Agreement with herein respondent International Exchange Bank (IEB). As security for its
loan obligations, SSC executed five separate deeds of chattel mortgage constituted over various
equipment found in its steel manufacturing plant.

On July 7, 2004, the IEB filed with the RTC of Misamis Oriental an action for injunction
for the purpose of enjoining SSC from taking out the mortgaged equipment from its premises
because SSC defaulted in the payment of its obligations and IEB's demand for payment went
unheeded. IEB filed a Supplemental Complaint praying for the issuance of a writ of replevin or,
in the alternative, for the payment of SSC's outstanding obligations and attorney's fees.

On August 30, 2004, SSC entered into a Capacity Lease Agreement with herein
petitioner Chuayuco Steel Manufacturing Corporation (CSMC) which allowed the latter to lease
and operate the former's cold rolling mill and galvanizing plant for a period of five years.

On October 21, 2004, herein petitioner Metropolitan Bank and Trust Company
(Metrobank) filed a motion for intervention contending that it has legal interest in the properties
subject of the litigation between IEB and SSC because it is a creditor of SSC and that the
mortgage contracts between IEB and SSC were entered into to defraud the latter's creditors.
Metrobank prayed for the rescission of the chattel mortgages executed by SSC in favor of IEB.
On January 21, 2005, CSMC filed an Omnibus Motion for intervention and for allowance to
immediately operate the cold rolling mill and galvanizing plant of SSC contending that its
purpose in intervening is to seek the approval of the court to operate the said plant pursuant to
the Capacity Lease Agreement it entered into with SSC.

On February 14, 2005, the RTC issued an Order admitting the motions for intervention
filed by CSMC and Metrobank.

On March 15, 2005, the RTC granted the motion to operate the machineries pendente lite.
On June 8, 2005, the RTC issued a Joint Resolution reiterating its admission of CSMC's motion
for intervention and directing the latter to file its complaint-inintervention.

On August 25, 2005, IEB filed a petition for certiorari, prohibition and mandamus with
the CA assailing the RTC Orders dated September 6, 2004 and February 14, 2005, Resolution
dated March 15, 2005 and Joint Resolution dated June 8, 2005. CA granted the petition and
annulled said decisions.

Metrobank, CSMC and SSC filed their respective motions for reconsideration, but these
were all denied by the CA in its Resolution dated December 22, 2006.
ISSUE:
Whether or not the Metrobank may be allowed to intervene pursuant to Art. 1177 of the
Civil Code.

HELD:
The Court ruled that Metrobank may not be allowed to intervene and pray for the
rescission of the chattel mortgages executed by SSC in favor of IEB. The remedy being sought
by Metrobank is in the nature of an accion pauliana which, under the factual circumstances
obtaining in the present case, may not be allowed. Following successive measures must be taken
by a creditor before he may bring an action for rescission of an allegedly fraudulent contract: (1)
exhaust the properties of the debtor through levying by attachment and execution upon all the
property of the debtor, except such as are exempt by law from execution; (2) exercise all the
rights and actions of the debtor, save those personal to him (accion subrogatoria); and (3) seek
rescission of the contracts executed by the debtor in fraud of their rights (accion pauliana). An
action to rescind, or an accion pauliana, must be of last resort, availed of only after the creditor
has exhausted all the properties of the debtor not exempt from execution or after all other legal
remedies have been exhausted and have been proven futile.

It does not appear that Metrobank sought other properties of SSC other than the subject
lots alleged to have been transferred in fraud of creditors. Neither is there any showing that
Metrobank subrogated itself in SSC's transmissible rights and actions. Without availing of the
first and second remedies, Metrobank simply undertook the third measure and filed an action for
annulment of the chattel mortgages. This cannot be done. It can only be availed of in the absence
of any other legal remedy to obtain reparation for the injury. No evidence was presented nor
even an allegation was offered to show that Metrobank had availed of the abovementioned
remedies before it tried to question the validity of the contracts of chattel mortgage between IEB
and SSC.
 C.

KINDS
OF
OBLIGATIONS
CONDITIONAL OBLIGATIONS
(ART. 1179 1192)
 ATIENZA vs ESPIDOL
G.R. NO. L-180665 August 11, 2010
Topic: Conditional Obligations

FACTS:
Petitioners, the Atienzas, own a parcel of agricultural land at Cabanatuan city. They
decided to sell it to respondent Espidol because petitioner Paulino Atienza needed money for his
daughter's leukemia treatment. they entered into a contract to sell the land for 130.00 per square
meter or a total of 2,874,670.00 payable in three installments. Espidol paid them 100,000.00
upon the execution of the contract and 30,000.00 as commission. When the Atienzas demanded
the payment of the second installment, respondent could not fully pay 1,750,000.00. He offered
to pay 500,000.00 instead but the Atienzas refused to accept the amount. petitioners then filed a
complaint at the RTC of Cabanatuan for the annulment of the contract with damages. Espidol
argued that their contract was a contract of sale on installment, and that non-payment of
installment would not amount to a breach that would be a ground for annulment. The RTC ruled
in favor of respondent Espidol, stating that he made an honest effort to pay his dues and that the
annulment of the contract is subject to the realty installment buyer protection act (RA 6552). The
CA affirmed the decision, hence this petition.

ISSUE:
Whether or not the Atienzas can validly cancel the contract to sell on the ground of non-
payment of installment?

HELD:
In a contract to sell, the buyers' full payment of the price is a positive suspensive
condition to the coming into effect of the agreement. the title simply remains in the seller if the
buyer does not comply with the condition precedent of making payment at the time specified in
the contract. In the present case, the contract involved is a contract to sell because the Atienzas
wanted Espidol to pay the purchase price in installments before they can give him the title.
However, since Espidol failed to pay the purchase price/installment on the day certain agreed
upon as the positive suspensive condition, the Atienzas CAN VALIDLY CANCEL their contract
to sell because the obligation to sell the parcel of land did not arise. When Espidol failed to pay,
the Atienzas were in no obligation to reserve the land for him. Furthermore, the failure to pay the
second installment was no small default for the RTC to regard that Espidol made honest efforts
to pay. In fact, even as the case was pending and the last date of installment passed, Espidol yet
again failed to pay his dues. The decision of the RTC and CA is REVERSED and SET ASIDE.
the contract to sell is cancelled. Petitioners are ordered to return the 130,000.00 to Espidol.
 VDA. DE MISTICA V. NAGUIAT
G.R. No. 137909 December 11, 2003
Topic: Conditional Obligations

FACTS:
On April 5, 1979, Eulalo Mistica, deceased husband of petitioner, entered into a contract
of sale with respondent Bernardino Naguiat over a 200-square-meter parcel of land. The
purchase price was P20,000, with the P2,000 down payment due immediately after the signing of
the contract, and the balance to be paid in a span of ten years. In case of non-payment within the
ten-year period agreed upon, Naguiat will pay 12% interest until fully paid.

Pursuant to their agreement, respondent gave a down payment of P2,000.00 out of the
full purchase price of P20,000.00. On February 7, 1980, respondent made another payment of
P1,000.00 and after that no other payment was made. Eulalio died sometime in 1986. In 1991,
petitioner Fidela Del Castillo Vda. De Mistica filed with the trial court a complaint for rescission
of the contact to sell. She argues that she is entitled to rescind the contract under Art. 1191 of the
Civil Code because respondents failure to pay the balance of the purchase price within the ten-
year period constituted substantial breach. She further avers that the proviso on the payment of
interest did not extend the period to pay, and allowing such interpretation would make the
obligation potestative and void under Art. 1182.

Respondent argues, on the other hand that the contract cannot be rescinded because it
clearly stipulates that in case of failure to pay the balance within the time specified, a yearly
interest of 12% is to be paid. Further, during the wake of Eulalio Mistica, he offered to pay the
remaining balance to petitioner but she refused.

Both the trial court and the appellate court found for the respondent.

ISSUE:
Whether or not petitioner may have the contract rescinded, and whether or not the
stipulation extending the payment after ten years converted the obligation to a potestative one.

HELD:
No, the Contract may not be rescinded.

In a contract of sale, the remedy of an unpaid seller is either specific performance or

rescission. Under Article 1191 of the Civil Code, the right to rescind an obligation is predicated
on the violation of the reciprocity between parties, brought about by a breach of faith by one of
them. Rescission, however, is allowed only where the breach is substantial and fundamental to
the fulfillment of the obligation. In the present case, the failure of respondents to pay the balance
of the purchase price within ten years from the execution of the Deed did not amount to a
substantial breach. In the contract, it was stipulated that payment could be made even after ten
years from the execution of the Contract, provided the vendee paid 12% interest. The stipulations
of the contract constitute the law between the parties; thus, courts have no alternative but to
enforce them as agreed upon and written.
 Moreover, it is undisputed that during the ten-year period, petitioner and her deceased
husband never made any demand for the balance of the purchase price. Petitioner even
refused the payment tendered by respondents during her husband's funeral, thus showing that she
was not exactly blameless for the lapse of the ten-year period. Had she accepted the tender,
payment would have been made well within the agreed period.

The contention that extending the period beyond ten years subject to the payment of
additional 12% interest converted the obligation into a purely potestative one is also untenable.
The Code prohibits purely potestative, suspensive, conditional obligations that depend on the
whims of the debtor, because such obligations are usually not meant to be fulfilled. Indeed, to
allow the fulfillment of conditions to depend exclusively on the debtor's will would be to
sanction illusory obligations. The contract does not allow such thing. First, nowhere is it stated in
the Deed that payment of the purchase price is dependent upon whether respondents want to pay
it or not. Second, the fact that they already made partial payment thereof only shows that the
parties intended to be bound by the contract.
TAYAG V CA -
 FERNANDO GAITE vs ISABELO FONACIER
G.R. No. L-11827 JULY 31, 1961
Topic: CONDITIONAL OBLIGATIONS

FACTS:
Isabelo Fonacier was the owner and/or holder of 11 iron lode mineral claims situated in
the province of Camarines Norte. By Deed of Assignment, Fonacier constituted and appointed
Fernando Gaite as his true and lawful attorney-in-fact to enter in to contract with any individual
or juridical person for the exploration and development of the mining claims aforementioned on
a royalty basis of not less than P0.50 per ton of ore that might be extracted therefrom. Gaite then
executeda general assignment conveying the right to develop and exploit the mining claim to
Larap Iron Mines, owned by him, and then started to develop the same. Fonacier then decided to
revoke the authority granted to Gaite; the latter acceded and transferred the claims back to
Fonacier but for considerationroyalties and a sum of P75,000, P10,000 of which was already
paid. A balance of P65,000 remained for which Fonacier issued 2 sureties, good for a year. There
was a stipulation that the P65,000 balance will be paid from the 1st shipment of ores and its local
sale. Eventually, the sureties expired and Fonacier defaulted in settling his debt. He now alleges
that the payment of the balance was subject to a suspensive conditionbeing the 1st shipment
and sale of iron ores.

ISSUE:
Whether or not the payment of the balance is subject suspensive condition.

HELD:
NO. The words of the contract express no contingency in the buyer's obligation to pay:
"The balance of Sixty-Five Thousand Pesos (P65,000) will be paid out of the first letter of credit
covering the first shipment of iron ore . . ." etc. There is no uncertainty that the payment will
have to be made sooner or later; what is undetermined is merely the exact date at which it will be
made. By the very terms of the contract, therefore, the existence of the obligation to pay is
recognized; only its maturity or demandability is deferred.what was constituted is a contract of
sale. A contract of sale is normally commutative and onerous: not only does each one of the
parties assume a correlative obligation (the seller to deliver and transfer ownership of the thing
sold and the buyer to pay the price), but each party anticipates performance by the other from the
very start. If it is a suspensive condition, Fonacier would have been able to postpone payment
indefinitely.
 LIRAG TEXTILE MILLS, INC. AND FELIX K. LIRAG
vs. COURT ON APPEALS and CRISTAN ALCANTARA
G.R. No. L-30736 April 14, 1975
Topic: Conditional Obligations

FACTS:
Petitioner Lirag Textile Mills, Inc. employed respondent Cristan Alcantara with an
express agreement as to the period of the latter's employment in the former's firm, that definite
period starting from the respondent's employment up to the time he may voluntarily resign or
when petitioner may remove respondent for a valid cause or causes. It is clear that the duration of
the employment agreed upon extends from the time when the employment of the respondent
commenced up to the time when he voluntarily resigns, or up to the time he, by his act or acts
creates a valid cause or causes which would justify the petitioner in terminating his employment.

Subsequently, the petitioner terminated private respondents employment without a valid

cause because its contention of "serious reverses, both in terms of pecuniary loss and in market
opportunities.

ISSUE:
Whether or not the petitioner is liable to the respondent for damages regarding the
termination of the latters employment.

HELD:
Yes. The Supreme Court held that petitioner acted in bad faith when it committed that
breach of contract because it "tried its very best both in the trial court and in the respondent
Appellate Court to convince both courts that it suffered 'serious losses both in terms of pecuniary
loss and in market opportunities' as a valid cause for the termination of private respondent's
employment, said petitioners knowing fully well that such was not the truth as said allegation
was a falsehood."
 MACTAN-CEBU INTL AIRPORT AUTHORITY vs BERNARDO LOZADA
G.R. No. 176625 February 25, 2010
Topic: Article 1187 (1179-1192) Conditional Obligations

FACTS:
Anastacio Deiparine is the owner of a lot located in Lahug, Cebu City. The same lot was
subject to expropriation proceedings, initiated by the Republic of the Philippines, represented by
Civil Aeronautics Administration(CAA), for the expansion and improvement of Lahug Airport.
As early as 1947, the lots were already occupied by the U.S. Arny. They were turned over to the
Surplus property Commission, the Bureau of Aeronautics, the National Airport Corporation and
then to the CAA. During the pendency of the expropriation proceedings, Lozada, acquired the lot
from Deiparine.

Dec 29, 1961, the trial court favoured the Republic and was ordered to pay the Fair
Market Value with damages starting from 1947 when it was first occupied by eh airport. The
affected landowners appealed. Pending Appeal, The Air Transportation Office (Formerly the
CAA), proposed a compromise settlement that the landowners would either not appeal or
withdraw their appeals in consideration that the lands would be resold at the price they
expropriated in the event that the ATO would abandon the Lahug Airport, pursuant to policy
established in similar cases. Because of this, Lozada did not appeal.

The projected improvement and expansion plan of old Lahug Airport was not pursued.
Lozada and the landowners contracted the CAA requesting the repurchase of the lots as per
previous agreement. The CAA replied that it might be used as an emergency DC-3 airport. The
CAA reitered that the assurance that should this office dispose and resell the properties which
may found to be no longer as an airport, then the policy of the office to give priority to the
former owners subject to the approval of the President.

Nov 1989, President Aquino issued a Memorandum directing the transfer of general
aviation operations of the Lahug Airport to the Mactan International Airport before the end of
1990, and upon such transfer, the closure of the Lahug Airport. Congress enacted a Law for its
enforcement. From the date of the institution of the expropriation proceedings up to the present,
the public propose of the said exprorpriation was never actually initated, realized or
implemented. Instead, the old airport was converted into a commercial complex. Lozadas lot
became the site of a jail known as Bagong Buhay Rehabilitation Complex, while a portion was
occupied by squatters. The old airport was sooner converted to Ayala I.T. Park, a commercial
area.
The RTC rendered its decision of favouring the landowners as to restore possession and
ownership of the land, upon payment of expropriation price to plaintiffs. Likewise, the CA has
also affirmed the decision of the RTC. Hence, MCIAA filed a petition to reverse.

ISSUE:
Whether or Not the Respondents Utterly Failed to prove that there was a repurchase
agreement or compromise settlement between them and the government

HELD:
 No. The testimonial evidence that there was an agreement is credible. The acquisition by
the Republic of the expropriated lots was subject to the condition that the Lahug Airport would
continue its operation. The condition not having materialized because the airport had been
abandon, the former owner should then be allowed to reacquire the expropriated property. In the
power of Eminent Domain is subject to two mandatory requirements: 1) That it is for a particular
purpose; and 2) that just compensation to be paid to the property owner. These requirements
partake of the nature of implied conditions that should be complied with to enable the condemner
to keep the property expropriated. With respect to the element of public use, the expropriator
should commit to use the property pursuant to the purpose stated in the petition, failing which, it
should file another petition for the purpose. If he does not file, it is then incumbent upon him to
return the said property to its private owner if he desires to reacquire the same.

The right of respondents to repurchase their lots may be enforced based on a constructive
trust constituted on the property held by the government in favour of the respondents. The
predicament of petitioners involves a constructive trust, one that is akin to the implied trust
referred to in Art. 1454 of the Civil Code, "If an absolute conveyance of property is made in
order to secure the performance of an obligation of the grantor toward the grantee, a trust by
virtue of law is established. If the fulfilment of the obligation is offered by the grantor when it
becomes due, he may demand the reconveyance of the property to him." In the case at bar,
petitioners conveyed Lots to the government with the latter obliging itself to use the realties for
the expansion of Lahug Airport; failing to keep its bargain, the government can be compelled by
petitioners to reconvey the parcels of land to them, otherwise, petitioners would be denied the
use of their properties upon a state of affairs that was not conceived nor contemplated when the
expropriation was authorized.

The rights and obligations between the constructive trustee and the beneficiary, in this
case, respondent MCIAA and petitioners over, are echoed in Art. 1190 of the Civil Code, "When
the conditions have for their purpose the extinguishment of an obligation to give, the parties,
upon the fulfilment of said conditions, shall return to each other what they have received . . . . In
case of the loss, deterioration or improvement of the thing, the provisions which, with respect to
the debtor, are laid down in the preceding article shall be applied to the party who is bound to
return . . .

While petitioners are obliged to Reconvey the lot to respondents, Respondents must
return to the former what they received as just compensation for the expropriation of the
property, legal interest, while in this case runs from the time petitioners comply with their
obligation to respondents.

Article 1187 of the Civil Code, petitioners may keep whatever income or fruits they may
have obtained from their lot, and respondents need not account for the interests that the amounts
they received as just compensation may have earned in the meantime. In accordance with Article
1190 of the Civil Code vis--vis Article 1189, which provides that "(i)f a thing is improved by its
nature, or by time, the improvement shall inure to the beneCt of the creditor . . .," respondents, as
creditors, do not have to pay, as part of the process of restitution, the appreciation in value of
Lot, which is a natural consequence of nature and time.
 REPUBLIC OF THE PHILIPPINES vs. HOLY TRINITY DEVELOPMENT CORP.
G.R. NO. 172410 April 14, 2008
Conditional Obligations

FACTS:
On December 29, 2000 Republic of PH through the toll regulatory board (TRB), filed
with the RTC complaint for expropriation against landowners whose properties would be
affected by construction, rehabilitation and expansion of the North Luzon Expressway.
Respondent Holy Trinity and Development Corporation (HTRDC) was one of the affected
landowners.

On March 19, 2002 the RTC issued a writ of possession in favour of the petitioner after
compliance with the depositary requirements by law. On March 3, 2003, HTRDC filed with RTC
a Motion to withdraw deposit, praying that the respondent or its duly authorized representative
be allowed to withdraw the amount of 22, 968,000.00 out of TRBs advance deposit. RTC issued
an order allowing such withdrawal but made a reservation as to the interest accrued.

On March 11, 2004 the RTC decided in favor of the HTRDC declaring that the interest
earnings from the deposit, under the principle of accessions, are considered as fruits and should
properly pertain to the herein defendant/property owner. The Republic contends that the
respondent is entitled only to an amount equivalent to the zonal value of the expropriated
property.

ISSUE:
Whether or not, HTRDC has owns the interest that accrued on the deposited amount.

HELD:
Yes. The petition was denied. According to decision, TRB does not object to HTRDCs
withdrawal of the amount of P22,968,000.00 from the expropriation account, provided that it is
able to show (1) that the property is free from any lien or encumbrance and (2) that it is the
absolute owner thereof.21 The said conditions do not put in abeyance the constructive delivery
of the said amount to HTRDC pending the latters compliance therewith. Article 118722 of the
Civil Code provides that the "effects of a conditional obligation to give, once the condition has
been fulfilled, shall retroact to the day of the constitution of the obligation." Hence, when
HTRDC complied with the given conditions, as determined by the RTC in its Order23 dated 21
April 2003, the effects of the constructive delivery retroacted to the actual date of the deposit of
the amount in the expropriation account of DPWH.
 ROMULO A. CORONEL, et.al., petitioners, vs. THE COURT OF APPEALS,
CONCEPCION D. ALCARAZ et.al., respondents
G.R. No. 103577 October 7, 1996
Topic: Conditional Obligations

FACTS:
On January 19, 1985, defendants-appellants Romulo Coronel, executed a document
entitled "Receipt of Down Payment" in favor of plaintiff Ramona Patricia Alcaraz with the
following conditions:

1. Ramona will make a down payment of Fifty Thousand (P50,000.00) Pesos

upon execution of the document;
2. The Coronels will cause the transfer in their names of the title of the property
registered in the name of their deceased father upon receipt of the Fifty Thousand
(P50,000.00) Pesos down payment;
3. Upon the 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 One Million One Hundred Ninety Thousand (P1,190,000.00) Pesos.

On the same date (January 15, 1985), plaintiff-appellee Concepcion D. Alcaraz, mother
of Ramona, paid the down payment of Fifty Thousand (P50,000.00) Pesos. On February 6, 1985,
the property originally registered in the name of the Coronels' father was transferred in their
names.

On February 18, 1985, the Coronels sold the property to intervenor-appellant Catalina B.
Mabanag. For this reason, Coronels canceled and rescinded the contract with Ramona by
depositing the down payment paid by Concepcion in the bank.

ISSUE:
1. Whether or not the executed contract was a contract to sell.
2. Whether or not petitioner may validly rescind the contract.

HELD:
1. No. The contract was a contract of sale not a contract to sell. To distinguish, a contract
to sell is a bilateral contract whereby the prospective seller, while expressly reserving the
ownership of the subject property despite delivery thereof to the prospective buyer, binds himself
to sell the said property exclusively to the prospective buyer upon fulfillment of the condition
agreed upon, that is, full payment of the purchase price. In a conditional contract of sale,
however, upon the fulfillment of the suspensive condition, the sale becomes absolute and this
will affect the seller's title. If there had been previous delivery of the subject property, the seller's
ownership or title to the property is automatically transferred to the buyer such that, the seller
will no longer have any title to transfer to any third person. The agreement could not have been a
contract to sell because the sellers herein made no express reservation of ownership or title to the
subject parcel of land.
 2. No. It was the contention of the petitioners that there was in fact a perfected contract of
sale between them and Ramona P. Alcaraz, the latter breached her reciprocal obligation when
she rendered impossible the consummation thereof by going to the United States of America.
There was no valid rescission of the contract. The petitioners may not unilaterally and
extrajudicially rescind the contract of sale, there being no express stipulation authorizing the
sellers to extrajudicially rescind the contract of sale. Moreover, petitioners are estopped from
raising the alleged absence of Ramona because although the evidence on record shows that the
sale was in the name of Ramona P. Alcaraz as the buyer, the sellers had been dealing with
Ramona's mother, who had acted for and in behalf of her daughter, if not also in her own behalf.
The physical absence of Ramona P. Alcaraz is not a ground to rescind the contract of sale.
 Luzon Brokerage Co., Inc. v Maritime Bldg Co., Inc.
G.R. No. L-25885 January 31, 1972
Topic: Conditional Obligation Rescission

FACTS:
On April 30, 1949, in the City of Manila, the defendant Myers Building Co., Inc., owner
of three parcels of land in the City of Manila, together with the improvements thereon, entered
into a contract entitled "Deed of Conditional Sale" in favor of Bary Building Co., Inc., later
known as Maritime Building Co., Inc., whereby the former sold the same to the latter for P1,
000,000, to be paid in monthly installments of P10,000 with a 5% interest per annum (later
changed to P5,000 with 5.5% interest). They agreed that in case of failure on the part of the
vendee to pay any of the installments due and payable, the contract shall be annulled at the
option of the vendor and all payments already made by vendee shall be forfeited and the vendor
shall have right to re-enter the property and take possession thereof.

Maritime failed to pay the installment for March 1961. Maritime VP Schedler requested
Myers President Parsons for a moratorium on the payments to which the Board of Directors of
the Myers Co., Inc. refused to grant the request for moratorium for suspension of payments under
any condition.

On May 16, 1961, the Myers Building Co., Inc. made a demand upon the Maritime
Building Co., Inc., for the payment of the installments that had become due and payable, which
letter, however, was returned unclaimed.

Then, on June 5, 1961, the Myers Building Co., Inc. wrote the Maritime Building Co.,
Inc. another letter advising it of the cancellation of the Deed of Conditional Sale entered into
between them and demanding the return of the possession of the properties and holding the
Maritime Building Co., Inc. liable for use and occupation of the said properties at P10, 000
monthly.
Myers Building Co., Inc. demanded from its lessee, Luzon Brokerage, the payment of monthly
rentals of P10T + return of the property. Luzon Brokerage, to avoid paying to the wrong party,
filed an action for interpleader. Myers then filed a cross-claim, praying for judicial confirmation
of its right to rescind.

ISSUE:
Whether or not Myers Building Co., Inc. may extra judicially rescind the contract.

HELD:
Yes. The SC held that Maritime having acted in bad faith, was not entitled to ask the
court to give it further time to make payment and thereby erase the default or breach that it had
deliberately incurred. Thus the lower court committed no error in refusing to extend the periods
for payment. To do otherwise would be to sanction a deliberate and reiterated infringement of the
contractual obligations incurred by Maritime, an attitude repugnant to the stability and obligatory
force of contracts.
 The court also stated: Well settled is, however, the rule that a judicial action for the
rescission of a contract is not necessary where the contract provides that it may be revoked and
cancelled for violation of any of its terms and conditions" (Lopez vs. Commissioner of Customs)
and the party who deems the contract violated may consider it resolved or rescinded, and act
accordingly, without previous court action, but it proceeds at its own risk. For it is only the final
judgment of the corresponding court that will conclusively and finally settle whether the action
taken was or was not correct in law. But the law definitely does not require that the contracting
party who believes itself injured must first file suit and wait for a judgment before taking
extrajudicial steps to protect its interest. (UP vs. De Los Angeles)

PREMISES CONSIDERED, the appealed decision should be, and hereby is, affirmed,
and appellant Maritime Building Co., as well as appellee Luzon Brokerage Co., are further
ordered to surrender the premises to the appellee Myers Building Co. Costs against appellant.
 PILIPINO TELEPHONE CORPORATION v. RADIOMARINE NETWORK
(SAMARTNET) PHILIPPINES, INC.
G.R. No. 160322 August 24, 2011.
Topic: Conditional Obligation

FACTS:
On December 11, 1996 petitioner Pilipino Telephone Corporation (Piltel) expressed its
willingness, on purely best effort, to buy in 1997 from respondent Radiomarine Network, Inc.
(Smartnet) 300,000 units of various brands of cellular phones and accessories (Motorola,
Mitsubishi, and Ericsson). On December 12, 1996, Piltel agreed to sell to Smartnet a 3,500-
square meter lot, known as the Valgoson Property, in Makati City for P560 million. Smartnet
agreed to pay Piltel P180 million as down payment with the balance of P380 million to be partly
set off against the obligations that Piltel was to incur from its projected purchase of cellular
phones and accessories from Smartnet. Smartnet agreed to settle any unpaid portion of the
purchase price of the land after the set off on or about April 30, 1997.

The parties also agreed on a rescission and forfeiture clause which provided that, if
Smartnet fails to pay the full price of the land within the stipulated period and within five days
after receipt of a notice of delinquency, it would automatically forfeit to Piltel 10% of the P180
million down payment or P18 million and the contract shall be without force and effect. Smartnet
failed to pay the P380 million balance of the purchase price on or about the date it fell due. On
December 19, 1997 Piltel returned P50 million to Smartnet, a portion of the P180 million down
payment that it received. Smartnet later requested Piltel for the return of the remaining P130
million but the latter failed to do so.

On December 1, 1999 Smartnet filed a complaint against Piltel for rescission of their
contract to sell alleging that it withheld payment of the balance of the purchase price of the
subject property because Piltel reneged on its commitment to purchase from Smartnet 300,000
units of cellular phones and accessories. Piltel claimed that the agreement to purchase cellular
phones and accessories was not part of its contract with Smartnet for the sale of the Valgoson
Property and that Piltel committed to buy equipment from Smartnet only on a best effort basis.
For this reason, Piltel pointed out, Smartnet did not have the power to rescind the contract to sell
the Valgoson Property and, hence, cannot invoke that contract's rescission and forfeiture clause.

ISSUE:
Whether or not the failure to pay the purchase price as a condition renders the contract to
sell without force and effect.

HELD:
Yes. The Supreme Court ruled that Smartnet's nonpayment of the full price of the
property was not an act of rescission. It was but an event that rendered the contract to sell
without force and effect. In a contract to sell, the prospective seller binds himself to part with his
property only upon fulfillment of the condition agreed, in this case, the payment in full of the
purchase price. If this condition is not fulfilled, the seller is then released from his obligation to
sell. As the Court said in Heirs of Cayetano Pangan and Consuelo Pangan v. Perreras, the
payment of the purchase price in a contract to sell is a positive suspensive condition, the failure
of which is not a breach but a situation that results in the cancellation of the contract. Strictly
speaking, therefore, there can be no rescission or resolution of an obligation that is still non-
existent due to the non-happening of the suspensive condition.
 International Hotel Corporation vs. Joaquin, Jr
G.R. No. 158361 April 10, 2013.
Topic: Conditional Obligations, Mixed Conditions.

FACTS:
Francisco Joaquin was contracted by International Hotel Corporation to render technical
assistance in securing a foreign loan for the construction of a hotel, to be guaranteed by the
Development Bank of the Philippines. The contract composed of 9 different phases, to which the
Board of IHC approved phase 1 to 6 and applied for a foreign loan guarantee with DBP. Joaquin
was paid for his partial performance. Thereafter, Joaquin met with the Board of IHC and
presented the results of loan negotiations with Roger Dunn and Materials Handling Corp. He
recommended to consider Materials Handling because it had better terms in the loan contract.
While negotiations were going on , Joaquin and the executive director of IHC met with Weston
International Corp. to explore possible financing. Materials Handling Corp. failed to deliver the
loans, IHC informed DBP that it would use Weston for financing the loans, to which DBP
cancelled the guarantee agreement for failing to comply with the conditions it stipulated. Due to
Joaquins failure to secure the needed loan, IHC cancelled shares of stock issued to him. Thus,
Joaquin prays for specific performance and damages.

ISSUE:
Whether or not the Condition in the Contract and Joaquin had complied, and was fulfilled
to which Joaquin may collect damages.

HELD:
Yes. Art. 1186 is not applicable at the present case, in that Joaquin did not voluntarily
prevent the fulfilment of the obligation. Because the happening of the fulfilment of the
obligation, which was the securing of the foreign loans, was subject to a mixed condition that
was dependant on the will of a 3rd party.

To secure a DBP-guaranteed loan did not solely rely upon the sole diligence of the
obligor, respondents Joaquin, because it had required the action and discretion of a 3rd party,
which was an able and willing financial institution to provide the needed loan, and the DBP
Board of Governors to secure the loan. These 3rd persons could not be compelled to act in any
manner favourable to IHC.

When the fulfilment of a condition is dependant partly on the will of a 3rd party and
partly on the obligor, the obligation is mixed. Thus, the rule on mixed conditional obligations is
that when the condition is not fulfilled but the obligor did all in his power to comply with the
obligation, the condition should be deemed satisfied. Joaquin was able to secure an agreement
with Weston, and subsequently tried to reverse the prior cancellation of DBPs guaranty, there is
thus constructive fulfilment of the obligation.
 GAITE and RHOGEN BUILDERS
vs. THE PLAZA, INC. and FGU INSURANCE CORPORATION
G.R. No. 177685 JANUARY 26, 2011
Topic: Art. 1167 and 1191

FACTS:
The Plaza, through Reyes, entered into a contract with Rhogen Builders, represented by
Gaite, for the construction of a restaurant building in Greenbelt, Makati worth Php 7.6M. Gaite
and FGU executed a surety bond in the amount of Php 1,155,000.00 in favor of The Plaza to
secure Rhogen's compliance with the obligation. The Plaza likewise paid the same amount as
downpayment. In the construction, Gaite was ordered to cease and desist from continuing with
the construction because of violations of the National Building Code; consequently, its building
permit was revoked. Rhogen demanded payment for the job accomplished but it was found in the
actual jobsite assessment that they were entitled to much less than what they demanded for
payment so the Project Manager recommended the amount payable to be withheld pending
compliance to a previous Construction Memo. Gaite notified Reyes that he is suspending
construction work until Reyes and the Project Manager cooperate to resolve the issues to address
the problem, saying they can resolve it with their cooperation. Reyes disagreed claiming that
they have no obligation to help Rhogen to get out of the situation arising from its non-
performance of its own contractual undertakings.

Gaite informed the Plaza that he is terminating their contract based on the Contractor's
Right to Stop Work or Terminate Contracts as provided for the General Conditions of the
Contract, claiming that Reyes refused to cooperate in solving the problem. For The Plaza, Reyes
claimed that he will hold Gaite and Rhogen responsible for failure to comply with their
obligation to deliver the finished structure on the stipulated date. The Plaza invoked Sec. 121 of
the Articles of General Conditions granting the owner the right to terminate the contract for
failure of the contractor to execute work properly, make good such deficiencies, and deduct the
cost from the payment due to the contractor. Moreover, they will utilize the services of a
competent contractor but will charge Rhogen and demanded reimbursement costs of removal of
structures and of the downpayment, where a copy was also sent to FGU Insurance. However,
FGU claimed that it has no liability under the circumstances and could not act favorably.

The Plaza filed for the nullification of the contract. The RTC held that is was proper for
The Plaza to withhold the payment and that the Rhogen is guilty of breach and is liable for
damages under Art. 1170 and 1167 of the Civil Code. Rhogen and FGU appealed to the CA but
it affirmed the RTC decision where it held that The Plaza cannot be demanded to comply with its
obligation under the contract since Rhogen already failed to comply with its own contractual
obligation.

ISSUES:
1) W/N Rhogen had no factual or legal basis to terminate the General Construction
Contract

2) W/N Rhogen should return the downpayment paid by The Plaza with legal interest
HELD:
1) YES. Rhogen had no legal basis to terminate the contract on the basis of Art. 1191
which provides for the remedy of rescission (or resolution) available to the injured party in
reciprocal obligations. It is a principal action based on breach of faith by the other party who
violates the reciprocity, that is, the failure of the obligor to comply with the obligation. The
injured party is the party who has faithfully fulfilled or is willing to perform the obligation. In the
case of Rhogen and The Plaza, there is a reciprocal obligation as The Plaza's obligation to pay is
conditioned on Rhogen's completion of the construction within the stipulated period. In this case,
The Plaza was ready to fulfill its obligation but Rhogen was at fault for failing to comply with
the rules and regulations of the local authorities which affected the construction that led to a
substantial violation of the Construction Contract which entitled The Plaza, being the injured
party, to terminate the same.

2) YES. Rhogen should return the downpayment on the basis of Art. 1167 which
provides that if a person obliged to do something fails to do it, the same shall be executed at his
cost.
 SOLAR HARVEST, INC. vs. DAVAO CORRUGATED CARTON CORPORATION
G.R. No. 176868 July 26, 2010
Topic: Article 1169 (Delay)

FACTS:
In the first quarter of 1998, petitioner, Solar Harvest, Inc., entered into an agreement with
respondent, Davao Corrugated Carton Corporation, for the purchase of corrugated carton boxes,
specifically designed for petitioner's business of exporting fresh bananas, at US $1.10 each. The
agreement was not reduced into writing. To get the production underway, petitioner deposited,
on March 31, 1998, US$40,150.00 in respondent's US Dollar Savings Account with Westmont
Bank, as full payment for the ordered boxes.

Despite such payment, petitioner did not receive any boxes from respondent. On January
3, 2001, petitioner wrote a demand letter for reimbursement of the amount paid. On February 19,
2001, respondent replied that the boxes had been completed as early as April 3, 1998 and that
petitioner failed to pick them up from the former's warehouse 30 days from completion, as
agreed upon. Respondent mentioned that petitioner even placed an additional order of 24,000
boxes, out of which, 14,000 had been manufactured without any advanced payment from
petitioner. Respondent then demanded petitioner to remove the boxes from the factory and to pay
the balance of US$15,400.00 for the additional boxes and P132,000.00 as storage fee.

On August 17, 2001, petitioner filed a Complaint for sum of money and damages against
respondent. The Complaint averred that the parties agreed that the boxes will be delivered within
30 days from payment but respondent failed to manufacture and deliver the boxes within such
time. The petitioner further alleged that repeated follow-up was made by them for the immediate
production of the ordered boxes, but defendant would only show samples of boxes; thus, because
of the defendants failure to deliver the ordered boxes, the petitioner had to cancel the same and
demand payment/refund, but the defendant refused to pay. In its answer with counterclaim,
respondent insisted that as early as April 3, 1998, it had already completed production of the
36,500 boxes. Respondent averred that, on October 8, 1998, petitioner's representative, Bobby
Que, went to the factory and saw that the boxes were ready for pick up. On February 20, 1999,
Que visited the factory again and supposedly advised respondent to sell the boxes as rejects to
recoup the cost of the unpaid 14,000 boxes, because petitioner's transaction to ship bananas to
China did not materialize. In reply, petitioner denied that it made a second order of 24,000 boxes
and that respondent already completed the initial order of 36,500 boxes and 14,000 boxes out of
the second order. It maintained that respondent only manufactured a sample of the ordered boxes
and that respondent could not have produced 14,000 boxes without the required pre-payments.

On cross-examination, Que further testified that China Zero Food, the Chinese company
that ordered the bananas, was sending a ship to Davao to get the bananas, but since there were no
cartons, the ship could not proceed. For respondent, Bienvenido Estanislao testified that he met
Que in Davao in October 1998 to inspect the boxes and that the latter got samples of them. In
February 2000, they inspected the boxes again and Que got more samples. Estanislao said that
petitioner did not pick up the boxes because the ship did not arrive. Jaime Tan, the president of
respondent, said that during the last visit of Que and Estanislao, he asked them to withdraw the
boxes immediately because they were occupying a big space in his plant, but they, instead, told
him to sell the cartons as rejects. He was able to sell 5,000 boxes at P20.00 each for a total of
P100,000.00. They then told him to apply the said amount to the unpaid balance.

The Regional Trial Court (RTC) ruled that respondent did not commit any breach of faith
that would justify rescission of the contract and the consequent reimbursement of the amount
paid by petitioner. The RTC said that respondent was able to produce the ordered boxes but
petitioner failed to obtain possession thereof because its ship did not arrive. It thus dismissed the
complaint and respondent's counterclaims. The Court of Appeals (CA) denied the appeal of the
petitioner. According to CA, it was unthinkable that over a period of more than two years,
petitioner did not even demand for the delivery of the boxes. The CA added that even assuming
that the agreement was for respondent to deliver the boxes, respondent would not be liable for
breach of contract as petitioner had not yet demanded from it the delivery of the boxes.

ISSUE:
1. Whether or not the respondent incurred delay.
2. Whether or not the petitioner can claim reimbursment.

HELD:
1. No. Davao Corrugated Carton Corporation did not incur delay. According to Article 1169
of the Civil Code, those obliged to deliver or do something incur in delay from the time the
oblige judicially or extrajudicially demands form them the fulfillment of their obligation. Evident
from the records and even from the allegations in the complaint was the lack of demand by
petitioner upon respondent to fulfill its obligation to manufacture and deliver the boxes. The
Complaint only alleged that petitioner made a "follow-up" upon respondent, which, however,
would not qualify as a demand for the fulfillment of the obligation. Petitioner's witness also
testified that they made a follow-up of the boxes, but not a demand.

2. No. The petitioners claim for reimbursement is actually one for rescission or resolution
of contract under Article 1191, which must be taken in conjunction with Article 1169 of the Civil
Code. The right to rescind a contract arises once the other party defaults in the performance of
his obligation. In reciprocal obligations, as in a contract of sale, the general rule is that the
fulfillment of the parties' respective obligations should be simultaneous. Hence, no demand is
generally necessary because, once a party fulfills his obligation and the other party does not
fulfill his, the latter automatically incurs in delay. But when different dates for performance of
the obligations are fixed, the default for each obligation must be determined by the rules given in
the first paragraph of Article 1169, that is, the other party would incur in delay only from the
moment the other party demands fulfillment of the former's obligation. Thus, demand upon the
obligee is still necessary before the obligor can be considered in default and before a cause of
action for rescission will accrue. Without a previous demand for the fulfillment of the obligation,
petitioner would not have a cause of action for rescission against respondent as the latter would
not yet be considered in breach of its contractual obligation. Even assuming that a demand had
been previously made before filing the present case, petitioner's claim for reimbursement would
still fail, as the circumstances would show that respondent was not guilty of breach of contract.
 UNIVERSAL FOOD CORPORATION v CA
G.R. No. L-29155 May 13, 1970
Topic: Art. 1191 - Rescission

FACTS:
That as far back as 1938, Magdalo V. Francisco, Sr. discovered or invented a formula for
the manufacture of a food seasoning (sauce) derived from banana fruits popularly known as
MAFRAN sauce; that the manufacture of this product was used in commercial scale in 1942, and
in the same year plaintiff registered his trademark in his name as owner and inventor with the
Bureau of Patents; that due to lack of sufficient capital to finance the expansion of the business,
in 1960, said plaintiff secured the financial assistance of Tirso T. Reyes who, after a series of
negotiations, formed with others defendant Universal Food Corporation eventually leading to the
execution on May 11, 1960 of the 'Bill of Assignment'.

On May 31, 1960, Magdalo Francisco entered into contract with UFC stipulating among
other things that he be the Chief Chemist and Second Vice-President of UFC and shall have
absolute control and supervision over the laboratory assistants and personnel and in the purchase
and safekeeping of the chemicals used in the preparation of said Mafran sauce and that said
positions are permanent.

A series of memoranda was issued by UFC regarding production of Mafran Sauce and
Porky Pops and temporary employment. On January 9 and 16, 1961, UFC, acting thru its
President and General Manager, authorized Porfirio Zarraga and Paula de Bacula to look for a
buyer of the corporation includingits trademarks, formula and assets at a price of not less than
P300,000.00. Due to these successive memoranda, without plaintiff Magdalo V. Francisco, Sr.
being recalled back to work, he filed the present action on February 14, 1961. Then in a letter
dated March 20, 1961, UFC requested said plaintiff to report for duty, but the latter declined the
request because the present action was already filed in court.

ISSUE:
Whether or not Magdalo Francisco is entitled to rescission.

HELD:
No. Petitioners contention that Magdalo Franciscos petition for rescission should be
denied because under Article 1383 of the Civil Code of the Philippines rescission can not be
demanded except when the party suffering damage has no other legal means to obtain reparation,
was of no merit because it is predicated on a failure to distinguish between a rescission for
breach of contract under Article 1191 of the Civil Code and a rescission by reason of lesion or
economic prejudice, under Article 1381. This was a case of reciprocal obligation. Article 1191
may be scanned without disclosing anywhere that the action for rescission thereunder was
subordinated to anything other than the culpable breach of his obligations by the defendant.
Hence, the reparation of damages for the breach was purely secondary. Simply put, unlike Art.
1383, Art. 1191 allows both the rescission and the payment for damages. Rescission is not given
to the party as a last resort, hence, it is not subsidiary in nature.
 Sps. Felipe and Leticia Cannu vs Sps. Gil and Fernandina Galang and
National Home Mortgage Finance Corporation
G.R. No. 139523 May 26, 2005
Topic: Rescission of Reciprocal Obligations

FACTS:
In order to buy a house and lot with an area of 150 square meters in Pulanglupa, Las
Pinas City,Gil and Fernandina Galang (herein respondents) loaned from Fortune Savings and
Loan Association(FSLA) the amount of Php 173,800.00. In order to pay it, they mortgaged the
property in favour of theFortune Savings and Loan Association and the National Home
Mortgage Finance Corporation (NHMFC)bought the lot from FSLA. Leticia Cannu, one of the
petitioners in this case, agreed to purchase themortgaged property for Php 120,000.00 and to
assume the balance of the mortgage obligations with theNHMFC and the developer of the
property. Several payments were made and there was a remainingbalance of Php 45,000.00. A
deed of sale & assumption of mortgage was executed between the Galangand Cannu spouses and
the petitioners immediately took possession and occupied the house and lot.Although there have
been requests by Adelina Timbang (the attorney-in-fact) and Fernandina Galang forthe payment
of the balance, else the Cannu spouses would be forced to vacate the property, the Cannusrefused
to do so. On May 21, 1993, Fernandina Galang paid Php 233, 957.64 as the full payment of
theremaining balance in the mortgage loan with the NHMFC. The Cannus opposed the release of
TransferCertificate Title Number T-8505 in favour of the Galangs insisting that the subject
property had alreadybeen sold to them. A Complaint for Specific Performance and Damages was
filed praying that the Cannuspouses be declared as owners of the house and lot involved subject
to reimbursements of the amountmade by the Galang spouses in preterminating the mortgage
loan with NHMFC.

ISSUES:
1. Whether or not the petitioners breach of obligation was substantial; whether or not
there wasno substantial compliance with the obligation to pay the monthly amortization with the
NHMFC;
2. Whether or not the action for rescission was subsidiary

HELD:
The failure of the Cannus to pay the Php 45,000.00 is a substantial breach of obligation.
UnderArticle 1191 of the Civil Code of the Philippines, the resolution of a party to pay an
obligation is foundedon a breach of faith by the other party which violates the reciprocal
obligation. The petitioners hadample amount of time to pay the amount, but despite the demands
to pay such, they did not complywith their obligation. Rescission may only ocur on breaches
which are substantial in order to defeat theobject of the parties in making the agreement.
Furthermore, Felipe and Leticia Cannu committedanother breach in obligation on the Deed of
Sale with Assumption of Mortgage. The mortgage obligation with the NHMFC was not formally
assumed on account of the Cannus failure to submit the requirements in order to be considered
as successorsinterest of the involved house and lot inPulanglupa. Article 1191, not Article 1381,
is the applicable provision in the case at bar since it is aretaliatory provision in a sense that the
action is not substantive and because it is the duty of the courtto require the parties involved to
surrender whatever they may have received from the other in theresolution of the Deed of Sale
with Assumption of Mortgage. It is unjust that a party is bound to fulfil hispart of the obligation
when the other does not do his part.
 UNIVERSITY OF THE PHILIPPINES
vs WALFRIDO DE LOS ANGELES
G.R. No. L 28602 September 29, 1970
Topic: Rescission of Obligations

FACTS:
On November 2, 1960, UP and ALUMCO entered into a logging agreement whereby the
latter was granted exclusive authority to cut, collect and remove timber from the land grant for a
period starting from the date of agreement to December 31, 1965, extendible for a period of five
years by mutual agreement.

On December 8, 1964, ALUMCO incurred an unpaid balance of 219,362.94 pesos.

Despite repeated demands, ALUMCO still failed to settle their balance. UP sent a notice to
rescind the logging agreement. On the other hand, ALUMCO executed an instrument entitled
Acknowledgement of Debt and Proposed Manner of Payments which stipulated the following:
In the event that the payments called for are not sufficient to liquidate the indebtedness, the
balance outstanding after the said payments have been applied shall be paid by the debtor in full
no later than June 30, 1965 and In the event that the debtor fails to comply with any of its
promises, the Debtor agrees without reservation that the Creditor shall have the right to consider
the Logging Agreement rescinded without necessity of any judicial suit. ALUMCO continued its
logging operations, but again incurred an unpaid account. UP informed ALUMCO that it had
considered their agreement rescinded and of no further legal effect.

ISSUE:
Whether or not the contract is already rescinded and may disregard the same before any
judicial pronouncement to that effect?

HELD:
The court ruled in the positive. UP and ALUMCO had expressly stipulated that upon
default by the debtor, UP has the right and the power to consider the Logging Agreement as
rescinded without the necessity of any judicial suit. In connection with Art. 1191 of the Civil
Code, the SC stated in Froilan vs Pan Oriental Shipping Co, There is nothing in the law the
prohibits the parties from entering into an agreement that violation of the terms of contract would
cause cancellation thereof, even without the court intervention. In other words, it is not always
necessary for the injured party to resort to court for rescission of the contract.
 Visayan Sawmill Company, Inc., et. al. v. Court of Appeals, et. al.
GR No 83851 March 3, 1993
Topic: Power to Rescind Obligations
FACTS:
On May 1, 1983, herein plaintiff-appellee and defendants-appellants entered into a sale
involving scrap iron located at the stockyard of defendant-appellant corporation at Cawitan, Sta.
Catalina, Negros Oriental, subject to the condition that plaintiff-appellee will open a letter of
credit in the amount of P250,000.00 in favor of defendant-appellant corporation on or before
May 15, 1983. This is evidenced by a contract entitled Purchase and Sale of Scrap Iron duly
signed by both parties.

On May 17, 1983, plaintiff-appellee through his man, started to dig and gather and scrap
iron at the defendant-appellant's premises, proceeding with such endeavor until May 30 when
defendants-appellants allegedly directed plaintiff-appellee's men to desist from pursuing the
work in view of an alleged case filed against plaintiff-appellee by a certain Alberto Pursuelo.
This, however, is denied by defendants-appellants who allege that on May 23, 1983, they sent a
telegram to plaintiff-appellee cancelling the contract of sale because of failure of the latter to
comply with the conditions thereof.

On May 24, 1983, plaintiff-appellee informed defendants-appellants by telegram that the

letter of credit was opened May 12, 1983 at the Bank of the Philippine Islands main office in
Ayala, but the transmittal was delayed.

On May 26, 1983, defendants-appellants received a letter advice from the Dumaguete
City Branch of the Bank of the Philippine Islands dated May 26, 1983
On July 19, 1983, plaintiff-appellee sent a series of telegrams stating that the case filed against
him by Pursuelo had been dismissed and demanding that defendants-appellants comply with the
deed of sale, otherwise a case will be filed against them.

In reply to those telegrams, defendants-appellants' lawyer, on July 20, 1983 informed

plaintiff-appellee's lawyer that defendant-appellant corporation is unwilling to continue with the
sale due to plaintiff-appellee's failure to comply with essential pre-conditions of the contract.
On July 29, 1983, plaintiff-appellee filed the complaint below with a petition for preliminary
attachment. The writ of attachment was returned unserved because the defendant-appellant
corporation was no longer in operation and also because the scrap irons as well as other pieces of
machinery can no longer be found on the premises of the corporation.

In his complaint, private respondent prayed for judgment ordering the petitioner
corporation to comply with the contract by delivering to him the scrap iron subject thereof; he
further sought an award of actual, moral and exemplary damages, attorney's fees and the costs of
the suit.

In their Answer with Counterclaim, petitioners insisted that the cancellation of the
contract was justified because of private respondent's non-compliance with essential pre-
conditions, among which is the opening of an irrevocable and unconditional letter of credit not
later than 15 May 1983.
 During the pre-trial of the case on 30 April 1984, the parties defined the issues to be
resolved; these issues were subsequently embodied in the pre-trial order, to wit:

"Was the contract entitled Purchase and Sale of Scrap Iron, dated May 1, 1983 executed
by the parties cancelled and terminated before the Complaint was filed by anyone of the parties;
if so, what are the grounds and reasons relied upon by the cancelling parties; and were the
reasons or grounds for cancelling valid and justified?
defendants-appellants argue that under Articles 1593 and 1597 of the Civil Code, automatic
rescission may take place by a mere notice to the buyer if the latter committed a breach of the
contract of sale.

ISSUE:
Whether or not the rescission was proper.

HELD:
Even if one were to grant that there was a breach of the contract by the buyer, automatic
rescission cannot take place because, as already stated, delivery had already been made. And, in
cases where there has already been delivery, the intervention of the court is necessary to annul
the contract.
As the lower court aptly stated:

'Respecting these allegations of the contending parties, while it is true that Article 1593
of the New Civil Code provides that with respect to movable property, the rescission of the sale
shall of right take place in the interest of the vendor, if the vendee fails to tender the price at the
time or period fixed or agreed, however, automatic rescission is not allowed if the object sold has
been delivered to the buyer (Guevarra vs. Pascual, 13 Phil. 311; Escueta vs. Pando, 76 Phil. 256),
the action being one to rescind judicially and where Article 1191, supra, thereby applies. There
being already an implied delivery of the items, subject matter of the contract between the parties
in this case, the defendant having surrendered the premises where the scraps were found for
plaintiff's men to dig and gather, as in fact they had dug and gathered, this Court finds the mere
notice of resolution by the defendants untenable and not conclusive on the rights of the plaintiff
(Ocejo Perez vs. Int. Bank, 37 Phi. 631). Likewise, as early as in the case of Song Fo vs.
Hawaiian Philippine Company, it has been ruled that rescission cannot be sanctioned for a slight
or casual breach (47 Phil. 821).'

In the case of Angeles vs. Calasanz (135 (1935) SCRA 323), the Supreme Court ruled:
'Article 1191 is explicit. In reciprocal obligations, either party has the right to rescind the
contract upon failure of the other to perform the obligation assumed thereunder.
Of course, it must be understood that the right of a party in treating a contract as cancelled or
resolved on account of infractions by the other contracting party must be made known to the
other and is always provisional, being ever subject to scrutiny and review by the proper court.'

Thus, rescission in cases falling under Article 1191 of the Civil Code is always subject to
review by the courts and cannot be considered final.
In the case at bar, the trial court ruled that rescission is improper because the breach was very
slight and the delay in opening the letter of credit was only 11 days.

Where time is not of the essence of the agreement, a slight delay by one party in the
performance of his obligation is not a sufficient ground for rescission of the agreement. Equity
and justice mandates that the vendor be given additional period to complete payment of the
purchase price.' (Taguda vs. Vda. de De Leon, 132 SCRA (1984), 722).
 TAYAG v COURT OF APPEALS
G.R. No. 96053. March 3, 1993
Topic: Article 1191 - Recission

FACTS:
On May 28, 1975, a deed of conveyance executed by Juan Galicia, Sr., prior to his
demise in 1979, 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 under the following terms:

"1. The sum of PESOS: THREE THOUSAND (P3,000.00) is HEREBY

acknowledged to have been paid upon the execution of this agreement;
2. The sum of PESOS: TEN THOUSAND (P10,000.00) shall be paid within ten (10)
days from and after the execution of this agreement;
3. The sum of PESOS: TEN THOUSAND (P10,000.00) represents the VENDORS'
indebtedness with the Philippine Veterans Bank which is hereby assumed by the
VENDEE; and
4. The balance of PESOS: TWENTY SEVEN THOUSAND (P27,000.00) shall be
paid within one (1) year from and after the execution of this instrument."

The first installment of P3,000 was received by Juan Galicia, Sr. In the second condition,
the petitioners asserted that they only received P9,707.00 on numerous occasions from May
29, 1975 up to November 3, 1979. For the third condition, concerning private respondent's
assumption of the vendors' obligation to the Philippine Veterans Bank (P10,000), the
vendee paid only the sum of P6,926.41 while the difference of the indebtedness came
from Celerina Labuguin. Moreover, petitioners asserted that for the payment of the fourth
condition of P27,000, they did not receive even a single centavo from 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.

The RTC ruled in favor of the private respondent on the basis of constructive
fulfillment under Article 1186 and estoppel through acceptance of piecemeal payments in
line with Article 1235 of the Civil Code. Because the acceptance by petitioners of the
various payments even beyond the periods agreed upon, was perceived by the lower court
as tantamount to faithful performance of the obligation pursuant to Article 1235 of the
Civil Code. Furthermore, the trial court noted that private respondent consigned
P18,520.00, an amount sufficient to offset the remaining balance, leaving the sum of
P1,315.00 to be credited to private respondent.

While the 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.
Declaring that: "With respect to the fourth condition stipulated in the contract, the period
indicated therein is deemed modified by the parties when the heirs of Juan Galicia, Sr.
accepted payments without objection up to November 3, 1979. On the basis of receipts
presented by appellee commencing from August 8, 1975 up to November 3, 1979, a total
amount of P13,908.25 has been paid, thereby leaving a balance of P13,091.75. Said
unpaid balance plus the amount reimbursable to appellant in the amount of P3,778.77
will leave an unpaid total of P16,870.52. Since appellee consigned in court the sum of
P18,500.00, he is entitled to get the excess of P1,629.48. Thus, when the heirs of Juan
Galicia, Sr. (obligees) accepted the performance, knowing its incompleteness or irregularity
and without expressing any protest or objection, the obligation is deemed fully complied
with (Article 1235, Civil Code)."

ISSUE:
Whether or not the petitioners have the right to rescind the contract pursuant to Article
1191 of the Civil Code

HELD:
NO. The suggestion of petitioners that the covenant must be cancelled in the light
of private respondent's so-called breach seems to overlook the petitioners' demeanor who,
instead of immediately filing the case precisely to rescind the instrument because of the
non-compliance of the private respondent, they allowed the private respondent to effect
numerous payments posterior to the grace periods provided in the contract. This apathy of
petitioners who even permitted the private respondent to take the initiative in filing the
suit for specific performance against them, is similar to waiver or abandonment of the right to
rescind as conferred by Article 1191 of the Civil Code.

Moreover, the Court said that both the trial court and respondent court were correct in
sustaining the claim of private respondent anchored on estoppel or waiver by acceptance
of delayed payments under Article 1325 of the Civil Code, to wit: When the obligee accepts
the performance, knowing its incompleteness or irregularity, and without expressing any
protest or objection, the obligation is deemed fully complied with."

In this case, the heirs of Juan Galicia, Sr. accommodated private respondent by
accepting the delayed payments of the latter not only beyond the grace periods but also
during the pendency of the case for specic performance. Indeed, the right to rescind is
not absolute and recission will not be granted where there has been substantial compliance
by partial payments. Therefore, the petitioners are now estopped from renouncing from their
commitment on account of their acceptance of the benefits arising from the overdue
accounts of the private respondent.
 BINALBAGAN TECH. INC. vs. COURT OF APPEALS
G.R. No. 100594 March 10, 1993
Topic: Article 1191
FACTS:
On May 11, 1967, private respondents, through Angelina P. Echaus, in her capacity as
Judicial Administrator of the intestate estate of Luis B. Puentevella, executed a Contract to Sell
and a Deed of Sale of forty-two subdivision lots within the Phib-Khik Subdivision of the
Puentevella family, conveying and transferring said lots to petitioner Binalbagan Tech., Inc. In
turn Binalbagan, through its president Hermilio J. Nava, executed an Acknowledgment of Debt
with Mortgage Agreement, mortgaging said lots in favor of the estate of Puentevella. Upon the
transfer to Binalbagan of titles to the 42 subdivision lots, petitioner took possession of the lots
and the building and improvements thereon and started operating a school on the property from
1967.

In 1974, after having been found that there was a pending case involving the forty-two
lots, petitioner Binalbagan Tech, Inc. was evicted from the subdivision and it was only in 1982
that the petitioner was reinstated on the said lots. Upon the reinstatement, respondent Angelina
Echaus demanded the payment of Php 367, 509.92 through a demand letter. The amount
demanded by responded represents the price of the land and the accrued interests.

Petitioner failed to effect payment which prompted the respondents to file a case against
them. The Trial Court ruled in favor of the now petitioner stating that the period within which to
institute a written contract under Article 1144 of the Civil Code which provides that [t]he
following actions must be brought within ten years from the time the right of action accrues: (1)
Upon a written contract; (2) Upon an obligation created by law; (3) Upon a judgment which
upon the present case has already prescribed. But the Court of Appeals reversed the said decision
which led to the present petition for certiorari.

ISSUE:
Whether or not the period to institute action upon a written contract has prescribed.

HELD:
No. The prescriptive period within which the respondent could institute a written contract
has not prescribed because since the petitioner was evicted from the subject lots in 1974 by
virtue of and reinstated to the possession thereof only in 1982, during the period from 1974 to
1982, the seller private respondent Angelina Echaus' warranty against eviction given to buyer
petitioner was breached though without her fault. From 1974 to 1982, only 7 years have elapsed
which was within the 10-year prescriptive period.

Furthermore, it follows that during that period of 1974-1982, the respondent was not in a
legal position to demand compliance of the prestation of petitioner to pay the price of said
subdivision lots because it was suspended. As provided in Article 1191 of the Civil Code, [t]he
power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him. The injured party may choose between the fulfillment
and the rescission of the obligation, with the payment of damages in either case. He may also
seek rescission, even after 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.

A party to a contract cannot demand performance of the other party's obligations unless
he is in a position to comply with his own obligations. Similarly, the right to rescind a contract
can be demanded only if a party thereto is ready, willing and able to comply with his own
obligations. Also, in a contract of sale, the vendor is bound to transfer the ownership of and
deliver, as well as warrant, the thing which is the object of the sale as provided in Article 1495 of
the Civil Code.

Wherefore, the petition is denied and the decision of the Court of Appeals is affirmed.
 ERNESTO DEIPARINE, JR. vs.
THE HON. COURT OF APPEALS, CESARIO CARUNGAY
G.R. No. 96643 April 23, 1993
Topic: Resolution/Rescission of Obligations

FACTS:
The spouses Cesario and Teresita Carungay entered into an agreement with Ernesto
Deiparine, Jr. for the construction of a three-story dormitory in Cebu City.
The Carungays agreed to pay and Deiparine bound himself to erect the building in strict
accordance to plans and specifications. Nicanor Trinidad, Jr., a civil engineer, was designated as
the representative of the Carungay spouses, with powers of inspection and coordination with the
contractor.

Deiparine then started the construction. Trinidad sent him a document entitled General
Conditions and Specifications. In the course of the construction, Trinidad reported to Cesario
Carungay that Deiparine had been deviating from the plans and specifications, thus impairing the
strength and safety of the building.

Carungay ordered Deiparine to first secure approval from him before pouring cement.
Order was ignored. Carungay then sent another memorandum with complaints but this was also
ignored. After several conferences, the parties agreed to conduct cylinder tests to ascertain if the
structure thus far built complied with safety standards. Deiparine and Carungay agreed on core
testing. Deiparaine even promised that if the tests should show a total failure of if the failure
exceed 10%, he would shoulder all expenses. The core testing was conducted by Geo-Testing
International and was found that the building was
structurally defective.

Spouses Carungay filed complaint with the RTC Cebu for the rescission of the
construction contract and for damages.

ISSUE:
Whether or not Article 1191 applies in the rescission of the contract.

HELD:
Yes. The construction contract falls squarely under the coverage of Article 1191 because
it imposes upon Deiparine the obligation to build the structure and upon the Carungays the
obligation to pay for the project upon its completion. Article 1191, unlike Article 1385, is not
predicated on economic prejudice to one of the parties but on breach of faith by one of them that
violates the reciprocity between them. The violation of reciprocity between Deiparine and the
Carungay spouses, to wit, the breach caused by Deiparine's failure to follow the stipulated plans
and specifications, has given the Carungay spouses the right to rescind or cancel the contract.
 PRUDENCE REALTY and DEVELOPMENT CORPORATIO vs.
THE COURT OF APPEALS, HON. NORBERTO Y. GERALDEZ, in his capacity as
Presiding Judge RTC, Branch 36, Calamba, Laguna, PAULINA GONZALES-HABANA
G.R. No. 110274 March 21, 1994
Topic: Art. 1191

FACTS:
On July 29, 1979, Paulina Gonzales Habana sold three parcels of land covering an area of
10.36 has to Prudence Realty and Development Corporation for P2,279,398.00. On September 2,
1980, the Corporation filed an action for the rescission of the contract. On September 21, 1982,
the then Court of First Instance of Manila rendered judgment in accordance with a compromise
agreement reached by the parties and approved by the court. The agreement was embodied in the
judgment.

ISSUE:
Whether or not the compromise agreement by the parties is rescissible.

HELD:
NO. Habana seeks the rescission of the compromise agreement under Art. 1191 of the
Civil Code. * However, this provision applies only to reciprocal obligations in general and not
to obligations arising from a judicial compromise, as we have consistently held in a long line of
decisions. Judgment upon agreement of the parties is more than a mere contract binding upon
them; having the sanction of the court and entered as its determination of the controversy it has
the force and effect of any other judgment. The rule is that a judgment rendered in accordance
with a compromise agreement is immediately executory as there is no appeal from such
judgment. The reason for the rule is that when both parties enter into an agreement to end a
pending litigation and request that a decision be rendered approving said agreement, it is only
natural to presume that such action constitutes an implicit, as undeniable as an express, waiver of
the right to appeal against said decision. When the terms of a compromise judgment are violated,
the remedy of the aggrieved party is to move for its execution, not its invalidation. In fact, the
court has inherent powers to prevent its decision from becoming a dead letter and may hold the
judgment debtor in contempt if it finds the refusal to be malicious and systematic.
Petition is GRANTED. [in favor of Prudence Realty]
 GENARO R. REYES, CONSTRUCTION, INC. vs. COURT OF APPEALS AND
DEPARTMENT OF PUBLIC WORKS AND HIGHWAYS
G.R. No. 108718 July 14, 1994
Topic: Rescission of Obligation

FACTS:
The Government through respondent DPWH and the joint venture of Genaro G. Reyes
Construction, Inc. (GGRCI) entered into a Contract for the construction of the flood control
facilities and land improvement works of the Lower Agusan Development Project, Stage 1,
Phase 1, Butuan City. Petitioners forthwith mobilized and deployed their men and equipment
after receiving the Notice to Proceed issued by DPWH.

Project Engineers Japanese Eichiro Araide and Engineer Aquiles Sollano recommended
termination of the contract alleging that the project work progress is already 9.50 percent behind
schedule (negative slippage). Four days later Consultant Eiichiro Araide gave another figure of
9.8% negative slippage.

Reviewing the incurred negative slippage in detail, it can clearly be seen that the bulk can
be attributed to the unaccomplished spoil bank and dredging section of the project. The spoil
bank section, supposedly 100 hectares in area had right of way problems; that is, only 40
hectares or 40% of the total area have been acquired. DPWH Secretary De Jesus then terminated
the contract of the GGRCI. Under the law, specifically Presidential Decree No. 1870, the
Government is authorized to take over delayed infrastructure projects only whenever a contractor
is behind schedule in its contract and incurs 15% or more negative slippage, and the
implementing agency, may undertake the administration of the whole or a portion of the
unfinished work or have the whole or portion of such unfinished work done by another
contractor through a negotiated contract at the current valuation price. The contractor filed a case
in the trial court twice denied by the latter and was also dismissed by respondent court of
appeals.

ISSUE:
Whether or not respondents have acted within the bounds of the law when they
terminated the contract based on the admitted 9.86% slippage
HELD:
NO. The discretion of the DPWH to terminate or rescind the contract comes into play
only in the event the contractor shall have incurred a negative slippage of 15% or more. In the
instant case, the negative slippage of petitioners at the time they were served the notice of
termination was only 9.86%. Such wrongful and illegal act is in derogation of petitioners' right
not to be deprived of property without due process of law. Petitioners' contract with the DPWH
covering the project in questions a proprietary right within the meaning of the Constitution and
can only be rescinded strictly in accordance with the governing law, Presidential Decree No.
1870, as implemented by DPWH Circular No. 102.

Paragraph 3 of Presidential Decree No. 1870 refers to specific causes (a) refusal of the
contractor to provide tools, equipment, and workers; (b) subletting or assigning the contract to
subcontractors without DPWH permission; and (c) willful violation of covenants and
agreements. Not one of the above exists in the case at bench. Respondents cannot, as they allege,
rely on the ordinary rules of contract under the Civil Code that if the obligor does not comply
with the terms and conditions of the contract, the obligee has the right to ask for rescission with
damages. A special law fixes the condition of slippage at 15%. This has to be followed. The law
on contracts cannot also penalize the obligor for faults of the obligee.

The main cause of the delay was due to respondent DPWH officials and not to petitioner.
A total of P51 million was appropriated and released to acquire rights of way or to buy the lands
upon which the flood control project would be constructed. The farmers and landowners refused
to move out when the funds to compensate them were not forthcoming. This was the main cause
of the 9.6% slippage and it is not attributable to petitioners.
 SANTOS B. AREOLA AND LYDIA D.AREOLA VS COURT OF APPEALS
G.R. No. 95641 September 22,1994
Topic: Resolution or Rescission of Obligation

FACTS :
On June 29, 1995, seven months after the issuance of petitioners personal insurance
policy no. PA-20015, the respondent insurance company unilaterally cancelled the same. The
reason for the cancellation was that the company records revealed that the petitioner- insured
failed to pay his premiums.

The petitioner was shocked upon knowledge of the said cancellation. Hence, on July 15,
1995 the petitioner sent a letter to the respondent insurance company asking to be insured under
the same terms and conditions as stated in Policy No PA-20015 or that the current commercial
rate of increase under the provincial receipt 9300 be returned to him.

The company wrote in their reply that the reason why they thought that no payment was
made was because of the fact that no provincial receipt was issued under the name of the
petitioner. The company later stated that the cancellation of the petitioners insurance policy was
due to the failure of its branch manager Malapit to turn over the premiums collected. Hence,for
this reason no receipt was issued under the name of the petitioner. The respondent company
further alleged that it has taken steps to rectify its error by reinstating the cancelled policy prior
to the filling of the complaint by the petitioner.

ISSUE:
Whether or not the erroneous act of cancelling the insurance policy entitle the petitioner
to payment of damages.

HELD:
Yes. The erroneous act of cancelling the insurance policy entitles the petitioner to
payment of damages. The argument of the respondent that the act of Malapit does not constitute
to the companys act is untenable. Malapits action is not separate and distinct with that of the
respondents insurance company. A corporation acts through its employees. In the present case,
Malapit was the general manager of the branch located in Baguio. Hence, this would mean that
his act of receiving premiums is attributable to the insurance company.

It is stated in Article 1191 of the civil code, that the injured party is given a choice
between fulfilment or rescission in case the respondent does not comply with what is incumbent
upon him. However, the said article entitles the injured party to payment of damages, regardless
of whether he demands fulfilment or rescission of the obligation.

In the present case, what was awarded is nominal damages. The rationale behind this was
the fact that the respondent insurance company with reasonable time took steps to rectify the
wrong committed by reinstating the insurance policy of the petitioner. Therefore, there was no
actual or substantial damages that was suffered by the petitioner at the time the insurance policy
was cancelled.
 DIESEL CONSTRUCTION CO., INC. vs. UPSI PROPERTY HOLDINGS INC.
GR. No. 154885 March 24, 2008.
Topic: Article 1191; Rescission
FACTS:
Diesel, as contractor, and UPSI, as owner entered into a construction agreement for the
interior architectural construction works for the 14th to 16th floors of UPSI Building 3 Condotel
Project. The agreement contained provisions on contract works, project completion, extensions,
delays, damages for negative slippage. In case of unjustifiable delay, Diesel will have to pay
UPSI liquidated damages in the amount equivalent to 1/5 of 1% of the total project cost for each
calendar day of delay.

Diesel requested for extension due to the following cause or delaying factors: (1) manual
hauling of material from the 14th to 16th floors (2) delayed supply of marble (3) various change
orders (4) delay in the installation of shower assembly. UPSI disapproved the request thus
putting Diesel in default.

Diesel finished the project however, UPSI disregarded the notice and refused to accept
delivery, claiming that Diesel had abandoned the project unfinished. UPSI withheld Diesels
10% retention money and refused to pay the unpaid balance of the contract price.

ISSUE:
Whether or not Diesel is in delay.

HELD:
No, Diesel can not be considered in delay and hence, is not amenable under the
Agreement for liquidated damages. A provision on the Agreement on excusable delays include
2.3.e Any delays initiated by the Owner or his personnel which are clearly outside the control of
the Contractor. The CA completely failed to factor in the change orders of UPSI to Diesel the
directives effectively extending the Project completion time at the behest of UPSI. Thus, UPSI
effectively moved the completion date through the various COs. According to UPSIs Progress
Report, Diesels scope of work was already 97.56% complete. Such level of work
accomplishment would be considered as substantial to warrarnt full payment of the contract
amount, less actual damages suffered by UPSI. At. 1234 of the Civil Code says as much, If the
obligation had been substantially performed in good faith, the obligor may recover as though
there had been a strict and complete fulfillment, less damages suffered by the obligee.. Thus,
Diesel could no longer be considered in delay.
 SPOUSES JOSE T. VALENZUELA and GLORIA VALENZUELA vs.
KALAYAAN DEVELOPMENT & INDUSTRIAL CORPORATION
G.R. No. 163244 June 22, 2009
Topic: Novation
FACTS:
Kalayaan Development and Industrial Corporation (Kalayaan) is the owner of a parcel of
land that the petitioners, Spouses Jose T. Valenzuela and Gloria Valenzuela are illegally
occupying and they introduced several improvements thereon. Kalayaan discovered that the lot
was being illegally occupied by the petitioners, Kalayaan demands that they immediately vacate
the premises and surrender possession thereof. Petitioners then negotiated with Kalayaan to
purchase the portion of the lot they were occupying. The parties executed a Contract to Sell
wherein they stipulated that petitioners would purchase 236 square meters of the subject property
for P1,416,000.00. Petitioners initially gave P500,000.00 upon signing the contract and agreed to
pay the balance of P916,000.00 in twelve (12) equal monthly installments, or P76,333.75 a
month until fully paid. The parties also agreed that, in case petitioners failed to pay any of the
installments, they would be liable for liquidated penalty at the rate of 3% a month compounded
monthly until fully paid. It was also stipulated that Kalayaan shall execute the corresponding
deed of absolute sale over the subject property only upon full payment of the total purchase
price. After paying a half of the purchase price, petitioners requested Kalayaan to issue a deed of
sale for the 118 sq. m. portion of the lot where their house was standing, considering that they no
longer had the resources to pay the remaining balance. Kalayaan sent various demand letters to
the petitioners for them to pay the remaining amount.

Petitioners then wrote to the counsel of Kalayaan, and requested him to intercede on their
behalf and to propose to Kalayaan that Gloria's sister, Juliet, was willing to assume payment of
the remaining balance for the 118 sq. m. portion of the subject property at P10,000.00 a month.
Petitioners stated that they had already separated the said 118 sq. m. portion and had the property
surveyed by a licensed geodetic engineer to determine the unpaid portion of the property that
needed to be separated from their lot. Juliet made eight payments of P10,000.00 per month to
Kalayaan, which the latter accepted for and in behalf of her sister Gloria.

Kalayaan's in-house counsel demanded that petitioners pay their outstanding obligation.
However, his demands remained unheeded. This led to Kalayaan filing a Complaint for
Rescission of Contract and Damages against petitioners. The Court in this case ruled in favor of
Kalayaan. Petitioners then went to appeal but still the ruling was still upheld.

Petitioners claim that there was a valid novation in the present case. They aver that the
CA failed to see that the original contract between the petitioners and Kalayaan was altered,
changed, modified and restructured, as a consequence of the change in the person of the principal
debtor and the monthly amortization to be paid for the subject property. When they agreed to a
monthly amortization of P10,000.00 per month, the original contract was changed; and Kalayaan
recognized Juliet's capacity to pay, as well as her designation as the new debtor. The original
contract was novated and the principal obligation to pay for the remaining half of the subject
property was transferred from petitioners to Juliet. When Kalayaan accepted the payments made
by the new debtor, Juliet, it waived its right to rescind the previous contract. Thus, the action for
rescission filed by Kalayaan against them, was unfounded, since the contract sought to be
rescinded was no longer in existence.

ISSUE:
Whether or not there was novation in the part of Kalayaan

HELD:
The petition is devoid of merit.
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.

Article 1292 of the Civil Code provides that "[i]n order that an obligation may be
extinguished by another which substitutes the same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new obligations be on every point incompatible with
each other". Novation is never presumed. Parties to a contract must expressly agree that they are
abrogating their old contract in favor of a new one. In the absence of an express agreement,
novation takes place only when the old and the new obligations are incompatible on every point.
The test of incompatibility is whether or not the two obligations can stand together, each one
having its independent existence. If they cannot, they are incompatible and the latter obligation
novates the first.
Thus, in order that a novation can take place, the concurrence of the following requisites are
indispensable:
1) There must be a previous valid obligation;
2) There must be an agreement of the parties concerned to a new contract;
3) There must be the extinguishment of the old contract; and
4) There must be the validity of the new contract.

In the instant case, none of the requisites are present. There is only one existing and
binding contract between the parties, because Kalayaan never agreed to the creation of a new
contract between them or Juliet. True, petitioners may have offered that they be substituted by
Juliet as the new debtor to pay for the remaining obligation. Nonetheless, Kalayaan did not
acquiesce to the proposal. Its acceptance of several payments after it demanded that petitioners
pay their outstanding obligation did not modify their original contract. Petitioners, admittedly,
have been in default; and Kalayaan's acceptance of the late payments is, at best, an act of
tolerance on the part of Kalayaan that could not have modified the contract.
OBLIGATIONS WITH A PERIOD
(ART. 1193 1198)
 FERNANDO A. GAITE vs. ISABELO FONACIER, GEORGE KRAKOWER,LARAP
MINES &SMELTING CO., INC., SEGUNDINA VIVAS,FRANCISCO
DANTE,PACIFICO ESCANDOR and FERNANDO TY
G.R. L-11827 July 31 1961
Topic: Obligations with Period

FACTS:
Isabelo Fonacier (Fonacier) was the owner and/or holder of 11 iron lode mineral claims
known as the Dawahan Group. He executed a Deed of Assignment and appointed Fernando
Gaite (Gaite) as his attorney-in-fact, who is authorized to enter into a contract for the exploration
and development of the mining claims on a royalty basis.
Gaite was the single proprietor of Larap Iron Mines, upon which he executed a general
assignment conveying the development and eexploitation of the mining claims under the Deed
of Assignment.

Several improvements were made in the area for the operation of a mine. Approximately
24,000 metric tons of iron ore was extracted.

For some reason, Fonacier decided to revoke the authority given to Gaite, to which the
latter agreed subject to certain conditions. One of the conditions is that Fonacier shall pay 75,000
pesos, for the 25,000 metric tons of iron ore already extracted. 10,000 pesos of which will be
paid upon signing of the agreement. The balance of 65,000 pesos shall be paid through a letter of
credit covering the first shipment of iron ores or first local sale of iron ore.
On December 8, 1964, to secure its payment, Fonacier delivered to Gaite surety bonds. One of
which is with Far Eastern Surety and Insurance Co., which liability shall be attached only when
there had been an actual sale of iron ore for the amount of 65,000 pesos and its liability will
expire on December 8, 1955.

On December 8, 1955, the bond with Far Eastern Surety and Insurance Co. expired, no
sale was made of the iron ores and no payment of 65,000 pesos was also made. Gaite filed with
the Court of First Instance a complaint against Fonacier for the payment of 65,000 pesos with
damages.

Fonacier argued that his obligation is subject to a condition that he will pay the balance
out of the sale of iron ores but there was still no sale of iron ores, hence the condition is not yet
fulfilled and the obligation is not yet due and demandable.

The trial court, in deciding in favor of Gaite, held that the obligation between Gaite and
Fonacier was one with period or term and it become due and demandable under Article 1198 of
the Civil Code when Fonacier failed to secure another surety when the surety with Far Eastern
Surety and Insurance Co. expired on December 8, 1955. Hence, this case.

ISSUE:
Whether or not the contract between Fonacier and Gaite is one with period and not with a
condition and it become due and demandable.
HELD:
Yes, the contract is one with period. According to the Supreme Court, what characterizes
a conditional obligation is the fact that its efficacy or obligatory force is subordinated to the
happening of a future and uncertain event; so that if the suspensive condition does not take place,
the parties would stand as if the conditional obligation had never existed. As opposed to one with
a period, it does not concern itself with the efficacy of the contract but only with demandability;
so that the arrival of the period will make the contract demandable. Here, the balance of 65,000
pesos shall be paid out of the first letter of credit of the first shipment or first local sale of the
iron ores, which shows no uncertainty that the payment will have to be made sooner or later. It is
the exact date at which the payment will be made that is undetermined and not the existence of
the obligation. the previous sale or shipment of the ore was not a suspensive condition for the
payment of the balance of the agreed price, but was intended merely to fix the future date of the
payment. The contract between Fonacier and Gaite is effective but its demandability is the
question.

With respect to demandability, the contract becomes due and demandable on December
8, 1955. According to Paragraph 2 and 3 of Article 1189 of the Civil Code, the debtor lose his
right to the period: 2. When he does not furnish to the creditor the guaranties or securities which
he has promised; and 3. When by his own acts he has impaired said guaranties or securities after
their establishment, and when through fortuitous event they disappear, unless he immediately
gives new ones equally satisfactory. Here, Fonacier failed to renew the surety with Far Eastern
Surety and Insurance Co. or to replace it with other equivalent surety. Moreover, Fonacier had
impaired the securities originally given and thereby forfeited any further time within which to
pay.

Therefore, the contract of Fonacier and Gaite is considered to be one with a period
because only its demandability is deferred by the terms of the contract and not its efficacy.
Moreover, the same becomes due and demandable on December 8, 1955 because Fonacier failed
to renew or to acquire new surety which prevents him to the use of period under the contract.
 FILOMENA SARMIENTO and EUSEBIO M. VILLA SENOR vs GLICERIO
JAVELLANA
G.R. No. 18500 October 02, 1922
Topic: Obligations with a Period

FACTS:
On August 29, 1911, the defendant loaned the plaintiffs the sum of P1,500 with interest at
the rate of 25 per cent per annum for the term of one year. As guarantee for this loan, the
plaintiffs pledged a large medal with a diamond in the center and surrounded with ten
diamonds, a pair of diamonds earrings, a small comb with twenty-diamonds, and two diamond
rings, which the contracting parties appraised at P4,000. The loan was evidenced by two
documents; (Exhibit A and 1) wherein the amount appears to be P1,875, which includes the 25
per cent interest on the sum of P1,500 for the term of one year.
The plaintiff alleged that at the maturity of the loan, August 31, 1912, the plaintiff
Eusebio M. Villasenor, being unable to pay the loan, obtained from the defendant an extension,
with the condition that the loan was to continue, drawing interest at the rate of 25 per cent per
annum, so long as the security given was sufficient to cover the capital and the accrued interest.
On August 1919, plaintiff Eusebio, went to the house of the defendant and offered to pay the
loan and redeem the jewels, to pay the amount of P11,000, but the defendant then informed the
plaintiff that the period for redemption of the jewels pledged had already elapsed contending that
the period for prescription of the action to recover the pledged item should be computed from
August 28, 1911, which is the date the contract was made; according to the defendant the
plaintiffs could have opt to pay the loan due even before the expiration of the period fixed for
payment.

ISSUE:
W/N the defendants contention is proper regarding the prescription of the plaintiffs
action for recovery of the item pledged.

HELD:
The Court ruled in favor of the plaintiffs and rejected the defendants contention, stating
Article 1128 of the Civil Code (1196 now) that Whenever in an obligation a period is
designated, it is presumed to have been established for the benefit of both the creditor and the
debtor, unless from the tenor of the same or other circumstances it should appear that the period
has been established in favor of one or of the other., which in this case, there was no express
stipulation giving the benefit of time to a particular party. Thus, the defendants contention that
payment of the principal, as well as recovery of the item pledged could have been made even
before the expiration of the period for payment is not tenable. The prescription period for
claiming the pledged item should be computed from August 31, 1912 when the period for
payment expired and computing from that time to October 9, 1920 or the time the complaint was
filed, 10 years have not lapsed, the right to claim the pledged item has not yet lapsed.
 VICTORIA SEOANE vs CATALINA FRANCO
G.R. No. 7859 February 12, 1913
Topic: Articles 1193 1198 (Obligations with a Period)

FACTS:
On October 13, 1884, a mortgage was executed to secure the payment by the mortgagor
the sum of Php 4,876.01 and was fixed to pay the sum little by little. On August 8, 1911, the
claim was disclosed to the plaintiffs intestate. Both the principal and the interest was not paid.
From the facts stated, it appears that the mortgage intends to leave the duration of the period for
the payment to the will of the debtor. In addition, the instrument seems to give the debtor the
option on when to pay the obligation.

ISSUE:
Whether or not the duration of the period for the payment of the obligation in the
mortgage is left to the will of the debtor.

HELD:
As provided in the case of Levy Hermanos vs Paterno, which was applied in this case,

The defendant having bound himself to pay his debt to the plaintiffs in partial
payments, xxx it is seen that the obligation is one of payment by installments.
xxx the obligation is one of payment by installments, nevertheless no fixed day
was specified for its fulfillment, so that the period for payment is undetermined
or was not fixed by the parties when they executed the contract. Besides, it is
evident that the term for payment was granted for the exclusive benefit of the
defendant and for his own convenience, as by the language of the document, the
plaintiffs gained nothing by the fact that the debt was not immediately
demandable.

From the said jurisprudence, it is apparent that the instrument is one which leaves the
period of payment to the will of mortgagor. It should be brought to the court for the purpose of
setting the date on which the instrument should become due and payable. Thus, the action is
premature and was tried before it is due. Besides, as the intention of the mortgage is to leave the
period of payment to the will of the mortgagor, an action could have been maintained by the
mortgagee at any time after its execution for the naming of a date on which the instrument must
be paid in full. However, the right of action accrued as soon as the instrument was executed.
 BENITO ORIT v. BALRODGAN COMPANY, LTD.
G.R. No. L-12277 December 29, 1950
TOPIC: Article 1196

FACTS:
The plaintiff brought an action in the CFI of Camarines Norte to collect Five thousand
pesos from the defendant which is the balance of an account due for export logs purchased by the
defendant from the plaintiff, P1,500 for attorneys fee, P3000 for moral damages, P2,000 as
exemplary damages and costs. The parties, assisted by their counsel entered into a stipulation of
facts and submitted it to the Court on September 25, 1956. The parties mutually agreed to submit
to the Court a fixed date when the defendant should pay the obligation which was on or before
November 6, 1956, and that for failure of the parties, they mutually agreed that the Court shall
have the power to fix a reasonable time when the defendant should pay, and the judgment would
be based on the stipulation of facts. The parties, however, failed to submit to the Court the date
when the defendant had to pay the plaintiff. On November 6, 1956, the defendant filed a motion
praying that judgment be rendered according to the stipulation of facts, and the Court shall fix
the time when the defendant should pay the sum due. The Court granted the motion, ordering the
defendant to pay within thirty days from receipt of notice of judgment the P5,000 with legal
interest thereon from 8 December 1955 until fully paid and to pay the costs. The Court denied
the motion for reconsideration on January 21, 1957, thus the appeal.

ISSUE:
Whether or not the Courts may fix a period in an obligation

HELD:
Under the stipulation of facts, the parties agreed to set the date for the appellant to pay the
appellee. They failed to set the date and as such, the Court rendered a decision in accordance
with the stipulated facts and ordered the appellant to pay the appellee within thirty days from
receipt of notice of judgment. The judgment was in pursuant to the compromise embodied in the
stipulation of facts entered by the parties freely and voluntarily with the assistance of their
respective counsel, and thus the appellant cannot claim and complain that the period fixed by the
Court was unreasonable. The appellant claimed that the period of thirty days was only redounded
to the benefit of the creditor, the appellee, and not mutually citing the provisions of Article 1196
of the New Civil Code which states, Whenever in an obligation a period is designated, it shall
be presumed to have been established for the benefit of both the creditor and debtor, unless from
the tenor or circumstances it should appear that the period has been established for the benefit of
one or of the other. In the case at bar where the parties entered into a compromised agreement
ending a controversy and authorizing the Court to fix a reasonable time within which the
appellant should pay its debt, the article cited cannot be applied. It should apply in cases where
parties to a contract themselves have fixed a period.
 ANITA C. BUCE vs. THE HONORABLE COURT OF APPEALS, SPS. BERNARDO C.
TIONGCO and ARACELI TIONGCO, SPS. DIONISIO TIONGCO and LUCILA
TIONGCO, and JOSE M. TIONGCO
G.R. No. 136913 May 12, 2000
Topic: Obligation with a Period

FACTS:
Petitioner leased a 56-square meter parcel of land located at 2068 Quirino Avenue,
Pandacan, Manila. The lease contract was for a period of fifteen years to commence on June 1,
1979 and to end on June 1, 1994 "subject to renewal for another ten (10) years, under the same
terms and conditions." Petitioner then constructed a building and paid the required monthly
rental of P200. Private respondents, through their administrator Jose Tiongco, later demanded a
gradual increase in the rental until it reached P400 in 1985. For July and August 1991, petitioner
paid private respondents P1,000 as monthly rental.

On December 6, 1991, private respondents counsel wrote petitioner informing her of the
increase in the rent to P1,576.58 effective January 1992 pursuant to the provisions of the Rent
Control Law. Petitioner, however, tendered six checks for only P400 each, payable to Tiongco as
administrator. As might be expected, private respondents refused to accept the same.

On August 9, 1993, petitioner filed with the Regional Trial Court of Manila a complaint
for specific performance with prayer for consignation. She prayed that private respondents be
ordered to accept the rentals in accordance with the lease contract and to respect the lease of
fifteen years, which was renewable for another ten years, at the rate of P200 a month.
In their Answer, private respondents argued that they were justified in refusing the checks for
P400 that petitioner tendered under Republic Act No. 877, as amended. Moreover, the phrase in
the lease contract authorizing renewal for another ten years does not mean automatic renewal;
rather, it contemplates a mutual agreement between the parties.

On 29 August 1995, the RTC declared the lease contract automatically renewed for ten
years. On appeal, the Court of Appeals reversed the decision of the RTC. According to the Court
of Appeals, the phrase in the contract "this lease shall be for a period of fifteen (15) years
effective June 1, 1979, subject to renewal for another ten (10) years, under the same terms and
conditions" is unclear as to who may exercise the option to renew. The Court of Appeals denied
petitioners motion for reconsideration. Hence, this petition.

ISSUE:
Whether or not the parties intended an automatic renewal of the lease contract when they
agreed that the lease shall be for a period of fifteen years "subject to renewal for another ten (10)
years, under the same terms and conditions.

HELD:
No. The Supreme Court ruled that according to Article 1370 of the New Civil Code, the
literal meaning of the stipulations shall control if the terms of the contract are clear and leave no
doubt upon the intention of the contracting parties. However, if the terms of the agreement are
ambiguous, resort is made to contract interpretation which is the determination of the meaning
attached to written or spoken words that make the contract. Also, to ascertain the true intention
of the parties, their actions, subsequent or contemporaneous, must be principally considered, in
accordance to Article 1371 of the same code.

The phrase "subject to renewal for another ten (10) years" is unclear on whether the
parties contemplated an automatic renewal or extension of the term, or just an option to renew
the contract; and if what exists is the latter, who may exercise the same or for whose benefit it
was stipulated.

In the Courts jurisdiction, a fine delineation exists between renewal of the contract and
extension of its period. Generally, the renewal of a contract connotes the death of the old contract
and the birth or emergence of a new one. A clause in a lease providing for an extension operates
of its own force to create an additional term, but a clause providing for a renewal merely creates
an obligation to execute a new lease contract for the additional term. As renewal of the contract
contemplates the cessation of the old contract, then it is necessary that a new one be executed
between the parties.

There is nothing in the stipulations in the contract and the parties actuation that shows
that the parties intended an automatic renewal or extension of the term of the contract. The fact
that the lessee was allowed to introduce improvements on the property is not indicative of the
intention of the lessors to automatically extend the contract. Considering the original 15-year
duration of the contract, structures would have necessarily been constructed, added, or built on
the property, which in its previous state was an idle 56-square meter lot in the heart of Manila.
Petitioner leased the property for the purpose of turning it into a commercial establishment and
to which it has been transformed as Anitas Grocery and Store. Neither the filing of the
complaint a year before the expiration of the 15-year term nor private respondents acceptance of
the increased rentals has any bearing on the intention of the parties regarding renewal. It must be
recalled that the filing of the complaint was even spawned by private respondents refusal to
accept the payment of monthly rental in the amount of only P400.

In the case at bar, it was not specifically indicated who may exercise the option to renew,
neither was it stated that the option was given for the benefit of herein petitioner. Thus, pursuant
to the Fernandez v. Court of Appeals ruling and Article 1196 of the Civil Code, the period of the
lease contract is deemed to have been set for the benefit of both parties. Renewal of the contract
may be had only upon their mutual agreement or at the will of both of them. Since the private
respondents were not amenable to a renewal, they cannot be compelled to execute a new contract
when the old contract terminated on June 1, 1994. It is the owner-lessors prerogative to
terminate the lease at its expiration. 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
between continuing the 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 equality exists between
the lessor and the lessee since the life of the contract would be dictated solely by the lessee.
 LL AND COMPANY DEVELOPMENT AND AGRO-INDUSTRIAL CORPORATION
vs. HUANG CHAO CHUN AND YANG TUNG FA
G.R. No. 142378 March 7, 2002
Topic: Obligations with a Period

FACTS:
This case originated from an unlawful detainer case filed by the petitioner on October 9,
1996. In the said complaint, petitioner alleged that respondents Huang Chao Chun and Yang
Tung Fa violated their amended lease contract over a 1,112 square meter lot it owns when they
did not pay the monthly rentals thereon in the total amount of P4,322,900.00. On September 16,
1996, the amended lease contract, to which they entered into on August 1991, already expired
but respondents refused to surrender possession thereof plus the improvements made thereon,
and pay the rental arrearages despite repeated demands. The amended contract states that there
will be a change of the leased lot into a wider one but the rental will be the same at P100.00 per
square meters and/or P111,200.00 per month; that the rental shall be paid without the need to
demand; that the term of lease is 5 years, with the option to renew before the expiration and it
may be adjusted depending upon the ejectment of tenants; that lessees have the option to
introduce improvements on said land and such improvements will become the property of the
lessor without extra compensation of the same; that violation by the Lessees of any of the terms
and condition of said contract is equivalent to forfeitures of the deposit in favor of the Lessor.

Respondents claimed, among other things, that they are entitled to a renewal of their
contract in view of the provision therein providing for automatic renewal, and also in view of the
P24,000,000.00 worth of improvements they introduced on the leased premises. MTC dismissed
the case and ruled that that the contract entered into by the parties may be extended by the
lessees for reasons of justice and equity. ). It also ruled that the corporations failure to pay the
monthly rentals as they fell due was justified by the fact that petitioner refused to honor the basis
of the rental increase as stated in their Lease Agreement.

The RTC and the Court of Appeals affirmed the Decision of the MTC and agreed that
the Contract of Lease entered into by the parties could be extended unilaterally by the lessees for
another five years or until September 16, 2001, on the basis of justice and equity.

ISSUE:
Whether the court could still extend the term of the lease, after its expiration.

HELD:
No. The MTC had no power to extend the contract that already expired. The Supreme
Court stated that the power of the courts to fix a longer term for a lease is discretionary. Such
power is to be exercised only in accordance with the particular circumstances of a case: a longer
term to be granted where equities demanding extension come into play; to be denied where none
appear -- always with due deference to the parties freedom to contract.[10] Thus, courts are not
bound to extend the lease it held in another case that It is not the province of the court to alter a
contract by construction or to make a new contract for the parties
 It is also absent from the provisions of the contract that the contract will be automatically
renewed thus the period is presumed to be for the benefit of both parties (as stated in Art. 1196).
In this case, the renewal of the contract may be authorized only upon their mutual agreement or
at their joint will.
 MACASAET vs MACASAET
G.R. no. L-154391-92 September 30, 2004
Topic: Obligations with a Period

FACTS:
This case involves a dispute between petitioners spouses Ismael and Teresita Macasaet,
and respondents spouses Vicente and Rosario Macasaet, parents of petitioner Ismael. Herein
respondents filed an ejectment case against the petitioners because they failed to pay a weekly
rental of 500.00 as lease. Respondents allege that they invited respondents to live at Banay-
banay, Lipa City, and that they executed a verbal lease agreement, which the petitioners failed to
uphold. Petitioners allege that the verbal agreement did not exist, as they were merely invited to
stay at Banay-banay for them to live near one another, and for their construction business. They
also allege that the lots in question are in fact advance inheritance. The MTC granted the
ejectment suit, but the RTC allowed the petitioners to appropriate the improvements upon the
land. CA also affirmed the decisions of the two courts, hence this petition.

ISSUE:
Do petitioners have the right to occupy the lots in question?

HELD:
NO. SC AFFIRMS the ejectment. In the present case, article 1197 of the civil code finds
no application because the parties did not intend a period got their alleged agreement.
Respondents invited petitioners to stay at the questioned lots with familial love as their basis.
Mere failure to fix a period does not necessarily give courts the authority to do so. Respondents
allowed petitioners to stay as long as both parties benefited from their stay, and this served as a
resolutory condition. Since persistent animosity and countless arguments persisted over parental
love of the respondents, the purpose of the agreement ceased. Respondents merely tolerated their
stay thereafter and they no longer have cause for continued possession of the lots upon receipt of
the notice to vacate. Since petitioners did not heed the notice, ejectment was proper. Their
possession, which was originally lawful, became unlawful when the reason therefor -- love and
solidarity -- ceased to exist between them.
 ABAD et al V. GOLDLOOP PROPERTIES INC.
G.R. No. 137909 December 11, 2003
Topic: Conditional Obligations

FACTS:
Petitioners (all surnamed Abad) were the owners of 13 parcels of agricultural land in
Cavite. Goldloop Properties, through its President Zapanta, enetered into a Deed of Conditional
Sale with petitioners for a total of P34,815,300 for the entire land area. In accordance with the
terms, an earnest money of P1M was given by Goldloop to Abad. The first payment of P6,
765,660.00 shall also be paid upon signing the Deed of Conditional Sale. The remaining balance,
representing the full and final payment of the total contract price, in the amount of
P27,049,640.00 shall be paid on or before 31 December 1997. Under paragraph 8 of the Deed, it
was also stipulated that:

In the event that the BUYER cannot comply, to fulfill his obligation to this contract, for
the balance of the total consideration, one week before December 31, 1997, the BUYER shall
forward a formal request for an extension of the contract not to exceed 30 days (on or before
January 28, 1998). This grant of extension is afforded to the BUYER on a one-time basis and no
subsequent extensions will be granted. In the event that the BUYER fails to comply [with] his
part of the obligation within the specified extension period, the earnest money of ONE MILLION
PESOS (PHP1,000,000.00), given by the BUYER to the SELLER by way of MBTC Check No.
2930037 dated July 02, 1997, shall be forfeited in favor of the SELLER but the first payment
check of SIX MILLION SEVEN HUNDRED SIXTY-FIVE THOUSAND SIX HUNDRED SIXTY
PESOS (PHP6,765,660.00) shall be returned to the BUYER without any additional charges to
the SELLER.

In a letter to Abad, Zapanta stated that due to the continuing economic downturn, the
transaction would not be consummated. He then requested that the first payment be returned
within five days, in accordance with paragraph 8. Because of the refusal of Abad, Goldloop filed
a Complaint for Collection which the RTC sustained. According to the RTC, a careful and
thorough study of [paragraph 8 of the Deed of Conditional Sale] undeniably reveals that whether
the contract was extended or not, the first payment in the amount of Php6,765,660.00 shall be
returned to the plaintiff. The statement "but the first payment check of six million seven hundred
sixty five thousand six hundred sixty pesos shall be returned to the buyer" indubitably
presupposes that the parties, although using the words "earnest money" had truly considered the
same as an option on the part of the plaintiff to rescind the contract in lieu of the forfeiture of
Php1,000,000.00 if, for whatever reasons, it chooses not to pursue the contract by not paying the
remaining balance thereon either one week before 31December 1997 if not extended or, until 28
January 1998 if extended. Put otherwise, the requirement of forwarding a formal request for
extension of the contract was provided for no other purpose than solely for the plaintiff to save
the amount of Php1,000,000.00 from being forfeited in the event it chooses to instead exercise its
option of paying the balance on or before the said stipulated periods. In short, the purpose of
paying the amount of Php6,765,660.00 is distinct and separate from that of Php1,000,000.00.

The CA affirmed the ruling of the RTC.

 Abad et al argue that buyer first had to comply with three conditions precedent before
the first payment could be returned to it: the formal request for extension, which must not exceed
30 days, and shall be on a one-time basis. These conditions were allegedly not fulfilled, as
Goldloop made no request for extension. Since respondent, as buyer, failed to comply with the
"condition precedents" in paragraph 8, its claim for refund did not ripen into a demandable right.
Moreover, even assuming they had an obligation to return the first payment, it should be deemed
one with a period. Even if no period was indicated in the contract it does not follow that no such
period was intended. Thus the remedy is not to demand the performance of the obligation, but to
ask the court to fix the period within which to return the first payment, pursuant to Art. 1197.

ISSUE:
Whether or not Abad et al had an obligation to return the first payment under the Deed of
Sale, and whether or not the obligation should be deemed to be one with a period.

HELD:
The Supreme Court affirmed the ruling of the trial court and the appellate court as to the
obligation of Abad to return the first payment.

Paragraph 8 of the contract is clear and unambiguous. As the trial and appellate courts
ruled, unlike the P1,000,000.00 earnest money which would be forfeited in favor of petitioners in
case of respondent's failure to deliver the balance of the total consideration, the first payment
would be returned to respondent. This obligation to return the first payment can be gleaned from
the second part of the disputed provision, which states: "but the first payment check of SIX
MILLION SEVEN HUNDRED SIXTY-FIVE THOUSAND SIX HUNDRED SIXTY PESOS
(PHP6,765,660.00) shall be returned to the BUYER without any additional charges to the
SELLER."

The Court cannot sustain petitioners' contention that their obligation to return the first
payment should be deemed one with a period, and that the Court should fix the period within
which they should comply with the obligation. In the first place, there is no occasion to apply the
first paragraph of Article 1197 since there is no showing that the parties had intended such a
period. This matter was not raised in the Answer, the Amended Answer or the Second Amended
Answer which petitioners filed in the trial court; no evidence was likewise offered to prove such
intent. Indeed, the parties to a contract are bound by their agreement, considering that obligations
arising from contracts have the force of law between the contracting parties and should be
complied with in good faith.
 PEOPLES BANK AND TRUST CO. vs DAHICAN LUMBER COMPANY
G. R. No. 17500 May 16, 1967
Topic: Obligations with a Period

FACTS:
Atlantic Gulf & Pacific Company of Manila sold and assigned all its rights in the
Dahican Lumber concession to Dahican Lumber Company (DALCO) - for the total sum of
$500,000.00, of which only the amount of $50,000.00 was paid. Thereafter, to develop the
concession, DALCO obtained various loans from the People's Bank & Trust Company
amounting, as of July 13, 1950, to P200,000.00. In addition, DALCO obtained, through the
BANK, a loan of $250,000.00 from the Export-Import Bank of Washington D.C., evidenced by
five promissory notes of $50,000.00 each, maturing on different dates, executed by both DALCO
and the Dahican America Lumber Corporation, a foreign corporation and a stockholder of
DALCO.

As security for the payment of the abovementioned loans, DALCO executed in favor of
the BANK a deed of mortgage covering five parcels of land situated in the province of
Camarines Norte, together with all the buildings and other improvements existing thereon and all
the personal properties of the mortgagor located in its place of business in the municipalities of
Mambulao and Capalonga, Camarines Norte. DALCO executed a second mortgage on the same
properties in favor of ATLANTIC to secure payment of the unpaid balance of the sale price of
the lumber concession amounting to the sum of $450,000.00. Both deeds contained a provision
extending the mortgage lien to properties to be subsequently acquired by the mortgagor.Both
mortgages were registered in the Office of the Register of Deeds of Camarines Norte.

Upon DALCO's and DAMCO's failure to pay the fifth promissory note upon its maturity,
the BANK paid the same to the Export-Import Bank of Washington D.C., and the latter assigned
to the former its credit and the first mortgage securing it. Subsequently, the BANK gave DALCO
and DAMCO up to April 1, 1953 to pay the overdue promissory note.

DALCO purchased various machineries, equipment, spare parts and supplies in addition
to, or in replacement of some of those already owned and used by it on the date aforesaid.
Pursuant to the provision of the mortgage deeds quoted theretofore regarding "after acquired
properties," the BANK requested DALCO to submit complete lists of said properties but the
latter failed to do so. In connection with these purchases, there appeared in the books of DALCO
as due to Connell Bros. Company (Philippines) - a domestic corporation who was acting as the
general purchasing agent of DALCO -the sum of P452,860.55 and to DAMCO, the sum of
P2,151,678.34.chan

The Board of Directors of DALCO, in a special meeting called for the purpose, passed a
resolution agreeing to rescind the alleged sales of equipment, spare parts and supplies by
CONNELL and DAMCO to it.

Thereafter, the BANK, in its own behalf and that of ATLANTIC, demanded that said
agreements be cancelled but CONNELL and DAMCO refused to do so. As a result, on February
12, 1953, ATLANTIC and the BANK, commenced foreclosure proceedings in the Court of First
Instance of Camarines Norte against DALCO and DAMCO.

The defendants contend that the action to foreclose the mortgages filed on February 12,
1953 was premature because the promissory note sued upon did not fall due until April 1 of the
same year.

ISSUE:
Whether or not the action to foreclose the mortgage is premature.

HELD:
No. Dahican Lumber Co., was insolvent as of the date of the filing of the complaint, it
should follow that the debtor thereby lost the benefit to the period.

x x x unless he gives a guaranty or security for the debt . . . (Art. 1198, New Civil Code);

and as the guaranty was plainly inadequate since the claim of plaintiffs reached in the aggregate,
P1,200,000 excluding interest while the aggregate price of the "after-acquired" chattels claimed
by Connell under the rescission contracts was P1,614,675.94, and the Court understanding that
when the law permits the debtor to enjoy the benefits of the period notwithstanding that he is
insolvent by his giving a guaranty for the debt, that must mean a new and efficient guaranty,
must concede that the causes of action for collection of the notes were not premature.
JOSE A. V. CORPUS vs. HON. FEDERICO C. ALIKPALA, as Presiding Judge of Branch
XXII, Court of First Instance of Manila and ACME MANUFACTURING Co., INC.
G.R. L-23707 January 17, 1968
Topic: Obligations with a Period

FACTS:
Jose A.V. Corpus (Corpus) filed a case for foreclosure of real estate mortgage against
Acme Steel Manufacturing Co., Inc. (Acme). Judgment was rendered based on the compromise
agreement between the parties. Among the terms and condition is that there will be a 1% interest
upon the amount of P100,000 representing the unpaid balance of the price of a building and 2
lots. The interest of 12,000 shall be paid in advance in 2 installments namely: 6,000 on May 30
and the other 6,000 on June 15.

Acme issued two post-dated checks. One was duly cashed but the other was returned
because of insufficiency of funds. Based on that failure of Acme to pay, Corpus filed a motion
for execution of the entire balance.

Acme claim that the funds in the bank run short of a few hundred pesos, that after he
learned about the returned check, they informed Corpus to redeposit the check, and that the
delayed payment is not substantial violation of the compromise agreement because all that
Corpus need to do is to redeposit the check and it involves only advance payment of interest.

The Regional Trial Court (RTC) issued the writ of execution for the payment of
P100,000 plus interest. Acme appealed with the Supreme Court on question of law, to which the
RTC allowed and suspend the enforcement of writ. Corpus also filed with the Supreme Court
this case against Judge Alikpala for Certiorari praying the nullification of the allowance of the
appeal.

ISSUE:
Whether or Not the dishonor of the checks representing the advance interest under the
compromise agreement resulted to forfeiture of the period given to pay the P 100,000.

HELD:
Yes. As provided under Article 1198 of the Civil Code, the debtor shall lose every right
to make use of the period: x x x 4. When the debtor violate any undertaking in consideration of
which the creditor agreed to the period. Here, Corpus seek not the rescission of the compromise
but its enforcement. The term of the compromise agreement are complete, definite and certain
and no suspense condition is attached to it. Moreover, the acceptance of Corpus of the check had
suspended his action to enforce the payment of the balance of the principal. Since the check was
dishonored, Acme automatically became in default and lost the right to use such period.
Therefore, the dishonor of the checks which resulted to the default of Acme to pay the advance
payment for interest resulted to the losing its right to make use of the period to which they can
pay the P 100,000.
LIRAG CASE
 CENTRAL PHILIPPINE UNIVERSITY VS COURT OF APPEALS
G.R. No. 112127 July 17, 1995
Article 1197 Obligation with a Period (Subtopic: Conditional Obgliations)

FACTS:
Sometime in 1939, the late Don Ramon Lopez, Sr., who was then a member of the Board
of Trustees of the Central Philippine College (now Central Philippine University), executed a
deed of donation in favour of Central Philippine University. Attached in the transfer title were
the following annotations:

1. The land will be utilized exclusive use of CPU 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 in any
way to encumber said land
3. It will be named RAMON LOPEZ CAMPUS erected on a cornerstone. Any
net income from the land or any of its parks shall be put in a fund (RAMON LOPEZ
CAMPUS FUND) to be used for improvements of said campus and erection of a building
thereon.

In May 1989, the respondents, 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 of action, that CPU had not complied with the conditions of the donation. And also, they
also argued that CPU negotiated with a National Housing Authority to Exchange the donated
property.

The Trial Court held that petitioner failed to comply with the conditions. The Court of
appeals held that the annotations at the back of petitioners certificate of title were resolutory
conditions breach of which should terminate the rights of the donne thus making the donation
revocable.

ISSUE:
1. Whether or Not Petitioner are onerous obligations and resolutory conditions of the
donations which must be fulfilled non-compliance of which would render the
donation revocable

2. Whether or Not Should fix the Period?

HELD:
1. YES. The conditions of the donations are clearly given. The donation was onerous, one
executed for a valuable consideration which is considered equivalent to the donation itself. When
Don Ramon Lopez donated the land with an obligation to establish a medical college, the
donation must be considered an onerous consideration. (ART 1181) When a person donates land
to another on the condition that the latter would build upon the land a school, the condition
imposed was a resolutory one. The donation had to be valid before the fulfilment of the
condition, that is to give the land first before the establishment of the building, it would be wrong
if they established a building without a donation.
 2. NO. As provided in ART. 1197 that the courts may fix the duration thereof because
the fulfilment of the obligation itself cannot be demanded until after the court has fixed the
period for compliance therwith and such period has arrived, it cannot be applied in the case
considered the different set of circumstances existing. Of over 50 years available for the
petitioner to avail of the opportunity to comply with the condition even if it be burdensome, to
make the donation valid, but failed to do so. There is no more need to fix the duration of a term
of the obligation would result to a multiplicity of suits. Moreover, ART. 1191, when one of the
obligors cannot comply with what is incumbent upon him, the oblige may seek rescission and the
courts 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 compliance, there is no more
obstacle for the court to decree the rescission claimed.
 DR. DANIEL VASQUEZ and MA. LUIZA M. VASQUEZ v. AYALA CORPORATION
G.R. NO. 149734 November 19,2004
Obligations with a Period

FACTS:
Daniel Vasquez owns Conduit Development, Inc. In 1981, Vasquez enters into a
Memorandum of Agreement (MOA) with Ayala Corporation wherein Ayala bought Conduit
from Vasquez. Ayala committed to develop Conduits lands including 4 parcels of land adjacent
to Vasquez retained land. In the provision of the MOA 5.7 its says that the buyer hereby
commits that it will develop the remaining property into a first class residential subdivision of
the same class as its New Alabang Subdivsion and that its intends to complete the first pohase
under its amended development plan within 3 years from the date of agreement. Taking the
position that Ayala was obliged to sell the 4 slots adjacent to the retained area within 3 yrs from
the MOA, the vasqez spouses sent several reminder letters of approaching so-called deadline. In
april 24, 2984, no demanded was made by the Vasquez.

In 1990, Ayala was able to develop the said lots. (This was after some slump, and some
litigation between Conduits former contractor (GP construction) and GPs subcontractor
(Lancer Builders).) Ayala then offered to sell the 4 parcels of land to Vasquez at P6.5k/sq. m.
which was the market price in 1990. Vasquez refused the offer. Vasquez contended that the
purchase price should be P460/sq. m. which was the market price in 1981 (time of purchase).
Ayala then lowered the purchase price to P5k/sq. m. but Vasquez refused again. Instead he made
a counter offer to buy the lots at P2k/sq. m. This time, Ayala refused.

ISSUE:
Whether or not, Ayala Corporation was not obliged to develop the remaining property
within 3 yrs from the execution of MOA

HELD:
Yes. Under Article 1193 of NCC, obligations whose fulfilment a day certain has been
fixed shall be demandable only when that day comes. However, no such day certain was fixed in
the MOA. Petitioners, therefore, cannot demand performance after the three year period fixed by
the MOA for the development of the first phase of the property since is not the same period
contemplated for the development of the subject lots, the petitioners should have allowed the
courts to fix the period in accordance with article 1197. Since there was no action filed, the
complaint has become premature, not being demandable at that time. Even if its is said that
Ayala Corp is in delay, it cannot be invoked because there was no demand by the petitioners to
perform the obligation.
 PAUL SCHENKER, plaintiff-appellant, vs. WILLIAM F. GEMPERLE,
defendant-appellee
G.R. No. L-16449 August 31, 1962
Topic: Obligations with a Period

FACTS:
In the summer of 1953, at Zurich, Switzerland, plaintiff Paul Schenker and defendant
William F. Gemperle agreed to organize a Philippine Corporation, later named as "The
Philippine Swiss Trading Co., Inc." and to divide the capital stock equally between themselves
and/or their associates. This verbal agreement was acknowledged and confirmed in writing by
defendant in his letter of September 14, 1953. The plaintiff signed and remitted to the defendant
at Manila, the said articles which placed in the name of plaintiff only 24% of the total
subscription and the balance of 76% being in the name of defendant and his relatives. Explaining
the discrepancy between the articles and their verbal covenant, the defendant stated that
"Temporarily, I had to place in my name 75% of the shares because there is a local law which
provides that when one intends to make contracts with the government, 75% of the subscribed
capital has to be Filipino as otherwise the Flag Law will be applied." In the same letter, however,
defendant assured the plaintiff that he would give the latter "exactly the same share holding as I
have". In view of the consistent refusals of the defendant to live up to their agreement,
notwithstanding repeated demands, the plaintiff filed a complaint.

Plaintiff contend that the filing of the complaint itself constituted a judicial demand for
performance, thereby making the defendant's obligation to become due. The obligation is pure
because it says " will give you, however, exactly the same share holding as I have" which
imparts an unconditional promise; and supposing that from the allegations of the complaint, it
may reasonably be inferred that it was intended to give the defendant time to fulfill his
obligation, the present action can be considered one for the fixing of such time (Art. 1197 Civil
Code).

Defendant filed a motion to dismiss; which was granted by the trial court. The latter ruled
that the agreement did not fix the time within which the defendant sought to perform its alleged
promise and, therefore, the obligation was not due and the action for its compliance was
premature; that the present complaint does not allege facts or lacks the characteristics for an
action to fix the period, a separate action to that effect should have been filed, because the action
which should be brought in order to have a term fixed is different from the action to enforce the
obligation; thus conveying the notion that the fixing of the period is incompatible with an action
for specific performance.

ISSUE:
Whether or not the obligation is one with a period.

HELD:
No. The obligation in question, is pure, because "its performance does not depend upon a
future or uncertain event or upon a past event unknown to the parties" and as such, "is
demandable at once" (Art. 1179 New Civil Code). The immediate payment by the plaintiff-
appellant of his subscriptions, after the organization of the corporation, can only mean that the
obligation should be immediately fulfilled, giving the defendant only such time as might
reasonably be necessary for its actual fulfillment. Furthermore, the ultimate facts to be alleged in
a complaint to properly and adequately plead the right of action granted by Article 1197, are (1)
Facts showing that a contract was entered into, imposing on one of the parties an obligation or
obligations in favor of the other; (2) Facts showing that the performance of the obligation was
left to the will of the obligor or clearly showing or from which an inference may reasonably be
drawn, that a period was intended by the parties. The complaint did not ask for the fixing of the
period, but for immediate and more positive relief.
 ENRIQUE C. ABAD ET AL vs. GOLDLOOP PROPERTIES INC.
G.R. NO. 168108 APRIL 13, 2007
Topic: Obligation with a Period

FACTS:
On August 29, 1997, respondent Goldloop Properties Inc. entered into a Deed of
Conditional Sale with petitioners for 13 parcels of titled agricultural land covering a total of
53,562 square meters at the price of P650 per square meter, or a total of P34, 815,300 for the
entire land area. The price was to be paid in three separate ways, (a) Earnest Money, (b) First
Payment, and (c) The remaining balance to be paid on or before Dec 31, 1997 and upon
fulfillment of some conditions.

The contract also stated: In the event that the BUYER cannot comply, to fulfill his
obligation with this contract, the BUYER shall forward a formal request for an extension of the
contract not to exceed 30 days (on or before January 28, 1998). This grant of extension is
afforded to the BUYER on a one-time basis and no subsequent extensions will be granted. In the
event that the BUYER fails to comply [with] his part of the obligation within the specified
extension period, the earnest money of P1, 000,000, given by the BUYER to the SELLER by way
of an MBTC Check dated July 02, 1997, shall be forfeited in favor of the SELLER but the first
payment check of PHP6, 765,660 shall be returned to the BUYER without any additional
charges to the SELLER.

On August 28, 1998, respondent informed Abad that he would not object to the planned
sale of the properties to other parties, provided that 50% of the forfeitable amount of P1,
000,000.00 would be returned in addition to the P6, 765,660.00 as provided in paragraph 8 of the
Deed of Conditional Sale. He also declared that the intended date of purchase had been adversely
affected by economic conditions which were never foreseen as a possible contingency.

On October 8, 1998, respondent informed Abad that the negotiations with the banks had
failed due to "the continuing economic downturn" and consequently, the transaction would not
be consummated. He then requested that the first payment be returned within five days, in
accordance with the deed.

On June 10, 2002, the RTC ruled in favor of respondent.

The CA dismissed the appeal and affirmed in toto the ruling of the trial court. Citing
Article 1370 of the Civil Code and related cases, it declared that if the terms of a contract are
clear with no doubt as to the intentions of the contracting parties, then the literal meaning of the
stipulations shall control. It held that the disputed paragraph 8 of the deed is plain and
unambiguous: in case respondent failed to pay the balance, the earnest money would be forfeited,
but the first payment shall be returned to respondent. The appellate court declared that
petitioner's obligation to return the first payment was an unconditional one.

ISSUE:
Whether or not the obligation to return the first payment of P6, 765,660.00, assuming it
to be unconditional, is an obligation with a period
HELD:
The Court cannot sustain petitioners' contention that their obligation to return the first
payment should be deemed one with a period, and that the Court should fix the period within
which they should comply with the obligation. In the first place, there is no occasion to apply the
first paragraph of Article 1197 since there is no showing that the parties had intended such a
period. This matter was not raised in any Answer which petitioners filed in the trial court; no
evidence was likewise offered to prove such intent. Indeed, the parties to a contract are bound by
their agreement, considering that obligations arising from contracts have the force of law
between the contracting parties and should be complied with in good faith.

The court quoted the ruling in Bautista v. Court of Appeals: The rule is that where the
language of a contract is plain and unambiguous, its meaning should be determined without
reference to extrinsic facts or aids. The intention of the parties must be gathered from that
language, and from that language alone.

CONSIDERING THE FOREGOING, the Court resolved to DENY the petition.

 THE SECRETARY OF EDUCATION v. HEIRS OF RUFINO DULAY, SR.
G.R. No. 164748. January 27, 2006.
Topic: Obligations with a Period

FACTS:
On August 3, 1981, the spouses Rufino Dulay, Sr. & Ignacia Vicente executed a deed of
donation over a 10,000-square-meter portion of their property located in Rizal, Santiago, Isabela
in favor of the then Ministry of Education and Culture. The deed provides that the consideration
is the benefits that may derived from the use of the property which is intended for school.
Sometime in 1988, Department of Education, Culture, & Sports (DECS) started construction of
the Rizal National High School building on a parcel of land it acquired from Alejandro Feliciano.
The school site was about 2 kilometers away from the land donated by the spouses Dulay.

On August 19, 1994, the spouses Dulay requested to the DECS that the property be
returned to them considering that the land was never used since 1981 to which the Barangay
Council of Rizal recognized the spouses right of redemption because of the failure to utilize the
intended purpose. On December 22, 1994, Rufino Dulay, Sr. passed away. On August 31, 1997,
the heirs of Dulay filed a complaint for the revocation of the deed of donation contending that
DECS did not fulfil the condition & that the land remained idle for years. DECS, thru the Office
of the Solicitor General (OSG), counter-argued that it complied w/ the said condition because it
the land was being used as its technology & & home economics laboratory. Respondents denied
such argument.

On December 26, 2002, the trial court ruled in favor of the respondents, revoking the
deed of donation since it is subject to a resolutory condition to which DECS did not comply; that
the intended school purpose is inexistent since another school has been built nearby. On July
30, 2004, the appellate court affirmed the decision of the trial court.

ISSUE:
Whether or not DECS complied w/ the resolutory condition, namely, that the land
donated shall be used for school purposes to justify the deed of donation.

HELD:
No. The Supreme Court ruled that the appellate court did not err in ruling that there is
nothing in the records that could concretely prove that the condition of donation has been
complied with by the defendant-appellants. Petitioners assert that the planting of palay is
intended for public purpose. In the same breadth, the planting of palay on the land donated can
hardly be considered and could not have been the "school purposes" referred to and intended by
the donors when they had donated the land in question. Also, the posture of the defendant-
appellants that the land donated is being used as technology and home economics laboratory of
the Rizal National High School is far from being the truth considering that not only is the said
school located two kilometers away from the land donated but also there was not even a single
classroom built on the land donated that would reasonably indicate that, indeed, classes have
been conducted therein.
 Jose A. V. Corpus v Hon. Federico C. Alikpala
G.R. No. L-23707 January 17, 1968
Topic: Obligations with a Period

FACTS:
A suit for foreclosure of a real estate mortgage filed by Corpus against Acme Steel
Manufacturing Corp, whereby a compromise judgment was rendered, where the parties agreed
that the unpaid balance of a Nestor de Castro Building be 100,000 Php, to be paid with interest of
1% per month for 1 year, and in the subsequent year 1% on the remaining balance and 0.5% for
the following 2 years. They also agreed that failure to follow the terms of the payment will give
the right to Corpus to be issued a writ of execution for the entire balance. One of Acmes checks
dishonoured when presented for payment due to insufficient funds. Corpus is thus seeking the
entirety of the sum from the Acme. The Corp. argued that it had now put sufficient funds in the
account and the check may be deposited, but Corpus moved for the issuance of the writ of
execution.

ISSUE:
Whether Corpus can demand the entirety of the sum

HELD:
Yes. Art. 1198 (4) is applicable which provides, the The debtor shall lose every right to
make use of the period: XXX (4) When the debtor has violates any undertaking in consideration
of which the creditor agreed to the period. XXX. This is the applicable provision as in asking for
the execution of the entire payment, Corpus was not seeking the resolution of the compromise
agreement, but was demanding enforcement of it. When the check was dishonoured, Acme
automatically became in default and had thus lost the right to make use of the period.
 ALTERNATIVE AND
FACULTATIVE OBLIGATIONS
(ART. 1199 1206)
 AGONCILLO and MARIO
vs. JAVIER, administrator of the estate of the late ANASTACIO ALANO
G.R. No. 12611 August 7, 1918
Topic: Alternative Obligations

FACTS:
Anastacio, Jose, and Florencio Alano, in a document, promised to pay Php 2,730.50 to
Da. Marcela Mario, it being the amount of indebtedness, within a year from the date of the
execution of said document. To secure the payment of the debt, they mortgaged to Mario a
house and lot which, in case of insolvency, shall be ceded to her and transferring all rights to
ownership and possession. Agoncillo and Mario filed the case to compel the defendants to pay
their debt and, in case of failure to do so, convey to them the house and lot. The defendants
claimed that any cause of action against the estate is barred by prescription for failure of Mario
to previously present her claim on the committee on claims for allowance appointed by the court
when Anastacio Alano died. The lower court held that the document was a conveyance of the
house and lot which took effect upon the failure of the debtors to pay the debt.

ISSUE:
W/N the action of the plaintiffs to claim the house and lot for the debtors insolvency is
barred by prescription

HELD:
YES. The action to claim the house and lot is barred by prescription because the claim
on the principal has prescribed. The principal undertaking is the payment of money. The opinion
of the Court is that the agreement to convey the house and lot in the event of failure to pay the
debt in money is perfectly valid. It is simply an undertaking that if the debt is not paid in money,
it will be paid in another way. The obligations of the debtors were alternative and they had the
right to elect which they would perform based on Art. 1132 of the Civil Code (now Art. 1200,
NCC). The liability of the defendants as to the conveyance of the house and lot is subsidiary and
conditional, being dependent upon the failure to pay in money. It must follow that upon
prescription of the action to recover the debt, the action to compel conveyance of the house and
lot must also prescribe because it is only a subsidiary alternative agreement on how the debt shall
be paid.
 ONG GUAN CAN vs. CENTURY INSURANCE CO.
G.R. No. L-22738 December 2, 1924
Topic: Alternative Obligations

FACTS:
A building of the plaintiff was insured against fire by the defendant in sum of P30,000, as
well as the goods and merchandise therein contained in the sum of P15,000. On February 28,
1923, the house and merchandise insured were burnt while the policies issued by the defendant
in favor of the plaintiff were in force. Under clause 14 of the conditions of the policies:

The Company may at its option reinstate or replace the property damaged or
destroyed, or any part thereof, instead of paying the amount of the loss or damage, or
may join with any other Company or insurers in so doing, but the Company shall not be
bound to reinstate exactly or completely, but only as circumstances permit and in
reasonable sufficient manner, and in no case shall the Company be bound to expend more
in reinstatement than it would have cost to reinstate such property as it was at the time of
the occurrence of such loss or damage, nor more than the sum insured by the Company
thereon.

On April 19, 1924, the Court of First Instance of Iloilo rendered a judgment in favor of
the plaintiff, sentencing the defendant company to pay him the sum of P45,000, the value of
certain policies of fire insurance, with legal interest thereon from February 28, 1923, until
payment with the costs. The defendant appealed from the judgment, and insist that the same must
be modified and that it must be permitted to rebuild the house burnt, subject to alignment of the
street where the building was erected, and that they be relieved from the payment of the sum in
which the building was ensured.

ISSUE:
Whether or not the defendant company may rebuild the house burnt instead of paying the
insured amount.

HELD:
No. The Court affirmed the judgment of the CFI. In alternative obligations, the debtor
must notify the creditor of his election, stating which of the two presentations he is disposed to
fulfill, in accordance with Article 1133 of the Civil Code. The object of this notice is to give the
creditor opportunity to express his consent or to impugn the election made by the debtor, and
only after said notice shall the election take legal effect when consented by the creditor, or if
impugned by the latter, when declared proper by a competent court.

In this case, record show that the company did not give any formal notice of election to
rebuild, and while the witnesses speak of the proposed reconstruction of the house destroyed, yet
the plaintiff did not give his assent to the proposition, for the reason that the new house would be
smaller and of materials of lower kind than those employed in the construction of the house
destroyed. Upon this point the trial judge very aptly says in his decision: "It would be an
imposition unequitable, as well as unjust, to compel the plaintiff to accept the rebuilding of a
smaller house than the one burnt, with a lower kind of materials that those of said house, without
offering him an additional indemnity for the difference in size between the two houses, which
circumstances were taken into account when the insurance applied for by the plaintiff was
accepted by the defendant". Additionally, rebuilding of the house was unjust because it does not
compensate the insured value of the merchandise contained in the house destroyed, which
amounts to the sum of P15,000.
Clara Tambunting De Legarda, et al. v
Victoria Desbarats Miailhe
 MARTINA QUIZANO VS. GAUDENCIO REDUGERIO JOSEFA POSTRADO
G.R. No. L-6220 Date: May 7, 1954
Topic: Facultative Obligations

FACTS:
On October 4, 1948, defendant-appellant Josefa Postrado together with her husband,
contracted a loan from plaintiff-appellee Martina Quizana amounting to Php 550.00 which they
promise to pay on the month of January 1949. It was also stipulated in the contract that if
defendant-appellants fail to pay the said amount on the stipulated date, they will give their
coconut farm situated at Cororocho, Balogo, Sta. Cruz, Marinduque.

The defendants-appellants admit the execution of the document, but claim, as special
defense, that since the 31st of January, 1949, they offered to pledge the land specified in the
agreement and transfer possession thereof to the plaintiff-appellee, but that the latter refused said
offer contending that the second part of the written obligation, in which the defendant -appellees
agreed and promised to deliver a mortgage over the parcel of land described therein, upon their
failure to pay the debt on a date specified in the proceeding paragraph, is not valid and not
binding and effective upon him

ISSUE:
Whether or not the second part of the written obligation, in which the defendant -
appellees agreed and promised to deliver a mortgage over the parcel of land described therein,
upon their failure to pay the debt on a date specified in the proceeding paragraph is valid and
binding upon the plaintiff

HELD:
The decisive question at issue, therefore, is whether the second part of the written
obligation, in which the obligors agreed and promised to deliver a mortgage over the parcel of
land described therein, upon their failure to pay the debt on a date specified in the proceeding
paragraph, is valid and binding and effective upon the plaintiff-appellee, the creditor. This
second part of the obligation in question is what is known in law as a facultative obligation,
defined in article 1206 of Civil Code of the Philippines, which provides:

ART. 1206. When only one prestation has been agreed upon, but the obligor may
render another in substitution, the obligation is called facultative.
xxx xxx xxx

This is a new provision and is not found in the old Spanish Civil Code, which was the
one in force at the time of the execution of the agreement.

There is nothing in the agreement which would argue against its enforcement. it is not
contrary to law or public morals or public policy, and notwithstanding the absence of any legal
provision at the time it was entered into government it, as the parties had freely and voluntarily
entered into it, there is no ground or reason why it should not be given effect. It is a new right
which should be declared effective at once, in consonance with the provisions of article 2253 of
the Civil Code of the Philippines, thus:
ART. 2253. . . . But if a right should be declared for the first time in this Code, it
shall be effective at once, even though the act or event which gives rise thereto
may have been done or may have occurred under the prior legislation, provided
said new right does not prejudice or impair any vested or acquired right, of the
same origin.
 ARCO PULP AND PAPER CO., INC. AND CANDIDA A. SANTOS
vs DAN T. LIM
G.R. No. 206806 June 25, 2014
Topic: Alternative Obligations

FACTS:
Dan T. Lim works in the business of supplying scrap papers, cartons and other raw
materials under the name of Quality Paper and Plastic Products, Enterprises to factories engaged
in the paper mill business. He delivered scrap papers to Arco Pulp and Paper Company, Inc.
through its CEO and President, Candida A. Santos. The parties allegedly agreed that Arco Pulp
and Paper would either pay Lim the value of the raw materials or deliver to him their finish
products of equivalent value.

Lim alleged that when he delivered the raw materials, Arco Pulp and Paper issue a post
dated check, with the assurance that the check would not bounce. When he deposited the check,
it was dishonored for being drawn against a closed account.

On the same day, Arco Pulp and Paper and Eric Sy executed a memorandum of
agreement where Arco Pulp and Paper bound themselves to deliver their finished products to
Megapack Container Corp owned by Sy. According to the memorandum, the raw materials
would be supplied by Lim, through his company, Quality Paper and Plastic Products.

Lim sent a demand letter to Arco Pulp and Paper but no payment was made to him.
Hence he filled a complaint for collection of sum of money.

RTC rendered judgment in favor of Arco Pulp and Paper and dismissed the complaint,
holding that Arco Pulp and Paper and Eric Sy entered into the memorandum of agreement,
novation took place, which extinguished Arco Pulp and Papers obligation Lim.

On Appeal, Lim argued that novation did not take place since the memorandum of
agreement between Arco Pulp and Paper and Eric Sy was an exclusive and private agreement
between them.

The CA reversed the decision of RTC and ruled that the facts and circumstances in this
case showed existence of an alternative obligation.

ISSUE:
Whether the obligation between parties was an alternative obligation

HELD:
Yes, the obligation between the parties was an alternative obligation. The rule on
alternative obligations is governed by Art 1199 of the Civil Code. According to factual findings
of the trial court and appellate court, the original contract between the parties was for respondent
to deliver scrap papers worth 7,220,969.31 to petitioner Arco Pulp and Paper. The payment for
this delivery became petitioners obligation. By agreement, the petitioner Arco Pulp and paper,
as the debtor, had the option to either pay the price, deliver the finished products or equivalent
value of respondent. The appellate court correctly identified the obligation between the parties as
an alternative obligation, whereby the petitioner after receiving the raw materials from
respondent, would either pay him the price of the raw materials or in the alternative, deliver to
him the finished products of equivalent value. Petition is denied.
JOINT AND SOLIDARY
OBLIGATIONS
(ART. 1207 1222)
 REPUBLIC GLASS CORPORATION AND GERVEL, INC. v CUA
G.R. No. 144413 July 30, 2004
Topic: Joint and Solidary Obligations

FACTS:
Petitioners Republic Glass Corporation (RGC) and Gervel, Inc. (Gervel) together
with respondent Lawrence C. Qua (Qua) were stockholders of Ladtek, Inc. (Ladtek). Ladtek
obtained loans from Metropolitan Bank and Trust Company (Metrobank) and Private
Development Corporation of the Philippines (PDCP) with RGC, Gervel and Qua as sureties.
Among themselves, RGC, Gervel and Qua executed Agreements for Contribution, Indemnity
and Pledge of Shares of Stocks (Agreements). The Agreements all state that in case of default
in the payment of Ladteks loans, the parties would reimburse each other the proportionate share
of any sum that any might pay to the creditors.

Ladtek defaulted on its loan obligations to Metrobank and PDCP. During the pendency of
Collection Case No. 8364, RGC and Gervel paid Metrobank P7 million. Later, Metrobank
executed a waiver and quitclaim dated 7 September 1988 in favor of RGC and Gervel. Based on
this waiver and quitclaim, Metrobank, RGC and Gervel filed on 16 September 1988 a joint
motion to dismiss Collection Case No. 8364 against RGC and Gervel. Qua refused to reimburse
the amount to RGC and Gervel. Subsequently, RGC and Gervel furnished Qua with notices of
foreclosure of Quas pledged shares. RGC and Gervel eventually foreclosed all the pledged
shares of stock at public auction.

RTC ruled in the Foreclosure Case No. 88-2643 that defendants' payment entitled them to
reimbursement from plaintiff and having failed to do so, the foreclosure of the shares of stocks
is justified. The CA ruled otherwise, stating that the payment did not extinguish the entire
obligation and did not benefit Qua. Accordingly, RGC and Gervel cannot demand
reimbursement. Hence, this petition.

ISSUE:
Whether or not RGC and Gervel have the right to seek for reimbursement from Qua as
solidary co-debtor.

HELD:
No. The SC held that the payment of the entire obligation by one or some of the solidary
debtors results in a corresponding obligation of the other debtors to reimburse the paying debtor.
However, we agree with RGC and Gervels contention that in this case payment of the entire
obligation is not an essential condition before they can seek reimbursement from Qua. The words
of the Agreements are clear.

If a solidary debtor pays the obligation in part, he can recover reimbursement from the
co-debtors only in so far as his payment exceeded his share in the obligation. Considering that
RGC and Gervel paid only P7 million out of the total obligation of P14,200,854.37, which
payment was less than RGC and Gervels combined shares in the obligation, 38 it was clearly
partial payment. Since they only made partial payments, RGC and Gervel should clearly and
convincingly show that their payments to Metrobank and PDCP exceeded their proportionate
shares in the obligations before they can seek reimbursement from Qua. This RGC and Gervel
failed to do. RGC and Gervel, in fact, never claimed that their payments exceeded their shares in
the obligations. Consequently, RGC and Gervel cannot validly seek reimbursement from Qua.

In sum, RGC and Gervel have no legal basis to seek reimbursement from Qua.
Consequently, RGC and Gervel cannot validly foreclose the pledge of Quas GMC shares of
stock which secured his obligation to reimburse. Therefore, the foreclosure of the pledged shares
of stock has no leg to stand on.
 Lafarge Cement Philippines, Inc., et al v. Continental Cement Corporation, et al
GR No 155173 November 23, 2004
Topic: Joint and Solidary Obligations

FACTS:
Briefly, the origins of the present controversy can be traced to the Letter of Intent (LOI)
executed by both parties on August 11, 1998, whereby Petitioner Lafarge Cement Philippines,
Inc. (Lafarge) -- on behalf of its affiliates and other qualified entities, including Petitioner Luzon
Continental Land Corporation (LCLC) -- agreed to purchase the cement business of Respondent
Continental Cement Corporation (CCC). On October 21, 1998, both parties entered into a Sale
and Purchase Agreement (SPA). At the time of the foregoing transactions, petitioners were well
aware that CCC had a case pending with the Supreme Court. The case was docketed as GR No.
119712, entitled Asset Privatization Trust (APT) v. Court of Appeals and Continental Cement
Corporation.

In anticipation of the liability that the High Tribunal might adjudge against CCC, the
parties, under Clause 2 (c) of the SPA, allegedly agreed to retain from the purchase price a
portion of the contract price in the amount of P117,020,846.84 -- the equivalent of
US$2,799,140. This amount was to be deposited in an interest-bearing account in the First
National City Bank of New York (Citibank) for payment to APT, the petitioner in GR No.
119712.

However, petitioners allegedly refused to apply the sum to the payment to APT, despite
the subsequent finality of the Decision in GR No. 119712 in favor of the latter and the repeated
instructions of Respondent CCC. Fearful that nonpayment to APT would result in the
foreclosure, not just of its properties covered by the SPA with Lafarge but of several other
properties as well, CCC filed before the Regional Trial Court of Quezon City on June 20, 2000, a
Complaint with Application for Preliminary Attachment against petitioners. Docketed as Civil
Case No. Q-00-41103, the Complaint prayed, among others, that petitioners be directed to pay
the APT Retained Amount referred to in Clause 2 (c) of the SPA.

Petitioners moved to dismiss the Complaint on the ground that it violated the prohibition
on forum-shopping. Respondent CCC had allegedly made the same claim it was raising in Civil
Case No. Q-00-41103 in another action, which involved the same parties and which was filed
earlier before the International Chamber of Commerce. After the trial court denied the Motion to
Dismiss in its November 14, 2000 Order, petitioners elevated the matter before the Court of
Appeals in CA-GR SP No. 68688.

In the meantime, to avoid being in default and without prejudice to the outcome of their
appeal, petitioners filed their Answer and Compulsory Counterclaims ad Cautelam before the
trial court in Civil Case No. Q-00-41103. In their Answer, they denied the allegations in the
Complaint. They prayed -- by way of compulsory counterclaims against Respondent CCC, its
majority stockholder and president Gregory T. Lim, and its corporate secretary Anthony A.
Mariano -- for the sums of (a) P2,700,000 each as actual damages, (b) P100,000,000 each as
exemplary damages, (c) P100,000,000 each as moral damages, and (d) P5,000,000 each as
attorneys fees plus costs of suit.
 Petitioners alleged that CCC, through Lim and Mariano, had filed the baseless
Complaint in Civil Case No. Q-00-41103 and procured the Writ of Attachment in bad faith.
Relying on this Courts pronouncement in Sapugay v. CA, petitioners prayed that both Lim and
Mariano be held jointly and solidarily liable with Respondent CCC.

On behalf of Lim and Mariano who had yet to file any responsive pleading, CCC moved
to dismiss petitioners compulsory counterclaims on grounds that essentially constituted the very
issues for resolution in the instant Petition.

ISSUE:
Whether or not the RTC gravely erred in ruling that (i) petitioners counterclaims against
Respondents Lim and Mariano are not compulsory; (ii) Sapugay v. Court of Appeals is
inapplicable here; and (iii) petitioners violated the rule on joinder of causes of action.

HELD:
Obligations may be classified as either joint or solidary. Joint or jointly or conjoint
means mancum or mancomunada or pro rata obligation; on the other hand, solidary obligations
may be used interchangeably with joint and several or several. Thus, petitioners usage of
the term joint and solidary is confusing and ambiguous.
The ambiguity in petitioners counterclaims notwithstanding, respondents liability, if proven, is
solidary. This characterization finds basis in Article 1207 of the Civil Code, which provides that
obligations are generally considered joint, except when otherwise expressly stated or when the
law or the nature of the obligation requires solidarity. However, obligations arising from tort are,
by their nature, always solidary. We have assiduously maintained this legal principle as early as
1912 in Worcester v. Ocampo, in which we held:
x x x The difficulty in the contention of the appellants is that they fail to
recognize that the basis of the present action is tort. They fail to recognize the universal
doctrine that each joint tort feasor is not only individually liable for the tort in which he
participates, but is also jointly liable with his tort feasors. x x x

It may be stated as a general rule that joint tort feasors are all the persons who
command, instigate, promote, encourage, advise, countenance, cooperate in, aid or abet the
commission of a tort, or who approve of it after it is done, if done for their benefit. They are each
liable as principals, to the same extent and in the same manner as if they had performed the
wrongful act themselves. x x x

Joint tort feasors are jointly and severally liable for the tort which they commit. The
persons injured may sue all of them or any number less than all. Each is liable for the whole
damages caused by all, and all together are jointly liable for the whole damage. It is no defense
for one sued alone, that the others who participated in the wrongful act are not joined with him as
defendants; nor is it any excuse for him that his participation in the tort was insignificant as
compared to that of the others. x x x
 Joint tort feasors are not liable pro rata. The damages can not be apportioned among
them, except among themselves. They cannot insist upon an apportionment, for the purpose of
each paying an aliquot part. They are jointly and severally liable for the whole amount. x x x

A payment in full for the damage done, by one of the joint tort feasors, of course
satisfies any claim which might exist against the others. There can be but satisfaction. The
release of one of the joint tort feasors by agreement generally operates to discharge all. x x x

Of course the court during trial may find that some of the alleged tort feasors are liable
and that others are not liable. The courts may release some for lack of evidence while
condemning others of the alleged tort feasors. And this is true even though they are charged
jointly and severally.

In a joint obligation, each obligor answers only for a part of the whole liability; in a
solidary or joint and several obligation, the relationship between the active and the passive
subjects is so close that each of them must comply with or demand the fulfillment of the whole
obligation. The fact that the liability sought against the CCC is for specific performance and tort,
while that sought against the individual respondents is based solely on tort does not negate the
solidary nature of their liability for tortuous acts alleged in the counterclaims. Article 1211 of the
Civil Code is explicit on this point:

Solidarity may exist although the creditors and the debtors may not be bound in the
same manner and by the same periods and conditions.

The solidary character of respondents alleged liability is precisely why credence cannot
be given to petitioners assertion. According to such assertion, Respondent CCC cannot move to
dismiss the counterclaims on grounds that pertain solely to its individual co-debtors. In cases
filed by the creditor, a solidary debtor may invoke defenses arising from the nature of the
obligation, from circumstances personal to it, or even from those personal to its co-debtors.

Article 1222 of the Civil Code provides:

A solidary debtor may, in actions filed by the creditor, avail itself of all defenses
which are derived from the nature of the obligation and of those which are personal to
him, or pertain to his own share. With respect to those which personally belong to the
others, he may avail himself thereof only as regards that part of the debt for which the
latter are responsible.

The act of Respondent CCC as a solidary debtor -- that of filing a motion to dismiss the
counterclaim on grounds that pertain only to its individual co-debtors -- is therefore allowed.
However, a perusal of its Motion to Dismiss the counterclaims shows that Respondent CCC filed
it on behalf of Co-respondents Lim and Mariano; it did not pray that the counterclaim against it
be dismissed. Be that as it may, Respondent CCC cannot be declared in default. Jurisprudence
teaches that if the issues raised in the compulsory counterclaim are so intertwined with the
allegations in the complaint, such issues are deemed automatically joined. Counterclaims that are
only for damages and attorneys fees and that arise from the filing of the complaint shall be
considered as special defenses and need not be answered.
 CCCs Motion to Dismiss the Counterclaim on Behalf of Respondents Lim and Mariano
Not Allowed.

While Respondent CCC can move to dismiss the counterclaims against it by raising
grounds that pertain to individual defendants Lim and Mariano, it cannot file the same Motion on
their behalf for the simple reason that it lacks the requisite authority to do so. A corporation has a
legal personality entirely separate and distinct from that of its officers and cannot act for and on
their behalf, without being so authorized. Thus, unless expressly adopted by Lim and Mariano,
the Motion to Dismiss the compulsory counterclaim filed by Respondent CCC has no force and
effect as to them.
 CERNA MANOLO P. CERNA vs. THE HONORABLE COURT OF THE
HONORABLE COURT OF APPEALS and CONRAD C. LEVISTE
G.R. No. L-4835. March 30, 1993
Topic: Solidary Obligations

FACTS:
On or about October 16, 1972, Celerino Delgado and Conrad Leviste entered into a
loan agreement which was evidenced by a promissory note. On the same date, Delgado
executed a chattel mortgage over a Willy's jeep owned by him; he is acting as the attorney-
in-fact in a mortgage contract of herein petitioner and; he also mortgage a "Taunus" car owned
by the petitioner. Consequently, the period lapsed without Delgado paying the loan. For
that reason, Leviste was prompted to file a collection suit (docketed as Civil Case No.
17507 ) with the CFI of Rizal against Delgado and petitioner Cerna as solidary debtors.

The petitioner filed his first Motion to Dismiss on the ground of lack of cause of
action against petitioner and the death of Delgado. Petitioner claimed that the claim
should be filed in the proceedings for the settlement of Delgado's estate as the action did
not survive Delgado's death. Moreover, he also stated that since Leviste already opted to
collect on the note, he could no longer foreclose the mortgage. This Motion to Dismiss
was denied. Thereafter, petitioner filed with the Court of Appeals a special civil action
for certiorari, mandamus, and prohibition with preliminary injunction docketed as CA G.R.
No. 03088 on the ground that the respondent judge committed grave abuse of discretion
in refusing to dismiss the complaint, but then the court denied because the petitioner failed
to prove the death of Delgado and the consequent settlement proceedings regarding the
latter's estate.

On February 18, 1977, petitioner filed his second Motion to Dismiss on the
ground that the trial court acquired no jurisdiction over deceased defendant, that the claim
did not survive, and that there was no cause of action against him. The motion was
dismissed.

Thereafter, petitioner filed a motion to reconsider the said order but this was
denied. Then, on October 17, 1977, he filed another petition for certiorari and prohibition
with the Court of Appeals. In holding petitioner liable, the Court of Appeals held that
petitioner Cerna and Delgado were liable as solidary debtors.

ISSUE:
Whether or not petitioner Cerna and Delgado are liable as solidary debtors

HELD:
NO. The Court did not agree. The Court said, only Delgado signed the promissory
note and accordingly, he was the only one bound by the contract of loan. Nowhere did it
appear in the promissory note that the petitioner was a co-debtor. The law is clear that
"contracts take effect only between the parties . . ." But by some stretch of such
imagination, petitioner was held solidarily liable for the debt allegedly because he was a
co-mortgagor of Delgado, the principal debtor. This ignores the basic precept that "there is
solidarily liability only when the obligation expressly so states, or when the law or the
nature of the obligation requires solidarity." We have already stated that the contract of
loan, as evidenced by the promissory note, was signed by Delgado only. Hence, the
petitioner had no part in the said contract, nowhere could it be seen from the agreement
that petitioner was solidarily bound with Delgado for the payment of the loan.

Moreover, there is also no legal provision nor jurisprudence in our jurisdiction

which makes a third person (petitioner Cerna) who secures the fulfillment of another's
obligation by mortgaging his own property to be solidarily bound with the principal
obligor (Delgado). A chattel mortgage may be "an accessory contract" to a contract of
loan, but that fact alone does not make a third-party mortgagor (petitioner) solidarily
bound with the principal debtor (Delgado) in fulfilling the principal obligation that is, to
pay the loan. The signatory to the principal contract of loan remains to be primarily
bound. It is only upon the default of the latter that the creditor may have been recourse
on the mortgagors by foreclosing the mortgaged properties in lieu of an action for the
recovery of the amount of the loan. Moreover, the liability of the third-party mortgagors
extends only to the property mortgaged. Should there be any deficiency, the creditors has
recourse on the principal debtor.

More so, the mortgage contract was also signed only by Delgado as mortgagor. The
Special Power of Attorney did not make the petitioner a mortgagor, all it did was to
authorized Delgado to mortgage certain properties belonging to petitioner. In this case, the
petitioner lent his car to Delgado so that the Delgado may mortgage the same to secure
his debt to Leviste. Thus, from the contract itself, it was clear that only Delgado was the
mortgagor regardless of the fact the he used properties belonging to a third person to
secure his debt.

Leviste, having chosen to file the collection suit, could not now run after the
petitioner for the satisfaction of the debt. This is even more true in this case because of
the death of the principal debtor, Delgado. Leviste was pursuing a money claim against a
deceased person. (Section 7, Rule 86 lof the Rules of Court).
 SESBRENO vs. COURT OF APPEALS and RODIS, SR.
G.R. No. 84096 January 26, 1995
Topic: Joint and Solidary Obligations

FACTS:
Petitioner Raul H. Sesbreno made a money market placement in the amount of Php
300,000 with PhilFinance with a term of 32 days payable on March 13, 1981. In turn
PhilFinance issued a Certificate of Confirmation of Sale of a Delta Motor Corporation
Promissory Note (DMC PN) and a Certificate of Securities Delivery Receipt indicating that the
said promissory note where the Pilipinas Bank was the custodian-depositary evidencing the
petitioner's money market placement. The promissory note had a face value of Php 2.3 million
stamped across the face of the note non-negotiable with PhilFinanace as the payee and Delta
Motor Corporation as the maker.

The checks were dishonored for having been drawn against insufficient funds which
prompted the petitioner to demand to Pilipinas Bank the physical delivery of the promissory note
which the latter did not. The petitioner also made a written demand from Delta Motor
Corporation for the partial satisfaction of the promissory note which the latter also denied and
insisted that such note was not intended to be negotiable.

As the petitioner failed to collect his investment and interest, he filed an action for
damages with the Regional Trial Court against Delta Motor Corporation and Pilipinas Bank. The
complaint was dismissed since the petitioner did not implead PhilFnance in the complaint for
damages arising from the non-return of his investment with respect to the same money market
placement involved. The said complaint having been dismissed for lack of merit, petitioner
appealed to the Court of Appeals which affirmed the dismissal order. The Court of Appeals held
that PhilFnance is "solely and legally obligated to return the investment of plaintiff, together with
its earnings, and to answer all the damages plaintiff has suffered incident thereto." Petitioner
thereafter led a petition for review on certiorari.

ISSUE:
Whether or not a non-negotiable promissory note be assigned.

HELD:
Yes. Although the promissory note was marked non-negotiable, it was not at the same
time stamped not-transferable or non-assignable. Hence, there is no stipulation which
prohibits the promissory note to be assigned nor transferred.
In money market placement, the investor is a lender who loans his money to a borrower through
a middleman or dealer. Petitioner here loaned his money to a borrower through PhilFinance and
when the latter failed to deliver back petitioner's placement with the corresponding interest
earned at the maturity date, the liability incurred by PhilFinance was a civil one. As such,
petitioner could have instituted against PhilFinance before the ordinary courts a simple action for
recovery of the amount he had invested and he could have prayed therein for damages but he did
not. Thus, the Court of Appeals correctly ruled that a money market transaction partakes of the
nature of a loan and therefore "nonpayment thereof would not give rise to criminal liability for
estafa through misappropriation or conversion. The Court of Appeals noted that PhilFinance was
not obliged under the money market transaction to return the same money he or the corporation
had received from petitioner. The Court rendered a decision ordering Pilipinas Bank to pay
petitioner the amount of P304,533.33 in damages plus legal interest thereon at the rate of six
percent (6%) per annum counted from April 2, 1981 being the custodian-depositary of DMC PN.
In holding Pilipinas Bank liable for damages for breach of duty.

Petitioner's recovery of his investment and the dismissal of the criminal aspect of the case
he had led against private respondent as a consequence of this decision notwithstanding, he still
has an opportunity to hold private respondent liable in a criminal liable as it was held in People
v. Tugbang that ". . . an accused acquitted of a criminal charge may nevertheless be held in the
same case civilly liable where the facts established by the evidence so warrants."

Wherefore the petition is denied and the decision of the Court of Appeals, as modified is
affirmed in toto.
METRO MANILA TRANSIT CORPORATION vs. THE
COURT OF APPEALS
G.R. No. 141089 August 1, 2002
Topic:
 ESTRELLA PALMARES, petitioner, vs.
THE COURT OF APPEALS, and M.B. LENDING CORPORATION, respondents.
G.R. No. 126490 March 31, 1998
Topic: Joint and Solidary Obligations in relation to Suretyship

FACTS:
Pursuant to a promissory note dated March 13, 1990, private respondent M.B. Lending
Corporation extended a loan to the spouses Osmea and Merlyn Azarraga, together with
petitioner Estrella Palmares, in the amount of P30,000.00 payable on or before May 12, 1990,
with compounded interest at the rate of 6% per annum to be computed every 30 days from the
date thereof. On four occasions after the execution of the promissory note and even after the loan
matured, petitioner and the Azarraga spouses were able to pay a total of P16,300.00, thereby
leaving a balance of P13,700.00. No payments were made after the last payment on September
26, 1991. Consequently, on the basis of petitioner's solidary liability under the promissory note,
respondent corporation filed a complaint against petitioner Palmares as the lone party-defendant,
to the exclusion of the principal debtors, allegedly by reason of the insolvency of the latter.
appellate court declared that petitioner Palmares is a surety since she bound herself to be jointly
and severally or solidarily liable with the principal debtors, the Azarraga spouses, when she
signed as a co-maker. As such, petitioner is primarily liable on the note and hence may be sued
by the creditor corporation for the entire obligation.

The basis of petitioner Palmares' liability under the promissory note is expressed in this
wise:
ATTENTION TO CO-MAKERS : PLEASE READ WELL
I, Mrs . Estrella Palmares , as the Co-maker of the above-quoted loan, have fully
understood the contents of this Promissory Note for Short-Term Loan:
That as Co-maker, I am fully aware that I shall be jointly and severally or solidarily liable
with the above principal maker of this note;
That in fact, I hereby agree that M.B. LENDING CORPORATION may demand
payment of the above loan from me in case the principal maker, Mrs . Merlyn Azarraga
defaults in the payment of the note subject to the same conditions above-contained.

[A]lthough the second paragraph says that she is liable as a surety, the third paragraph
defines the nature of her liability as that of a guarantor.

Petitioner accordingly concludes that her liability should be deemed restricted by the
clause in the third paragraph of the promissory note to be that of a guarantor.

ISSUE:
Whether or not petitioner is a surety and thus jointly and severally liable with the debtors.

HELD:
YES. Art. 2047. By guaranty, a person called the guarantor binds himself to the creditor
to fulfill the obligation of the principal debtor in case the latter should fail to do so. If a person
binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I
of this Book shall be observed. In such case the contract is called a suretyship.
 In the case at bar, petitioner expressly bound herself to be jointly and severally or
solidarily liable with the principal maker of the note. The terms of the contract are clear, explicit
and unequivocal that petitioner's liability is that of a surety.

Several attendant factors in that genre lend support to our finding that petitioner is a
surety. For one, when petitioner was informed about the failure of the principal debtor to pay the
loan, she immediately offered to settle the account with respondent corporation. Obviously, in
her mind, she knew that she was directly and primarily liable upon default of her principal. For
another, and this is most revealing, petitioner presented the receipts of the payments already
made, from the time of initial payment up to the last, which were all issued in her name and of
the Azarraga spouses. This can only be construed to mean that the payments made by the
principal debtors were considered by respondent corporation as creditable directly upon the
account and inuring to the benefit of petitioner. The concomitant and simultaneous compliance
of petitioner's obligation with that of her principals only goes to show that, from the very start,
petitioner considered herself equally bound by the contract of the principal makers. In this
regard, we need only to reiterate the rule that a surety is bound equally and absolutely with the
principal, and as such is deemed an original promisor and debtor from the beginning. This is
because in suretyship there is but one contract, and the surety is bound by the same agreement
which binds the principal. In essence, the contract of a surety starts with the agreement, which is
precisely the situation obtaining in this case before the Court.

A surety is usually bound with his principal by the same instrument, executed at the same
time and upon the same consideration; he is an original debtor, and his liability is immediate and
direct.

A creditor's right to proceed against the surety exists independently of his right to
proceed against the principal. Under Article 1216 of the Civil Code, the creditor may proceed
against any one of the solidary debtors or some or all of them simultaneously. The rule,
therefore, is that if the obligation is joint and several, the creditor has the right to proceed even
against the surety alone. Since, generally, it is not necessary for the creditor to proceed against a
principal in order to hold the surety liable, where, by the terms of the contract, the obligation of
the surety is the same that of the principal, then soon as the principal is in default, the surety is
likewise in default, and may be sued immediately and before any proceedings are had against the
principal.

Judgment appealed from is AFFIRMED subject to modification.

 GEORGE TIU AND ROSALINA TIU vs. COURT OF APPEALS AND JUAN GO
G.R. No. 107481 November 18, 1993
Topic: Joint and Solidary Obligations

FACTS:
George Tiu and Rosalina Tiu negotiated a loan of P300,000.00 with Juan Go who then
asked for a mortgage of the Condominium Units owned by Tiu as security for the payment. Juan
Go then prepared a document denominated as "deed of sale of a condominium with right to
repurchase" and another as "contract of lease", the former in favor of the spouses Lim and the
latter in favor of George Tiu. When George Tiu tried to redeem the said properties, Juan Go
refused redemption of the mortgaged properties. Spouses Lim claimed that by virtue of George
Tiu's failure, as vendor a retro, to exercise his right to repurchase the condominium units within
the period expressly stipulated in the contract, the spouses thereupon irrevocably acquired the
absolute ownership of said condominium units; that absolute ownership thereof has been
consolidated in their names;

Go subsequently filed a motion to admit third party-complaint for a sum of money and
damages against Joaquin Tiu, alleging that on different dates, the latter had, for himself and in
behalf of the Tius, received the money as loan or advances in connection with the latter's tobacco
business, in the total amount of P700,000.00, for which amount Joaquin Tiu should be held
jointly and severally liable with the Tius.

ISSUE:
Whether or not Joaquin Tiu is solidariliy liable with George and Rosalina Tiu

HELD:
NO. The various receipts clearly show that the appellant George Tiu never signed the
receipts nor received any money from appellant Go while appellant Joaquin Tiu signed and
received the money for and in behalf of Rosalina. Consequently, they are not liable solidarily for
the said amounts even if the money were used for their tobacco business. And even if they
admitted that they received the money, both are not liable in solidum because there was no
express provision in said receipts that appellants George and Joaquin Tiu should be liable in
solidum.

There is solidary obligation only when the obligation expressly so states or when the law
or nature of the obligation requires solidarity. There is also no truth to the allegation that
appellants George and Joaquin Tiu admitted that they are jointly and solidarily liable for said
amount. What they admitted was that they received said money. Appellants' failure to deny the
allegations in Go's third party complaint does not amount to an admission that they are solidarily
liable. Be it noted that appellants Tiu, in their reply and answer to the counterclaim of appellant
Go, admitted that only appellant Rosalina Tiu received the monies.

The doctrine laid down on the case of Un Fak Leang vs. Nigurra, falls squarely on the
point wherein the Supreme Court ruled that an admission of two debtors in their brief that their
liability in the contract is a solidary one does not convert the joint character of their obligation as
appearing in their contract, for what determines the nature of the obligation is the tenor of their
contract itself, not the admission of the parties.
 SOLIDBANK CORPORATION VS MINDANAO FERROALLOY CORPORATION
G.R. No.153535 July 28, 2005
Topic: Joint and Solidary Obligation

FACTS :
The following corporations decided to forge into a joint venture: Maria Cristina Chemical
Industries(MCCI) and three Korean corporations, namely Ssangyong Corporation, the Pohang
Iron Corporation and Steel Company and the Dongil Industries Company, Ltd. They decided to
establish a corporation, under the name of Mindanao Ferroalloy Corporation with principal
office situated in Illigan City. The president and chairman of the board of directors was Ricardo
P. Guevarra, while the vice president of the corporation was the general manager of Ssangyong
Corporation, Jong-Won Hong and so was Terresita Cu.

On November 26,1990 the board of directors approved a resolution which states that
Teresita Cu acting together with Jong- Won Hong was to secure an omnibus line from Solidbank
with an amount of P30,000,000.000. Sometime in April 1991, the indebtedness of the company
ballooned to the amount of P200,453,686.69 as compared to its assets which contained only
P65,476,000.

On May 21, 1991 the corporation secured an ordinary loan from Solidbank with the
amount of P3,200,000. Later March 28, 1991, another loan was granted in favour of the
corporation with an amount of P1,800.000. This would mean that the total loan obtained by the
company amounted to P5,000,000. The corporation and the bank agreed to consolidate and thus
they agreed to reconstruct the two loan availments both payable on September 20 ,1991. The
corporation later executed Promisorry Note No. 96-91-00865-6 in favour of the bank with an
amount of P5,160,000.000 payable on September 20, 1991. The corporation also executed a
Deed of Assignment in favour of the bank covering its rights, title and interest.

After the execution of the said deeds, the corporation stopped its operations. Hence with
this being said , the corporation failed to pay Solidbank the amount of P7,283,913.33.

ISSUE:
Whether or not in the absence of joint and solidary liability the provision of Article 1208
in relation to Article 1207 of the civil code will apply in the case at bar

HELD:
No. As stated in Article 1207 of the civil code, there is solidary liability only when the
obligation expressly so states, or when the law or the nature of the obligation requires solidarity.
Since solidarity is not expressly stated in the promisory note, it cannot be presumed.

With regard to joint liability, it also cannot apply in this case. The evidence show that
there is only one debtor: the corporation. For a joint obligation to exist, there must be at least two
debtors each of whom is liable only for a proportionate part of the debt, and the creditor is
entitled only to a proportionate part of a credit. The fact that Respondents Cu and Hong sign for
and on behalf of the corporation clearly established that they are acting in behalf of the
corporation.
 INTERNATIONAL FINANCE CORPORATION
vs. IMPERIAL TEXTILE MILLS, INC.
GR. No. 154885 March 24, 2008.
Topic: Article 1207-1222; Joint and Solidary Obligations

FACTS:
International Finance Corporation and Philippine Polyamide Industrial Corporation
entered into a loan agreement wherein IFC extened to PPIC a loan of US$ 7 000 000, payable in
16 semi-annual installments of US$ 437, 500 each with interest rate of 10% per annum on the
prinicpal amount of the loan advanced and outstanding from time to time. A Guarantee
Agreement was executed with Imperial Textile Mills, Inc. , Grand Textile Manufacturing Corp.
and IFC as parties. ITM and Grandtex agreed to guarantee PPICs obligation under the loan
agreement. The first 3 installments have been paid however the next 3 were rescheduled as
requested by PPIC. Despite rescheduling, PPIC defaulted. IFC served a notice of default to PPIC
demanding the latter to pay the outstanding principal loan and all its acrrued interests. Despite
such notice, PPIC failed to pay the loan and interests.

IFC applied for the extrajudicial foreclosure of mortgages on the real estate, buildings,
machinery and equipment plant and all improvements owned by PPIC. The extrajudicial sale of
PPICs properties amounted to US$ 5 250 000 leaving a balance of US$ 2 833 967. PPIC failed
to pay the remaining balance, IFC demanded ITM and Grandtex as guarantors to pay the
outstanding balance. The remaining balance is still left unpaid.
CA held that ITM bound itself under the Guarantee Agreement to pay PPICs obligation upon
default. It held as well that ITMs liability as a guarantor would arise only if and when PPIC
could not pay. Since PPICs inability to comply with its obligation was not sufficiently
established, ITM could not immeditaly be made to assume the liability.

ISSUE:
Whether or not Imperial Textile Mills is a surety and thus solidarily liable with PPIC for
the payment of the loan

HELD:
Yes, ITM is a surety. While the Guarantee Agreement specifically stated that ITM was
jointly and severally liable, the contract further stated that ITM was a pimary obligor, not a
mere surety. Those stipulations meant only one thing: that at bottom, it was a surety. Thus, ITM
bound itself to be solidarily liablewith PPIC. ITM thereby brought itself to the level of PPIC and
could not be deemed merely secondarily liable. As Article 2047 provides, a suretyship is created
when a guarantor binds itself solidarily with the principal obligor. Article 1216 states that The
creditor may proceed against any one of the solidary debtors or some or all of them
simultaneously. The demand made against one of them shall not be an obstacle to those which
may subsequently be directed against the others, so long as the debt has not been fully collected.
Thus the petitioner as creditor was justified in taking action directly against a respondent.
 PEOPLE OF THE PHILIPPINES vs. BARTOLOME TAMPUS and IDA
MONTESCLAROS
G.R. No. 181084 June 16, 2009
Topic: Solidary liability in criminal offenses

FACTS:
On February 19, 1995, Ida and ABC, whom are mother and daughter started to rent a
room in a house owned by Tampus, a barangay tanod. On April 1, 1995., ABC testified that she
was in the house with Ida and Tampus who were both drinking beer at that time. They forced
her to drink beer 10 and after consuming three and one-half (3 1/2) glasses of beer, she became
intoxicated and very sleepy. While ABC was lying on the floor of their room, she overheard
Tampus requesting her mother, Ida, that he be allowed to "remedyo" or have sexual intercourse
with her. Appellant Ida agreed and instructed Tampus to leave as soon as he finished having
sexual intercourse with ABC. Ida then went to work, leaving Tampus alone with ABC. ABC fell
asleep and when she woke up, she noticed that the garter of her panties was loose and rolled
down to her knees. She suffered pain in her head, thighs, buttocks, groin and vagina, and noticed
that her panties and short pants were stained with blood which was coming from her vagina.
When her mother arrived home from work the following morning, she kept on crying but
appellant Ida ignored her. ABC sought the help of her aunt Nellie to file a complaint against
Tampus for rape and the trial court convicted Tampus of two counts of rape, and Ida was found
guilty as an accomplice in the crime.

Pending resolution of the appeal before the Court of Appeals, accused Tampus died on
November 16, 2000 and his appeal was dismissed by the Third Division of this Court. Thus, the
appeal before the Court of Appeals dealt only with that of appellant Ida. Ida was held to be
solidarily liable with Tampus for the entire amount of indemnity.

ISSUE:
Whether or not Ida should be solidarily liable with tampus for the civil indemnity as ruled
by the trial court

HELD:
Yes, In the case at bar, the trial court ruled that the accomplice is solidarily liable with the
principal for the entire amount of the civil indemnity of P50,000.00. This is an erroneous
apportionment of the civil indemnity. First, because it does not take into account the difference
in the nature and degree of participation between the principal, Tampus, versus the accomplice,
Ida. Ida's previous acts of cooperation include her acts of forcing ABC to drink beer and
permitting Tampus to have sexual intercourse with her daughter. But even without these acts,
Tampus could have still raped ABC. It was Tampus, the principal by direct participation, who
should have the greater liability, not only in terms of criminal liability, but also with respect to
civil liability. Second, Article 110 of the Revised Penal Code states that the apportionment
should provide for a quota amount for every class for which members of such class are solidarily
liable within their respective class, and they are only subsidiarily liable for the share of the other
classes. The Revised Penal Code does not provide for solidary liability among the different
classes, as was held by the trial court in the case at bar. Thus, taking into consideration the
difference in participation of the principal and accomplice, the principal, Tampus, should be
liable for two-thirds (2/3) of the total amount of the civil indemnity and moral damages and
appellant Ida should be ordered to pay one-third (1/3) of the amount.
 BENIGNO VIGALLA vs PHILIPPINE COLLEGE OF CRIMINOLOGY
GR No. 200094 June 10, 2013
Topic: SOLIDARY LIABILITY

FACTS:
PCCr is a non-stock educational institution, while the petitioners were janitors, janitresses
and supervisor in the Maintenance Department of PCCr under the supervision and control of
Atty. Florante A. Seril. The petitioners, however, were made to understand, upon application
with respondent school, that they were under MBMSI, a corporation engaged in providing
janitorial services to clients. Atty. Seril is also the President and General Manager of MBMSI.
PCCr discovered that the Certificate of Incorporation of MBMSI had been revoked as of July 2,
2003. On March 16, 2009, PCCr, through its President, respondent Gregory Alan F. Bautista
(Bautista), citing the revocation, terminated the school's relationship with MBMSI, resulting in
the dismissal of the employees or maintenance personnel under MBMSI, except Alfonso Bongot
(Bongot) who was retired. The dismissed employees filed their respective complaints for illegal
dismissal, reinstatement, back wages, separation pay, underpayment of salaries, overtime pay,
holiday pay, service incentive leave, and 13th month pay against MBMSI, Atty. Seril, PCCr, and
Bautista. In their complaints, they alleged that it was the school, not MBMSI, which was their
real employer because (a) MBMSIs certification had been revoked; (b) PCCr had direct control
over MBMSIs operations; (c) there was no contract between MBMSI and PCCr; and (d) the
selection and hiring of employees were undertaken by PCCr.

ISSUE:
Whether or not a labor-only contractor is solidary liable with the employer.

HELD:
YES. They are liable with the employer. The NLRC and the CA correctly ruled that the
releases, waivers and quitclaims executed by petitioners in favor of MBMSI redounded to the
benefit of PCCr pursuant to Article 1217 of the New Civil Code. The reason is that MBMSI is
solidarily liable with the respondents for the valid claims of petitioners pursuant to Article 109 of
the Labor Code. As correctly pointed out by the respondents, the basis of the solidary liability of
the principal with those engaged in labor-only contracting is the last paragraph of Article 106 of
the Labor Code which provides that In such cases, the person or intermediary shall be
considered merely as an agent of the employer who shall be responsible to the workers in the
same manner and extent as if the latter were directly employed by him. The Court holds that the
releases, waivers and quitclaims executed by petitioners in favor of MBMSI redounded to the
respondents' benefit. The liabilities of the respondents to petitioners are now deemed
extinguished. The Court cannot allow petitioners to reap the benefits given to them by MBMSI
in exchange for the releases, waivers and quitclaims and, again, claim the same benefits from
PCCr, only contracting is the last paragraph of Article 106 of the Labor Code.
 PH CREDIT CORPORATION vs COURT OF APPEALS and CARLOS M. FARRALES
G.R. No. 109648 November 22, 2001
Topic: Joint and Solidary Obligations

FACTS:
This is a Petition for Review under Rule 45 of the Rules of Court assailing the October
28, 1992 Decision and the April 6, 1993 Resolution of the Court of Appeals in CA-GR SP Nos.
23324 and 25714. The decision dismissed CA-GR SP No. 23324 for being moot and academic
and 25714 for lack of merit. The assailed Resolution denied the petitioners Motion for
Reconsideration.
The facts of the cases are as follows:
1. CA-G.R. SP No. 23324
PH Credit Corp., filed a case against Pacific Lloyd Corp., Carlos Farrales (Private
Respondent), Thomas H. Van Sebille and Federico C. Lim, for a sum of money. After
service of summons upon the defendants, they failed to file their answer within the
reglementary period, hence they were declared in default. On January 31, 1984, a
decision was rendered, the dispositive portion of the which reads as follows:
"WHEREFORE, judgment is hereby rendered in favor of plaintiff PH Credit
Corporation and against defendants Pacific Lloyd Corporation, Thomas H. Van Sebille,
Carlos M. Farrales, and Federico C. Lim, ordering the latter to pay the former, the
following:
'A) The sum of P118,814.49 with interest of 18% per annum, starting December 20, 1982
until fully paid;
'B) Surcharge of 16% per annum from December 20,1982;
'C) Penalty Charge of 2% per month from December 20,1982, computed on interest and
principal compounded;
'D) Attorney's fees in an amount equivalent to 25% of the total sum due; and
'E) Costs of suit.
'SO ORDERED.'
After the aforesaid decision, has become final and executory, a Writ of execution was issued.
Personal and Real properties of Carlos Farrales were levied and sold at public auction wherein
the petitioner was the highest bidder, to which the private respondent objected.
The Trial Court ruled in favor of the private respondent, declaring the auction sale of
Farrales private properties as null and void, to which the Court of Appeals had affirmed and
further held that pursuant to the January 31, 1984 decision of the Trial Court, the liability of
Farrales was merely joint and not solidary and that there was no legal basis for the levying and
selling of Farralesproperties in order to satisfy the whole obligation.
Hence this petition, to which the petitioner contends among other things, that the CA had
erred in ruling that the liability of Farrales is merely joint and solidary notwithstanding the
Suretyship Agreement that was executed by the defendants, as mentioned in the proceedings of
the Trial Court, stating that xxx to the effect that if Pacific Lloyd Corporation cannot pay the
amount loaned by plaintiff to said corporation, then Federico C. Lim, Carlos M. Farrales and
Thomas H. Van Sebille will hold themselves jointly and severally together with defendant
Pacific Lloyd Corporation to answer for the payment of said obligation.

ISSUE:
W/N the petitioners contention holds merit in this case regarding the solidarity of the
respondents liability.

HELD:
The Court dismissed the petition. Stating among other things that the basis of the
execution should be the January 31, 1984 Decision rendered by the Trial Court, which does not
make mention that of the fact that the liability of the respondents is solidary. This is
notwithstanding the fact that a suretyship agreement was mentioned in the body of the Trial
Court case. It is a well settled rule that when there is conflict between the body of the case and its
dispositive portion (fallo), the latter prevails since it contains the final judgment of the court.
There being no mention in the dispositive portion of the Trial Court decision that the liability is
solidary, then the liability is merely joint, applying Articles 1207 and 1208 of the Civil Code.
 LILIBETH SUNGA-CHAN and CECILIA SUNGA vs COURT OF APPEALS, et al
G.R. No. 164401 June 25, 2008
Topic: Articles 1207 1222 (Joint and Solidary Obligations)

FACTS:
In 1977, Chua and Jacinto Sunga formed a partnership engaging in the marketing of
liquefied petroleum gas. The business operated under the name of Shellite Gas Appliance Center
(Shellite), registered as a sole proprietorship in the name of Jacinto despite the partnership
arranged for equal sharing of the net profit. After Jacintos death in 1989, his widow and her
daughter, Cecilia Sunga and Lilibeth Sunga-Chan, respectively, pursued the business without
Chuas consent. Thereafter, Chuas repeated demands of accounting and winding up was
ignored. Hence, on June 22, 1992, Chua filed a complaint for Winding Up of a Partnership
Affairs, Accounting, Appraisal and Recovery of Shares and Damages with Writ of Preliminary
Attachment. The RTC ruled in favor of the plaintiff.

After one month, the same court issued an amended writ of execution. However, the said
execution cannot be immediately executed as Chua requested from the trial court to commission
a certified public accountant to assume the accounting work and inventory of the partnership
assets if petitioners refuse to do it before the deadline set by the court. Afterwards, Chua
withdrew his motion and requested for the admission of an accounting report prepared by CPA
Cheryl Gahuman. Chuas total claim amounted to Php 14,277,344.94. The RTC approved the
computation of claims with regard to the petitioners failure and refusal, despite notice, to appear
and submit an accounting report on the winding up of the partnership on April 29 and 30, 2002.
Nevertheless, petitioners submitted their own CPA-certified valuation and accounting report
limiting Chuas claim to Php 3,154,736.65. On November 6, 2002, the RTC rejected the
accounting report of the petitioners, while upholding the new computation of claims submitted
by Chua. Petitioners filed for reconsideration but was denied by both the trial and appellate
courts.

ISSUE:
Whether or not Lilibeth Sunga-Chan and Cecilia Sunga are solidarily liable for the claims
of Chua.

HELD:
The obligation of petitioners is solidary. The complaint of Chua for winding up of
partnership affairs, accounting, appraisal, and recovery of shares and damages is clearly a suit to
enforce a solidary or joint and several obligation on the part of petitioners. The continuance of
the business and management of Shellite by petitioners against the will of Chua gave rise to a
solidary obligation, the acts complained of not being severable in nature.

As provided in Article 1207:

The concurrence of two or more creditors or two or more debtors in one and the
same obligation does not imply that each of one of the former has a right to demand, or
that each of the latter is bound to render, entire compliance with the prestation. There is
solidary liability only when the obligation expressly so states, or when the law or the
nature of the obligation requires solidarity.
 The need for the imposition of a solidary liability becomes all the more pronounced
considering the impossibility of quantifying how much of the partnership assets or profits was
misappropriated by each petitioner. Likewise, the petitioners obligation for the payment of
damages and attorneys and litigation fees ought to be solidary in nature, they having resisted in
bad faith, compelling Chua to resort to litigation.
DIVISIBLE AND INDIVISIBLE
OBLIGATIONS
(ART. 1223 - 1225)
 NATIVIDAD P. NAZARENO v. COURT OF APPEALS
G.R. No. 138842 October 18, 2000
TOPIC: Divisible and Indivisible Obligations (Art. 1223-1225)

FACTS:
Maximino Nazareno, Sr. and Aurea Poblete acquired properties in Quezon City and
Cavite during their marriage. They have five children namely, Natividad, Romeo, Jose, Pacifico,
and Maximino, Jr. herein petitioners. The ownership of some of the properties were in question
as it appears that after the death of Maximino, Sr., Romeo filed an intestate case in CFI of
Cavite. Upon reorganization of the Courts in 1983, the case was transferred to RTC of Naic,
Cavite and Romeo was appointed as the administrator of his fathers estate. In the course of the
proceedings, it was discovered that his parents executed several deeds of sale in favor of his
sister, Natividad, one of which involved six lots in Quezon City for the total amount of P47,800.
The petitioners argued that the Deed of Absolute Sale dated on January 7, 1970 was an
indivisible contract founded on an indivisible obligation, and as such it cannot be annulled by
only one of them.

ISSUE:
Whether or not the Deed of Absolute Sale executed by the deceased spouses during their
lifetime involving their conjugal properties was an indivisible contract

HELD:
The obligation was indivisible as the performance cannot be done in parts, otherwise the
value of what is transferred be diminished. The petitioners were mistaken in basing the
indivisibility of a contract on the number of obligors. An obligation is indivisible when it cannot
be validly performed in parts, whatever may be the nature of the thing which is the object
thereof. Indivisibility refers to the prestation and not to the object, itself.
 SPOUSES INOCENCIO H. GONZALES and ROSARIO ES QUIVEL GONZALES vs.
GSIS
G.R. No. L-51997 September 10, 1981
Topic: Divisible and Indivisible Obligations

FACTS:
On April 2, 1968, August 14, 1968 and November 7, 1968, petitioner-spouses Inocencio
H. Gonzales and Rosario Esquivel Gonzales obtained a housing loan of P80,000.00 from the
respondent GSIS. This was to be repayable within fifteen years at 6% interest per annum for the
first P30,000.00 and pay for the balance. GSIS accepted as collaterals two (2) residential lots
located in Quezon City, and two (2) agricultural lands located in Jaen, Nueva Ecija. Of the latter
two, one is 15.7880 hectares in area, while the other is 9.4602 hectares. Petitioners were able to
pay several monthly installments of P814.38 until both of them retired compulsorily from
government service in 1973, leaving an unpaid obligation of over P73,000.00, which, as of May
31, 1978, amounted to P 135,884.87 because of accumulated interests or arrearages.

By virtue of Presidential Decree No. 27, otherwise known as the Tenants' Emancipation
Act, effective October 21, 1972, the agricultural lands of petitioners were subdivided and
awarded by the then Department of Agrarian Reform to the tenant-farmers therein. It was only in
May of 1979, however, that payment by the Land Bank became remittable covering in particular,
the 15- hectare land of petitioners in Jaen.

The land, having been appraised at P117,005.00, that sum was tendered by the Land
Bank to the GSIS broken down as follows: 20% in cash or P23,505.00 (recomputed at
P23,401.00), and 80% in bonds or P93,500.00 (re-computed at P93,604.00). The GSIS refused
acceptance unless the payment in bonds was to be credited thus: P16,400.00 at par (the loan
value of the property) and P77,100.00 in land bank bonds discounted at 18%; interest per annum
to maturity.

Petitioners, on July 30, 1979, accepted under protest the condition of the GSIS. This,
however, did not stop them from seeking reconsideration of the decision of the GSIS to the
extent of appealing to the Office of the President on September 24, 1979 and offering to pay the
balance of their obligation in cash provided GSIS would accept at par value the Land Bank
bonds without awaiting payment corresponding to their other 9-hectare agricultural land in Jaen.
However, the GSIS maintained its previous position. Subsequently, the instant Petition for
mandamus was filed on November 28, 1979, with petitioners praying that the GSIS be directed
to accept the payment of Land Bank bonds at par value, without any discount whatsoever, so that
any of petitioners collaterals could be released. They also ask for actual, moral and exemplary
damages, aside from attorney's fees and costs of suit.

ISSUE:
Whether or not the GSIS may be compelled under the provisions of Section 80, Republic
Act No. 3844, as amended, to accept Land Bank bonds at face value in payment of outstanding
loans secured partially by lands taken by the Land Bank under Operation Land Transfer.

HELD:
 Yes. The Supreme Court ruled that under Section 80 of Republic Act No. 3844,
otherwise known as "The Code of Agrarian Reforms of the Philippines," as amended by
Presidential Decree No. 251, when lands with existing encumbrances are acquired under the land
reform program, the land owner is paid the net value of the land as determined under Presidential
Decree No. 27, minus the outstanding balance of his obligation to a government lending
institution, which is to be paid directly to the latter by the Land Bank in Land Bank bonds,
existing charters of those government lending institutions to the contrary notwithstanding. The
insistence of the GSIS to discount those bonds (notwithstanding the alleged "reasonableness" of
the 18% discount rate) is to defeat that very provision aimed not only to cushion the impact of
dispossession on the land owner but also to benefit the tenant so that the latter may obtain title to
the land free from any hen or encumbrance. The aforementioned statute does not explicitly
provide that Land Bank bonds shall be accepted at their face value but there can be no question
that such is the intendment of the law particularly in the absence of any provision expressly
permitting discounting, as differentiated from Republic Act No. 304, or the Backpay Law, as
amended by Republic Acts Nos. 800 and 897, which expressly allows it.

Land Bank bonds are certificates of indebtedness, approved by the Monetary Board of the
Central Bank, fully tax-exempt both as to principal and income, and bear interest at the rate of
6% per annum redeemable at the option of the Land Bank at or before maturity, which in no case
shall exceed 25 years. They are fully negotiable and unconditionally guaranteed by the
Government of the Republic of the Philippines. (Section 76, RA 3844, as amended by PD 251)
The Court ruled that it is clear then that it is not only the loan value but the outstanding balance
of the obligation that has to be settled with Land Bank bonds at their par or face value. The fact
that only one agricultural land of the four securities was placed under land reform should make
no difference. Although it may be conceded that the obligation of the petitioners is, in a sense,
divisible because it can be settled partially according to current practice, it does not render the
mortgage of four (4) parcels of land also divisible. Generally, the divisibility of the principal
obligation is not affected by the indivisibility of the mortgage. The mortgage obligation is
indivisible; that is, it cannot be divided among the different lots. A real estate mortgage
voluntarily constituted by the debtor on two or more parcels of land is one and indivisible. Each
and every parcel under mortgage answers for the totality of the debt. Being indivisible, the full
value of the one parcel being paid for by the Land Bank should be applied in full to the
outstanding loan obligation without any discounting.

The case at bar does not fall under the exception in Article 2089 of the Civil Code where
each of the several things given in mortgage guarantees only a determinate portion of the credit.
This exception contemplates separate debts secured by separate properties, which is not the
factual set-up herein. Neither can it be said that the Land Bank, by operation of law, has rendered
the mortgage of the four parcels divisible by taking only one of them solely to obtain its release.
The basic indivisibility of the mortgage obligation still remains unimpaired despite that fact. To
hold that the acceptance of the bonds at par value should be limited only to the loan value of
properties acquired by the Land Bank but should be discounted as to other lands not so acquired,
would not only run counter to the principle of indivisibility of a mortgage and contravene the
clear mandate of PD No. 251, but would also reduce the bond payment to the dispossessed
landowner by approximately one-half, to his complete detriment. This is a consequence that
neither law, equity, nor justice would countenance.
 BLOSSOM AND COMPANY, INC., vs. MANILA GAS CORPORATION
G.R. No. L-32958 November 8, 1930
TOPIC: Divisible and Indivisible Obligations

FACTS:
On September 10, 1918, it entered into a contract with the defendant in which the
plaintiff promised and undertook to purchase and receive from the defendant and the defendant
agreed to sell and deliver to the plaintiff, for a period of four years, three tons of water gas tar per
month from September to January 1, 1919 and twenty tons per month after January 1, 1919, for
the remaining period of the contract; one-half ton of coal gas tar a month from September to
January 1, 1919, and six tons per month after January 1, 1919, for the remainder of the contract,
delivery to be made at the plant of the defendant in the City of Manila, without containers and at
the price of P65 per ton for each kind of gas tarsaid price will increase or decrease depending
on the prices of raw materials used.

On January 31, 1919, this contract was amended so that it should continue to remain in
force for a period of ten years from January 1, 1919. And that from and after January 1, 1919,
plaintiff would take at least the quantities specified in the contract of September 10, 1918, and
that at its option, it would have the right to take the total output of water gas tar of defendant's
plant and 50 per cent of the gross output of its coal gas tar, and upon giving ninety days' notice, it
would have the right to the entire output of coal gas tar, except such as the defendant might need
for its own use. In sum, , the contract provided for the delivery to the plaintiff from month to
month of the specified amounts of the different tars as ordered and requested by the plaintiff.

That in consideration of this modification of the contract of September 10, 1918, plaintiff
agreed to purchase from the defendant of certain piece of land lying adjacent to its plant at the
price of P5 per square meter. Defendant sold and conveyed the land to the plaintiff which in turn
executed a mortgage thereon to the defendant for P17,140.20, to secure the payment of the
balance of the purchase price

About the last part of July, 1920 the defendant willfully, and deliberately breached its
said contract, Exhibit C, with the plaintiff by ceasing to deliver any coal and water gas tar to
petitioner. notwithstanding the frequent and urgent demands made by the plaintiff defendant
flatly refused to make any deliveries under said contract.

On November 23, 1923, the plaintiff was forced to commence action against the
defendant to recover the damages which it had up to that time suffered by reason of such flagrant
violation of said contract on the part of the defendant herein, and to obtain the specific
performance of the said contract and after due trial of that action. Judgment was entered therein
in favor of the plaintiff for the sum of P26,119.08, as the damages suffered by this plaintiff by
the defendant's breach of said contract from July, 1920, up to and including September, 1923,
with legal interest thereon from November 23, 1923.

On January 31, 1926, plaintiff made demands for the delivery of certain amounts of coal
gas tar and water gas but the defendant refused to make such deliveries. On March 26, 1926 the
said defendant offered to resume delivery to the plaintiff from that date of the minimum monthly
quantities of tars stated in its contract. The plaintiff commenced to accept deliveries of said tars
from it, and at once ascertained that the said defendant was deliberately charging it prices much
higher than the contract price. On January 29, 1927, plaintiff again demanded for deliveries but
the defendant again refused to make such deliveries. Because of this, the plaintiff filed another
complaint and prayed for the rescission of said contract and for the full damages which the
plaintiff has suffered from September, 1923, and will suffer for the remainder of said contract by
reason of the defendant's failure and refusal to perform the same.

After the evidence was taken the referee found that the plaintiff was entitled to
P56,901.53 damages. But the damages was entered awarding damages to plaintiff in the sum of
P2,219.60 pertaining only to the excessive price paid by plaintiff. Plaintiff appealed.

ISSUE:
Whether or not the Trial Court erred in holding that this suit in so far as the damages
from November, 1923, to March 31, 1926, are concerned , is res judicata.

HELD:
YES. The previous action by plaintiff to recover damages resulting to the breach of
contract and the judgment rendered thereof is a bar to an action for the recovery of damages
resulting to a subsequent breach of the same action.

As what was held in Pakas vs. Hollingshead, Upon refusal, by the seller, after partial
performance, longer to comply with his contract to sell and deliver a quantity of articles in
installments the buyer cannot keep the contract in force and maintain actions for breaches as
they occur but must recover all his damages in one suit

And in the opinion of the same, the Court stated that:

In as much as there was a total breach of the contract by the defendant's refusal to
deliver, the plaintiff cannot split up his demand and maintain successive actions, but must either
recover all his damages in the first suit. .. . In other words, there can be but one action for
damages for a total breach of an entire contract to deliver goods, and the fact that they were to
be delivered in installment from time to time does not change the general rule.

And in Watts vs. Weston (238 Federal, 149), the Court stated:
Where a continuing contract was terminated by the absolute refusal of the party whose
action was necessary to further perform, a claim for damages on account of the breach
constituted as indivisible demand, and when the same or any part of the same was pleaded,
litigated, and final judgment rendered, such suit and judgment constitute a bar to subsequent
demands which were or might have been litigated therein.
 J.M. TUASON & CO., INC., VS COLLECTOR OF INTERNAL REVENUE
G.R. NO. L-11530 JUNE 30, 1960
Topic: Divisible and Indivisible Obligations

FACTS:
On November 6, 1951 the Varsity Hills, Inc., owner of five parcels of residential land in
Quezon City, entered into a contract with petitioner J. M. Tuason & Co., Inc., a corporation
engaged in the business of developing subdivisions and promoting sales therein, whereby it
ceded to the latter its five parcels of residential land above described generally for the purpose of
having it surveyed, platted, monumented and otherwise developed into a subdivision. During the
period from the fourth quarter of 1951 to the second quarter of 1953, inclusive, Tuason & Co.,
Inc. received as compensation for its services the following amounts: P282,862.70 as 10 per cent
commission for sales and P116,331.21 as "administration fee." On August 22, 1953, the
respondent Collector of Internal Revenue assessed against the petitioner the broker's tax on the 8
per cent received by the latter as "administration fee" in the amount of P8,724.84, representing
the broker's percentage tax and surcharge thereon. Petitioner contested this assessment, although
it paid the respondent under protest P9,024.84 and thereafter filed a claim for its refund. As
respondent refused to grant the refund, petitioner instituted an action in the Court of Tax Appeals
for the review of the assessment. After trial the Court of Tax Appeals sustained the assessment
and denied the refund prayed for. It is against this refusal to grant the refund that the appeal to
this Court has been presented.

ISSUE:
Whether or not entire fee received by broker subject to tax if contract covering several
prestations is indivisible?

HELD:
Yes. It follows, therefore, that the parties have agreed on giving compensation
denominated administration fees for services which may well be included in the duties of a
broker. But the duty of developing the subdivision, with its lots, streets, playgrounds, sewage,
etc. is also a necessary incident to the duty of selling the lands subject of the contract. The lands
must be subdivided into residential lots, with streets laid out, before said lots can be sold. And
while this work may be entrusted to another, the parties have seen fit to have the same entrusted
to the petitioner. It would be reasonable that this work or duty be considered distinct and separate
from the duties or incidents of the brokerage, and not subject to the tax on brokers. But the
parties have by their contract rendered it impossible to separate the amount due petitioner for
such duty and obligation (of developing a subdivision) from those due petitioner as
"administration fees." Petitioner may well be a contractor, in so far as the developing of the
subdivision is concerned. But neither petitioner nor the owner has shown which portion of the
fee mentioned in the contract as "administration fee" is given petitioner as its compensation for
developing the subdivision. The reason for all this must be the fact that the parties have
considered their contract as one whole, indivisible contract, especially as the corresponding fees
for the different prestations therein undertaken by petitioner are grouped into two, "brokerage"
and "administration", without it being possible to separate and identify what portion is due
petitioner for developing the subdivision and what portion for the supposed acts of
administration, which may also be considered acts of brokerage. It is in the above sense that the
Court of Tax Appeals has held that the consideration for all the different prestations is simple,
entire and indivisible, for which reason the contract must be considered as one indivisible
contract of brokerage, the developing of the subdivision being considered as a necessary incident
to, and preparatory for, the sales of the lots of the subdivision, and the documentation and
collection also an integral part of the sales or negotiations therefor.

Considering, therefore, that the parties to the contract evidently made a single, indivisible
contract because of indivisibility of consideration, for the reason that the parties fixed a so-called
administration fee for developing the subdivision and for executing all necessary documentation
and collection for the consummation of the sales of the lots in the subdivision, without possibility
of determining the fees for each of the distinct prestation, we are constrained to find that the
court below committed no error in confirming the assessment subject of the petition for review.
 INTESTATE ESTATE OF FRANCISCO UBAT V. ANASTASIA UBAT DE MONTES,
and PHILIPPINE NATIONAL BANK
G.R. No. L-11633 January 31, 1961
Topic: Divisible and Indivisible Obligations

FACTS:
On October 7, 1936, Eduardo Ubat obtained a loan of P400.00, evidenced by a
promissory note, from the Philippine National Bank and, as security for payment, mortgaged his
land. He died after having paid three installments, and his only son, Francisco Ubat, inherited the
mortgaged property. On September 18, 1946, Francisco Ubat borrowed P400.00 from the
Philippine National Bank, executing a chattel mortgage on the standing crops of his land.
Francisco Ubat died on September 25, 1954, when the unpaid balance of his indebtedness was
P82.00.

An intestate proceeding was filed by one of the creditors of Francisco, where Atanasia
Ubat de Montes, Franciscos daughter, was appointed administratrix. The bank filed two claims,
the first referring to the indebtedness of Francisco Ubat in the amount of P82.00, with interest,
plus attorney's fees, and the second referring to the account of Eduardo Ubat in the sum of
P310.37, or the unpaid installments due in 1939, 1940, 1941, 1942, 1943, 1944 and 1945, with
interest, plus attorney's fees. The administratrix admitted the first claim but opposed the second,
on the ground that, since this obligation was payable in ten equal yearly installments, all the
unpaid installments, except the one that fell due on October 7, 1945, had already prescribed. In
its order dated March 1, 1956, the court approved the first claim; and, as to the second, only the
sum of P55.23, representing the tenth installment, was allowed.

Eduardos promissory note dated October 8, 1936 was the basis of the second claim:

"On or before the 7th day of October, 1946, for value received I promise to pay to
the order of the Philippine National Bank, at its office in Manila. Philippine Islands, the
sum of Four Hundred Only pesos (P400.00) with interest thereon compounded semi-
annually, at the rate of eight per cent (8%) per annum from date hereof until paid and
with interest at the same rate on annual installments overdue and unpaid. Payment of the
principal and the corresponding interest shall be made in ten equal annual installments of
P59.61 each in accordance with the following schedule of amortization."

The administratrix construes this obligation as divisible, and because its payment was
stipulated to be in ten equal yearly installments, it results that on October 7, 1939, when the
fourth installment had become due and payable, the prescriptive period of ten years commenced
to run as to said installment, and that, following a similar computation as to the other installment,
only the tenth installment of P59.61, which fell due on October 7, 1945, was recoverable when
the present claim was filed on September 26, 1955.

The bank, on the other hand, argues that the parties could not have intended a divisible
obligation because no fixed date was agreed upon for the payment of each installment.
ISSUE:
Whether or not the the obligation to pay the installments was divisible such that each
installment has its own prescription, and all except one have already prescribed.

HELD:
Yes. the note provides that "payment of the principal and the corresponding interest shall
be made in ten equal annual installments of P59.61 each"; and this stipulation is couched in
mandatory tenor, deducible from the use of the unequivocal terms "shall be made", thereby
making it an absolute duty (not merely an optional benefit) on the part of the debtor to pay such
installments yearly. In other words, each installment, if not paid, gave rise to a separate cause of
action, which might be the subject matter of suit by the bank. The statute of limitations
consequently began to run, as to each unpaid installment, from the date the bank could sue the
debtor therefor. While the promissory note was payable "on or before the 7th day of October,
1946", this period was limited by the particular provision requiring (not merely allowing)
payment in ten "equal annual installments."

The argument of the bank overlooks the fact that the debtor was bound to pay the
installments in accordance with the schedule of amortizations set forth in the promissory note
executed on October 7, 1936, for which it is clear that said installments were to be settled at the
"End of Year 1, 2, 3, 4, 5, 6, 7, 8, 9, and 10" (Record on Appeal, p. 38), computed logically
without saying from the date of the note, October 7, 1936.
 METROPOLITAN BANK AND TRUST COMPANY VS. SLGT HOLDINGS
G. R. No. 175181-82 September 14, 2007
Topic: Divisible and Indivisible Obligations

FACTS:
Dylanco and SLGT, respondents, each entered into a contract to sell with ASB
Development Corporation (ASB) for the purchase of units at BSA Towers then being developed
by the latter. As stipulated, ASB will deliver the units thus sold upon completion of the
construction or before December 1999. Relying on this and other undertakings, Dylanco and
SLGT each paid in full the contract price of their respective units. The promised completion date
came and went, but ASB failed to deliver, as the Project remained unfinished at that time. To
make matters worse, respondents learned that the lots on which the BSA Towers were to be
erected had been mortgaged to Metrobank and UCPB without the prior written approval of the
Housing and Land Use Regulatory Board (HLURB).

Thereafter, Dylanco and SLGT filed with the HLURB a complaint for delivery of
property and title and for the declaration of nullity of mortgage. During this time, ASB had
already filed with SEC a petition for rehabilitation and a rehabilitation receiver had in fact been
appointed. According to ASB, it encountered liquidity problems after Metrobank and UCPB
simultaneously demanded payments of their loans.

Petitioners claim that respondents have no personality to ask for the nullification of the
mortgage because they are not parties to the said mortgage transaction, and that the transaction
was done in good faith.

HLURB ruled in favor of respondents stating that the mortgage constituted over the lots
is invalid for the lack of mortgage clearance from the HLURB. The Office of the President and
the Court of Appeals affirmed the said decision.

Petitioners now contend that the appellate court erred when it declared the subject
mortgage contract void in its entirety and then directed both petitioner banks to release the
mortgage on the Project.

ISSUE:
Whether or not the nullity extends to the entire mortgage contract.

HELD:
Yes. A mortgage contract is, by nature, indivisible. Consequent to this feature, a debtor
cannot ask for the release of any portion of the mortgaged property or of one or some of the
several properties mortgaged unless and until the loan thus secured has been fully paid,
notwithstanding the fact that there has been partial fulfillment of the obligation. Hence, it is
provided that the debtor who has paid a part of the debt cannot ask for the proportionate
extinguishments of the mortgage as long as the debt is not completely satisfied.

The situation obtaining in the case at bench is within the purview of the aforesaid rule on
the indivisibility of mortgage. It may be that Section 18 of PD 957 allows partial redemption of
the mortgage in the sense that the buyer is entitled to pay his installment for the lot or unit
directly to the mortgagee so as to enable him - the said buyer - to obtain title over the lot or unit
after full payment thereof. Such accommodation statutorily given to a unit/lot buyer does not,
however, render the mortgage contract also divisible. Generally, the divisibility of the principal
obligation is not affected by the indivisibility of the mortgage. The real estate mortgage
voluntarily constituted by the debtor (ASB) on the lots or units is one and indivisible.

The mortgage contract executed between ASB and the petitioner banks is considered
indivisible, that is, it cannot be divided among the different buildings or units of the Project.
Necessarily, partial extinguishment of the mortgage cannot be allowed. In the same token, the
annulment of the mortgage is an all or nothing proposition. It cannot be divided into valid or
invalid parts. The mortgage is either valid in its entirety or not valid at all. In the present case,
there is doubtless only one mortgage to speak of. Ergo, a declaration of nullity for violation of
Section 18 of PD 957 should result to the mortgage being nullified wholly.
 INTERNATIONAL HOTEL CORPORATION vs JOAQUIN, JR. AND SUAREZ
G.R. No. 158361 10 APRIL 2013
Topic: Divisible and indivisible obligation

FACTS:

Francisco B. Joaquin, Jr. proposed that he would render a technical assistance in securing a
foreign loan in favor International Hotel Corporation (IHC) for the construction of a hotel to be
guaranteed by the Development Bank of the Philippines (DBP).
The proposal includes 9 phases. The Board of Directors of IHC approved phases 1 to 6. They also
earmarked 2 Million pesos for the project. IHC applied for a foreign load guaranty with DBP,
which was approved subject to conditions.
Joaquin asked for the payment of his fees for the services amounting to 500,000, which is beyond
the technical proposal. Joaquin suggested that he is amenable to receive shares of stock in lieu of
cash payment, which was granted to Joaquin and Suarez.
Joaquin pursued negotiations for obtaining a loan. He narrowed the financiers to Roger Dunn &
Company (Roger) and Materials Handling Corporation (MHC). This recommendation was
accepted. Negotiations ensued with MHC with its principal, Barnes International (Barnes).
However, during the negotiation Joaquin and the Executive Director of IHC met Weston
International Corporation to explore possible financing.
When Barnes did not deliver the needed loan, IHC informed DBP that it will submit Weston for
consideration but resulted to cancellation of DBPs guaranty.
IHC finally entered into an agreement with Weston International Corporation and communicated
it with the DBP. The bank denied that application for guaranty for failure to comply with certain
conditions. Due to that failure to secure loan, the IHC through its president cancelled that shares
of stocks previously issued to Joaquin and Suarez.
Joaquin and Suarez filed a case for specific performance and annulment, damages and injunction
with the Regional Trial Court (RTC). RTC held IHC liable to Joaquin and Suarez but it was also
found by the RTC that Joaquin and Suarez failed to meet their obligation and the cancellation of
stocks is proper.
Both appealed with the Court of Appeals (CA), CA concurred with the RTC upholding liability of
IHC under Article 1186 and ruled that Joaquin had substantially performed his obligation and
become entitled to his services under Article 1234.
Hence, this case.

IHC arguments:
o that because the obligation was indivisible and subject to a suspensive condition, Article
1181 of the Civil Code27 applied, under which a partial performance was equivalent to
nonperformance; and that the award of attorneys fees should be deleted for lack of legal
and factual bases.
Joauin and Suarez contention:
o that the obligation was divisible and capable of partial performance

ISSUE:

Whether or not the obligation is indivisible which makes the partial performance equivalent to
nonperformance or divisible which is susceptible to the application of substantial performance.
HELD:

The contract is silent on constructive fulfillment of obligation.

On substantial Compliance.
o It is well to note that Article 1234 applies only when an obligor admits breaching the
contract after honestly and faithfully performing all the material elements thereof except
for some technical aspects that cause no serious harm to the obligee. IHC correctly
submits that the provision refers to an omission or deviation that is slight, or technical
and unimportant, and does not affect the real purpose of the contract.
It is notable that the confusion on the amounts of compensation arose from the parties inability to
agree on the fees that respondents should receive. Considering the absence of an agreement, and
in view of respondents constructive fulfillment of their obligation, the Court has to apply the
principle of quantum meruit in determining how much was still due and owing to respondents.
Under the principle of quantum meruit, a contractor is allowed to recover the reasonable value of
the services rendered despite the lack of a written contract. The measure of recovery under the
principle should relate to the reasonable value of the services performed. The principle prevents
undue enrichment based on the equitable postulate that it is unjust for a person to retain any
benefit without paying for it. Being predicated on equity, the principle should only be applied if
no express contract was entered into, and no specific statutory provision was applicable.
OBLIGATIONS WITH A PENAL
CLAUSE (ART. 1226 1230)
 FILINVEST LAND VS COURT OF APPEALS
G.R. 138980 SEPTEMBER 20, 2005
TOPIC: Article 1226 Obligations with a Penal Clause

FACTS:
On 26 April 1978, Filinvest land awarded to PACIFIC the development of its residential
subdivisions consisting of two parcels of lands, subject to terms and conditions in an agreement.
To guarantee its compliance to the agreement, PACIFIC posted two surety bonds in favor of
Filinvest which were issued by Philippine American General Insurance (PHILMAGEN).
However after 3 extensions granted by Filinvest, PACIFIC failed to finish the contracted
works. Filinvest told PACIFIC that they will take over the project and hold them liable for
damages. Filinvest submitted its claim against PHILMAGEN under its performance and
guarantee bond but PHILMAGEN refused to acknowledge liability, for that the principal,
PACIFIC, refused liability.
PACIFIC claims that its failure to finish work was due to the inclement weather and
change order which plaintiff refused to accept and pay for caused the disruption of work. Since
the contractual relation between Filinvest and PACIFIC created a reciprocal obligation, the
failure of FILINVEST to pay its progressing bills estops it from demanding fulfilment of what is
incumbent upon PACIFIC. And that the extensions granted was a waiver to claim any damages
for the delay. It was a unilateral and voluntary action of Filinvest in preventing PACIFIC from
completing the work has relieved PACIFIC from the obligation.
PHILMAGEN contends that various amendments on the principal contract and the
deviations in the implementation were resorted by Filinvest and PACIFIC without
PHILMAGENS written consent, have automatically released them from any or all liability
covered by the surety bonds issued.
An ocular inspection was appointed by the judge. The said court commissioner made
basis that the work done or undone could be made other than the contract billings and payments
made by both parties at there was no proper procedure followed in terminating the contract, lack
of inventory of work accomplished, absence of appropriate record of work progress and
inadequate documentation and system of construction management. There was a clear extension
and PACIFIC will pay the penalty. However, the penalty (P 15, 000.00 per day amounted to
P3,990,000.00) seems to be excessive and held that a forfeiture of the amount due to Pacific
from Filinvest is a reasonable penalty considering the amount of work already performed by
Pacific. The trial court dismissed Filinvests complaint. The CA upheld the same.

ISSUE:
Whether or Not the liquidated damages agreed upon by the parties should be reduced
considering that the liquidated damages was fixed by the parties to server not only as penalty in
case PACIFIC fails to fulfil its obligation on time, but also as indemnity for actual and
anticipated damages which Filinvest may suffer by reason of such failure
HELD:
 Yes. There is no question that the penalty of P15,000.00 per day of delay was mutually
agreed upon by the parties and that the same is sanctioned by law. A penal clause is an accessory
undertaking to assume greater liability in case of breach.
It is attached to an obligation in order to insure performance and has a double function:
(1) to provide for liquidated damages, and (2) to strengthen the coercive force of the obligation
by the threat of greater responsibility in the event of breach. Article 1226 of the Civil Code
states:
Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity
for damages and the payment of interests in case of noncompliance, if there is no stipulation to
the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is
guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the provisions of
this Code.
As a general rule, courts are not at liberty to ignore the freedom of the parties to agree on
such terms and conditions as they see fit as long as they are not contrary to law, morals, good
customs, public order or public policy.[13] Nevertheless, courts may equitably reduce a stipulated
penalty in the contract in two instances: (1) if the principal obligation has been partly or
irregularly complied; and (2) even if there has been no compliance if the penalty is iniquitous or
unconscionable in accordance with Article 1229 of the Civil Code which provides:
Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been
partly or irregularly complied with by the debtor. Even if there has been no performance, the
penalty may also be reduced by the courts if it is iniquitous or unconscionable.
In herein case, the trial court ruled that the penalty charge for delay pegged at P15,000.00
per day of delay in the aggregate amount of P3,990,000.00 -- was excessive and accordingly
reduced it to P1,881,867.66 considering the amount of work already performed and the fact that
Filinvest consented to three (3) prior extensions. As it is settled that the project was
already 94.53% complete and that Filinvest did agree to extend the period for completion of the
project, which extensions Filinvest included in computing the amount of the penalty, the
reduction thereof is clearly warranted.
In cases where there has been partial or irregular compliance, as in this case, there will be
no substantial difference between a penalty and liquidated damages insofar as legal results are
concerned. The distinction is thus more apparent than real especially in the light of certain
provisions of the Civil Code of the Philippines which provides in Articles 2226 and Article 2227.
There is no justification for the Civil Code to make an apparent distinction between a penalty and
liquidated damages because the settled rule is that there is no difference between penalty and
liquidated damages insofar as legal results are concerned and that either may be recovered
without the necessity of proving actual damages and both may be reduced when proper.
 Florentino vs. Supervalue, Inc.
G.R. No. 172384 September 12, 2007
Topic: Obligations with a penal clause

FACTS:
Florentino is the sole proprietor of Empanada Royale, while the respondent is a
corporation which leases stalls and commercial store spaces in SM. Both parties executed 3
contracts to lease cart-type stalls in SM, each with a term of 4 months renewable upon
agreement. When the contracts expired, the parties renewed. A month before the renewal
expires, PET received 2 letters from RESP. One charges them of violating the contract of lease
by not opening on Dec 16 and 26 of 1999, increasing their price without consulting the RESP;
and frequently closing early because of the lack of supply, which violates the terms of the
contract. The second letter was to inform the PET that RESP would not be renewing their
contract. The RESP confiscated the equipment and personal belongings of the PET found in the
stall after the contract expired. PET demanded, through a letter, that the RESP release the
equipment and personal belongings and to return the security deposit. A month later, the PET
sent another letter demanding the same. The RESP still refused to comply. PET filed an action
for Specific performance, Sum of Money and Damages in the RTC. PET claims that RESP had
always verbally represented that the contract would be renewed, and so the PET introduced
improvements in the store space (200k). PET further avers that RESP refuses to give back the
security deposit, personal belongings and equipment without reason even after repeated
demands, PET prays for actual, moral and exemplary damages plus attorneys fees. RESP
reiterated that PET violated their contract and is also liable for electricity and water bills and
claims that the confiscation of the items was in the exercise of its retaining lien because PET
failed to settle obligations. RTC found for petitioner. CA modified, and found that RESP was
justified in forfeiting the security.

ISSUE:
Whether or not petitioner is entitled to get back her security deposit.

HELD:
Yes, but only half.. Courts may reduce penalty in two instances (1) if the principal
obligation has been partly or irregularly complied with and even if there has been no compliance
if the penalty is iniquitous or unconscionable. The forfeiture of the security deposit, in this case,
is excessive since the breaches were not of such degree that the respondent was unduly
prejudiced. RESP should reimburse half of the deposit. It has been a practice that lessees
improve the leased spaces, no misrepresentation from the lessor induced the lessee from doing as
such. To be entitled to reimbursement for improvements, Art. 1678 should be read together with
448 and 546, the PET must be considered a builder of good faith.
 MAKATI DEVELOPMENT CORPORATION, plaintiff-appellant, vs.
EMPIRE INSURANCE CO., defendant-appellee
G.R. No. L-21780 June 30, 1967
Topic: Obligations with a penal clause

FACTS:
On March 31, 1959, the Makati Development Corporation sold to Rodolfo P. Andal a lot,
with an area of 1,589 square meters, in Makati, Rizal, for P55,615.

A so-called "special condition" contained in the deed of sale provides that "the
VENDEES shall commence the construction and complete at least 50% of [their] residence on
the property within two (2) years to the satisfaction of the VENDOR and, in the event of [their]
failure to do so, the bond which the VENDEES has delivered to the VENDOR will be forfeited
in favor of the VENDOR by the mere fact of failure of the VENDEES to comply with this
special condition." To insure faithful compliance with this "condition," Andal gave a surety bond
wherein he, as principal, and the Empire Insurance Company, as surety, jointly and severally,
undertook to pay the Makati Development Corporation the sum of P12,000 in case Andal failed
to comply with his obligation under the deed of sale.

Andal did not build his house; instead he sold the lot to Juan Carlos. As neither Andal nor
Juan Carlos built a house on the lot within the stipulated period, the Makati Development
Corporation, sent a notice of claim to the Empire Insurance Co. advising it of Andal's failure to
comply with his undertaking. Demand for the payment of P12,000 was refused, whereupon the
Makati Development Corporation filed a complaint in the Court of First Instance of Rizal against
the Empire Insurance Co. to recover on the bond in the full amount. Andal alleged that the
"special condition" in the deed of sale was contrary to law, morals and public policy.
The lower court rendered judgment, sentencing the Empire Insurance Co. to pay the Makati
Development Corporation; but reduced the liability for breach because there was only really a
little delay.

ISSUE:
Whether or not the trial court may reduce the penalty despite the penal clause.

HELD:
Yes. While it is true that in obligations with a penal sanction the penalty takes the place
of "damages and the payment of interest in case of non-compliance" and that the obligee is
entitled to recover upon the breach of the obligation without the need of proving damages, it is
nonetheless true that in certain instances a mitigation of the obligor's liability is allowed.
The trial court found that Juan Carlos had finished more than 50 per cent of his house by April,
1961, or barely a month after the expiration on March 31, 1961 of the stipulated period. There
was therefore a partial performance of the obligation within the meaning and intendment of
article 1229 of the Civil Code.
 Country Bankers Insurance Corp. and Enrique Sy v CA and Oscar Ventanilla Ent. Corp.
G.R. No. 85161 September 9, 1991
Topic: Obligation with a Penal Clause

FACTS:
Respondent OVEC, as lessor, and the petitioner Sy, as lessee, entered into a lease
agreement over the Avenue, Broadway and Capitol Theaters and the land on which they are
situated in Cabanatuan City. The term of the lease was for 6 years commencing from June 13,
1977 and ending June 12, 1983. After more than 2 years of operation of the Avenue, Broadway
and Capitol Theaters, the lessor OVEC made demands for the repossession of the said leased
properties in view of the Sy's arrears in monthly rentals and non-payment of amusement taxes.

On August 8, 1979, OVEC and Sy had a conference and by reason of Sy's request for
reconsideration of OVECs demand for repossession of the 3 theaters, the former was allowed to
continue operating the leased premises upon his conformity to certain conditions imposed by the
latter in a supplemental agreement dated August 13, 1979.

In pursuance of their latter agreement, Sy's arrears in rental in the amount of P125,
455.76 was reduced to P71, 028.91. However, the accrued amusement tax liability of the 3
theaters to the City Government of Cabanatuan City had accumulated to P84, 000 despite the fact
that Sy had been deducting the amount of P4, 000 from his monthly rental with the obligation to
remit the said deductions to the city government. Hence, letters of demand dated January 7, 1980
and February 3, 1980 were sent to Sy demanding payment of the arrears in rentals and
amusement tax delinquency. The latter demand was with warning that OVEC will re-enter and
repossess the Avenue, Broadway and Capital Theaters on February 11, 1980 in pursuance of the
pertinent provisions of their lease contract and their supplemental letter-agreement. But
notwithstanding the said demands and warnings SY failed to pay the above-mentioned amounts
in full Consequently, OVEC padlocked the gates of the three theaters under lease and took
possession thereof in the morning of February 11, 1980 by posting its men around the premises
of the Id movie houses and preventing the lessee's employees from entering the same.
Sy filed the present action for reformation of the lease agreement, damages and injunction late in
the afternoon of the same day. And by virtue of a restraining order dated February 12, 1980
followed by an order directing the issuance of a writ of preliminary injunction issued in said
case, Sy regained possession and operation of the Avenue, Broadway and Capital theaters.

ISSUE:
Whether or not respondent is unjustly enriched or benefits at the expense of petitioners.

HELD:
No. A provision which calls for the forfeiture of the remaining deposit still in the
possession of the lessor, without prejudice to any other obligation still owing, in the event of the
termination or cancellation of the agreement by reason of the lessee's violation of any of the
terms and conditions of the agreement is a penal clause that may be validly entered into. A penal
clause is an accessory obligation which the parties attach to a principal obligation for the purpose
of insuring the performance thereof by imposing on the debtor a special presentation (generally
consisting in the payment of a sum of money) in case the obligation is not fulfilled or is
irregularly or inadequately fulfilled. As a general rule, in obligations with a penal clause, the
penalty shall substitute the indemnity for damages and the payment of interests in case of non-
compliance. This is specifically provided for in Article 1226, par. 1, New Civil Code. In such
case, proof of actual damages suffered by the creditor is not necessary in order that the penalty
may be demanded (Article 1228, New Civil Code). However, there are exceptions to the rule that
the penalty shall substitute the indemnity for damages and the payment of interests in case of
non-compliance with the principal obligation. They are first, when there is a stipulation to the
contrary; second, when the obligor is sued for refusal to pay the agreed penalty; and third, when
the obligor is guilty of fraud (Article 1226, par. 1, New Civil Code). It is evident that in all said
cases, the purpose of the penalty is to punish the obligor. Therefore, the obligee can recover from
the obligor not only the penalty but also the damages resulting from the non-fulfillment or
defective performance of the principal obligation.
EXTINGUISHMENT OF
OBLIGATIONS

START: Art. 1232

END: Art. 1269
 CATHAY PACIFIC ARWAYS, LTD. v. SPOUSES DANIEL VAZQUEZ, ET AL
G.R. No. 150843 March 14, 2003
Topic: Payment or Performance: Identity of the Prestation

FACTS:
Respondents-spouses Dr. Daniel Earnshaw Vazquez and Maria Luisa Madrigal Vazquez
are frequent yers of petitioner Cathay Pacific Airways, Ltd., and are Gold Card members of its
Marco Polo Club. The Vazquezes, together with their maid and two friends, Pacita Cruz and
Josena Vergel de Dios, went to Hongkong for pleasure and business. For their return ight to
Manila, they were booked on Cathay's Flight CX-905 Business Class Section. When boarding
time was announced, a ground attendant approached Dr. Vazquez and told him that the
Vazquezes' accommodations were upgraded to First Class. Dr. Vazquez refused the upgrade,
reasoning that it would not look nice for them as hosts to travel in First Class and their guests, in
the Business Class; and moreover, they were going to discuss business matters during the flight.
Dr. Vazquez continued to refuse, so the ground stewardess told them that if they would not avail
themselves of the privilege, they would not be allowed to take the flight. Eventually, after talking
to his two friends, Dr. Vazquez gave in.

Upon their return to Manila, the Vazquezes instituted before the Regional Trial Court of
Makati City an action for damages against Cathay. In its answer, Cathay alleged that it is a
practice among commercial airlines to upgrade passengers to the next better class of
accommodation, whenever an opportunity arises, such as when a certain section is fully booked.
Priority in upgrading is given to its frequent flyers, who are considered favored passengers, like
the Vazquezes. The trial court found for the Vazquezes and awarded them damages. On appeal
by the petitioner, the Court of Appeals deleted the award for exemplary damages; and it reduced
the awards for moral and nominal damages for each of the Vazquezes to P250,000 and P50,000,
respectively, and the attorney's fees and litigation expenses to P50,000 for both of them. Hence
this petition.

ISSUE:
Whether or not there is breach of contract.

HELD:
Yes. The Supreme Court ruled that a contract is a meeting of minds between two persons
whereby one agrees to give something or render some service to another for a consideration.
There is no contract unless the following requisites concur: (1) consent of the contracting parties;
(2) an object certain which is the subject of the contract; and (3) the cause of the obligation
which is established. Undoubtedly, a contract of carriage existed between Cathay and the
Vazquezes. They voluntarily and freely gave their consent to an agreement whose object was the
transportation of the Vazquezes from Manila to Hong Kong and back to Manila, with seats in the
Business Class Section of the aircraft, and whose cause or consideration was the fare paid by the
Vazquezes to Cathay. The only problem is the legal effect of the upgrading of the seat
accommodation of the Vazquezes. Did it constitute a breach of contract? Breach of contract is
defined as the "failure without legal reason to comply with the terms of a contract." It is also
defined as the "[f]ailure, without legal excuse, to perform any promise which forms the whole or
part of the contract." a
 ASJ Corporation vs. Evangelista
G.R. No. 158086 February 14, 2008
Topic: Payment or Performance: Identity of the Prestation

FACTS:

Respondents, under the name and style of R.M. Sy Chicks, are engaged in the large scale
business of buying broiler eggs, hatching them, and selling their hatchlings (chicks) and egg by
products For the incubation and hatching of these eggs, respondents availed of the hatchery
services of ASJ Corp., a corporation duly registered in the name of San Juan and his family
respondents delivered to petitioners various quantities of eggs at an agreed service fee of 80
centavos per egg, whether successfully hatched or not. Each delivery was reflected in a Setting
Report indicating the following: the number of eggs delivered; the date of setting or the date the
eggs were delivered and laid out in the incubators; But as their business went along, respondents
delays on their payments were tolerated by San Juan, who just carried over the balance, as there
may be, into the next delivery, out of keeping goodwill respondent Efren went to the hatchery to
pick up the chicks and byproducts covered by Setting Report No. 108, but San Juan refused to
release the same due to respondents failure to settle accrued service fees on several setting
reports Efren returned to the hatchery to pick up the chicks and byproducts covered by Setting
Report No. 109, but San Juan again refused to release the same unless respondents fully settle
their accounts respondent Maura, with her son Anselmo, tendered P15,000.009 to San Juan, and
tried to claim the chicks and by products. She explained that she was unable to pay their balance
because she was hospitalized for an undisclosed ailment. San Juan accepted the P15,000.00, but
insisted on the full settlement of respondents accounts before releasing the chicks and by
products.

ISSUE:
Whether San Juan is right to retain the chicks prior to the full payment of respondent.

HELD:
Yes Petitioners obligation to deliver the chicks and byproducts corresponds to three
dates: the date of hatching, the delivery/pickup date and the date of respondents payment.
Respondents made delays on their payments, but petitioners tolerated such delay. Under Article
1248 of the Civil Code, the creditor cannot be compelled to accept partial payments from the
debtor, unless there is an express stipulation to that effect. More so, respondents cannot
substitute or apply as their payment the value of the chicks and byproducts they expect to derive
because it is necessary that all the debts be for the same kind, generally of a monetary character.
Needless to say, there was no valid application of payment in this case.
 SONNY LO vs. KJS ECO-FORMWORK SYSTEM PHIL., INC.
G.R. No. 149420 October 8, 2003
Topic: Art. 1245 Dacion en pago

FACTS:

Sonny Lo is a building contractor doing business under the name of Sans Enterprises. He
purchased scaffolding equipment worth 540,425.80 from KJS Eco-Formwork System Phil., Inc.
and paid a downpayment of 150,000.00 with the balance payable in ten monthly installments.
Due to financial difficulties, he was only able to pay the first two monthly installments and
hence, failed to settle his obligation despite demands from KJS. Lo and KJS then executed a
Deed of Assignment where Lo assigned his receivables in the amount of 335,462.14 from
Jomero Realty Corporation to KJS. However, when KJS tried to collect from Jomero Realty
Corp., the company refused to honor the Deed of Assignment claiming that Lo is also indebted to
it. KJS then sent a letter to Lo demanding payment of his obligation but he claimed that his
obligation had been extinguished when they executed the Deed of Assignment.

ISSUES:

1) W/N the Deed of Assignment extinguished Los obligation

HELD:

No. The assignment of credit is an agreement by which the owner of the credit (assignor,
in the case of assignment, Sonny Lo) by a legal cause like sale, dacion en pago, exchange, or
donation, and without the consent of the debtor (in the case of assignment, Jomero Realty Corp.),
transfers his credits and accessory rights to another (assignee, in the case of assignment, KJS)
who acquires the power to enforce it to the same extent as the assignor could enforce it against
the debtor (JRC).

In dacion en pago, as a special mode of payment, the debtor offers another thing to the
creditor who accepts it as equivalent of payment of an outstanding debt. For it to be valid, the
requisites are:
1) there must be a performance of the prestation in lieu of the payment which may consist
in the delivery of the corporeal (physical) thing or a real right or a credit against the third
person;
2) there must be some difference between the prestation due and that which is given in
substitution;
3) there must be an agreement between the creditor and debtor that the obligation is
immediately extinguished by reason of the performance of a prestation different from that
due.

This partakes the nature of a sale where the creditor becomes the vendee in buying the
property of the debtor, the payment of which is to be charged against the debtors debt. The
vendor or assignor (Lo) is bound by certain warranties. Under Art. 1628 of the Civil Code, the
vendor shall be responsible for the existence and legality of credit at the time of the sale. Lo is
bound to warrant or guarantee the existence and legality of the credit at the time of the sale or
assignment. KJS alleged the non-existence of the credit since Lo is also indebted to JRC and as
such, its obligation to Lo has already been extinguished (by compensation). Lo should make
good his warranty and pay the obligation.

Moreover, it was expressly stipulated in the Deed of Assignment that the assignor, at the
request of the assignee, execute acts and deeds necessary for the assignee to recover whatever
collectibles the assignor has. Hence, Lo, as assignor, is guilty of breach. He should have ensured
the performance thereof when it was found inexistent. He should be liable to pay KJS the amunt
of his indebtedness. The Supreme Court ordered him to pay 335,462.14 with legal interest.
 DEVELOPMENT BANK OF THE PHILIPPINES vs.
COURT OF APPEALS and LYDIA CUBA
G.R. No. 118342 January 5, 1998
Topic: Article 1245 and 1255 (Dation in Payment / Payment by Cession)

FACTS:
Lydia Cuba is a grantee of a Fishpond Lease Agreement No. 2083 from the Government.
She obtained 3 separate loans from the Development Bank of the Philippines (DBP), each of
which was covered by a promissory note. As a security for the loans, Cuba executed two Deeds
of Assignment of her Leasehold Right. Due to Cubas failure to pay her loan on the scheduled
dates, without foreclosure proceedings, DBP appropriated the Leasehold Right of Cuba over the
fishpond. After, DBP executed a Deed of Conditional Sale of the Leasehold Right in favor of
Cuba. Due to Cubas failure to pay amortization stipulated in the Deed of Conditional Sale, DVP
sent a Notice of Rescission thru Notarial Act. DBP took possession of the Leasehold Rights of
the fishpond and advertised it for public bidding to dispose the property. Thereafter, DBP
executed a Deed of Conditional Sale in favor of Agripina Caperal and Caperal was awarded
Fishpond Lease Agreement.
Cuba filed a complaint against DBP and Caperal and sought for the declaration of nullity
of DBPs appropriation of her rights without foreclosure proceedings contrary to Article 2088 of
the Civil Code. The trial court resolved the issue in favor of Cuba and declared invalid the deed
of assignment for being a clear case of patum commissorium. On appeal, the Court of Appeals
reversed the decision of the trial court and declared that the deed of assignment was an express
authority from Cuba for DBP to sell whatever right she had over the fishpond and held that the
deed of assignment amounted to a novation of the promissory note.

ISSUE:
Whether or not there was a dation in payment O payment by cession.
HELD:
No. The Supreme Court find no merit in DBP's contention that the assignment novated
the promissory notes in that the obligation to pay a sum of money the loans was substituted by
the assignment of the rights over the fishpond. As correctly pointed out by Cuba, the said
assignment merely complemented or supplemented the notes; both could stand together. The
former was only an accessory to the latter. The obligation to pay a sum of money remained, and
the assignment merely served as security for the loans covered by the promissory notes.

Neither did the assignment amount to payment by cession under Article 1255 of the Civil
Code for the plain and simple reason that there was only one creditor, the DBP. Article 1255
contemplates the existence of two or more creditors and involves the assignment of all the
debtor's property. Nor did the assignment constitute dation in payment under Article 1245 of the
Civil Code, which reads: "Dation in payment, whereby property is alienated to the creditor in
satisfaction of a debt in money, shall be governed by the law on sales." It bears stressing that the
assignment, being in its essence a mortgage, was but a security and not a satisfaction of
indebtedness.

The assignment of Leasehold Rights was a mortgage contact. The assignment, being in
its essence a mortgage, was but a security and not a satisfaction of indebtedness. Indeed, the
obligation to pay a sum of money remained, and the assignment merely served as security for the
loans covered by the promissory notes.
 CULABA V. CA
G.R. No. 125862 April 4, 2004
Topic: Extinguishment of Obligations (Payment)

FACTS:
The spouses Francisco and Demetria Culaba were engaged in the sale and distribution of
San MiguelCorporations (SMC) beer products. SMC sold beer products on credit to the Culaba
spouses in theamount of P28,650.00 thereafter, the Culaba spouses made a partial payment of
P3,740.00 leaving anunpaid balance of P24,910.00. As they failed to pay despite repeated
demands, SMC filed an action for collection of a sum of money against them before the RTC.

The defendant/spouses denied any liability claiming that they had already paid the
plaintiff in full onfour separate occasions. To substantiate this claim, the defendants presented 4
Temporary ChargeSales (TCS) Liquidation Receipts: 27331, 27318, 27339, 27346. Defendant
Francisco Culaba testified that he made payments to an SMC supervisor who came in an SMC
van. The defendant, in good faith, then paid to the said supervisor, and he was, in turn, issued
genuine SMC Liquidation Receipts.

SMC, for its part, submitted a publishers affidavit to prove that the entire booklet of
TCSL Receipts bearing Nos. 27301-27350 were reported lost by it, and that it caused the
publication of the notice of loss.

ISSUE:
Whether or not petitioners obligation has been extinguished.

HELD:
Payment is a mode of extinguishing an obligation. Article ,1240 of the Civil Code
provides that payment shall be made to the person in whose favor the obligation has been
constituted, or his successor/in/interest, or any person authorized to receive it. In this case, the
payments were purportedly made to a supervisor of the private respondent, who was clan in an
SMC uniform and drove an SMC van. Heappeared to be authorized to accept payment as he
showed a list of customers accountabilities and issued SMC liquidation receipts which looked
genuine. Unforunately for petitioner Francisco Culaba, he did not ascertain the identity and
authority of the said supervisor, nor did he ask to be shown any identification to prove that the
latter was, indeed, an SMC supervisor. The petitioners relied solely on the mans representation
that he was collecting payments for SMC. Thus, the payments the petitioners claimed they made
were not the payments that discharged their obligation to private respondents.

The basis of agency is representation. A person dealing with an agent is put upon an
inquiry and must discover upon his peril the authority of the agent. In the instant case, the
petitioners loss could have been avoided if they had simply exercised due diligence in
ascertaining the identity of the person to whom they allegedly made the payments. The fact that
they were parting with valuable consideration should have made them more circumspect in
handling their business transactions. Persons dealing withan assumed agent are bound at their
peril to ascertain not only the fact agency but also the nature and extent of authority, and in case
either is controverted, the burden of proof is upon them to establish it. The petitioners in this case
failed to discharge this burden, considering that the private respondent vehemently denied that
the payments were accepted by it, and were made to its authorized representative
 PHILIPPINE COMMERCIAL INTERNATIONAL BANK
vs COURT OF APPEALS
G.R. No. 121413 January 29, 2001
Topic: Payment or Performance - Proper Payee

FACTS:
This case is consist of three consolidated petitions involving several checks payable to
the Bureau of Internal Revenue but it was embezzled by an organized syndicate. Ford drew and
issued a Citibank check in the amount of P4,746,114.41 in favor of the CIR as payment of Fords
percentage or manufacturers sale taxes for the 3rd quarter of 1977. The said check was
deposited with PCIB and was subsequently cleared at the Central Bank. Upon presentment with
Citibank, the proceeds of the check was paid to PCIB as collecting or depository bank. The
proceeds of the same Citibank check was never received by the payee CIR. Upon demand by the
CIR, ford was compelled to make a second payment to BIR of its percentage tax and that second
payment of plaintiff was received by the CIR. Defendant refused to reimburse so the plaintiff
filed a complaint. An investigation revealed that the check was recalled by Godofredo Rivera,
the general ledger accountant of Ford, he purportedly needed to hold back the check because
there was an error in the computation of the tax due to the BIR. The alleged members of the
syndicated later replaced the said check with a managers check with Pacific Banking
Corporation. Ford filed a third party complaint against Godofredo Rivera and Pacific Banking
Corporation. The case against the latter was dismissed. The case against the former was likewise
dismissed because the summons could not be served.

The Trial Court rendered its decision ordering the defendants Citibank and PCIB jointly
and severally, to pay Ford the amount of P4,746,114.41 representing the face value of plaintiffs
Citibank check. Citibank and PCIB appealed. The CA affirmed RTC by dismissing the
complaint insofar as Citibank is concerned.

On another case, Ford drew two checks in favor of the Comissioner of Internal Revenue,
amounting to P5,851,706.37 and P6,311,591.73. Both are crossed checks payable to payees
account only. The checks never reached BIR, so plaintiff was compelled to make second
payments. Plaintiff instituted an action for recovery against PCIB and Citibank.

On investigation of NBI, the modus operandi was discovered. Godofredo made the
checks but instead of delivering them to BIR, passed it to Castro, who was the manager of PCIB
San Andres. Castro opened a checking account in the name of a fictitious person. Castro
deposited a worthless Bank of America check with the same amount as that issued by Ford.
While being routed to the Central Bank for clearing, the worthless check was replaced by the
genuine one from Ford.
The trial court absolved PCIB and held Citibank liable, which decision was affirmed in toto by
the Court of Appeals.

ISSUES:
1. Whether there is contributory negligence on the part of Ford
2. Whether Ford has the right to recover from PCIB and Citibank the value of the checks
intended as payment to the Commissioner o Internal Revenue
HELD:

(1)The general rule is that if the master is injured by the negligence of a third person and
by the concuring contributory negligence of his own servant or agent, the latter's negligence is
imputed to his superior and will defeat the superior's action against the third person, asuming, of
course that the contributory negligence was the proximate cause of the injury of which complaint
is made. As defined, proximate cause is that which, in the natural and continuous sequence,
unbroken by any efficient, intervening cause produces the injury and without the result would
not have occurred. It appears that although the employees of Ford initiated the transactions
attributable to an organized syndicate, in our view, their actions were not the proximate cause of
encashing the checks payable to the CIR. The degree of Ford's negligence, if any, could not be
characterized as the proximate cause of the injury to the parties. The mere fact that the forgery
was committed by a drawer-payor's confidential employee or agent, who by virtue of his position
had unusual facilities for perpetrating the fraud and imposing the forged paper upon the bank,
does not entitle the bank to shift the loss to the drawer-payor, in the absence of some
circumstance raising estoppel against the drawer. This rule likewise applies to the checks
fraudulently negotiated or diverted by the confidential employees who hold them in their
possession.

(2)We have to scrutinize, separately, PCIBs share of negligence when the syndicate
achieved its ultimate agenda of stealing the proceeds of these checks.
On record, PCIB failed to verify the authority of Mr. Rivera to negotiate the checks. The neglect
of PCIB employees to verify whether his letter requesting for the replacement of the Citibank
Check No. SN-04867 was duly authorized, showed lack of care and prudence required in the
circumstances. Furthermore, it was admitted that PCIB is authorized to collect the payment of
taxpayers in behalf of the BIR. As an agent of BIR, PCIB is duty bound to consult its principal
regarding the unwarranted instructions given by the payor or its agent. It is a well-settled rule
that the relationship between the payee or holder of commercial paper and the bank to which it is
sent for collection is, in the absence of an agreement to the contrary, that of principal and agent.
A bank that receives such paper for collection is the agent of the payee or holder.
Indeed, the crossing of the check with the phrase Payees Account Only, is a warning that the
check should be deposited only in the account of the CIR. Thus, it is the duty of the collecting
bank PCIB to ascertain that the check be deposited in payees account only. Therefore, it is the
collecting bank (PCIB) which is bound to scrutinize the check and to know its depositors before
it could make the clearing indorsement all prior indorsements and/or lack of indorsement
guaranteed.

Lastly, banking business requires that the one who first cashes and negotiates the check
must take some precautions to learn whether or not it is genuine. And if the one cashing the
check through indifference or other circumstance assists the forger in committing the fraud, he
should not be permitted to retain the proceeds of the check from the drawee whose sole fault was
that it did not discover the forgery or the defect in the title of the person negotiating the
instrument before paying the check. For this reason, a bank which cashes a check drawn upon
another bank, without requiring proof as to the identity of persons presenting it, or making
inquiries with regard to them, cannot hold the proceeds against the drawee when the proceeds of
the checks were afterwards diverted to the hands of a third party. In such cases the drawee bank
has a right to believe that the cashing bank (or the collecting bank) had, by the usual proper
investigation, satisfied itself of the authenticity of the negotiation of the checks. Thus, one who
encashed a check that had been forged or diverted and in turn received payment thereon from the
drawee, is guilty of negligence that proximately contributed to the success of the fraud practiced
on the drawee bank. The latter may recover from the holder the money paid on the check.
 BARITUA v CA
G.R. No. L-82233 March 22, 1990
Topic: Payment - Proper Payee

FACTS:
A tricycle driven by Bienvenido Nacario was caught in an accident with a bus driven by
Edgar Bitancor and owned by Jose Baritua which led to the death of Nacario and his passenger.
Subsequently, by way of extra-judicial settlement, Nacario's widow, Alicia received 18,500 and
thereby executing a release claim which would free the petitioners herein of all actions, claims
and demands arising from the accident. The deceased parents, private respondents herein, filed a
complaint for damages against the petitioners. They alleged that they were promised to be
indemnified for the death of their son, for the funeral expenses and for the cost of the tricycle
which they just loaned to their son. However, they reneged to their promise and instead
negotiated with their son's long-estranged wife. The RTC denied their prayers stating that the
payment to the wife and son as preferred heirs extinguished petitioner's liability. The CA
reversed the ruling stating that the private respondents herein instituted the case in their private
capacity and not as heirs. Hence, this petition.

ISSUE:
Whether or not Alicia, the surviving spouse and the one who received the petitioners'
payment, is entitled to it.

RULING:
Yes. The SC held that the petition is meritous. Art. 1240 of the NCC states that Payment
shall be made to the person in whose favor the obligation has been constituted, or his successor
in interest, or any person authorized to receive it. Certainly, there can be no question that Alicia
and her son with the deceased are the successors in interest referred to in Art. 887 as the persons
authorized to receive payment. As provided in Art. 985, it is patently clear that the parents of the
deceased succeed only when the latter dies without a legitimate descendant. The petitioners
therefore acted correctly in settling their obligation with Alicia as the widow of Bienvenido and
as the natural guardian of their lone child. This is so even if Alicia had been estranged from
Bienvenido. Mere estrangement is not a legal ground for the disqualification of a surviving
spouse as an heir of the deceased spouse.
 RIDO MONTECILLO vs IGNACIA REYES and
SPOUSES REDEMPTOR and ELISA ABUCAY
G.R. No. 138018 July 26, 2002
Topic: Payment or Performance

FACTS:
Respondents Ignacia Reynes and Spouses Abucay filed on June 20, 1984 a complaint for
Declaration of Nullity and Quieting of Title against petitioner Rido Montecillo. Reynes asserted
that she is the owner of a lot situated in Mabolo, Cebu City, covered by Transfer Certificate of
Title No. 74196 and containing an area of 448 square meters. In 1981, Reynes sold 185 square
meters of the Mabolo Lot to the Abucay Spouses who built a residential house on the lot they
bought.
Reynes alleged further that on March 1, 1984 she signed a Deed of Sale of the Mabolo
Lot in favor of Montecillo. Reynes, being illiterate, signed by affixing her thumb-mark on the
document. Montecillo promised to pay the agreed P47,000.00 purchase price within one month
from the signing of the Deed of Sale. Montecillos Deed of Sale.
Reynes further alleged that Montecillo failed to pay the purchase price after the lapse of
the one-month period, prompting Reynes to demand from Montecillo the return of the Deed of
Sale. Since Montecillo refused to return the Deed of Sale, Reynes executed a document
unilaterally revoking the sale and gave a copy of the document to Montecillo.
Subsequently, on May 23, 1984 Reynes signed a Deed of Sale transferring to the Abucay
Spouses the entire Mabolo Lot, at the same time confirming the previous sale in 1981 of a 185-
square meter portion of the lot.
Reynes and the Abucay Spouses alleged that on June 18, 1984 they received information
that the Register of Deeds of Cebu City issued Certificate of Title No. 90805 in the name of
Montecillo for the Mabolo Lot.
Reynes and the Abucay Spouses argued that for lack of consideration there (was) no
meeting of the minds between Reynes and Montecillo. Thus, the trial court should declare null
and void ab initio Montecillos Deed of Sale, and order the cancellation of Certificate of Title
No. 90805 in the name of Montecillo.
In his Answer, Montecillo, a bank executive with a B.S. Commerce degree, claimed he
was a buyer in good faith and had actually paid the P47,000.00 consideration stated in his Deed
of Sale. Montecillo, however, admitted he still owed Reynes a balance of P10,000.00. He also
alleged that he paid P50,000.00 for the release of the chattel mortgage which he argued
constituted a lien on the Mabolo Lot. He further alleged that he paid for the real property tax as
well as the capital gains tax on the sale of the Mabolo Lot.
In their Reply, Reynes and the Abucay Spouses contended that Montecillo did not have
authority to discharge the chattel mortgage, especially after Reynes revoked Montecillos Deed
of Sale and gave the mortgagee a copy of the document of revocation. Reynes and the Abucay
Spouses claimed that Montecillo secured the release of the chattel mortgage through
machination. They further asserted that Montecillo took advantage of the real property taxes paid
by the Abucay Spouses and surreptitiously caused the transfer of the title to the Mabolo Lot in
his name.
During pre-trial, Montecillo claimed that the consideration for the sale of the Mabolo Lot
was the amount he paid to Cebu Ice and Cold Storage Corporation (Cebu Ice Storage for
brevity) for the mortgage debt of Bienvenido Jayag (Jayag for brevity). Montecillo argued that
the release of the mortgage was necessary since the mortgage constituted a lien on the Mabolo
Lot.
Reynes, however, stated that she had nothing to do with Jayags mortgage debt except
that the house mortgaged by Jayag stood on a portion of the Mabolo Lot. Reynes further stated
that the payment by Montecillo to release the mortgage on Jayags house is a matter between
Montecillo and Jayag. The mortgage on the house, being a chattel mortgage, could not be
interpreted in any way as an encumbrance on the Mabolo Lot. Reynes further claimed that the
mortgage debt had long prescribed since the P47,000.00 mortgage debt was due for payment on
January 30, 1967.
The trial court rendered a decision on March 24, 1993 declaring the Deed of Sale to
Montecillo null and void. The trial court ordered the cancellation of Montecillos Transfer
Certificate of Title No. 90805 and the issuance of a new certificate of title in favor of the Abucay
Spouses. The trial court found that Montecillos Deed of Sale had no cause or consideration
because Montecillo never paid Reynes the P47,000.00 purchase price, contrary to what is stated
in the Deed of Sale that Reynes received the purchase price. The trial court ruled that
Montecillos Deed of Sale produced no effect whatsoever for want of consideration.

ISSUE:
Was there an agreement between Reynes and Montecillo that the stated consideration of
P47,000.00 in the Deed of Sale be paid to Cebu Ice and Cold Storage to secure the release of the
Transfer Certificate of Title?

HELD:
Montecillos Deed of Sale does not state that the P47,000.00 purchase price should be
paid by Montecillo to Cebu Ice Storage. Montecillo failed to adduce any evidence before the trial
court showing that Reynes had agreed, verbally or in writing, that the P47,000.00 purchase price
should be paid to Cebu Ice Storage. Absent any evidence showing that Reynes had agreed to the
payment of the purchase price to any other party, the payment to be effective must be made to
Reynes, the vendor in the sale. Article 1240 of the Civil Code provides as follows:
Payment shall be made to the person in whose favor the obligation has been constituted, or his
successor in interest, or any person authorized to receive it.
Thus, Montecillos payment to Cebu Ice Storage is not the payment that would extinguish
Montecillos obligation to Reynes under the Deed of Sale.
It militates against common sense for Reynes to sell her Mabolo Lot for P47,000.00 if
this entire amount would only go to Cebu Ice Storage, leaving not a single centavo to her for
giving up ownership of a valuable property. This incredible allegation of Montecillo becomes
even more absurd when one considers that Reynes did not benefit, directly or indirectly, from the
payment of the P47,000.00 to Cebu Ice Storage.
The trial court found that Reynes had nothing to do with Jayags mortgage debt with
Cebu Ice Storage. The trial court made the following findings of fact:
x x x. Plaintiff Ignacia Reynes was not a party to nor privy of the obligation in favor of the
Cebu Ice and Cold Storage Corporation, the obligation being exclusively of Bienvenido Jayag
and wife who mortgaged their residential house constructed on the land subject matter of the
complaint. The payment by the defendant to release the residential house from the mortgage is a
matter between him and Jayag and cannot by implication or deception be made to appear as an
encumbrance upon the land.
 Thus, Montecillos payment to Jayags creditor could not possibly redound to the benefit
of Reynes. We find no reason to disturb the factual findings of the trial court. In petitions for
review on certiorari as a mode of appeal under Rule 45, as in the instant case, a petitioner can
raise only questions of law. This Court is not the proper venue to consider a factual issue as it is
not a trier of facts.
JN DEVELOPMENT CORPORATION, and SPS. RODRIGO and LEONOR STA. ANA
vs. PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION
G.R. No. 151060 August 31, 2005
Topic: Payment or Performance

FACTS:
Petitioner JN Development Corporation (JN) and Traders Royal Bank (TRB) entered into
an agreement whereby TRB would extend to JN an Export Packing Credit Line for P2m. The
loan was covered by several securities, including a real estate mortgage and a letter of guarantee
from respondent Philippine Export and Foreign Loan Guarantee Corporation (PhilGuarantee)
covering 70% of the credit line. With PhilGuarantee was issuing a guarantee in favor of TRB, the
petitioner JN, executed a Deed of Undertaking to assure repayment to PhilGuarantee. However,
JN failed to pay the loan to TRB upon maturity. PhilGuarantee paid TRB the total of
P934,824.34. Subsequently, PhilGuarantee made several demands on JN, but the latter failed to
pay. JN proposed to settle the obligation by way of development and sale of the mortgaged
property. PhilGuarantee rejected the proposal.

PhilGuarantee thus filed a Complaint for collection of money and damages against herein
petitioners. However, the trial court dismissed PhilGuarantees Complaint as well as the
counterclaim of petitioners. It ruled that petitioners are not liable to reimburse PhilGuarantee
what it had paid to TRB. Crucial to this holding was the courts finding that TRB was able to
foreclose the real estate mortgage executed by JN, thus extinguishing petitioners obligation.
Moreover, there was no showing that after the said foreclosure, TRB had demanded from JN any
deficiency or the payment of the difference between the proceeds of the foreclosure sale and the
actual loan. In addition, the court held that since PhilGuarantees guarantee was good for only
one year from December 17, 1979, or until December 17, 1980, and since it was not renewed
after the expiry of said period, PhilGuarantee had no more legal duty to pay TRB on 10 March
1981. PhilGuarantee appealed to the CA. The appellate court reversed the RTC decision.

On appeal of PhilGuarantee to the CA, the appellate court reversed the RTC and ordered
petitioners to pay PhilGuarantee the sum of P934,624.34, plus service charge and interest. The
CA ruled that JNs obligation had become due and demandable within the 1 yr period of
effectivity of the guarantee; thus, PhilGuarantees payment to TRB conformed with its guarantee,
although the payment itself was effected one year after the maturity date of the loan. The CA
ruled that the contract of guarantee was not extinguished by the alleged lack of evidence on
PhilGuarantees consent to the extensions granted by TRB to JN. Interpreting Art. 2058 of the
Civil Code, the appellate court explained that while the provision states that the guarantor cannot
be compelled to pay unless the properties of the debtor are exhausted, the guarantor is not
precluded from waiving the benefit of excussion and paying the obligation altogether

ISSUE:
Whether or not TRB should be held liable in order to reimburse to PhilGuarantee upon its
payment of the obligation

HELD: YES.
 Under a contract of guarantee, the guarantor binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so. The guarantor who pays
for a debtor, in turn, must be indemnified by the latter. However, the guarantor cannot be
compelled to pay the creditor unless the latter has exhausted all the property of the debtor and
resorted to all the legal remedies against the debtor. This is what is otherwise known as the
benefit of excussion. It is clear that excussion may only be invoked after legal remedies against
the principal debtor have been expanded.

Thus, it was held that the creditor must first obtain a judgment against the principal
debtor before assuming to run after the alleged guarantor, for obviously the exhaustion of the
principals property cannot even begin to take place before judgment has been obtained. The law
imposes conditions precedent for the invocation of the defense. Thus, in order that the guarantor
may make use of the benefit of excussion, he must set it up against the creditor upon the latters
demand for payment and point out to the creditor available property of the debtor within the
Philippines sufficient to cover the amount of the debt. While a guarantor enjoys the benefit of
excussion, nothing prevents him from paying the obligation once demand is made on him.
Excussion, after all, is a right granted to him by law and as such he may opt to make use of it or
waive it. PhilGuarantees waiver of the right of excussion cannot prevent it from demanding
reimbursement from petitioners. The law clearly requires the debtor to indemnify the guarantor
what the latter has paid. The guarantee was only up to December 17, 1980. JNs obligation with
TRB fell due on June 30, 1980, and demand on PhilGuarantee was made by TRB on October 8,
1980. That payment was actually made only on March 10, 1981 does not take it out of the terms
of the guarantee.

What is controlling is that default and demand on PhilGuarantee had taken place while
the guarantee was still in force. The law does not prohibit the payment by a guarantor on his own
volition, heedless of the benefit of excussion. In fact, it recognizes the right of a guarantor to
recover what it has paid, even if payment was made before the debt becomes due or if made
without notice to the debtor, subject of course to some conditions.
The benefit of excussion, as well as the requirement of consent to extensions of payment, is a
protective device pertaining to and conferred on the guarantor. These may be invoked by the
guarantor against the creditor as defenses to bar the unwarranted enforcement of the guarantee.
However, PhilGuarantee did not avail of these defenses when it paid its obligation according to
the tenor of the guarantee once demand was made on it. What is peculiar in the instant case is
that petitioners, the principal debtors themselves, are muddling the issues and raising the same
defenses against the guarantor, which only the guarantor may invoke against the creditor, to
avoid payment of their own obligation to the guarantor. The Court cannot countenance their self-
seeking desire to be exonerated from the duty to reimburse PhilGuarantee after it had paid TRB
on their behalf and to unjustly enrich themselves at the expense of PhilGuarantee.
 SECURITY BANK & TRUST COMPANY vs. COURT OF APPEALS
G.R. No. 112214. June 18, 1998
Topic: Effect of payment without consent of the debtor

FACTS:
A.T. Diaz Realty had a savings account and a current accounts with petitioner, Security
Bank & Trust Company and had an agreement for an automatic transfer allowing the drawer to
draw a check against its current account and have it supported by funds from the savings account
if funds from the current account were insufficient to cover the amount of the check. Diaz issued
a Php 60,000.00 check payable to Arboleda. However, on the same date, Diaz ordered the bank
to stop payment on ground of "incomplete transaction" and posted by the bank on the current
account ledger. When the check was presented for encashment the bank personnel consulted only
the savings account ledger and encashed the check. It recredited the full amount to Diaz's
account when the bank discovered the mistake. The bank officials went to see respondent
Arboleda to ask for the return of the amount of Php 60,000.00. But they were told the money had
been turned over to Amador Libongco. When asked by bank officials, Libongco did not deny
receipt of the money, but said he would return it provided Diaz showed him the receipt for
payment of the capital gains tax. As Diaz failed to show receipts, Arboleda and Libongco refused
to return the money. Petitioner, therefore, filed the instant suit.
The bank sued private respondents for recovery of sum of money. Respondents denied any
obligation to return the money claiming that the check was for payment of the balance of the
purchase price and agent's commission. The trial court, finding that the sale between the parties
was consummated and that private respondent Arboleda was entitled to a commission, rendered
judgment dismissing the complaint, and ruled that since the sale has been completed there was
no basis for the stop payment order and that petitioner bank should not have recredited Diaz with
the Php 60,000.00 it paid Arboleda. Aggrieved, petitioner raised the issue to the Court of
Appeals which affirmed the trial court's decision.

ISSUE:
Whether or not the petitioner bank can ask respondent, Arboleda, for the return of the
amount of Php 60,000.00

HELD:
No. The Supreme Court held that the action for collection filed by petitioner is subject to
the defenses which private respondent Arboleda may have had the action been instituted by Diaz
and that since respondent Arboleda denied owing any obligation to Diaz, petitioner cannot ask
for reimbursement. Article 1236 of the Civil Code provides that [t]he creditor is not bound to
accept payment or performance by a third person who has no interest in the fulfillment of the
obligation, unless there is a stipulation to the contrary. Whoever pays for another may demand
from the debtor what he has paid, except that if he paid without the knowledge or against the will
of the debtor, he can recover only insofar as the payment has been beneficial to the debtor.
What appears to have happened in this case is that there was an agreement that if Anita Diaz, the
drawer of the check, paid the capital gains tax, she would be reimbursed the amount she had paid
to Arboleda. Claiming that she had paid the capital gains tax, Diaz issued a stop payment order
to petitioner and asked for the return of the check she had issued to Arboleda. As she could not
show any receipt for payment, however, Arboleda refused to return the check. Arboleda instead
cashed the check and refused to pay its proceeds.
Thus, even if petitioner is considered to have paid Anita Diaz in behalf of Arboleda, its right to
recover from Arboleda would be only to the extent that the payment benefited Arboleda, because
the payment (recrediting) was made without the consent of Arboleda. Since Arboleda denies
owing any obligation to Diaz, petitioner cannot ask for reimbursement.
 LORENZO SHIPPING CORP. vs. BJ MARTHEL INTERNATIONAL, INC.
485 PHIL 546-565 November 19, 2004
Topic: Payment or Performance

FACTS:
Petitioner Lorenzo Shipping Corporation is a domestic corporation engaged in coastwise
shipping and owns the cargo vessel M/V Dadiangas Express. On the hand, respondent BJ
Marthel International, Inc. is a business entity engaged in trading, marketing, and selling of
various industrial commodities. It is also an importer and distributor of different brands of
engines and spare parts.

Petition ordered a unit of cylinder twice on different dates, both purchases stating that the
term of payment would be "25% upon delivery, balance payable in 5 bi-monthly equal
installments." Instead of paying the 25% down payment for the first cylinder liner, petitioner
issued in favor of respondent ten postdated checks to be drawn against the former's account with
Allied Banking Corporation. The checks were supposed to represent the full payment of the
aforementioned cylinder liner. Respondent then deposited petitioner's check that was postdated
but was dishonored by the drawee bank due to insufficiency of funds. The remaining nine
postdated checks were eventually returned by respondent to petitioner.

Due to the failure of the parties to settle the matter, respondent filed an action for sum of
money and damages before the Regional Trial Court (RTC) of Makati City. In its complaint,
respondent alleged that despite its repeated oral and written demands, petitioner obstinately
refused to settle its obligations. Respondent prayed that petitioner be ordered to pay for the value
of the cylinder liners plus accrued interest of P111,300 and additional interest of 14% per annum
to be reckoned from June 1991 until the full payment of the principal; attorney's fees; costs of
suits; exemplary damages; actual damages; and compensatory damages.

Subsequently, respondent filed a Second Amended Complaint with Preliminary

Attachment. The amendment introduced dealt solely with the number of postdated checks issued
by petitioner as full payment for the first cylinder liner it ordered from respondent. Whereas in
the first amended complaint, only nine postdated checks were involved, in its second amended
complaint, respondent claimed that petitioner actually issued ten postdated checks.

ISSUE:
Whether or not the checks issued were supposed to represent the full payment of the first
cylinder liner ordered.

HELD:
The ten postdated checks issued by petitioner and received by the respondent as full
payment of the purchase price of the first cylinder liner fail to impress. It is not an indication of
failure to honor a commitment on the part of the respondent. As delivery of said checks could
produce the effect of payment only when they have been cashed, respondent's obligation to
deliver the first cylinder liner could not have arisen as claimed by petitioner since by that time,
petitioner had yet to fulfill its undertaking to fully pay for the value of the first cylinder liner.
 BRICKTOWN DEVELOPMENT CORPORATION (its new corporate name
MULTINATIONAL REALTY DEVELOPMENT CORPORATION) and MARIANO Z.
VERALDE vs. AMOR TIERRA DEVELOPMENT CORPORATION
G.R. No. 112182 December 12, 1994
Topic: Payment or Performance - Time of Performance

FACTS:
On 31 March 1981, Bricktown Development Corporation (herein petitioner corporation),
represented by its President and co-petitioner Mariano Z. Velarde, executed two Contracts to
Sell in favor of Amor Tierra Development Corporation (herein private
respondent), represented in these acts by its Vice-President, Moises G. Petilla, covering a total
of 96 residential lots. The total price of P21,639,875.00 was stipulated to be paid by private
respondent in such amounts and maturity dates, as follows: P2,200,000.00 on 31 March 1981;
P3,209,968.75 on 30 June 1981; P4,729,906.25 on 31 December 1981; and the balance of
P11,500,000.00 to be paid by means of an assumption by private respondent of petitioner
corporation's mortgage liability to the Philippine Savings Bank or, alternatively, to be made
payable in cash.

Private respondent was only able to pay petitioner corporation the sum of P1,334,443.21
[31 March 1981]. In the meanwhile, however, the parties continued to negotiate for a possible
modification of their agreement, although nothing conclusive would appear to have ultimately
been arrived at.

On 12 October 1981, petitioner corporation, through its legal counsel, sent private
respondent a "Notice of Cancellation of Contract on account of the latter's continued failure to
pay the installment due 30 June 1981 and the interest on the unpaid balance of the stipulated
initial payment.

Several months later, or on 26 September 1983, private respondent, through counsel,

demanded the refund of private respondent's various payments to petitioner corporation,
allegedly "amounting to P2,455,497.71," with interest within fifteen days from receipt of said
letter, or, in lieu of a cash payment, to assign to private respondent an equivalent number of
unencumbered lots at the same price fixed in the contracts. The demand, not having been heeded,
private respondent commenced, on 18 November 1983, its action with the court a quo. The
dispositive portion of the judgment rendered by the trial court, which was affirmed by the
appellate court in toto, included:

2. Ordering the [petitioner] corporation, Bricktown Development Corporation, also

known as Multinational Realty Development Corporation, to return to the [private
respondent] the amount of One Million Three Hundred Thirty Four Thousand Four
Hundred Forty-Three Pesos and Twenty-One Centavos (P1,334,443.21) with interest at
the rate of Twelve (12%) percent per annum, starting November 18, 1983, the date when
the complaint was filed, until the amount is fully paid.

ISSUE:
 Whether or not the amounts already remitted by private respondent under said contracts
were rightly forfeited by petitioner corporation.

HELD:
NO. The terms of payment agreed upon by the parties were not met by private
respondent. Of a total selling price of P21,639,875.00, private respondent was only able to remit
the sum of P1,334,443.21 which was even short of the stipulated initial payment of
P2,200,000.00. No additional payments, it would seem, were made. A notice of cancellation was
ultimately made months after the lapse of the contracted grace period.

It has been duly established through the testimony of plaintiff's witnesses Marcosa
Sanchez and Vicente Casas that there were negotiations to enter into another agreement between
the parties, after March 31, 1981.

We agree with the court a quo that there is, therefore, reasonable ground to believe that
because of the negotiations between the parties, coupled with the fact that the plaintiff never took
actual possession of the properties and the defendants did not also dispose of the same during the
pendency of said negotiations, the plaintiff was led to believe that the parties may ultimately
enter into another agreement in place of the "contracts to sell." There was, evidently, no malice
or bad faith on the part of the plaintiff in suspending payments. On the contrary, the defendants
not only contributed, but had consented to the delay or suspension of payments.
In fine, while we must conclude that petitioner corporation still acted within its legal right
to declare the contracts to sell rescinded or cancelled, considering, nevertheless, the peculiar
circumstances found to be extant by the trial court, confirmed by the Court of Appeals, it would
be unconscionable, in our view, to likewise sanction the forfeiture by petitioner corporation of
payments made to it by private respondent.

We do not find it equitable, however, to adjudge any interest payment by petitioners on

the amount to be thus refunded, computed from judicial demand, for, indeed, private respondent
should not be allowed to totally free itself from its own breach.

WHEREFORE, the appealed decision is AFFIRMED insofar as it declares valid the

cancellation of the contracts in question but MODIFIED by ordering the refund by petitioner
corporation of P1,334,443.21 with 12% interest per annum to commence only, however, from
the date of finality of this decision until such refund is effected. No costs.
SO ORDERED.
 G & M PHILIPPINES, INC. vs. CUAMBOT
G.R. No. 162308 November 22, 2006
Topic: Burden of Proving Payment

FACTS:
Romil V. Cuambot applied for deployment to Saudi Arabia as a car body builder with
petitioner G & M Philippines, Inc., a duly licensed placement and recruitment agency.
Respondent's application was duly processed and he later signed a two-year employment
contract to work at the Al Waha Workshop in Unaizah City, Gassim, Kingdom of Saudi Arabia.
Respondent did not finish his contract and returned to the Philippines barely six months later. He
filed before the National Labor Relations Commission (NLRC) a complaint for unpaid wages,
withheld salaries, refund of plane ticket and repatriation bond, later amended to include illegal
dismissal, claim for the unexpired portion of his employment contract, actual, exemplary and
moral damages, and attorney's fees.

Petitioner G & M insisted that respondent was religiously paid his salaries as they fell
due. After working for a little over seven months, respondent pleaded with his employer to be
allowed to return home since there were family problems he had to settle personally. Respondent
even submitted a resignation letter. To support such claim, petitioner submitted in evidence
copies of seven payslips duly authenticated by the Philippine Labor Attach in Riyadh, Saudi
Arabia.

Respondent countered that his signatures in the purported pay slips were forged. He also
stated that he was never given a copy of the contract of employment. To counter the allegation of
forgery, petitioner claimed that there was a great possibility that respondent had changed his
signature while abroad so that he could file a complaint for illegal dismissal upon his return.

ISSUE:
Whether or not the petitioner was able to present evidence to prove its claim that
respondent had received all his salaries and benefits in full

HELD:

After examination of the evidence on record, the petition must fail.

The petitioners attempts at establishing its case are not enough to convince the court of
the veracity of its claims. Amongst other things, the petitioner failed to submit the original copies
of the pay slips and the resignation letter to prove that they were actually penned by respondent,
they failed to submit an original copy of the employment contract to prove that they had actually
given a copy of such to respondent for him to sign, and a cursory look at the resignation letter
and the handwritten pay slips show that they were written by one person.

Moreover, one who pleads payment has the burden of proving it. The reason for the rule
is that the pertinent personnel files, payrolls, records, remittances and other similar documents
which will show that overtime, differentials, service incentive leave, and other claims of workers
have been paid are not in the possession of the worker but in the custody and absolute control
of the employer. Thus, the burden of showing with legal certainty that the obligation has been
discharged with payment falls on the debtor, in accordance with the rule that one who pleads
payment has the burden of proving it. Only when the debtor introduces evidence that the
obligation has been extinguished does the burden shift to the creditor, who is then under a duty
of producing evidence to show why payment does not extinguish the obligation. In this case,
petitioner was unable to present ample evidence to prove its claim that respondent had received
all his salaries and benefits in full.

Petition denied for lack of merit.

 CITIBANK AND INVESTOR FINANCE CORPORATION
vs. MODESTA R. SABENIANO
G.R. No. 156132 February 6, 2007
Topic: Burden Of Proving Payment
FACTS :
Sabeniano was a client of the petitioners CITIBANK and FNCB finance. She had several
deposits and market placements with the petitioners, among which were her savings account with
local brand of Citibank Manila, money market placement with petitioner FNCB finance and
dollar accounts in the Geneva Branch of Citibank. Also, the respondent incurred loans in
Citibank Manila amounting to P1,920,000 which is due and demandable on May 1979.
Respondent failed to pay her loans despite repeated demands by the petitioner. Hence, the
petitioner used respondents deposits and money market placement to off sett and liquidate her
loans.
The outstanding obligation of the respondent amounted to P2,156,940.58. FNCB
deducted an amount of P1,022,916.66 from the respondents money market placement. Citibank
Manila also deducted an amount of P31,079.14. This is also followed by the deduction of
Citibank Geneva an amount of P1,102,944.78. This was all done to offset the respondents loan
with the petitioners. The respondent on the other hand denies incurring such loans and also stated
that she was not informed with the offsetting.

ISSUE:
1. Whether or not there is compensation
2. Whether or not there is extraordinary inflation

HELD
No. There is no compensation in this case. Applying article 1278, two persons must be
both creditors and debtors of each other. In the present case, Citibank Manila and Citibank
Geneva are two separate entities. As for the dollar account, the respondent was a creditor to
debtor Citibank Geneva. For the outstanding loans, petitioner Citibank was the creditor and
respondent was the debtor. The Philippine branch of Citibank should be treated as one unit and it
should not be treated as one unit with the Geneva branch. Hence, this would mean that the
parties are not the principal creditor and debtor of each other.
No. Extraordinary Inflation of the dollar accounts is not present. It is stated in Article
1250 of the Civil Code in case of extraordinary inflation or deflation of the currency stipulated
should supervene, the value of the currency at the time of the establishment of the obligation
shall be the basis of payment, unless there is an agreement to the contrary. Extraordinary
inflation exist when there is a decrease or increase in the purchasing power of the Philippine
currency which is unusual or beyond the common fluctuation in the value of the currency, and
such increase cannot be forseen or was beyond the contemplation of the parties.
It is said that for extraordinary inflation to exist , there must be a proof of competent
evidence and assumption alone will not suffice. In the present case, petitioners did not present
proof as to how much the price of the goods risen in the said period. It can also be noted that
there was no express declaration by the BSP that such extraordinary inflation exist. Therefore,
the court ruled that petitioner Citibank should refund to the respondent the amount taken from
her Geneva account at the time of payment plus the stipulated interest for each of the fiduciary
placements and current accounts.
 CORUNA vs CINAMIN
GR. No. 154286 February 28, 2006.
Topic: Article 1232-1251; BURDEN OF PROOF IN PAYMENTS

FACTS:
Julieta Vasquez Corua was the owner of 2 lots. When Julieta died, intestate these
properties passed on to petitioners who were her children, namely: Magdalena, Jorge, Rosita,
Loreto, Rosendo, Jose, Benjamin, all surnamed Corua. The same lots was tenanted by herein
respondents. Petitioners filed before two separate complaints for cancellation and/or nullification
of emancipation patents and/or certificates of land transfers issued in favor of respondents.
Petitioners claimed that respondents failed to pay the rentals and amortizations for the lands

ISSUE:
Whether or not there were payments on the rented lands by the tenants.

HELD:
Yes. The Supreme Court cannot, however, agree in the petitioners' contention that the
amortization payments made by respondents to the Land Bank of the Philippines were invalid.
As the valuation of the subject lands was already accomplished, respondents were then
authorized to course their payment through the LBP pursuant to the law. Respondents direct us to
our holding in the case of Locsin v. Valenzuela where we declared that "under P.D. No. 251,
dated July 21, 1973, the Land Bank is tasked to finance the acquisition of farm lots and
whenever it pays the whole or a portion of the total cost of the farm lots, it shall be subrogated to
the right of the landowner to collect and receive the yearly amortizations or the amount paid
including interest thereon, from the tenants-farmers in whose favor the farm lots had been
transferred pursuant to P.D. No. 27.
 TIBAJIA vs. CA and EDEN TAN
G.R. No. 100290 June 4, 1993
Topic: Article 1249

FACTS:
There is a suit for collection of a sum of money filed by Eden Tan against the Tibajia
spouses and a writ of attachment was issued by the trial court. The Deputy Sheriff filed a return
stating that a deposit made by the Tibajia spouses had been garnished by him. Tibajia spouses
delivered to Deputy Sheriff Eduardo Bolima the total money judgment in check.

Private respondent refused to accept the payment made by the Tibajia spouses and
instead insisted that the garnished funds deposited be withdrawn to satisfy the judgment
obligation. Petitioners filed a motion to lift the writ of execution on the ground that the judgment
debt had already been paid

The motion was denied by the trial court on the ground that payment in cashier's check is
not payment in legal tender and that payment was made by a third party other than the defendant

ISSUE:
Whether or not the BPI cashier's check tendered by petitioners for payment of the
judgement is "Legal Tender"

RULING:
The provisions of law applicable to the case at bar are the following:

a. Article 1249 of the Civil Code which provides:

Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is
not possible to deliver such currency, then in the currency which is legal tender in the
Philippines.

The delivery of promissory notes payable to order, or bills of exchange or other

mercantile documents shall produce the effect of payment only when they have been cashed, or
when through the fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in abeyance.;

b. Section 1 of Republic Act No. 529, as amended, which provides:

Sec. 1. Every provision contained in, or made with respect to, any obligation which purports to
give the obligee the right to require payment in gold or in any particular kind of coin or currency
other than Philippine currency or in an amount of money of the Philippines measured thereby,
shall be as it is hereby declared against public policy null and void, and of no effect, and no such
provision shall be contained in, or made with respect to, any obligation thereafter incurred.
Every obligation heretofore and hereafter incurred, whether or not any such provision as to
payment is contained therein or made with respect thereto, shall be discharged upon payment in
any coin or currency which at the time of payment is legal tender for public and private debts

Section 63 of Republic Act No. 265, as amended (Central Bank Act) which provides:
Sec. 63. Legal character Checks representing deposit money do not have legal tender power
and their acceptance in the payment of debts, both public and private, is at the option of the
creditor: Provided, however, that a check which has been cleared and credited to the account of
the creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the
amount credited to his account.

In the recent cases of Philippine Airlines, Inc. vs. Court of Appeals 4 and Roman
Catholic Bishop of Malolos, Inc. vs. Intermediate Appellate Court, 5 this Court held that
A check, whether a manager's check or ordinary check, is not legal tender, and an offer of a
check in payment of a debt is not a valid tender of payment and may be refused receipt by the
obligee or creditor.
 TELENGTAN BROTHERS & SONS, INC vs UNITED STATES
LINES, INC. and the COURT OF APPEALS
G.R. No. 132284 February 28, 2006
Topic: Monetary Obligations

FACTS:
Petitioner Telengtan is a domestic corporation doing business under the name and style
La Suerte Cigar & Cigarette Factory, while respondent U.S. Lines is a foreign corporation
engaged in the business of overseas shipping. On June 22, 1981, United States Lines filed
a suit against Telengton Brothers and Sons seeking payment of demurrage charges plus interest
and damages. As stipulated, a consigne who fails to deliver their containerized cargo within the
10 day free period is liable to pay demurrage charges. Petitioner is alleged to have incurred
P94,000 which it refused to pay despite repeated demands. Petitioner disclaims liability alleging
that it has never entered into a contract nor signed an agreement to be bound by it. RTC ruled
that petitioner is liable to respondent and all be computed as of the date of payment which the
Court of Appeals affirmed the decision.

ISSUE:
Whether or not the re-computation of the judgment award in accordance with Article
1250 of the Civil Code proper.

HELD:
No. The Supreme Court found the trial courts decision as affirmed by the Court of
Appeals, erroneous. The Court holds that there has been an extraordinary inflation within the
meaning of Article 1250 of the Civil Code. There is no reason for ordering the payment of an
obligation in an amount different from what has been agreed upon because of the purported
supervening event of an extraordinary inflation. The assailed decision is affirmed with
modification that the order for re-computation as of the date of payment in accordance with the
provisions of Article 1250 of New Civil Code is deleted.
 UNITED STATES vs EMILIO BEDOYA
G.R. No. L-5100 November 03, 1909
Topic: Payment thru delivery of Bill of Exchange

FACTS:
On appeal is the decision made by the Court of First Instance of the City of Manila which
rendered herein appellant Emilio Bedoya, guilty of the crime of Estafa, for deliberately
using/indorsing a worthless Bill of Exchange in paying his indebtedness to Hector Faini (an
employee of Schweiger Import & Export Company). The Bill of Exchange was rendered to be
worthless when the issuer, Sr. Vicente Foz, upon demand of payment by Faini, had refused to
pay; wherein it was found that Sr. Foz was already insolvent and had no capacity to pay such Bill
of Exchange. Thus, the creditor (Faini) alleges that the appellant-debtor (Bedoya) had
deliberately indorsed such Bill of Exchange to him in order to do away with Bedoyas existing
liability.

Bedoya, on the other hand, alleges that he had no knowledge of Sr. Fozs insolvency and
reluctance to pay, and that he had no intention to issue such Bill of Exchange to defraud the
creditor (Schweiger Import & Export Co.). Bedoya also argued, among other things, that he
should not be held liable for Sr. Fozs failure to pay since he properly indorsed the Bill of
Exchange to Faini, which made Faini (Schweiger Import & Export, Co.) the holder of the Bill,
and in effect, already produced the effect of payment.

ISSUE:
Whether the delivery of the Bill of Exchange already produces the effect of payment.

HELD:
The Court reversed the appealed decision, finding accused-appellant Bedoya not guilty of
the crime of Estafa. The Court stated that under Art. 1170 (now Art. 1249) of the Civil Code, the
delivery of bills of exchange shall produce the effect of payment only when they have been
cashed (collected), or when through the fault of the creditor, the value of such Bill has been
impaired. In this case, the failure of the creditor, being the holder of the Bill, to protest Sr. Fozs
nonpayment, had impaired the value of the Bill, therefore, accused-appellants delivery of the
Bill should already constitute as payment in proper form. Therefore, since Bedoya had already
effected payment, he should not be chargeable with the crime of Estafa.
 MYRON C. PAPA, Administrator of the Testate Estate of ANGELA M. BUTTE vs A.U.
VALENCIA AND CO., INC., et al
G.R. No. 105188 January 23, 1998
Topic: Article 1249 (Monetary Obligations)

FACTS:

On June 1982, private respondents A.U. Valencia and Co., Inc. and Felix Pearroyo filed
a complaint for specific performance against Myron Papa, as administrator of the Testate Estate
of Angela Butte, with the Regional Trial Court. On June 15, 1973, petitioner sold to respondent
Pearroyo, through respondent Valencia, a parcel of land measuring 286.60 square meters,
situated at Retiro and Cadiz Streets, La Loma, Quezon City. The said lot was mortgaged by the
deceased to the Associated Banking Corporation. However, Butte died after the alleged sale and
prior to the release of the title to the property. The bank refused to release the title to the property
sold to Pearroyo notwithstanding the subsequent representations done by the respondents. The
bank insisted that the title will be released unless and until all of the mortgaged properties of the
deceased are redeemed. Furthermore, it was only on April 1977 that the respondents realized that
the mortgaged rights of the bank were assigned to one Tomas Parpana as special administrator of
Ramon Papa, Jr. It was also discovered that the petitioner continued collecting monthly rentals
from the said property even though it was already sold to the respondents and with the
knowledge of the said sale. Despite repeated demands from the respondents, the petitioner was
not able to deliver the title to the property. Thus, the petitioners filed a complaint for specific
performance to deliver the said title and pay the corresponding sums.

On the other hand, Delfin Jao was permitted to intervene in the case alleging that the
parcel of land was also sold to him by respondent Valencia through respondent Pearroyo on
August 20, 1973. He prayed that immediately after effecting the delivery to the respondents, the
said title of the property and the corresponding sums must likewise be delivered to him,
afterwards. Conversely, the petitioner claimed that the deceased failed to pay its real estate tax.
The said lot was then sold to the Reyes spouses at a public auction by the City Treasurer of
Quezon City. The trial and appellate courts decided in favor of the respondents. Hence, petitioner
appealed, claiming that the sale was never consummated since he did not encash the check
(amounting to Php 140,000.00) given by the respondents. He also asserts that the respondents
only paid Php 5,000.00 as its earnest money. Hence, this appeal.

ISSUE:

1. Whether or not the check is a valid tender of payment.

2. Whether or not sale has been consummated.

HELD:

It is certain that respondents Valencia and Pearroyo had given petitioner Papa the
amounts of Php 5,000.00 in cash on May 24, 1973, and Php 40,000.00 on June 15, 1973, as their
payment for the said parcel of land. Petitioner acknowledged the same and even issued receipts,
therefrom. After more than ten years from the payment in part by cash and in part by check, it is
presumed that the check was already encashed. On the other hand, if the petitioner did not encash
such check, his failure to do so for more than ten years undeniably caused the impairment of the
check because of his unreasonable and unexplained delay. The rule is otherwise if the debtor is
prejudiced by the creditors unreasonable delay in presentment.

Pursuant to Article 1249, paragraph 2:

The delivery of promissory notes payable to order, or bills of exchange or other

mercantile documents shall produce the effect of payment only when they have been cashed, or
when through the fault of the creditor they have been impaired.

If its non-payment is due to negligence, payment will be considered effected and the
obligation for which the check was given as conditional payment will be discharged. Therefore,
respondents had fulfilled their part in the contract of sale as they have already delivered the
payment of the purchase price, which consequently gives them the right to compel the petitioner
to deliver to them the said title, and to peacefully acquire the disputed lot. Indeed, a sale was
executed.
 PHILIPPINE AIRLINES INC v. HON. COURT OF APPEALS
GR No. L-49188 January 30, 1990
TOPIC: Article 1249

FACTS:
On June 29, 1972, the Court of First Instance of Manila rendered a judgment in favor of
private respondent Amelia Tan against petitioner when the former filed a complaint of damages
against the latter. The appellate court modified the amount to be received by Amelia Tan. Four
months later, respondent Amelia Tan moved for the issuance of a writ of execution stating that
the judgment rendered by the lower court and affirmed with modification by the Court of
Appeals remained unsatisfied. The petitioner filed an opposition, stating that the obligation had
already been paid through Deputy Sheriff Emilio Z. Reyes, as evidenced by cash vouchers which
were properly signed and receipted by said sheriff, who had absconded or disappeared.
Respondent filed for a writ of execution. Special Sheriff Jaime del Rosario was assigned to serve
a notice of garnishment on the depository bank of petitioner, and garnished the petitioners
deposit in said bank in the total amount of P64,408.00, hence the petition for certioriari.

ISSUE:
1) Whether or not payment made to Deputy Sheriff was valid
2) Whether or not such payment made to the absconding sheriff extinguish the judgment
debt.

HELD:
1) No. The payment to the absconding sheriff by check in his name did not operate as a
satisfaction of the judgment debt. In accordance with Article 1240 of the New Civil Code,
Payment shall be made to the person in whose favor the obligation has been constituted, or his
successor in interest, or any person authorized to receive it. In order to discharge the obligation,
payment should be made to the proper person, hence the payment should have been made to the
obligee or to an agent having an express or implied authority to receive the particular payment.

2) No. According to Article 1249, xxx The delivery of promisory notes payable to
order, or bills of exchange or other mercantile documents shall produce the effect of payment
only when they have been cashed, or when through the fault of the creditor they have been
impaired xxx The payment made by the petitioner to the absconding sheriff was not in cash or
legal tender but in checks. The checks were not payable to Amelia Tan or her company. Unless it
was authorized to do so by law or by the obligee, a public officer has no authority to accept
anything other than money payment of an obligation under judgment being executed. In this
case, the acceptance of the sheriff of the petitioners checks does not operate as a discharge of
the judgment debt. A negotiable instrument is only a substitute for money and not money, and as
such the delivery does not operate as payment. Payment in cash to the implementing officer may
be deemed to be payment of the judgment debt but such would result to damage or interminable
litigations each time a sheriff with huge amounts of cash absconds with it. The Courts, as a
protective measure, encourage the practice of payments by check, provided adequate controls are
instituted to prevent wrongful payment and illegal withdrawal or disbursement of funds. If
particularly big amounts are involved, escrow arrangements with a bank and carefully supervised
by the court would be the safer procedure, which is perfectly legal. Making the checks payable to
the judgment creditor would have prevented encashment or taking undue advantage by the
sheriff, and thus the petitioner had made it possible for the sheriff to misappropriate the funds
that were withdrawn.
 HYDRO RESOURCES CONTRACTORS CORPORATION vs.
NATIONAL IRRIGATION ADMINISTRATION
G.R. No. 160215 November 10, 2004
Topic: Payment in Foreign Currency

FACTS:
In a competitive bidding conducted by the National Irrigation Administration (NIA)
sometime in August 1978, Hydro Resources Contractors Corporation (Hydro) was awarded
Contract MPI-C-2 involving the main civil work of the Magat River Multi-Purpose Project. The
contract price for the work was pegged at P1,489,146,473.72 with the peso component thereof
amounting to P1,041,884,766.99 and the US$ component valued at $60,657,992.37 at the
exchange rate of P7.3735 to the dollar or P447,361,706.73.

On November 6, 1978, the parties signed Amendment No. 1 of the contract whereby NIA
agreed to increase the foreign currency allocation for equipment financing from
US$28,000,000.00 for the first and second years of the contract to US$38,000,000.00, to be
made available in full during the first year of the contract to enable the contractor to purchase the
needed equipment and spare parts. On April 9, 1980, the parties entered into a Memorandum of
Agreement (MOA) whereby they agreed that Hydro may directly avail of the foreign currency
component of the contract in order for the contractor to avoid further delays in the procurement
of the said spare parts and equipment.

A few months after, NIA and Hydro entered into a Supplemental Memorandum of
Agreement (Supplemental MOA) to include among the items to be financed out of the foreign
currency portion of the Contract construction materials, supplies and services as well as
equipment and materials for incorporation in the permanent works of the Project.

Work on the project progressed steadily until Hydro substantially completed the project
in 1982 and the final acceptance was made by NIA on February 14, 1984.

During the period of the execution of the contract, the foreign exchange value of the peso
against the US dollar declined and steadily deteriorated. Whenever Hydros availment of the
foreign currency component exceeded the amount of the foreign currency payable to Hydro for a
particular period, NIA charged interest in dollars based on the prevailing exchange rate instead
of the fixed exchange rate of P7.3735 to the dollar. Yet when Hydro received payments from
NIA in Philippine Pesos, NIA made deductions from Hydros foreign currency component at the
fixed exchange rate of P7.3735 to US$1.00 instead of the prevailing exchange rate.

In 1983, NIA and Hydro prepared a joint computation denominated as the MPI-C-2
Dollar Rate Differential on Foreign Component of Escalation. Based on said joint computation,
Hydro was still entitled to a foreign exchange differential of US$1,353,771.79 equivalent to
P10,898,391.17.

Hydro then presented its claim for said foreign exchange differential to NIA on August
12, 1983 but the latter refused to honor the same. Hydro made several demands to recover its
claim until the same was turned down with finality by then NIA Administrator Federico N.
Alday, Jr. on January 6, 1987.
On December 7, 1994, Hydro filed a request for arbitration with the Construction
Industry Arbitration Commission (CIAC). NIA filed a Motion to Dismiss but the same was
denied by CIAC.
Dissatisfied, NIA filed a petition for certiorari and prohibition with the Court of Appeals
which dismissed the petition. NIA challenged the resolution of the Court of Appeals before this
Court in a special civil action for certiorari.
Meanwhile, on June 10, 1997, the CIAC promulgated a decision in favor of Hydro. NIA
filed a Petition for Review on Appeal before the Court of Appeals.
The Court of Appeals rendered a decision reversing the judgment of the CIAC. Hydros
Motion for Reconsideration was denied.
Hence, this petition.

ISSUES:
1. Whether or not the provisions of R.A. No. 529, otherwise known as an Act To Assure
Uniform Value to Philippine Coin And Currency, is applicable to Hydros claim.
2. Whether or not Hydros claim should be computed at the fixed rate of exchange.

HELD:

1. No. The Supreme Court ruled that the Contract between NIA and Hydro is an internationally
tendered contract considering that it was funded by the International Bank for Reconstruction
and Development (IBRD). As a contract funded by an international organization, particularly one
recognized by the Philippines, the contract is exempt from the provisions of R.A. No. 529. R.A.
No. 4100 amended the provisions of R.A. 529, thus:

Sec. 1. Every provision contained in, or made with respect to, xxx any obligation
contracted in the Philippines which provisions 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 xxx,
be as it is hereby declared against public policy, and null, void, and of no effect, xxx. The above
prohibition shall not apply to (a) transactions where the funds involved are the proceeds of loans
or investments made directly or indirectly, xxx , by xxx financial and banking institutions so long
as the funds are identifiable, as having emanated from the sources enumerated above; xxx.

Even assuming that R.A. No. 529 is applicable, it is still erroneous for the Court of
Appeals to deny Hydros claim because Section 1 of R.A. No. 529 states that only the stipulation
requiring payment in foreign currency is void, but not the obligation to make payment. Every
other domestic obligation heretofore or hereafter incurred shall be discharged upon payment in
any coin and currency which at the time is legal tender for public and private debts. It is thus
erroneous for the Court of Appeals to disallow petitioners claim for foreign currency differential
because NIAs obligation should be converted to Philippine Pesos which was legal tender at the
time.

2. No. The Supreme Court ruled that NIA is, therefore, estopped from invoking the
contractual stipulation providing for the fixed rate to justify a lower computation than
 that claimed by Hydro. It cannot be allowed to hide behind the very provision which it
itself continuously violated. An admission or representation is rendered conclusive upon
the person making it and cannot be denied or disproved as against the person relying
thereon (Article 1431, Civil Code). A party may not go back on his own acts and
representations to the prejudice of the other party who relied upon them.

When the MOA and the Supplemental MOA were in effect, there were instances when
the foreign currency availed of by Hydro exceeded the foreign currency payable to it for that
particular Progress Payment. In instances like these, NIA actually charged Hydro interest in
foreign currency computed at the prevailing exchange rate and not at the fixed rate. NIA now
insists that the exchange rate should be computed according to the fixed rate and not the
escalating rate it actually charged Hydro.

Suffice it to state that this flip-flopping stance of NIA of adopting and discarding
positions to suit its convenience cannot be countenanced. A person who, by his deed or conduct
has induced another to act in a particular manner, is barred from adopting an inconsistent
position, attitude or course of conduct that thereby causes loss or injury to another. Indeed, the
application of the principle of estoppel is proper and timely in heading off NIAs efforts at
renouncing its previous acts to the prejudice of Hydro which had dealt with it honestly and in
good faith.
 FEDERICO SERRA,vs. CA & RIZAL COMMERCIAL BANKING
CORPORATION,
[G.R. No. 103338. January 4, 1994.]
Topic: Extraordinary Inflation/Deflation (ART 1250)

FACTS:
Petitioner Federico Serra is the owner of a 374 square meter parcel of land located at
Quezon St., Masbate, Masbate.in 1975, respondent Rizal Commercial Banking Corporation
(RCBC), in its desire to put up a branch in Masbate, Masbate, negotiated with petitioner for the
purchase of the then unregistered property.

Instead, on May 20, 1975, petitioner and private respondent entered into a "Contract of
Lease with Option to Buy," which provides, among other thing things that: the contract will be
effective for a period of 25 years; that respondent bank have the option of purchase if within the
first 10 years of the contract the land is registered under the TORRENS SYTEM; that a monthly
rental of P700 shall be paid.

Within the first three years, the land was registered and petitioner kept pursuing the bank
manager to effect the sale of the lot as per their agreement. In 1984, respondent communicated
its desire to exercise such option at the agreed price of not greater than P210.00 per square meter.
However, petitioner replied that he is no longer selling the property.

On March 14, 1985, a complaint for specific performance and damages was filed by
respondent against petitioner and petitioner filed a counterclaim in which he alleged that rental of
P700.00 has become unrealistic and unreasonable, that justice and equity will require its
adjustment. The court dismissed complaint but upon motion for reconsideration, judgment was
reversed and ordered herein petitioner to execute sale and the counterclaim was dismissed. CA
affirmed. Hence, this petition.

ISSUE:
Whether or not CA gravely abused its discretion in not granting currency adjustment on
the already eroded value of the stipulated rentals for twenty-five years.

HELD:
No. The court held that the decline of the purchasing power of the Philippine peso from
1983 to the time of the commencement of the present case in 1985,cannot be so great as to result
in an extraordinary inflation. Extraordinary inflation exists when there in an unimaginable
increase or decrease of the purchasing power of the Philippine currency, or fluctuation in the
value of pesos manifestly beyond the contemplation of the parties at the time of the
establishment of the obligation.

And if there is a need for the adjustment of the rentals, the parties themselves could
amend the contract.
 RAMOS VS. SARAO
G.R NO. 149756 February 11, 2005
Topic: Tender of Payment and Consignation

FACTS:
On February 21, 1991, Spouses Jonas Ramos and Myrna Ramos executed a contract over
their conjugal house and lot in favor of Susana S. Sarao for and in consideration of P1,310,430.
Entitled "DEED OF SALE UNDER PACTO DE RETRO," the contract, inter alia, granted the
Ramos spouses the option to repurchase the property within six months from February 21, 1991,
for P1,310,430 plus an interest of 4.5 percent a month. It was further agreed that should the
spouses fail to pay the monthly interest or to exercise the right to repurchase within the stipulated
period, the conveyance would be deemed an absolute sale.

On July 30, 1991, Myrna Ramos tendered to Sarao the amount of P1,633,034.20 in the
form of two managers checks, which the latter refused to accept for being allegedly insufficient.
On August 8, 1991, Myrna filed a Complaint for the redemption of the property and moral
damages plus attorneys fees. On August 13, 1991, she deposited with the RTC two checks that
Sarao refused to accept. On December 21, 1991, Sarao filed against the Ramos spouses a Petition
"for consolidation of ownership in pacto de retro sale", the civil cases were later consolidated
and jointly tried before RTC in Makati.

After trial, the RTC dismissed the Complaint and granted the prayer of Sarao to
consolidate the title of the property in her favor. Aggrieved, Myrna elevated the case to the CA.
The appellate court sustained the RTCs finding that the disputed contract was a bonafide pacto
de retro sale, not a mortgage to secure a loan. It ruled that Myrna Ramos had failed to exercise
the right of repurchase, as the consignation of the two managers checks was deemed invalid.
She allegedly failed (1) to deposit the correct repurchase price and (2) to comply with the
required notice of consignation.

ISSUE:
Whether or not there was no valid tender of payment of the redemption price, hence there
was also no valid consignation?

HELD:
NO. The Supreme Court held that tender of payment is the manifestation by debtors of
their desire to comply with or to pay their obligation If the creditor refuses the tender of payment
without just cause, the debtors are discharged from the obligation by the consignation of the sum
due. Consignation is made by depositing the proper amount to the judicial authority, before
whom the tender of payment and the announcement of the consignation shall be proved. All
interested parties are to be notified of the consignation. Compliance with these requisites is
mandatory. The facts show that the notice requirement was complied with. In her August 1, 1991
letter, petitioner said that should the respondent fail to accept payment, the former would consign
the amount. This statement was an unequivocal announcement of consignation. Concededly,
sending to the creditor a tender of payment and notice of consignation which was precisely
what petitioner did may be done in the same act. Because petitioners' consignation of the
amount of P1,633,034.20 was valid, it produced the effect of payment. "The consignation,
however, has a retroactive effect, and the payment is deemed to have been made at the time of
the deposit of the thing in court or when it was placed at the disposal of the judicial authority."
"The rationale for consignation is to avoid making the performance of an obligation more
onerous to the debtor by reason of causes not imputable to him."
 SPOUSES LLOBRERA et al V. JOSEFINA HERNANDEZ
G.R. No. 142882 May 2, 2006
Topic: Tender of Payment

FACTS:
Respondent Fernandez, one of the co-owners of the parcel of land subject of the dispute,
served a written demand letter to the petitioners to vacate the premises within fifteen days.
Petitioners nonetheless refused, leading to a complaint for ejectment and damages filed by
respondent against petitioners before the MTCC.

Petitioners alleged in their Answer that they had been occupying the property in question
beginning the year 1945 onwards, when their predecessors-in-interest, with the permission of
Gualberto de Venecia, one of the other co-owners of said land, developed and occupied the same
on condition that they will pay their monthly rental of P20.00 each. From then on, they have
continuously paid their monthly rentals to Gualberto de Venecia or Rosita de Venecia or their
representatives, such payments being duly acknowledged by receipts. Beginning sometime June
1996, however, the representative of Gualberto de Venecia refused to accept their rentals,
prompting them to consign the same to Banco San Juan, which bank deposit they continued to
maintain and update with their monthly rental payments.

The MTCC ruled in favor of petitioner and ordered them to vacate the land. The RTC on
appeal affirmed the MTCC Ruling. The Court of Appeals, in upholding the same, noted that the
petitioners failed to present any written memorandum of the alleged lease arrangements, and
there was in fact a dearth of evidence to substantiate the lessor-lessee relationship. The Court of
Appeals likewise held that the consignation made by respondents (petitioners herein) is not
legally tenable.

ISSUE:
Whether or not the consignation of monthly rentals made by present petitioners was valid

HELD:
No. First the Court established there was indeed absence of proof of any contractual basis
for petitioners possession of the subject premises, implying that their possession thereof is by
mere tolerance. Thus the alleged consignation of the P20.00 monthly rental to a bank account in
respondents name cannot save the day for the petitioners simply because of the absence of any
contractual basis for their claim to rightful possession of the subject property. Consignation
based on Art. 1256 of the Civil Code indispensably requires a creditor-debtor relationship
between the parties, in the absence of which, the legal effects thereof cannot be availed of.

Art. 1256: 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 consignation of the
thing or sum due.
Unless there is an unjust refusal by a creditor to accept payment from a debtor, Art. 1256 cannot
apply. Here, the possession of the property by the petitioners being by mere tolerance as they
failed to establish through competent evidence the existence of any contractual relations between
them and the respondent, the latter has no obligation to receive any payment from them. Since
the respondent is not a creditor to petitioners as far as the alleged P20.00 montly rental payment
is concerned, respondent cannot be compelled to receive such payment even through
consignation under Art. 1256. The bank deposit made by the petitioners intended as consignation
has no legal effect insofar as the respondent is concerned.
 BANCO FILIPINO SAVINGS AND MORTGAGE BANK vs. DIAZ
G. R. No. 153134 June 27, 2006
Topic: Tender of Payment and Consignation

FACTS:
Spouses Antonio and Elsie Diaz (respondents) secured a loan from Banco Filipino
Savings and Mortgage Bank (petitioner bank) in the amount of P400,000.00 with an interest rate
of 16% per annum. The said loan was later on restructured or consolidated in the increased
amount of P3,163,000.00 payable within a period of 20 years at an interest rate of 21% per
annum. The obligation was to be paid in equal monthly amortization, and secured by a real estate
mortgage over two commercial lots (located at Bolton and Bonifacio Streets in Davao City) and
additional collateral (the rentals on the mortgaged properties).
Despite repeated demands made on them, the respondents defaulted in the payment of
their obligation.
Before petitioner bank could foreclose the mortgaged properties, the respondents filed
with the RTC of Davao City a complaint and said court denied the application for the issuance of
a writ of preliminary injunction. On appeal, the CA affirmed the RTCs decision.
Thereafter, respondents filed another complaint for consignation & declaration of
cancellation of obligation with prayer for issuance of a preliminary injunction & TRO with the
RTC of Makati City.
Based on the findings of the court, the respondents had a remaining balance of
P1,034,600 which the respondent tendered the amount to petitioner bank to settle their account.
However, petitioner bank, through its liquidator, refused to accept it because the amount due is P
10,160,649. The respondent then consigned a managers check as full payment of their loan
obligation. Petitioner bank was informed of such consignation.
The RTC of Makati City ruled that the respondents total obligation to petitioner bank
amounted only to P1,034,600.00 exclusive of interests, and the latter could not charge and/or
collect any interest. It also considered the deposited check as consignation of the respondents
entire debt and that there was a valid consignation. The respondents obligation to petitioner
bank was declared as fully paid and/or cancelled.
On appeal by petitioner bank, the CA reversed and set aside the decision of the RTC of
Makati City. The CA declared that the deposited amount of P1,034,600.00 failed to effect a valid
consignation in law because it did not include all interests due. It ratiocinated that for a valid
consignation to exist, the tender of the principal must be accompanied with the tender of interests
which had accrued; otherwise, the said tender would not be effective.
Upon finality of the decision of the declaring that there was no valid consignation the
respondents filed with the RTC of Makati City a motion to withdraw deposit. They averred
therein that with the finality of the CA decision dismissing their complaint, they are now
withdrawing the amount of P1,034,600.00 which they had deposited by way of consignation with
the said lower court. In addition, they alleged that their loan obligation was eventually settled
with the payment of the amount of P25,000,000.00 through negotiations made with petitioner
bank by the brothers James and Francisco Gaisano as attorneys-in-fact of the respondents. They
prayed that they be allowed to withdraw the money which they deposited on consignation with
the said court (RTC of Makati City).
Petitioner bank opposed the respondents motion. It alleged that the respondents loan
obligation stood at P28,810,330.51. Petitioner bank asserted that the deposit in question should
be released to it as part of the full payment of the respondents obligation. It maintained that it
accepted the said consignation; hence, the respondents could no longer withdraw the said
amount.
Petitioner bank refuted the respondents claim that there was already full payment of their
obligation with the payment by the Gaisanos of P25,000,000.00. Petitioner bank stated that it
negotiated with the Gaisanos and the sum agreed thereon was allegedly for the payment of the
respondents obligation which amounted to P28,810,330.51. Petitioner bank added that during
this negotiation, it took into account and deducted from the said total obligation the amounts of
P1,462,901.00, representing the payments made by the respondents in 1990 and 1991, and
P1,034,600.00, representing the deposit made by the respondents with the RTC of Makati City.
The net obligation of the respondents after deducting these amounts stood at P26,312,828.52 and
it was this amount that petitioner bank agreed to be settled with the payment by the Gaisanos of
P25,100,000.00, not P25,000,000.00 as alleged by the respondents.

Petitioner bank accused the respondents of being in bad faith in that while its negotiation
with the Gaisanos had not yet been finalized, the respondents sought to withdraw the deposit in
question which was part of the consideration that induced petitioner bank to agree to settle the
respondents obligation with the payment by the Gaisanos of P25,100,000.00 Petitioner bank
prayed that the deposit in question be released to it in order that it could be applied to the
respondents total loan obligation.
The RTC denied the respondents motion to withdraw the deposit. On appeal, the CA
reversed the RTCs decision. It declared that the respondents had the statutory unilateral right to
withdraw their deposit by way of consignation because there was no acceptance of the same by
petitioner bank. The CA cited Article 1260 of the Civil Code which provides, in part, that before
the creditor has accepted the consignation, or before a judicial declaration that the consignation
has been properly made, the debtor may withdraw the thing or sum deposited, allowing the
obligation to remain in force.
The CA stressed that petitioner bank had not performed any prior unmistakable and
deliberate act denominating a preemptive acceptance of the deposit in partial settlement of the
loan obligation. The claim of acceptance was found to be an afterthought on the part of petitioner
bank and proffered for the sole purpose of opposing the respondents motion to withdraw
deposit.
Hence, this petition.

ISSUE:
Whether or not respondent Diaz may still withdraw the amount deposited with the RTC.

HELD:
Yes. Consignation is the act of depositing the thing due with the court or judicial
authorities whenever the creditor cannot accept or refuses to accept payment and it generally
requires a prior tender of payment. In order that consignation may be effective, the debtor must
show that: (1) there was a debt due; (2) 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 or because the title to the obligation has been lost; (3) previous notice of the
consignation had been given to the person interested in the performance of the obligation; (4) the
amount due was placed at the disposal of the court; and (5) after the consignation had been made,
the person interested was notified thereof.
The issue that now confronts the Court relates to the right of the respondents to withdraw
the amount deposited with the RTC of Makati City. Article 1260 of the Civil Code of the
Philippines pertinently provides:
Art. 1260. Once the consignation has been duly made, the debtor may ask the judge to
order the cancellation of the obligation.
Before the creditor has accepted the consignation, or before a judicial confirmation that
the consignation has been properly made, the debtor may withdraw the thing or the sum
deposited, allowing the obligation to remain in force.
This provision has been explained in this wise:
x x x The right of the debtor to withdraw the thing or amount deposited in court, depends upon
whether or not the consignation has already been accepted or judicially declared proper. Before
that time, the debtor is still the owner, and he may withdraw it; in this case, the obligation will
remain in full force as before the deposit. But once the consignation has been accepted by the
creditor or judicially declared as properly made, the debtor loses his right over the thing or
amount deposited, and he cannot withdraw the same without the consent of the creditor; if the
creditor consents to the withdrawal in such case, the obligation is revived as against the debtor
personally, but all rights of preference of the creditor over the thing and all his actions against
co-debtors, guarantors and sureties are extinguished.
xxxx
x x x We believe, however, that the contrary view is more acceptable. Before the consignation
has been accepted by the creditor or judicially declared as properly made, the debtor is still the
owner of the thing or amount deposited, and, therefore, the other parties liable for the obligation
have no right to oppose his withdrawal of such thing or amount. The debtor merely uses his
right, and unless the law expressly limits that use of his right, it cannot be prevented by the
objections of anyone. Our law grants to the debtor the right to withdraw, without any limitation,
and we should not read a non-existing limitation into the law. Although the other parties liable
for the obligation would have been benefited if the consignation had been allowed to become
effective, before that moment they have not acquired such an interest as would give them a right
to oppose the exercise of the right of the debtor to withdraw the consignation.
Before the consignation has been judicially declared proper, the creditor may prevent the
withdrawal by the debtor, by accepting the consignation, even with reservations. Thus, when the
amount consigned does not cover the entire obligation, the creditor may accept it, reserving his
right to the balance. x x x
Thus, under Article 1260 of the Civil Code, the debtor may withdraw, as a matter of
right, the thing or amount deposited on consignation in the following instances:
(1) Before the creditor has accepted the consignation; or
(2) Before a judicial declaration that the consignation has been properly made.
Obviously, in this case, there was no judicial declaration that the consignation had been
properly made. On the contrary, the CA declared that there was no valid consignation. What
remains to be determined then is whether petitioner bank had already accepted the deposit in
question so as to prevent the respondents from exercising their right to withdraw the same.
Petitioner bank insists that it had already done so. In fact, petitioner bank avers, it took
into account and deducted the deposit in question from the respondents outstanding obligation of
P28,810,330.51 when it negotiated with the Gaisanos. Deducting the deposit in question as well
as the payments made by the respondents during the period of 1990 and 1991, their net
obligation stood at P26,312,828.52. It was this
amount that petitioner bank allegedly agreed to be settled with the payment of P25,100,000.00
by the Gaisanos on behalf of the respondents.
To prove this claim, petitioner bank relies on the statement of account prepared by its
employees purportedly showing that the deposit in question was deducted from the respondents
outstanding obligatio. This statement of account, however, is self-serving and has no probative
value especially considering that the persons who prepared the same were not presented in court.
Thus, other than its bare allegation, petitioner bank has failed to establish by convincing
evidence that it had made such acceptance of the deposit in question prior to the respondents
filing of their motion to withdraw deposit as to effectively prevent them from withdrawing the
sum of P1,034,600.00 held by the RTC of Makati City.
With the finding that petitioner bank had not made any prior acceptance of the deposit in
question, the CA accordingly did not commit reversible error in setting aside the Orders of the
RTC of Makati City which had denied the respondents motion to withdraw deposit. Indeed,
absent this prior acceptance by petitioner bank or a judicial declaration that the consignation had
been properly made, the respondents remain the owners of the sum of P1,034,600.00 deposited
with the RTC of Makati City. When they filed their motion to withdraw the deposit, they did so
in the exercise of their right.
 SPS. BENOS vs. SPS. LAWILAO
G.R. No. 172259. 5 December 2006
Topic: Tender of Payment and Consignation

FACTS:
Spouses Benos sold their land and the building on it to Spouses Lawilao under a Pacto de Retro
sale.
50% bank and 50% to Lawilao
Benos will redeem the property within 18 months.
Son of Benos paid the bank of the 50% plus interest.
Lawilao also offered to pay but the bank refused.
Lawilao consigned against the bank and deposited the offered payment.
MTC dismissed the case
Lawilao filed with MCTC for consolidation of ownership but MCTC rendered decision in favor
of Benos.
Appeal with CA, dismissed
Hence, this case.

ISSUE:
WON there is valid consignation.

HELD:
No, there is no valid consignation.

Actions; Consignation; Words and Phrases; Consignation is made by depositing the proper
amount to the judicial authority, before whom the tender of payment and the announcement of
the consignation shall be proved, and all interested parties are to be notified of the
consignationand, compliance with these requisites is mandatory.Compliance with the
requirements of tender and consignation to have the effect of payment are mandatory. Thus
Tender of payment is the manifestation by debtors of their desire to comply with or to pay their
obligation. If the creditor refuses the tender of payment without just cause, the debtors are
discharged from the obligation by the consignation of the sum due. Consignation is made by
depositing the proper amount to the judicial authority, before whom the tender of payment and
the announcement of the consignation shall be proved. All interested parties are to be notified of
the consignation. Compliance with these requisites is mandatory.

In the instant case, records show that the Lawilao spouses filed the petition for consignation
against the bank in Civil Case No. 310 without notifying the Benos spouses. The petition was
dismissed for lack of cause of action against the bank. Hence, the Lawilao spouses failed to
prove their offer to pay the balance of the purchase price and consignation. In fact, even before
the filing of the consignation case, the Lawilao spouses never notified the Benos spouses of their
offer to pay.
 B.E. SAN DIEGO, INC., V.S. ROSARIO T. ALZUL
G.R. No. 169501 JUNE 8, 2007
Topic: Article 1258 Tender of Payment and Consignation

FACTS:
On Feb 10, 1975 Alzul purchased from B.E. Sandiego four lots through instalment under
Contract to Sell No. 867 at One Hundred Pesos per square meter, with a downpayment of P
12,750.00 and montly instalments of P1,249.50. The interest agreed upon was 12% per annum
until fully paid, thus, the total was P 237,660.00. Alzul took immediate possession of the subject
property, setting up a perimeter fence and constructing a house.
On July 25, 1977 Alzul signed a Conditional Deed of Assignment and Transfer of Rights
which was assigned to a certain Wilson P. Yu her rights under the Contract to Sell. B.E. San
Diego was notified of the execution of such deed. Later on, the Contract to Sell in Alzul name
was cancelled and B.E. San Diego issued a new one in favor of YU although it was also
denominated as Contract to Sell No. 867. On July 4, 1979, Alzul informed B.E. San Diego about
YUs failure and refusal to pay the amounts due under the conditional deed. She also manifested
that she would be the one to pay the instalments due to respondent on account of YUs default.
On August 25, 1980, Alzul commenced an action for rescission of the conditional deed of
assignment against Yu before the RTC Caloocan City. On Sept 30, 1985, Alzul caused the
annotation of notices of lis pendens of the titles covering the subject lots. The Trial court ruled in
favor of Alzul in the rescission case (And as so by the Appellate Court). On Feb 17, 1989, Alzul
notified B.E. San Diego that Contract to Sell No. 867 was declared Rescinded and cancelled. On
April 28, 1989, the lots were sld to spouses Ventura who were allegedly surprised to find the
annotation of lis pendens in their owners duplicate title.
The Ventura Spouses on May 8, 1990, filed an action wherein the decision was reversed
and set aside, wherein the titles are the spouses title are null and void, and reinstated to B.E. San
Diego. Upon appeal to the SC, Alzul must make full payment for the properties. On Several
dates, B.E. San Diego refused to accept payment. Thinking that an action for consignation alone
would not be sufficient to allow for the execution of a final judgment in her favor, Alzul decided
to file an action for consignation and specific performance against B.E. San Diego before the
Housing and Land Use Regulatory Board as to have been considered fully paid and be subject to
reimbursement. However, it was dismissed. Alzul filed at the office of the president and upheld
the HLURB ruling. He appealed to the Court of Appeals and questioned the decision of the
HLURB. It was reversed and Alzul was ordered to pay the balance due and B.E. San Diego to
accept payment with the corresponding deed of Sale saying that there was no valid consignation.
He filed for a motion for extension and made a consignation of which was granted by the CA.

ISSUE:
Whether or not the CA omitted a grave abuse of discretion in grating the consignation
HELD:
 No. There is no valid tender of payment made by respondent. Absent however a valid
consignation, mere tender will not suffice to extinguish her obligation and consummate the
acquisition of the properties. Respondent failed to effect consignation within a reasonable time
after the 30-day period. Instead of consigning the amount with the court of origin, respondent
filed a manifestation informing the court that petitioners unjust refusal of the tender of payment.
It was an inexcusable neglect on the part of respondent.
There was also no valid consignation made by respondent before the HLURB as she did
not deposit the amount with the quasi-judicial body. The first paragraph of Article 1258 of the
Civil Code provides that [c]onsignation shall be made by depositing the things due at the
disposal of judicial authority, before whom the tender of payment shall be proved, in a proper
case, and the announcement of the consignation in other cases. Respondent did not comply with
the provisions of law particularly with the fourth and fifth requirements specified above for a
valid consignation. In her complaint for consignation and specific performance, respondent only
prayed that she be allowed to make the consignation without placing or depositing the amount
due at the disposal of the court of origin. Verily, respondent made no valid consignation.
Decision: B.E. San Diego is the Owner and Alzul is subject to Reimbursement
 Naga Telephone Co., Inc vs. CA
G.R. No. 107112 February 24, 1994
Topic:

Facts:
NATELCO is a telephone company rendering local as well as long distance service in
Naga City while private respondent Camarines Sur II Electric Cooperative, Inc. (CASURECO II)
is a private corporation established for the purpose of operating an electric power service in the
same city.

On November 1, 1977, the parties entered into a contract for the use by petitioners in the
operation of its telephone service the electric light posts of private respondent in Naga City. In
consideration thereof, petitioners agreed to install, free of charge, 10 telephone connections for
the use of private respondent. Said contract also provided: (a) That the term or period of this
contract shall be as long as the party of the first part has need for the electric light posts of the
party of the second part it being understood that this contract shall terminate, the party of the
second part is forced to stop, abandoned its operation as a public service and it becomes
necessary to remove the electric lightpost.

After the contract had been enforced for over 10 yrs, RTC is against the petitioner for
reformation if the contract with damages, that after 11 yrs of petitioners use of the posts, the
telephone cables strung by them thereon have become much heavier with the increase in the
volume of their subscribers, worsened by the fact that their linemen bore holes through the posts
at which points those post were broken during the typhoon, the post cost higher so that the justice
and equity demand that the contract be reformed to abolish the inequities thereon.

Issue:
Whether or not the service has become so difficult as to be manifestly beyond the
contemplation of the parties, thus, the obligor may be released therefrom.

Held:
The contract has become iniquitous or unfavourable to the plantiff expansion of business
and increase the customers, necessitating the stringing of more and bigger telephone cable wires
by appellant to plantiffs electric posts without a corresponding increase in the 10 telephone
connections that later on was undisputed from the totality of the evidence on record and the
lower court so found.

Petitioners assert earnestly that Article 1267 of the New Civil Code is not applicable
primarily because the contract does not involve the rendition of service or a personal prestation
and it is not for future service with future unusual change. Which interpreted the article, should
be followed in resolving this case. Besides, said article was never raised by the parties in their
pleadings and was never the subject of trial and evidence. Article 1267 speaks of "service" which
has become so difficult. Taking into consideration the rationale behind this provision, the term
"service" should be understood as referring to the "performance" of the obligation. In the present
case, the obligation of private respondent consists in allowing petitioners to use its posts in Naga
City, which is the service contemplated in said article. Furthermore, a bare reading of this article
reveals that it is not a requirement thereunder that the contract be for future service with future
unusual change. According to Senator Arturo M. Tolentino, Article 1267 states in our law the
doctrine of unforeseen events. This is said to be based on the discredited theory of rebus sic
stantibus in public international law; under this theory, the parties stipulate in the light of certain
prevailing conditions, and once these conditions cease to exist the contract also ceases to exist.
Considering practical needs and the demands of equity and good faith, the disappearance of the
basis of a contract gives rise to a right to relief in favour of the party prejudiced.
JOSE DE LEON, CECILIO DE LEON, in their individual capacity, and JOSE DE LEON
and CECILIO DE LEON, as administrators of the intestate estate of Felix de Leon
vs. ASUNCION SORIANO
G.R. No. L-2724 August 24, 1950
Topic: Loss of the Thing Due
FACTS:
In the administration and settlement of the decedent's estate then pending in the Court of
First Instance Asuncion Soriano, the widow, on the one hand, and the natural children, plaintiffs,
on the other, reached on March 23, 1943 an agreement, approved by the probate court, whereby
the natural children obligated themselves, among other things, as follows:
At the end of each of agricultural year, the following amounts of palay shall be given to
the party of the FIRST PART (Asuncion Soriano) by the parties of the SECOND PART
(De Leons): in the month of March of the current year 1943; 1,200 cavanes of palay; in
the month of March 1944, 1,400 cavanes of palay; in the month March of 1945, 1,500
cavanes of palay; and in the month of March 1946 and every succeeding year thereafter,
1,600 cavanes of palay.
The defendants made deliveries to the plaintiff of 1,200 cavanes of palay in 1934, 700 in
1944, 200 in 1945, and another 200 in 1946, a total of 2,300 cavanes which was 3,400 cavanes
short of the 5,700 cavanes which should have been delivered up to and including 1946. It was to
recover this shortage or its value that this action was commenced.
The defendants averred that their failure to pay the exact quantities of palay promised for
1944, 1945 and 1946 was due to "the Huk troubles in Central Luzon which rendered impossible
full compliance with the terms of the agreement."
The court gave judgment for the plaintiff for 3,400 cavanes of palay or its equivalent in
cash, which was found to be 24,900, and legal interest. Judgment was affirmed by the appellate
court.

ISSUE:
Whether or not the obligation is extinguished due to impossibility of compliance

HELD:
No. Except as to quality and quantity, the first of which is itself generic, the contract sets
no bounds or limits to the palay to be paid, nor was there even any stipulation that the cereal was
to be the produce of any particular land. Any palay of the quality stipulated regardless of origin
on however acquired (lawfully) would be obligatory on the part of the obligee to receive and
would discharge the obligation. It seems therefore plain that the alleged failure of crops through
alleged fortuitous cause did not excuse performance
Article 1182 of the Civil Code which was in force at the time agreement in question was
entered into, provide that "Any obligation which consists in the delivery of a determinate thing
shall be extinguished if such thing should be lost or destroyed without fault on the part of the
debtor and before he is in default. Inversely, the obligation is not extinguished if the thing that
perishes is indeterminate. The cavanes of palay is indeterminate.
 SESBREO vs CA
G.R. No. 89252 May 24, 1993
Topic: Compensation
FACTS:
Petitioner Sesbreno made a money market placement in the amount of P300,000 with the
Philippine Underwriters Finance Corporation (PhilFinance), with a term of 32 days. PhilFinance
then issued to Sesbreno the Certificate of Confirmation of Sale of a Delta Motor Corporation
Promissory Note, the Certificate of Securities Delivery Receipt indicating the sale of the note
with notation that said security was in the custody of Pilipinas Bank, and postdated checks drawn
against the Insular Bank of Asia and America payable on March 1981. Upon its maturity,
petitioner sought to encash the postdated checks but they were dishonored for having insufficient
funds.
Petitioner then issued a demand letter to private respondent Pilipinas bank, but the note
was never released nor any instrument related thereto. Petitioner also made a written demand
upon private respondent Delta as maker for the partial satisfaction of the note, explaining that
Philfinance, as payee thereof, had assigned to him said note. Delta, however, denied any liability
to petitioner on the promissory note.

ISSUE:
Whether or Not there was valid compensation

HELD:
Yes. Since all the requisites of a valid compensation was followed. As noted, the
assignment to petitioner was made on 9 February 1981 or from 49 days before the "co-terminal
maturity" date, that is to say, before any compensation had taken place. Further, the assignment
to petitioner would have prevented compensation from taking place between Philfinance and
Delta, because upon execution of the assignment in favor of petitioner, Philfinance and Delta
would have ceased to be creditors and debtors of each other in their own right to the extent of the
amount assigned by Philfinance to petitioner. Thus, we conclude that the assignment effected by
Philfinance in favor of petitioner was a valid one and that petitioner accordingly became owner
of the DMC PN to the extent of the portion thereof assigned to him.
The record shows, however, that petitioner notified Delta of the fact of the assignment to
him only on 14 July 1981, that is, after the maturity not only of the money market placement
made by petitioner but also of both DMC PN and Philfinance PN. In other words, petitioner
notified Delta of his rights as assignee after compensation had taken place by operation of law
because the offsetting instruments had both reached maturity. It is a firmly settled doctrine that
the rights of an assignee are not any greater than the rights of the assignor, since the assignee is
merely substituted in the place of the assignor and that the assignee acquires his rights subject to
the equities which the debtor could have set up against the original assignor before notice of the
assignment was given to the debtor.
 MAVEST, INC., ET AL V. SAMPAGUITA GARMENT CORPORATION
G.R. NO. 127454 September 21, 2005
Topic: Compensation

FACTS:
in July and August 1989, petitioners Mavest U.S.A. and Mavest Manila Liaison Office
entered into a series of transactions with respondent Sampaguita Garment Corporation, whereby
the former would furnish from abroad raw materials to be manufactured by the latter into
finished products, for shipment to petitioners' foreign buyers, Sears Roebuck and JC Penney.
Each transaction was embodied in a purchase order (PO) specifying the style & description. The
orders of Sears Roebuck were duly paid in full by way of letter of credit. The JC Penney orders
consisting of 8,000 pcs. Cotton Woven Pants (Styles DJ-1 BR and DJ-1 XT . . . at $3.65 per
piece or a total of $29,200.00 were not covered by a letter of credit. Despite shipment and receipt
by JC Penney of said orders, no payment was made, thus prompting respondent to send demand
letters which remained unheeded. On April 27, 1990, respondent filed a complaint for collection
of a sum of money amounting to US$29,200.00 with damages before the Regional Trial Court at
Makati City against the herein petitioners and two (2) others, namely, MAVEST International
Co., LTD and Patrick Wang, former General Manager of MLO. That the defendant(s) ordered
from plaintiff an aggregate volume of 8,000 pieces Youngmen's Cotton Woven Pants at
US$29,200.00 and which were delivered to JC Penney Corporation of California, the consignee;
that the total costs of the goods remained unpaid, subject to the defense of compensation.

ISSUE:
Whether or not legal compensation applies in this case

HELD:
No. The Civil Code lists compensation as one of the modes of extinguishing the
obligations of persons who, in their own right, are creditors and debtors of each other.
Compensation may be legal or conventional. Legal compensation takes place ipso jure when all
the requisites of law are present, as opposed to conventional or voluntary compensation which
occurs when the parties agree to the mutual extinguishment of their credits or to compensate
their mutual obligations even in the absence of some of the legal requisites. For compensation to
validly take place, the governingCivil Code provisions require the concurrence of well-defined
conditions. At its minimum, compensation presupposes two persons who, in their own right and
as principals, are mutually indebted to each other respecting equally demandable and liquidated
obligations over any of which no retention or controversy commenced and communicated in due
time to the debtor exists. But while compensation, be it legal or conventional, requires the
concurrence in the parties of the characters of mutual debtors and creditors, their rights as such
creditors, or their obligations as such debtors, need not spring from one and the
same contract or transaction.
 Azolla Farms vs. Court of Appeals
G.R. No. 138085 November 11, 2004
Topic: Novation; Requisites

FACTS:
Petitioner Francis R. Yuseco, Jr., is the Chairman, President and Chief Operating Officer
of petitioner Azolla Farms International Philippines (Azolla Farms) engaged in the development,
exploitation, production, manufacturing, promotion, marketing, and sale of natural, organic
minerals, including its byproducts, with the ultimate objective of utilizing said products for the
promotion of food production. Azolla Farms undertook to participate in the National Azolla
Production Program. To finance its participation, petitioners applied for a loan with Credit
Manila, Inc., which the latter endorsed to its sister company, respondent Savings Bank of Manila
(Savings Bank). The Board of Directors of Azolla Farms passed a board Resolution authorizing
Yuseco to borrow from Savings Bank in an amount not exceeding P2,200,000.00. The loan
having been approved, Yuseco executed a promissory note promising to pay Savings Bank the
sum of P1,400,000.00 on or before September 13, 1983. The net proceeds of P1,225,443.31 was
released to FNCB Finance, the mortgagee of a 548 square meter lot with residential house owned
by Yuseco. With the release of the proceeds, FNCB Finance released the mortgage, and in turn,
the property was mortgaged to Savings Bank as collateral for the loan. Yuseco and Francisco
Bargas also executed an assignment of their shares of stock in Azolla Farms as additional
security. Yuseco then executed two other promissory notes on September 27, 1982 and January
4, 1983, both for the amount of P300,000.00.Petitioners Yuseco and Azolla Farms alleges that
Savings Bank unjustifiably refused to promptly release the remaining P300,000.00 which
impaired the timetable of the project and inevitably affected the viability of the project resulting
in its collapse, and resulted in their failure to pay off the loan. Respondent Savings Bank filed its
Answer denying the allegations in the complaint. It contends that there was evidence that Yuseco
was using the loan proceeds for expenses totally unrelated to the project and they decided to
withhold the remaining amount until Yuseco gave the assurance that the diversion of the funds
will be stopped. Petitioners filed a Motion to Admit Amended Complaint alleging that the
testimony of defense witness Jesus Venturina raised the issue of the invalidity of the promissory
notes and the real estate mortgage
Their Amended Complaint contains the following amendments: That defendant bank acts
in unilaterally reducing the agreed amount of FOUR MILLION PESOS (P4,000,000.00) to TWO
MILLION PESOS (P2,000,000.00) and in unreasonably delay (sic) the release of THREE
HUNDRED THOUSAND PESOS (P300,000.00) novated the promissory notes and also novated
the real estate mortgage executed by plaintiff-Yuseco

ISSUE:
Whether the promissory notes and mortage were novated thus cannot be enforced in the
case.

HELD:
No novation. 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. In order for novation to take place, the
concurrence of the following requisites is indispensable there must be a previous valid
obligation, there must be an agreement of the parties concerned to a new contract, there must be
the extinguishment of the old contract, and there must be the validity of the new contract. All
these requisites are patently lacking in this case. In the first place, there is no new obligation that
supposedly novated the promissory notes or the real estate mortgage, or a preexisting obligation
that was novated by the promissory notes and the real estate mortgage. There is only one
agreement between the parties in this case, i.e., petitioners P2,000,000.00 loan with respondent.
What transpired was an application for loan was filed by plaintiffs with Credit Manila in an
amount greater than the P2 million eventually granted. This loan application was endorsed to
defendant Savings Bank of Manila, processed by the latter and eventually approved by it in the
amount of P2 million. It cannot be said that the loan application of plaintiffs or their initial
representations with Credit Manilas Michael de Guzman was already in itself a binding original
contract that was later novated by defendant. Plaintiff Yuseco being himself a banker, cannot
pretend to have been unaware of banking procedures that normally recognize a loan
application as just that, a mere application. Only upon the banks approval of the loan
application in the amount and under such terms it deems viable and acceptable, that a binding
and effective loan agreement comes into existence. Without any such first or original loan
agreement as approved in the amount and under specified terms by the bank, there can be
nothing whatsoever that can be subsequently novated
 CALIFORNIA BUS LINES vs. STATE INVESTMENT HOUSE, INC.
G.R. No. 147950 December 11, 2003
Topic: Novation

FACTS:
Delta Motors applied for financial assistance from State Investment House (SIHI).
Meanwhile, California Bus Lines (CBLI) purchased 35 buses and two engines from Delta on
installment basis. CBLI executed 16 promissory notes and chattel mortgage over the buses in
favor of Delta, but CBLI defaulted in payment. CBLI then entered into a restructuring agreement
with Delta which provided for a new schedule of payments extending the period to pay and that
in case of default, Delta would have authority to take over the management and operations of
CBLI until CBLI remits or updates the past due account.
Delta executed a Continuing Deed of Receivables in favor of SIHI as security for the
payment of its obligations. Delta still failed to pay SIHI while CBLI still failed to pay Delta.
Delta then executed a Deed of Sale assigning to SIHI five of the 16 promissory notes from CBLI.
After a series of cases filed and buses sold, Deltas obligation to SIHI was not fully extinguished.
A compromise agreement was then entered into by Delta and CBLI where Delta will
foreclose the chattel mortgages over the 35 buses. CBLI refused to pay SIHI the value of the five
promissory notes claiming that the foreclosure of the chattel mortgages was in full settlement of
its obligations so SIHI then filed a complaint against CBLI to collect payment.

ISSUES:
1) W/N the restructuring agreement novated the five promissory notes Delta assigned to
SIHI
2) W/N the compromise agreement between Delta and CBLI superseded and/or
discharged the five promissory notes

HELD:
1) No. There was no novation. It is never presumed. The animus novandi must appear by the
express agreement of the parties, or by their acts that are too clear and unequivocal to be
mistaken. In the restructuring agreement, the parties did not expressly stipulate that it
novated the promissory notes. Without an express declaration, only a showing of
complete incompatibility between the old and new novation would sustain novation by
implication. The test of incompatibility is whether the two obligations can stand together,
each one having independent existence and if they cannot stand together, they are
incompatible and the latter obligation novates the first.
The Court found that there was no incompatibility between the promissory notes and the
restructuring agreement as there was no change in the object of the prior obligations. The
restructuring agreement ratified the previous obligations of CBLI and merely provided for a new
schedule of payments and additional security for Delta in its authority to take over management
of CBLI in case of the latters failure to pay. Where the parties to the new obligation expressly
recognize the continuing existence and validity of the old one, there can be no novation.
Moreover, the addition of other obligations did not extinguish the promissory notes as a change
in the incidental elements or addition of such element will not result in the extinguishment of the
obligation.
2) No. The compromise agreement between Delta and CBLI did not supersede and/or
discharge the five promissory notes. Since Delta has previously assigned the promissory
notes to SIHI, Delta had no more right to compromise them. SIHI, in requiring CBLI to
remit the payments directly to them revoked Deltas right to collect in behalf of SIHI.
The compromise agreement cannot bind SIHI as it covered only the rights and obligations of
only the parties to it, thus it covered only the rights and obligations of Delta and CBLI with
respect to the promissory notes that remained with Delta.
The extrajudicial foreclosure of the chattel mortgages effected by Delta cannot prejudice
SIHIs rights. The assignment of five promissory notes created a separate and independent
obligation on the part of CBLI to SIHI, distinct and separate from CBLIs obligations to Delta.
 ILOILO TRADERS FINANCE INC., vs.
HEIRS OF OSCAR SORIANO, JR. and MARTA SORIANO
G.R. No. 149683 June 16, 2003
Topic: Article 1291 (Novation)

FACTS:
In October 23, 1979 and February 29, 1980, the spouses Oscar Soriano and Marta
Soriano executed two promissory notes, secured by real property mortgages, in favor of Iloilo
Traders Finance, Inc. (ITF). The spouses Soriano defaulted on the notes and as a consequence,
ITF moved for the extrajudicial foreclosure of the mortgage. The spouses Soriano filed a
complaint against ITF and the court issued a writ of preliminary injunction to suspend the public
sale of the property. On August 15, 1983, the parties entered into an Amicable Settlement and
after, submitted it to the court, but it was disapproved by the trial court. Seven years later, the
spouses Soriano filed a motion to submit anew the amicable settlement but it was opposed by
ITF on the ground that the amount expressed in the settlement would no longer be accurate. The
trial court denied the motion of the spouses Soriano. After, the Sorianos withdrew their
complaint and filed a case for novation and specific performance which the trial court granted,
and affirmed by the Court of Appeals.

ISSUE:
Whether or not the amicable settlement entered into between the parties has novated the
original obligation.

HELD:
No. The Court reversed the decision of the Court of Appeals.
Novation may either be extinctive or modificatory, much being dependent on the nature
of the change and the intention of the parties. Extinctive novation is never presumed; there must
be an express intention to novate; in cases where it is implied, the acts of the parties must clearly
demonstrate their intent to dissolve the obligation as the moving consideration for the emergence
of new once. While an amicable settlement or a compromise is a contract whereby the parties, by
making reciprocal concessions, avoid a litigation or put an end to one already commenced. It
may be judicial or extrajudicial; the absence of court approval notwithstanding, the agreement
can become the source of rights and obligations of the parties.
The Court held that the parties entered into the agreement basically to put an end to Civil
Case No. 14007 then pending before the Regional Trial Court. Concededly, the provisions of the
settlement were beneficial to the respondent couple. The compromise extended the terms of
payment and implicitly deferred the extrajudicial foreclosure of the mortgaged property. It was
well to the interest of respondent spouses to ensure its judicial approval; instead, they went to
ignore the order of the trial court and virtually failed to make any further appearance in court.
This conduct on the part of respondent spouses gave petitioner the correct impression that the
Sorianos did not intend to be bound by the compromise settlement, and its non-materialization
negated the very purpose for which it was executed.
 GARCIA v LLAMAS
G.R. No. 154127 December 8, 2003
Topic: Extinguishment of Obligations (Novation)

FACTS:

A complaint for sum of money was filed by respondent Dionisio Llamas against
Petitioner Romeo Garcia and Eduardo de Jesus alleging that the two borrowed Php 400,000 from
him. They bound themselves jointly and severally to pay the loan on or before January 23, 1997
with a 15% interest per month. The loan remained unpaid despite repeated demands by
respondent. Petitioner resisted the complaint alleging that he signed the promissory note merely
as an accommodation party for de Jesus and the latter had already paid the loan by means of a
check and that the issuance of the check and acceptance thereof novated or superseded the
note.The trial court rendered a judgment on the pleadings in favor of the respondent and directed
petitioner to pay jointly and severally respondent the amounts of Php 400, 000 representing the
principal amount plusinterest at 15% per month from January 23, 1997 until the same shall have
been fully paid, less the amount of Php 120,000 representing interests already paid. The Court of
Appeals ruled that no novation, express or implied, had taken place when respondentaccepted the
check from de Jesus. According to the CA, the check was issued precisely to pay for the loan that
was covered by the promissory note jointly and severally undertaken by petitioner and de Jesus.

Respondents acceptance of the check did not serve to make de Jesus the sole debtor
because first, the obligation incurred by him and petitioner was joint and several; and second, the
check which had been intended to extinguish the obligation bounced upon its presentment.

ISSUE:

Whether or not there was novation of the obligation

HELD:

For novation to take place, the following requisites must concur: (1) There must be a
previous valid obligation; (2) the parties concerned must agree to a new contract; (3) the old
contract must be extinguished; and (4) there must be a valid new contract.The parties did not
unequivocally declare that the old obligation had been extinguished by the issuance and the
acceptance of the check or that the check would take the place of the note. There is no
incompatibility between the promissory note and the check.

Neither could the payment of interests, which in petitioners view also constitutes
novation, change the terms and conditions of the obligation. Such payment was already provided
for in the promissory noteand, like the check, was totally in accord with the terms thereof.
 Also unmeritorious is petitioners argument that the obligation was novated by the
substitution of debtors. In order to change the person of the debtor, the old must be expressly
released from the obligation, and the third person or new debtor must assume the formers place
in the relation. Well-settled is the rule that novation is never presumed. Consequently, that which
arises from a purported change in the person of the debtor must be clear and express. It is thus
incumbent on petitioner to show clearly and unequivocally that novation has indeed taken place.
Note also that for novation to be valid and legal, the law requires that the creditor expressly
consent to the substitution of a new debtor. In a solidary obligation, the creditor is entitled to
demand the satisfaction of the whole obligation from any or all of the debtors. It is up to the
former to determine against whom to enforce collection. Having made himself jointly and
severally liable with de Jesus, petitioner is therefore liable for the entire obligation.
 PROVIDENT SAVINGS BANK
vs COURT OF APPEALS
G.R. No. 97218 May 17, 1993
Topic: Novation

FACTS:

On February 17, 1967, the spouses Lorenzo Guarin and Liwayway Guarin obtained a
loan from defendant-appelant in the amount of P62,500 payable on or before June 20, 1967. As
security for the loan, they executed a real estate mortgage in favor of defendant-appelant over a
parcel of land. In September, 1972, defendant-appelant was placed under receivership by the
Central Bank of the Philippines until July 27, 1981 when the receivership was set aside by the
Supreme Court. Guarin signified its willingness to pay its obligation in exchange for the
mortgage title. Petitioner bank could not release said title as to it also served as a security for
another loan obtained by Guarin for his corporation. Private respondent Chua wrote the
petitioner bank saying that the mortgaged property was offered to him as payment of judgment
he obtained against the Guarins. The Guarins sold the property to Chua with the latter assuming
the obligations. Chua tried to pay the loan but the petitioner would not release the title unless the
second loan of Guarin was also settled.

The plaintiff filed a complaint against the defendant to compel the latter to release the
real estate mortgaged executed by the Gaurins in favor of defendant-appelant and to surrender to
plaintiff, as successor-in-interest of the Guarins the owners duplicate of the title of the land.

The respondent court noted that Wilson Chua can be considered a real-property-in-
interest because he is the successor-in-interest of the Guarins who is naturally entitled to the
realty as against the so-called right of Provident Savings Bank, as mortgagee, to foreclose the
mortgage which had become stale through sheer lapse of time. The matter of novation in the
form of substitution of the debtor without corresponding acquiesence of the mortgagee was
viewed by respondent court to be legally inconsequential due to the demeanor of the mortgagee-
bank in requiring Wilson Chua to pay the indebtedness of Lorenzo Guarin, posterior to the
change of obligors, which act was construed as equivalent to consent.

To the question of whether petitioner can still foreclose the subject realty, respondent
court gave a negative response on account of the absence of proof to indicate that the bank was
precluded from collecting indebtedness while it was under receivership from September, 1972
until July 20,1981.

ISSUE:

Whether or not petitioner can still foreclose the subject realty.

HELD:

Having arrived at the conclusion that the foreclosure is part of banks business activity
which could not have been pursued by the receiver then because of the circumstances discussed
in the Central Bank case, we are thus convinced that the prescriptive period was legally
interrupted by fuerza mayor in 1972 on account on the prohibition imposed by the Monetary
Board against petitioner from transacting business, until the directive of the board was nullified
in 1981. Indeed, the period during which the obligee was prevented by a caso fortuito from
enforcing his right is not reckoned against him (Article 1154, New Civil Code). When
prescription is interrupted, all the benefits acquired so far from the possession cease and when
prescription starts anew, it will be entirely a new one. This concept should not be equated with
suspension where the past period is included in the computation being added to the period after
prescription is resumed. Consequently, when the closure of was set aside in 1981, the period of
ten years within which to foreclose under Article 1142 of the New Civil Code began to run again
and, therefore, the action filed on August 21, 1986 to compel petitioner to release the mortgage
carried with it the mistaken notion that petitioners own suit foreclosure had prescribed

Contrary to respondent court's prescription of the existence of novation, the evidence at

hand does not buttress a finding along this line from the mere fact that petitioner supposedly did
not question the substitution when the bank reacted to private respondent's offer to pay the loan.
What seems to have escaped respondent court's attention was the condition imposed by the
petitioner that it will grant private respondent's request if the latter will also shoulder the
obligation incurred by Lorenzo Guarin in his capacity as president of the corporation. The
consent of the petitioner to the substitution, as creditor, was thus erroneously appreciated.
 BROADWAY CENTRUM CONDOMINIUM CORP. v TROPICAL HUT FOOD
MARKET, INC.
G.R. No. 79642 July 5, 1993
Topic: Novation

FACTS:

Petitioner as lessor and respondent as lessee entered into a lease agreement with a basic
rental of 120,000. However, during the 2nd year of the lease, the respondent appealed to
petitioner to lower the rental due to losses and bases on the premise that the initial rental
stipulated was based on projected sales. After negotiations and acknowledgement of the
petitioner that business establishments were affected by the temporary closure of Doa Juana
Rodriguez Ave., it granted the respondent a "provisional and temporary agreement" in favor of
the respondent granting 60,000 or 2% of gross receipts whichever is higher with the condition
that the petitioner will return a portion of the leased premises. Months later, the road expansion
project was completed and the petitioner is relaying that the concession can no longer be
extended in its present form hence, the increase of rental to 100,000. A series of negotiations
insued but it turned sour leading the respondent to file a complaint in the RTC and later on a
supplemental complain asking whether or not the the letteragreement dated 20 April 1982 had
novated the Lease Contract of 28 November 1980. The RTC ruled in favor of the petitioner
declaring that the lease contract was partially novated by the letteragreement with CA affiriming
such. Hence, this petition before the Court.

ISSUE:

Whether or not the letter-agreement has novated the contract of lease.

RULING:

No. The Court stated the definition of Novation as the extinguishment of an obligation by
the substitution of that obligation with 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 is never presumed; it must be
established either by the discharge of the old debt by the express terms of the new agreement, or
by the acts of the parties whose intention to dissolve the old obligation as a consideration of the
emergence of the new one must be clearly manifested. Applying the above principles to the case
at bar, it is entirely clear to the court that the letter-agreement of 20 April 1982 did not extinguish
or alter the obligations of respondent Tropical and the rights of petitioner Broadway under their
lease contract dated 28 November 1980.

The letter-agreement, in its own terms, a "provisional and temporary agreement to a

reduction of Tropical's monthly rental". Likewise, the lease contract made it clear that a
temporary and provisional concessional reduction of rentals which Broadway might grant to
Tropical was not to be construed as alteration or waiver of any of the terms of the Lease Contract
itself. The Court believes and so hold that the letter-agreement of 20 April 1982 did not
constitute a novation, whether partial or total, of the 28 November 1980 Contract of Lease
between Broadway and Tropical.
 PHILIPPINE SAVINGS BANK vs
SPS. RODOLFO C. MAALAC, JR. AND ROSITA P. MAALAC
G.R. No. 145441 April 26, 2005
Topic: Novation

FACTS:
Respondent spouses obtained a loan from petitioner covered by promissory note. As a
security for the loan, respondent executed a Real Estate Mortgage in favor of the petitioner over
eight parcels of land. Respondents were unable to pay the installments so that the loan
obligations were restructured. Respondent entered into Deed of Sale with Assumption of
Mortgage on 3 real properties (and another property) with spouses Galicia. Respondents
repeated default in payment of past due obligations prompted the petitioner to file for
extrajudicial foreclosure of remaining mortgaged properties. Respondent asked for partial release
of mortgage after enclosing a cashier check payment. Petitioner sold some mortgaged properties
that prompted respondent to institute action for damages. Trial court annulled the sale of
mortgaged properties. The Court of appeals affirmed with modification the decision of trial court
requiring indemnification of the respondent by petitioner.

ISSUE:
The Appellate Court has decided questions of substance in a way probably not in
accordance with law and with applicable decisions of this Honorable Court when it held that
supposedly there was a novation "of the previous mortgage of the properties" when in truth and
in fact the mortgage had already ceased to exist, that is, the mortgage had become null and void
as the same had been foreclosed by petitioner.

HELD:
On the issue of novation, the Court of Appeals held that novation occurred when PSBank
applied P1,000,000.00 of the P1,200,000.00 PCIB Check No. 002133 tendered by Maalac to the
loan account of the Galicias and the remaining P200,000.00 thereof to Maalacs account. It held
that when the bank applied the amount of the check in accordance with the instructions contained
therein, there was novation of the previous mortgage of the properties. It further observed that
the bank was fully aware that the issuance of the check was conditional hence, when it made the
application thereof, it agreed to be bound by the conditions imposed by Maalac.

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. In order for novation to take place, the
concurrence of the following requisites is indispensable: There must be a previous valid
obligation, There must be an agreement of the parties concerned to a new contract, There must
be the extinguishment of the old contract, and There must be the validity of the new contract.

The elements of novation are patently lacking in the instant case. Maalac tendered a
check for P1,200,000.00 to PSBank for the release of 4 parcels of land covered by TCT Nos. N-
36192, 36193, and 36194, under the loan account of the Galicias and 417012 (now TCT No.
79996) under the loan account of Maalac. However, while the bank applied the tendered
amount to the accounts as specified by Maalac, it nevertheless refused to release the subject
properties. Instead, it issued a receipt with a notation that the acceptance of the check is not a
commitment on the part of the bank to release the 4 TCTs as requested by Maalac.

From the foregoing, it is obvious that there was no agreement to form a new contract by
novating the mortgage contracts of the Maalacs and the Galicias. In accepting the check, the
bank only acceded to Maalacs instruction on whose loan accounts the proceeds shall be applied
but rejected the other condition that the 4 parcels of land be released from mortgage. Clearly,
there is no mutual consent to replace the old mortgage contract with a new obligation. The
conflicting intention and acts of the parties underscore the absence of any express disclosure or
circumstances with which to deduce a clear and unequivocal intent by the parties to novate the
old agreement.

Novation is never presumed, and the animus novandi, whether totally or partially, must
appear by express agreement of the parties, or by their acts that are too clear and unmistakable.
The extinguishment of the old obligation by the new one is a necessary element of novation,
which may be effected either expressly or impliedly. The term "expressly" means that the
contracting parties incontrovertibly disclose that their object in executing the new contract is to
extinguish the old one. Upon the other hand, no specific form is required for an implied
novation, and all that is prescribed by law would be an incompatibility between the two
contracts. While there is really no hard and fast rule to determine what might constitute to be a
sufficient change that can bring about novation, the touchstone for contrariety, however, would
be an irreconcilable incompatibility between the old and the new obligations.

A fortiori, 3 of the 4 properties sought to be released from mortgage, namely, TCT Nos.
N-36192, N-36193, and N-36194, have already been sold by Maalac to Galicia and are now
registered in the name of the latter who thereafter mortgaged the same as security to a separate
loan they obtained from the bank. Thus, without the consent of PSBank as the mortgagee bank,
Maalac, not being a party to the mortgage contract between the Galicias and the bank, cannot
demand much less impose upon the bank the release of the subject properties. Unless there is a
stipulation to the contrary, the release of the mortgaged property can only be made upon the full
satisfaction of the loan obligation upon which the mortgage attaches. Unfortunately, Maalac has
not shown that the P1,000,000.00 was sufficient to cover not only the accrued interests but also
the entire indebtedness of the Galicias to the bank.

Neither can Maalac be deemed substitute debtor within the contemplation of Article
1293 of the Civil Code, which states that:
Art. 1293. Novation which consists in substituting a new debtor in the place of the
original one, may be made without the knowledge or against the will of the latter, but not
without the consent of the creditor. Payment by the new debtor gives him the rights
mentioned in articles 1236 and 1237.

In order to change the person of the debtor, the old one must be expressly released from
the obligation, and the third person or new debtor must assume the formers place in the relation.
Novation is never presumed. Consequently, that which arises from a purported change in the
person of the debtor must be clear and express. It is thus incumbent on Maalac to show clearly
and unequivocally that novation has indeed taken place. In Magdalena Estates Inc. v. Rodriguez,
we held that the mere fact that the creditor receives a guaranty or accepts payments from a third
person who has agreed to assume the obligation, when there is no agreement that the first debtor
shall be released from responsibility, does not constitute a novation, and the creditor can still
enforce the obligation against the original debtor.

Maalac has not shown by competent evidence that they were expressly taking the place
of Galicia as debtor, or that the latter were being released from their solidary obligation. Nor was
it shown that the obligation of the Galicias was being extinguished and replaced by a new one.
The existence of novation must be shown in clear and unmistakable terms.

Likewise, we hold that Maalac cannot demand to repurchase the foreclosed piece of
land covered by TCT No. 417012 (now TCT No. 79996) from the bank. Its foreclosure and the
consolidation of ownership in favor of the bank and the resultant cancellation of mortgage
effectively cancelled the mortgage contract between Maalac and the bank. Insofar as TCT No.
417012 is concerned, there is no more existing mortgage to speak of. As the absolute owner of
the foreclosed property, the petitioner has the discretion to reject or accept any offer to
repurchase.

Granting arguendo that a new obligation was established with the acceptance by the bank
of the PCIB Check and its application to the loan account of Maalac on the condition that TCT
No. 417012 would be released, this new obligation however could not supplant the October 13,
1977 real estate mortgage executed by Maalac, which, by all intents and purposes, is now a
defunct and non-existent contract. As mentioned earlier, novation cannot be presumed.
 TRANSPACIFIC BATTERY CORPORATION and MICHAEL G. SAY v. SECURITY
BANK & TRUST CO.,
G.R. No. 173565 May 8, 2009
Topic: Novation

FACTS:
Transpacific, represented by its officers, Michael G. Say, Josephine G. Say and Myrna
Magpantay, entered into a Credit Line Agreement with the respondent Bank. Consequently, the
officers in behalf of Transpacific applied for nine letters of credit (LC) with the Bank to facilitate
the importation and/or purchases of certain merchandise, goods and supplies for its business. The
Bank issued the corresponding LCs to Transpacific. Transpacific then executed and delivered to
the Bank, as entrustor, nine trust receipt agreements for the release of the imported merchandise
and supplies in its favor, individual petitioners herein, binding themselves to be solidarily liable
with Transpacific to the Bank for the value of the merchandise and supplies covered by the trust
receipts.
Under the terms of the trust receipts, the entrustees agreed to hold the goods, merchandise
andsupplies, as well as the proceeds of the sale and collection thereof, in trust for the Bank for
thepayment of petitioners acceptance, bank commissions and charges, and/or any other
indebtedness of petitioners to the Bank, and deliver the same to the Bank upon maturity date
ofsaid trust receipts. On the maturity dates of the trust receipts, petitioners failed to account for
and to deliver to theBank the proceeds of the sale and collection of the goods, merchandise and
supplies subject of the trust receipts. Despite repeated demands, petitioners reneged on their
obligation
On 8 February 1984, petitioners and the Bank executed a letter-agreement restructuring
the formers obligation. Failure to meet one monthly installment when due, shall cause the
unmatured balance to become due and demandable. The account shall be referred automatically
to our Special Accounts Department for collection. Alleging that out of the total obligation of
P3,082,029.00, the amount of P2,290,865.41 remained unpaid, the Bank demanded in writing the
payment of the unpaid balance.[17] Despite repeated demands, petitioners failed to comply with
the restructuring agreement, prompting the Bank to file a criminal complaint for violation of
Presidential Decree No. 115 or the Trust Receipts Law. However, said complaint was dismissed.
On 24 January 1992, the Bank filed a complaint for recovery of a sum of money with the
RTC of Makati. Michael contends that said obligation had already been extinguished by novation
when the Bank restructured the obligation of Transpacific. He also claimed that the Bank is
guilty of laches for its inaction for an unreasonable length of time.
Melchor and Josephine, for their part, argued that the trust receipts have not been
executed in strict compliance with the requirements of the Trust Receipts Law; that their
participation in the questioned transactions was in their capacity as officers of Transpacific and
consequently, cannot be held liable in their individual capacities; that their signatures in some of
the documents were forged; and that the obligation had been extinguished by novation
Ma. Fe Rosadio, who was employed at the Foreign Department of the Bank and tasked
with documentation, processing and releasing of import bills and trust receipts, testified for the
Bank. She identified the trust receipts and attested to the genuineness of the signatures of
petitioners.
 Instead of presenting their witnesses, petitioners filed a demurrer to evidence trial court
denied on 8 December 1995. In a decision dated 5 March 2002, the trial court ruled in favor of
the Bank. The trial court lent credence to the testimony of Rosadio and upheld the authenticity
and genuineness of the signatures of the individual petitioners on the trust receipts. It also ruled
that the restructuring of the obligation did not relieve individual petitioners of their liability as
solidary debtors to the Bank as there was an express agreement on their part to be bound jointly
and severally with Transpacific under the trust receipts. On appeal, the Court of Appeals
affirmed the ruling of the trial court, that there was no novation in the restructuring of the
obligation, therefore, the individual petitioners as solidary debtors cannot be exonerated from the
obligation of Transpacific
ISSUE:
Whether or not the obligation under the trust receipts was novated by the restructuring
agreement.
HELD: No
Novation is a mode of extinguishing an obligation by changing its objects or principal
obligations, by substituting a new debtor in place of the old one, or by subrogating a third person
to the rights of the creditor.
In order for novation to take place, the concurrence of the following requisites are indispensable:
1. There must be a previous valid obligation;
2. There must be an agreement of the parties concerned to a new contract;
3. There must be the extinguishment of the old contract; and
4. There must be the validity of the new contract
Novation is never presumed, and the animus novandi, whether totally or partially, must
appear by express agreement of the parties, or by their acts that are too clear and unmistakable.
The extinguishment of the old obligation by the new one is a necessary element of novation,
which may be effected either expressly or impliedly. The contracting parties must
incontrovertibly disclose that their object in executing the new contract is to extinguish the old
one. Upon the other hand, no specific form is required for an implied novation, and all that is
prescribed by law would be an incompatibility between the two contracts.
The test of incompatibility is whether the two obligations can stand together, each one
having its independent existence. If they cannot, they are incompatible and the latter obligation
novates the first. Corollarily, changes that breed incompatibility must be essential in nature and
not merely accidental. The incompatibility must take place in any of the essential elements of the
obligation, such as its object, cause or principal conditions thereof; otherwise, the change would
be merely modificatory in nature and insufficient to extinguish the original obligation.
Petitioners proffer that the terms of the restructuring agreement are absolutely
incompatible with the terms of the trust receipts. First, the maturity date under the trust receipts
is reckoned at ninety (90) days from their respective issuance dates whereas it is one (1) year
under the restructuring agreement. Second, payment is in full under the trust receipts while under
the restructured obligation, it is to be made in equal monthly installments. Third, the rate of
interest under the trust receipts is 16% or 18% per annum whereas it is 5% per annum over prime
rate or 30% per annum, whichever is higher, under the restructured obligation. Fourth, the
restructuring agreement has a provision on the time of interest payments, as well as a review of
the interest rate, whereas there are no such provisions under the trust receipts. Fifth, the
obligation under the trust receipts is secured by the joint and solidary liability of the alleged
signatories, whereas the restructured obligation is secured by the joint and solidary liability of
Spouses Miguel and Mary Say and Michael G. Say. Sixth, there is no acceleration clause under
the trust receipts whereas the restructured obligation is subject to an acceleration clause.
Undoubtedly, there is no express novation since the restructuring agreement does not
state in clear terms that the obligation under the trust receipts is extinguished and in lieu thereof
the restructuring agreement will be substituted. Neither is there an implied novation since the
restructuring agreement is not incompatible with the trust receipt transactions.
Indeed, the restructuring agreement recognizes the obligation due under the trust receipts
when it required payment of all interest and other charges prior to restructuring. With respect to
Michael, there was even a proviso under the agreement that the amount due is subject to the joint
and solidary liability of Spouses Miguel and Mary Say and Michael Go Say. While the names of
Melchor and Josephine do not appear on the restructuring agreement, it cannot be presumed that
they have been relieved from the obligation. The old obligation continues to subsist subject to the
modifications agreed upon by the parties. The circumstance that motivated the parties to enter
into a restructuring agreement was the failure of petitioners to account for the goods received in
trust and/or deliver the proceeds thereof. To remedy the situation, the parties executed an
agreement to restructure Transpacifics obligations.
 ARCO PULP AND PAPER CO., INC. vs. LIM
G.R. No. 206806 June 25, 2014.
Topic: Novation
FACTS:
Respondent, Dan T. Lim works in the business of supplying scrap papers, cartons, and
other raw materials, under the name Quality Paper and Plastic Products, Enterprises, to factories
engaged in the paper mill business. From February 2007 to March 2007, he delivered scrap
papers worth PhP7,220,968.31 to Arco Pulp and Paper Company, Inc. (Arco Pulp and Paper)
through its Chief Executive Officer and President, Candida A. Santos. The parties allegedly
agreed that Arco Pulp and Paper would either pay Dan T. Lim the value of the raw materials or
deliver to him their finished products of equivalent value. Dan T. Lim alleged that when he
delivered the raw materials, Arco Pulp and Paper issued a post-dated check dated April 18, 2007
in the amount of PhP1,487,766.68 as partial payment, with the assurance that the check would
not bounce. When he deposited the check on April 18, 2007, it was dishonored for being drawn
against a closed account. On the same day, Arco Pulp and Paper and a certain Eric Sy executed a
memorandum of agreement where Arco Pulp and Paper bound themselves to deliver their
finished products to Megapack Container Corporation, owned by Eric Sy, for his account.
According to the memorandum, the raw materials would be supplied by Dan T. Lim, through his
company, Quality Paper and Plastic Products.
On May 5, 2007, Dan T. Lim sent a letter to Arco Pulp and Paper demanding payment of
the amount of PhP7,220,968.31, but no payment was made to him. Dan T. Lim filed a complaint
for collection of sum of money. On September 19, 2008, the trial court rendered a judgment in
favor of Arco Pulp and Paper and dismissed the complaint, holding that when Arco Pulp and
Paper and Eric Sy entered into the memorandum of agreement, novation took place, which
extinguished Arco Pulp and Paper's obligation to Dan T. Lim.
Dan T. Lim appealed and on January 11, 2013, the Court of Appeals 20 rendered a
decision 21 reversing and setting aside the judgment dated September 19, 2008 and ordering
Arco Pulp and Paper to jointly and severally pay Dan T. Lim the amount of PhP7,220,968.31
with interest at 12% per annum from the time of demand; PhP50,000.00 moral damages;
PhP50,000.00 exemplary damages; and PhP50,000.00 attorney's fees. Aggrieved, a petition for
review was filed.

ISSUE:
Whether or not the obligation between the parties was extinguished by novation.

HELD:
No. The Supreme Court held that the trial court erroneously ruled that the execution of
the memorandum of agreement constituted a novation of the contract between the parties. When
petitioner Arco Pulp and Paper opted instead to deliver the finished products to a third person, it
did not novate the original obligation between the parties. The rules on novation are outlined in
the Civil Code, thus:
Article 1291. Obligations may be modified by:
 (1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor.
Article 1292. In order that an obligation may be extinguished by another which
substitute the same, it is imperative that it be so declared in unequivocal terms, or that the
old and the new obligations be on every point incompatible with each other.
Article 1293. Novation which consists in substituting a new debtor in the place of the
original one, may be made even without the knowledge or against the will of the latter,
but not without the consent of the creditor. Payment by the new debtor gives him the
rights mentioned in Articles 1236 and 1237.
There is nothing in the memorandum of agreement that states that with its execution, the
obligation of petitioner Arco Pulp and Paper to respondent would be extinguished. It also does
not state that Eric Sy somehow substituted petitioner Arco Pulp and Paper as respondent's debtor.
It merely shows that petitioner Arco Pulp and Paper opted to deliver the finished products to a
third person instead.
Petitioner Arco Pulp and Paper's act of tendering partial payment to respondent also
conflicts with their alleged intent to pass on their obligation to Eric Sy. When respondent sent his
letter of demand to petitioner Arco Pulp and Paper, and not to Eric Sy, it showed that the former
neither acknowledged nor consented to the latter as his new debtor. These acts, when taken
together, clearly show that novation did not take place.
Therefore, there was no novation, petitioner Arco Pulp and Paper's obligation to
respondent remains valid and existing. Petitioner Arco Pulp and Paper, must still pay respondent
the full amount of PhP7,220,968.31.
CONTRACTS
 CAROLYN M. GARCIA vs RICA MARIE S. THIO
G.R. No. 154878 MARCH 16, 2007
Topic: Real and Consensual Contracts

FACTS:
This is a petition for review on certiorari, assailing the June 19, 2002 decision and August
20, 2002 resolution of the Court of Appeals (CA) which set aside the February 28, 1997 decision
of the Regional Trial Court (RTC) of Makati City, Branch 58.

Respondent Rica Marie S. Thio received from petitioner, two crossed checks amounting
to US$100,000 and P500,000 respectively, payable to the order of Marilou Santiago. The parties
have agreed verbally that these loans will bear a monthly interest of 3% and 4%, respectively.
While the respondent had issued several personal checks to cover the monthly interests, the same
had failed to pay the principal upon due date, despite repeated demands. Thus, petitioner filed a
case with the RTC against the respondent for the collection of the loans. The respondent denied
her indebtedness for the loans, and argued that the petitioner merely asked her to deliver said
crossed checks to Marilou Santiago. The RTC ruled in favor of the petitioner and ordered the
payment of the principal loans plus interest and damages.

The civil case was appealed to the CA, which ruled in favor of the respondent. This time,
the CA agreed with the respondent that she should not be liable as debtor for the loans, since the
respondent only received the checks, but there was nothing in the record which showed that the
respondent had indeed received the money. The CA further stated that a contract of loan is a real
contract that is only perfected upon the delivery of the object (in this case, the money). Thus, a
contract of loan did not exist between the respondent and the petitioner, causing the CA to set
aside the RTCs earlier ruling. Hence this petition.

ISSUE:
Whether or not there was a valid contract of loan between the petitioner and respondent.

HELD:
The Court affirmed the RTCs ruling, finding the respondent liable as debtor for the
subject loans. The Court agreed with the petitioner that, although the respondent only received
the crossed checks, and did not physically received the proceeds, it can be argued in the records
that the respondent had full control and possession of these checks, which naturally included the
proceeds thereof. Based on the testimony of their witness, the respondent had re-lent the money
to Santiago on a higher interest rate. Moreover, it was shown on the record that the petitioner did
not know personally Marilou Santiago, and that in the petition for insolvency filed by Marilou
Santiago, it was the respondent, not the petitioner who was listed as one of Santiagos creditors.
These facts, have led the Court to believe that the loan contracted by Marilou Santiago is distinct
from the loan between the petitioner and the respondent; which means that the respondent should
properly be held liable as debtor, and to pay the amounts owing to the petitioner.
UNITED BF HOMEOWNERS ASSOCIATIONS, INC., et al vs THE MUNICIPAL CITY
MAYOR, et al
G.R. No. 141010 February 7, 2007
Topic: Article 1306 (Validity of Contractual Stipulations)

FACTS:

On November 11, 1997, the Municipal Council of Paraque enacted a Municipal

Ordinance titled An Ordinance Prescribing the Comprehensive Land Use Plan & Zoning of the
Municipality of Paraaque Pursuant to the Local Government Code of 1991 and Other Pertinent
Laws. The ordinance reclassifies El Grande and Aguirre Avenues in BF Homes Paraaque from
residential to commercial areas. On January 27, 1998, the United BF Homeowners Association,
Inc. (UBFHAI), several homeowners associations, and residents of BF Homes Paraaque filed
with the appellate court a petition for prohibition with an application for temporary restraining
order and preliminary injunction asserting that the reclassification of some parts of the
subdivision, particularly from residential to commercial zone, is unconstitutional since it impairs
the contracts between the developer of BF Homes Paraaque and its lot buyers. It was mentioned
in the lot buyers titles that the property shall be used for residential purposes only and for no
other purpose.

On the other hand, public respondents claim that the approval of the ordinance is a valid
exercise of police power by the Municipal Council of Paraaque, and that the ordinance can
nullify or supersede the contractual obligations agreed to by the concerned parties. Meanwhile,
El Grande Aguirre Commerce and Trade Organization (EL ACTO) were also made respondents
in the case. It maintained that its members are lot owners, residents, and operators of commercial
establishments along El Grande and Aguirre Avenues who will get affected if the municipal
order is pronounced unconstitutional. Moreover, it proclaims that the municipal order is a valid
exercise of police power, and that petitioners are guilty of estoppel because they recommended
the opening of these establishments in the said subdivision.

The Court of Appeals ruled that the passage of the ordinance is a valid exercise of police
power. It also gave attention to the fact that the said avenues has long been commercialized
being main streets of the subdivision. The commercial zones in the area showed that the service
to the needs of its residents is insufficient. Hence, there was a necessity to open more
commercial districts.

ISSUE:
Whether or not the municipal order is constitutional considering that it impairs a
contractual obligation annotated in homeowners titles and violates the doctrine of separation of
powers.

HELD:
Petitoners raise Presidential Decree No. 957 titled Subdivision and Condominium
Buyers Protective Decree. They claim that the decree protects the buyers and guarantee that
subdivision developers save their promises and representations. Petitioners point that one of the
promises of the developer of BF Homes Paraaque is that properties are meant for residential
purposes only. Petitioners insist that the reclassification of some parts of the subdivision is
unconstitutional as it will impair the contracts between the developer of the subdivision and the
lot buyers.

The Court has upheld in several cases the superiority of police power over the non-
impairment clause. The constitutional guaranty of non-impairment of contracts is limited by the
exercise of the police power of the State, in the interest of public health, safety, morals and
general welfare. In Ortigas & Co., Limited Partnership v. Feati Bank and Trust Co., the court
held that,

while non-impairment of contracts is constitutionally guaranteed, the rule is

not absolute, since it has to be reconciled with the legitimate exercise of police power
xxx the exercise of police power may be judicially inquired into and corrected only if it
is capricious, whimsical, unjust or unreasonable, there having a denial of due process
or a violation of any other applicable constitutional guarantee.

Likewise, it was stated in Sangalang v. Intermediate Appellate Court that,

Our Constitution guarantees sanctity of contracts and is said to be the law

between the contracting parties, but while it is so, it cannot contravene law,
morals, good customs, public order, or public policy. Above all, it cannot be
raised as a deterrent to police power

Therefore, it was ruled that Municipal Order No. 97-98 is a legitimate exercise of police
power and the reclassification of El Grande and Aguirre Avenues in BF Homes Paraaque is not
unreasonable.
 DAISY B. TIU, petitioner vs. PLATINUM PLANS PHIL., INC, respondent
GR No. 163512 February 28, 2007
TOPIC: Article 1306, Validity of Contractual Stipulations

FACTS:
Respondent is a domestic corporation engaged in pre-need industry wherein petitioner
Tiu was its Division Marketing from 1987 to 1989. On January 1, 1993, a contract of
employment valid for five years was executed between the respondent company and petitioner
when she was re-hired as Senior Assistant Vice-President and Territorial Operations Head in
charge of its Hongkong and ASEAN operations. The petitioner stopped reporting for work on
September 16, 1995. She became Vice-President for Sales of Professional Plans Inc., a company
also engaged in pre-need industry on November 1995. The respondent sued the petitioner for
damages before the RTC of Pasig City for violation of the non-involvement clause in her
contract of employment, which was upheld by the RTC. The CA affirmed the RTCs decision in
favor of the respondents, and reasoned that petitioner entered into a contract in her own will and
volition bounding herself to fulfill not only what was expressly stipulated but also all its
consequences that were not against good faith, usage, and law. It was also ruled that the
stipulation prohibiting non-employment for two years was valid considering the nature of
respondents business.

ISSUE:
Whether or not the non-involvement clause is valid

HELD:
No. Article 1306 provides that parties to a contract may establish such stipulations,
clauses, terms, and conditions as they may deem convenient provided they are not contrary to
law, morals, good customs, public order, or public policy. A non-involvement clause is not
necessarily void for being in restraint of trade as long as there are reasonable limitations. The
limit of two years from the time petitioners employment with respondent ends has a time limit,
and the prohibition is only limited to engaging in any pre-need business akin to respondents
business. The petitioner held a position which is privy and highly sensitive of the respondents
business and allowing her to engage in a rival business after she leaves work would make the
respondents secrets vulnerable. Thus, the non-involvement clause is not contrary to public
welfare.
 DUNCAN ASSOCIATION OF DETAILMAN-PTGWO and PEDRO A. TECSON
vs. GLAXO WELLCOME PHILIPPINES, INC.
G.R. No. 162994 September 17, 2004
Topic: Validity of Contractual Stipulations

FACTS:
Petitioner Pedro A. Tecson (Tecson) was hired by respondent Glaxo Wellcome
Philippines, Inc. (Glaxo) as medical representative on October 24, 1995, after Tecson had
undergone training and orientation. Thereafter, Tecson signed a contract of employment which
stipulates, among others, that he agrees to study and abide by existing company rules; to disclose
to management any existing or future relationship by consanguinity or affinity with co-
employees or employees of competing drug companies and should management find that such
relationship poses a possible conflict of interest, to resign from the company.

The Employee Code of Conduct of Glaxo similarly provides that an employee is

expected to inform management of any existing or future relationship by consanguinity or
affinity with co-employees or employees of competing drug companies. If management
perceives a conflict of interest or a potential conflict between such relationship and the
employees employment with the company, the management and the employee will explore the
possibility of a "transfer to another department in a non-counterchecking position" or preparation
for employment outside the company after six months.

Tecson was initially assigned to market Glaxos products in the Camarines Sur-
Camarines Norte sales area. Subsequently, Tecson entered into a romantic relationship with
Bettsy, an employee of Astra Pharmaceuticals (Astra), a competitor of Glaxo. Bettsy was Astras
Branch Coordinator in Albay. She supervised the district managers and medical representatives
of her company and prepared marketing strategies for Astra in that area.
Even before they got married, Tecson received several reminders from his District Manager
regarding the conflict of interest which his relationship with Bettsy might engender. Still, love
prevailed, and Tecson married Bettsy in September 1998.

In January 1999, Tecsons superiors informed him that his marriage to Bettsy gave rise to
a conflict of interest. Tecsons superiors reminded him that he and Bettsy should decide which
one of them would resign from their jobs, although they told him that they wanted to retain him
as much as possible because he was performing his job well.

Tecson requested for time to comply with the company policy. But in November 1999,
Glaxo transferred Tecson to the Butuan City-Surigao City-Agusan del Sur sales area. Tecson
asked Glaxo to reconsider its decision, but his request was denied. Tecson brought the matter to
Glaxos Grievance Committee. Glaxo, however, remained firm in its decision and gave Tescon
until February 7, 2000 to comply with the transfer order. Tecson defied the transfer order and
continued acting as medical representative in the Camarines Sur-Camarines Norte sales area.
Glaxo then offered Tecson a separation pay but he declined the offer. On November 15, 2000,
the National Conciliation and Mediation Board (NCMB) rendered its decision declaring as valid
Glaxos policy on relationships between its employees and persons employed with competitor
companies, and affirming Glaxos right to transfer Tecson to another sales territory.
Aggrieved, Tecson filed a petition for review with the Court of Appeals assailing the NCMB
decision. On May 19, 2003, the Court of Appeals promulgated its decision denying the said
petition. Tecson filed a motion for reconsideration, but the motion was denied by the appellate
court.
Hence, this petition.

ISSUE:
Whether or not Glaxos policy against its employees marrying employees from
competitor companies is valid.

HELD:
No. The Supreme Court ruled that there is no reversible error that can be ascribed to the
Court of Appeals when it ruled that Glaxos policy prohibiting an employee from having a
relationship with an employee of a competitor company is a valid exercise of management
prerogative. Glaxo has a right to guard its trade secrets, manufacturing formulas, marketing
strategies and other confidential programs and information from competitors, especially so that it
and Astra are rival companies in the highly competitive pharmaceutical industry.

The Court of Appeals also correctly noted that the assailed company policy which forms
part of respondents Employee Code of Conduct and of its contracts with its employees, such as
that signed by Tescon, was made known to him prior to his employment. Tecson, therefore, was
aware of that restriction when he signed his employment contract and when he entered into a
relationship with Bettsy. Since Tecson knowingly and voluntarily entered into a contract of
employment with Glaxo, the stipulations therein have the force of law between them and, thus,
should be complied with in good faith (Article 1159, Civil Code). He is therefore estopped from
questioning said policy.

The prohibition against personal or marital relationships with employees of competitor

companies upon Glaxos employees is reasonable under the circumstances because relationships
of that nature might compromise the interests of the company. In laying down the assailed
company policy, Glaxo only aims to protect its interests against the possibility that a competitor
company will gain access to its secrets and procedures.

The policy being questioned is not a policy against marriage. It is clear that Glaxo does
not impose an absolute prohibition against relationships between its employees and those of
competitor companies. Its employees are free to cultivate relationships with and marry persons
of their own choosing. What the company merely seeks to avoid is a conflict of interest between
the employee and the company that may arise out of such relationships.
 STAR PAPER CORPORATION, JOSEPHINE ONGSITCO & SEBASTIANCHUA vs .
RONALDO D. SIMBOL, WILFREDA N. COMIA & LORNA E. ESTRELLA,
G.R. No. 164774 April 12, 2006.
Topic: Validity of Contractual Stipulation (Article 1306)

FACTS:
Petitioner Star Paper Corporation (the company) is a corporation engaged in trading
principally of paper products. Respondents Ronaldo D. Simbol (Simbol), Wilfreda N. Comia
(Comia) and Lorna E. Estrella (Estrella) were all regular employees of the company.

Simbol met and married a co-employee in the company. Prior to the marriage, they were
advised by their director that should they decide to get married, one of them should resign
pursuant to a company policy promulgated in 1995, which provides:

1. New applicants will not be allowed to be hired if in case he/she has [a] relative, up to
[the] 3rd degree of relationship, already employed by the company.
2. In case of two of our employees (both singles [sic], one male and another female)
developed a friendly relationship during the course of their employment and then decided to get
married, one of them should resign to preserve the policy stated above.

The same thing happened to respondent Comia. But they both deny that their resignation
was voluntary.

Estrella, on the other hand was impregnated by a coworker whom she thought was a
separated man. When she learned that he was still married, she severed ties with him. When she
got back to work after a 21-day leave, because she needed to recover from an accident, she found
out that she was being dismissed for immoral conduct. She refused to sign the memorandum
because she has not been given a chance to explain. The management asked her to write an
explanation. However, after submission of the explanation, she was nonetheless dismissed by the
company. Due to her urgent need for money, she later submitted a letter of resignation in
exchange for her thirteenth month pay.

Respondents later filed a complaint for unfair labor practice, constructive dismissal,
separation pay and attorney's fees. They averred that the aforementioned company policy is
illegal and contravenes Article 136 of the Labor Code.

Labor Arbiter dismissed complaint and the NLRC affirmed. However the CA reversed
the decision. Hence petitioners appealed.

ISSUE:
Whether or not the CA erred in holding that the subject 1995 policy/regulation is
violative of the Constitutional rights towards marriage and the family of employees and of
Article 136 of the Labor Code.

HELD:
 Article 136 of the Labor Code provides that it shall be unlawful for an employer to
require as a condition of employment or continuation of employment that a woman employee
shall not get married, or to stipulate expressly or tacitly that upon getting married a woman
employee shall be deemed resigned or separated, or to actually dismiss, discharge, discriminate
or otherwise prejudice a woman employee merely by reason of her marriage.

The courts have found the no-spouse employment policy invalid for failure of the
employer to present any evidence of business necessity other than the general perception that the
spouses in the same workplace might adversely affect the businesscalled the bona fide
occupational qualification. Unless the employer can prove that the reasonable demands of the
business require a distinction based on marital status and there is no better available or
acceptable policy which would better accomplish the business purpose, an employer may not
discriminate against an employee based on the identity of the employee's spouse. This is known
as the bona fide occupational qualification exception.

To justify a bona fide occupational qualification, the employer must prove two factors:
(1) that the employment qualification is reasonably related to the essential operation of
the job involved (requirement of Reasonableness) and,
(2) that there is a factual basis for believing that all or substantially all persons meeting
the qualification would be unable to properly perform the duties of the job.

In the present case, the Court found no reasonable business necessity. Petitioners' sole
contention that "the company did not just want to have two (2) or more of its employees related
between the third degree by affinity and/or consanguinity" is evidently not the valid reasonable
business necessity required by the law.

Respondents were hired after they were found fit for the job, but were asked to resign
when they married a co-employee. Petitioners failed to show how the marriage of Simbol, then a
Sheeting Machine Operator, to Alma Dayrit, then an employee of the Repacking Section, could
be detrimental to its business operations. Neither did petitioners explain how this detriment will
happen in the case of Wilfreda Comia, then a Production Helper in the Selecting Department,
who married Howard Comia, then a helper in the cutter-machine. The policy is premised on the
mere fear that employees married to each other will be less efficient.

Thus, for failure of petitioners to present undisputed proof of a reasonable business

necessity, we rule that the questioned policy is an invalid exercise of management prerogative.
Premiere Dev Bank v CA
BARNACHEA
 BENJAMIN VICTORIANO V. ELIZALDE ROPE WORKERS UNION
G.R. No. L-25246 September 12, 1974
Topic: Validity of Contractual Stipulations

FACTS:
Benjamin Victoriano, a member of Iglesia ni Cristo, was an employee of the Elizalde
Rope Factory, Inc. As such employee, he was a member of the Elizalde Rope Workers Union,
which had with the company a collective bargaining agreement (CBA) containing a closed shop
provision requiring membership in the union as a condition of employment for all permanent
employees. This agreement was pursuant to the Industrial Peace Act. RA 3350 amended said act,
however, by stating that such agreement will not cover members of any religious sects which
prohibit affiliation of their members in any such labor organization.

Being a member of a religious sect prohibiting affiliation with labor organizations,

Victoriano presented his resignation to the Union. The Union thus wrote a letter to the company
asking for the latter to separate Victoriano from service, in view of the fact that he was resigning
from the Union as a member. The management in turn notified him and his counsel that unless
they could achieve a satisfactory arrangement with the Union, the company would be constrained
to dismiss him from the service. This prompted the filing of an action for injunction.

The Union invokes the union security clause of the CBA, and assailed the
constitutionality of RA 3350. Among their arguments on constitutionality was that it impaired
the obligation of its contract by introducing a change into the express terms of the union security
clause. In effect, the Union argues, the company was partly absolved by the law from the
contractual obligation it had with the Union of employing only members in permanent positions.

ISSUE:
Whether or not RA 3350 impaired the obligation of contract between the Union and the
company

HELD:
No. First the Court explained that any statute which introduces a change into the express
terms of the contract, or its legal construction, or its validity, or its discharge, or the remedy for
its enforcement, impairs the contract. The extent of the change is not material. It is not a question
of degree or manner or cause, but of encroaching in any respect on its obligation or dispensing
with any part of its force. There is an impairment of the contract if either party is absolved by
law from its performance. Impairment has also been predicated on laws which, without
destroying contracts, derogate from substantial contractual rights.

The prohibition is not absolute and unqualified; rather, the prohibition is general and
prohibits unreasonable impairment only. In spite of the constitutional prohibition, the State
continues to possess authority to safeguard the vital interests of its people. Legislation
appropriate to safeguarding said interests may modify or abrogate contracts already in effect. For
not only are existing laws read into contracts in order to fix the obligations as between the
parties, but the reservation of essential attributes of sovereign power is also read into contracts as
a postulate of the legal order. All contracts made with reference to any matter that is subject to
regulation under the police power must be understood as made in reference to the possible
exercise of that power. Otherwise, important and valuable reforms may be precluded by the
simple device of entering into contracts for the purpose of doing that which otherwise may be
prohibited. The policy of protecting contracts against impairment presupposes the maintenance
of a government by virtue of which contractual relations are worthwhile a government which
retains adequate authority to secure the peace and good order of society. The contract clause of
the Constitution must, therefore, be not only in harmony with, but also in subordination to, in
appropriate instances, the reserved power of the state to safeguard the vital interests of the
people. It follows that not all legislations, which have the effect of impairing a contract, are
obnoxious to the constitutional prohibition as to impairment, and a statute passed in the
legitimate exercise of police power, although it incidentally destroys existing contract rights,
must be upheld by the courts.

Every case must be determined upon its own circumstances. Legislation impairing the
obligation of contracts can be sustained when it is enacted for the promotion of the general good
of the people, and when the means adopted to secure that end are reasonable. Both the end
sought and the means adopted must be legitimate. Here the purpose of RA 3350 was to insure
freedom of belief and religion, and to promote the general welfare by preventing discrimination
against those members of religious sects which prohibit their members from joining labor unions.
It cannot be gainsaid that said purpose is legitimate.
 POLOTAN VS. COURT OF APPEALS
G.R. No. 119379. September 25, 1998
Topic: (B.1) Escalation Clause

FACTS:
Private respondent Security Diners International Corporation (Diners Club), a credit card
company, extends credit accommodations to its cardholders for the purchase of goods and other
services from member establishments. Said goods and services are reimbursed later on by
cardholders upon proper billing.

Petitioner Rodelo G. Polotan, Sr. applied for membership and credit accommodations with
Diners Club. The application form contained terms and conditions governing the use and
availment of the Diners Club card, among which is for the cardholder to pay all charges made
through the use of said card within the period indicated in the statement of account and any
remaining unpaid balance to earn 3% interest per annum plus prime rate of Security Bank &
Trust Company.

Petitioner incurred credit charges plus appropriate interest and service charges in the aggregate
amount of P33,819.84 which had become due and demandable. Demands for payment made
against petitioner proved futile. Hence, private respondent filed a Complaint for Collection of
Sum of Money against petitioner before the lower court.

The RTC ruled in favor of petitioner, which the Court of Appeals affirmed. Hence, this petition.
Petitioner claims that the subject contract is one-sided in that the contract allows for the
escalation of interests, but does not provide for a downward adjustment of the same in violation
of Central Bank Circular 905. Petitioner further argues that the interest rate was unilaterally
imposed and based on the standards and rate formulated solely by Diners Club.

ISSUE:
Whether or not escalation clauses are valid as it is dependent upon the will of one of the
contracting parties.

HELD:
Yes, they are valid. The assailed contract provision states that:
PAYMENT OF CHARGES - xxx xxx xxx The Cardholder agrees to pay interest per annum at
3% plus the prime rate of Security Bank and Trust Company. xxx xxx xxx Provided that if there
occurs any change in the prevailing market rates the new interest rate shall be the guiding rate of
computing the interest due on the outstanding obligation without need of serving notice to the
Cardholder other than the required posting on the monthly statement served to the Cardholder.
The Cardholder hereby authorizes Security Diners to correspondingly increase the rate of such
interest in the event of changes in prevailing market rates and to charge additional service fees as
may be deemed necessary in order to maintain its service to the Cardholder.

There is nothing inherently wrong with escalation clauses. Escalation clauses are valid
stipulations in commercial contracts to maintain fiscal stability and to retain the value of money
in long-term contract.
 The contractual provision in question states that if there occurs any change in the
prevailing market rates, the new interest rate shall be the guiding rate in computing the interest
due on the outstanding obligation without need of serving notice to the cardholder other than the
required posting on the monthly statement served to the Cardholder. This could not be
considered an escalation clause for the reason that it neither states an increase nor a decrease in
interest rate. Said clause simply states that the interest rate should be based on the prevailing
market rate.

Interpreting it differently, while said clause does not expressly stipulate a reduction in
interest rate, it nevertheless provides a leeway for the interest rate to be reduced in case the
prevailing market rates dictate its reduction.

Admittedly, the second paragraph of the questioned proviso which provides that the
Cardholder hereby authorizes Security Diners to correspondingly increase the rate of such
interest in the event of changes in prevailing market rates x x x is an escalation clause. However,
it cannot be said to be dependent solely on the will of private respondent as it is also dependent
on the prevailing market rates.

Escalation clauses are not basically wrong or legally objectionable as long as they are not
solely potestative but based on reasonable and valid grounds. Obviously, the fluctuation in the
market rates is beyond the control of private respondent.
 New Sampaguita Builders Construction, Inc. (NSBCI) and Spouses Dee vs. Philippine
National Bank
G.R. 148753 30 July 2004
Topic: (B.1) Escalation Clause

FACTS:

New Sampaguita Builders Construction, Inc. (NSBCI), through a board resolution,

o authorize the application and the act of securing a commercial loan with the Philippine
National Bank (PNB) for 8M;
o usage and mortgage of a real properties registered under the name of Eduardo Dee
(husband in Spouses dee; the president and chairman of NSBCI);
o Authorized Spouses Dee to act as sureties or co-oblifors who are solidarily liable with
NSBCI
Another resolution was approves regarding the granting od PNBs Request to break down the
loan into revolving credit line (RCL) of 7.7M and a unadvised line (UL) of 0.3M.
The loan was secured by 10 residential land at Pangasinan owned by Spouses Dee.
NSBCI excecuted the following:
o PN - 29 June 1989 - Due on 27 Oct 89 - 5M
o PN - 1 Sept 89 - Due on 30 Dec 89 - 2.7M
o PN - 6 Sept 89 - Due on 4 Jan 90 - 300K

o Credit Agreement - 31 Aug 89 - for RCL

o do- - 5 Sept 89 - for UL
NSBCI failed to pay the PNs
NSBCI ask for extension and restructuring of its loan.
Subsequently, NSBCI tendered 3 checks for 200K, 650K, and 150K.
Mr. Dee informed a PNB Representative his intention to remit to PNB post-dated checks
covering the interests, penalties and part of the principal loans of the acccount due.
Another PNB represenatative informed Mr. Dee that the said proposal will be acceptable for
PNB if the total payment of 4M will cover 1M as principal and 3M as interests and penalties.
Mr. Dee reiterated his proposal to pay the past due account and later on issued 4 checks.
2 of the checks were dishonored.
PNB warned NSBCI to make good the checks but was not heeded.
PNB then sent demand letter to NSBCI but the latter failed to pay.
Thus, PNB filed with the Sheriff a Petition for Sale of the mortgage property.
PNB was the highest bidder for 10.3M pesos.
Spouses Dee failed to avail the one year redemption period.
PNB informed NSBCI that the proceeds of the sale is not sufficient to cover their claim of 12M.
PNB demanded 2M + interest and other charges until all is paid.
NSBCI refused to pay.
PNB Institute a complaint for the collection of its defficiency claim. Trial Court ruled in favor of
PNB.
NSBCI appealed with the CA but it ruled that:
o The increase in interest rates of the loan were authorized by law and Monetary Board and
voluntarily and freely agreed upon by the parties in the Credit Agreements.
o Hence, the increases (ESCALATION CLAUSE) of interest were binding upon NSBCI.
Hence, this Case.
ISSUE:

WON PNB bloated the loan of NSBCI by imposing interests, and penalties without legal, valid
and equitable justification. YES

HELD:

DOCTRINES:
o A borrowers accessory duty to pay interest does not give the lender unrestrained
freedom to charge any rate other than that which was agreed uponit would be the
zenith of farcicality to specify and agree upon rates that could be subsequently upgraded
at whim by only one party to the agreement; The unilateral determination and
imposition of increased rate is violative of the principle of mutuality of contracts
ordained in Article 1308 of the Civil Code.
o Although escalation clauses are valid in maintaining fiscal stability and retaining the
value of money on long-term contracts, giving the lender an unbridled right to adjust the
interest independently and upwardly would completely take away from the borrower the
right to assent to an important modification in their agreement and would also negate
the element of mutuality in their contracts.
APPLICATION: (Some not stated in the FACTS [reason: the facts was copied from CA
decision)
o In each drawdown, the Promissory Notes specified the interest rate to be charged: 19.5
percent in the first, and 21.5 percent in the second and again in the third. However, a
uniform clause therein permitted respondent to increase the rate within the limits
allowed by law at any time depending on whatever policy it may adopt in the future x x
x, without even giving prior notice to petitioners.
WHEREFORE, as computed by SC, the total debt of NSBCI was only 5.4M (inclusive of
interest, penalties et al.). SC ordered PNB to refund 3.6M.
 TITAN CONSTRUCTION CORPORATION VS UNI-FIELD ENTERPRISES, INC.
G.R. 153874 MARCH 1, 2007
Topic: (B.2) Adhesion

FACTS:
Titan Construction Corp. is engaged in the construction business, while Uni-Field is
engaged in selling various construction materials. From 1990 to 1993, Titan purchased on credit
various construction supplies and materials from respondent amounted to P 7,620,433.12, but
was only able to pay P6,215,795.70, leaving a balance of P 1,404,637.42. On 19 October 1994,
Uni-Field sent a demand letter to Titan. But the balance remained unpaid.

On 26 June 1995, Uni-Field filed with the trial court a complaint for collection of sum of
money with damages against Titan. In its answer, Titan admitted the purchases but disputed the
amount claimed by Uni-Field. Titan interposed a counterclaim and sought to recover P 204,
527.99 from Uni-Field based on damaged vinyl tiles, non-delivery of materials, and advances for
utility expenses, dues and insurances premiums on the condominium unit turned over by Titan to
Uni-Field. On 9 Sept 1997, the trial court rendered judgement in favor of Uni-Field, ordering
Titan to pay 1) Principal amount of P 1, 404, 114.00 2) Interest charges of P 504, 114.00 plus
accrued interest charges at 24% per annum compounded yearly reckoned from July 1995 up to
the time of full payment. 3) Liquidated damages of P 324, 147.94 4)Attorneys fees equivalent to
25% of whatever amount is due and payable and accumulated appearance fees at P1,000.00 per
hearing 5) Costs of Suits

Petitioner appealed to the Court of Appeals. It was denied for lack of merit and affirmed
the lower courts decision. And explained that the terms and conditions therein have become the
law between the parties, and both are bound by said conditions. Failure of a party to contest the
terms and conditions results in his admission thereof. The contracts are perfected by mere
consent; the stipulation of the contract being the law between the parties, courts have no
alternative but to enforce them as they agreed upon and written, there being no law or public
policy against the stipulated provisions.

ISSUE:
1. Whether or Not The Court of Appeals Erred in Finding Legal Basis for Liquidated
damages, attorneys fees and Interest in favor of Respondent.
2. Whether or Not The Court of Appeals erred by Overlooking certain facts or
circumstances of weight and influence which if considered would alter the results of the case

HELD:
1. NO. While the delivery receipts and sales invoice did not form part of respondents
formal offer of evidence, records show that the delivery receipts and sales invoices formed part
of petitioners formal offer of evidence. The delivery receipts and sales invoices expressly
stipulated the payment of interest, liquidated damages, and attorneys fees in case of overdue
accounts and collection suits. Petitioner did not only bind itself to pay the principal amount, it
also promised to pay 1) the interest on overdue accounts, compounded with the principal
obligations as may accrue 2) liquidated damages based on the outstanding total obligation 3)
attorneys fees based on the total claim including liquidated damages. Since petitioner freely
entered into the contract, the stipulations in the contract are binding on petitioner.

The Court has repeatedly held that contracts of adhesion are as binding as ordinary
contacts. Those who adhere to the contract are in reality free to reject it entirely and if they
adhere, they give their consent. It is true that on some occasions the court struck down such
contract as void when the weaker party is imposed upon in dealing with the dominant party and
is reduced to the alternative of accepting the contract or leaving it, completely deprived of the
opportunity to bargain on equal footing.

Considering that petitioner and respondent have been doing business from 1990 to 1993
and that petitioner is not a small time construction company, petitioner is "presumed to have full
knowledge and to have acted with due care or, at the very least, to have been aware of the terms
and conditions of the contract. Petitioner was free to contract the services of another supplier if
respondent's terms were not acceptable. Moreover, petitioner failed to show that in its
transactions with respondent it was the weaker party or that it was compelled to accept the terms
imposed by the respondent. In fact, petitioner only questioned the terms of the contract after the
trial court issued its 9 September 1997 Decision. The Court, therefore, upholds the validity of the
contract between petitioner and respondent.

2. NO. As a rule, only questions of law may be appealed to the Court by petition for
review. The Court is not a trier of facts, its jurisdiction being limited to errors of law. Moreover,
factual findings of the trial court, particularly when affirmed by the Court of Appealrs, are
generally binding on the Court. In this case, the factual findings of the trial court and the Court of
Appeals were based on substantial evidence which were not refuted with contrary proof by
petitioner.
 TOLENTINO VS. CA
G.R. 171354 March 7, 2007
Topic: (B.2) Adhesion

FACTS:
In 1996, petitioner Marylou B. Tolentino applied for and was granted by private
respondent Citytrust Banking Corp which is now BPI, a business Credit Line Facility for
P2,450,000 secured by a First Real Estate Mortgage over her property covered by transfer
Certificate of Title (TCT) No: 1933. On July 16, 1998, Citytrust informed Tolentino that her
credit line has expired and she failed to settle her obligations thus her property was extra
judicially foreclosed and sold in public auction, with Citytrust as the highest bidder.

In March 2000, the statement of account to redeem sent by Citytrust showed petitioners
outstanding obligations at P5,386,993.91. Tolentino asked for a re-computation and the deletion
of certain charges, but was denied by Citytrust. April 2000, Tolentino filed a complaint for
judicial Redemption, Accounting and Damages alleging several reasons including that the bank
unilaterally increased the interest charges in her credit line from 17.75% to 23.04%, that she was
forced to convert her existing Home Owners Credit Line into the Amortized Term Loan with
interest of 19.50% that the bank cancelled her credit line when she refused the said conversion.
In its Answer Citytrust asserted that petitioners credit line has a term of one year and that upom
the expiration of the said period, it may be cancelled and closed; that the inclusion of late
payment charges, for foreclosure expense, attorneys fees, liquidated damages, foreclosure fee,
and interests in the redemption price was in accordance with the terms and conditions of their
loan and mortgage contracts.

ISSUE:
W/N the mortgage agreement is a contract of adhesion since it was solely prepared by the
bank and petitioner only participation thereto was to affix her signature.

HELD:
Yes. The courts conclusions is that no compelling reasons were presented to declare the
subject contractual documents as void contracts of adhesion. A contract of adhesion is an
agreement where one of the parties imposes a ready-made form of contract which the other party
may accept or reject, but which the latter cannot modify. One party prepares the stipulation in the
contract, while the other party merely affixes his signature or his adhesion thereto giving no
room for negotiation and depriving the latter of the opportunity to bargain on equal footing.

Contract of Adhesion is just as binding as ordinary contracts. However, there are

instances when this court has struck down such contact as void when the weaker party is
imposed upon dealing with the dominant bargaining party and is reduced to the alternative of
taking it or leaving it, completely deprived of the opportunity to bargain on equal footing. A
contract of adhesion is not valid, it is also not entirely prohibited. The one who adheres to the
contract is in reality free to reject it entirely; if he adheres he give his consent. If there is
ambiguity it must be construed with the parties who prepared it. If it is not obscure then the
stipulations are controlling.
 The petitioner signed the contract through mistake, violence, intimidation, undue
influence, or fraud. Petitioner even admitted during trial that she was not compelled to sign the
contracts, nor was she totally ignorant of their nature, having been engaged in the business since
1984.
 SPOUSES RODELIO and ALICIA POLTAN vs.
BPI FAMILY SAVINGS BANK, INC. and JOHN DOE
G.R. No. 164307 March 5, 2007
Topic: Adhesion Topic: (B.2) Adhesion

FACTS:
On 11 November 1991, the petitioners obtained a loan evidenced by a promissory note1
from Mantrade Development Corporation (Mantrade) secured by a chattel mortgage over a 1-
unit Nissan Sentra Motor Vehicle. Mantrade, with notice to the petitioners, assigned to BPI, by
way of a Deed of Assignment, all its rights, title and interest to the promissory note and chattel
mortgage. The petitioners defaulted in complying with the terms and conditions of the
promissory note and chattel mortgage when they failed to pay five consecutive monthly
installments which fell due on 15 January 1994 up to 15 May 1994.

BPI demanded from the petitioners the whole balance of the promissory note in the
amount of P286,540.06, including accrued interest, or to return to BPI the possession of the
motor vehicle for the purpose of foreclosure in accordance with the undertaking stated in the
chattel mortgage. Petitioners failed and refused to heed said demand. It is specifically provided
in the promissory note and chattel mortgage that failure to pay any installment when due shall
make the subsequent installments and the entire balance of the obligation due and payable.

In their Answer to the Complaint,6 the petitioners did not deny that they purchased the
vehicle from Mantrade on installment and the same loan was subsequently assigned to BPI. They
disclosed that BPI required them to obtain a motor vehicle insurance policy from FGU
Insurance. They had been religiously paying the monthly installments on the vehicle until it
figured in an accident where it became a total wreck. Under the terms of the insurance policy
from FGU Insurance, the vehicle had to be replaced or its value paid to them. Due to the failure
and refusal of FGU Insurance to replace the vehicle or pay its value, the petitioners stopped the
payment of the monthly installment.

ISSUE:
Whether or not the contracts of loan are inefficacious for being contracts of adhesion.

HELD:
No. The accepted rule is that a contract of adhesion is not per se inefficacious. A contract
of adhesion is defined as one in which one of the parties imposes a ready-made form of contract,
which the other party may accept or reject, but which the latter cannot modify. One party
prepares the stipulation in the contract, while the other party merely affixes his signature or his
"adhesion" thereto, giving no room for negotiation and depriving the latter of the opportunity to
bargain on equal footing. The one who adheres to the contract is in reality free to reject it
entirely; if he adheres, he gives his consent. A contract of adhesion is just as binding as ordinary
contracts.

The petitioners failed to show that they were under duress or forced to sign the loan
documents. They were presumed to have signed the assailed documents with full knowledge of
their import. The natural presumption is that one does not sign a document without first
informing himself of its contents and consequences.
 Ariaga Vda De Gurrea v Suplico
G.R. No. 144320 Apr. 26, 2006
Topic: (B.3) Validity of Contracts

FACTS:
In 1958, Rosalina Gurrea transferred the ownership of a lot to Adelina Gurrea. That
Adelina continued to be the owner of the lot until her death. Thereafter, a proceeding was
instituted to have the will she executed during her lifetime probated and to settle her estate.
Under the said will, the San Juan lot was bequeathed to Pilar and Luis Gurrea, while 700,000
pesetas, of the lot in Baguio City and a one-hectare piece of land in Negros Occidental were
given to Ricardo Gurrea.

Ricardo, represented by and through his counsel Atty. Suplico (the defendant), filed an
Opposition. In consideration of said representation, Ricardo agreed to pay Atty. Suplico a
contingent fee of 20% of whatever is due me. During the pendency of the proceedings and upon
the oral instructions of Ricardo, Atty. Suplico negotiated with the other heirs of Adelina Gurrea
regarding the transfer of the piso(apartment building) in Spain to Ricardos daughter, Juliet
Gurrea de Melendres. Ricardo further instructed Atty. Suplico not to enter into any settlement
with the heirs unless the piso is transferred to his daughter. Finally, the transfer of the piso worth
P64,000 was executed and the heirs arrived at an amicable settlement regarding the estate of
Adelina Gurrea. Hence, Ricardo Gurrea withdrew his Opposition and the heirs then drew up a
project of partition which was eventually approved by the probate court. Pursuant to the project
of partition, the following properties were adjudicated to Ricardo Gurrea: (1) the whole of the
Baguio lot (with assessed value of P26,350.00); (2) the whole of the San Juan lot (with assessed
value of P9,630); and (3) a parcel of land in Negros Occidental (with assessed value of P300).
As payment of his attorneys fees, Ricardo offered the San Juan lot to Atty. Suplico who was
initially hesitant to accept the same as the property is occupied by squatters. However, in order
not to antagonize his client, Atty. Suplico agreed to Ricardos proposal with the further
understanding that he will receive an additional commission of 5% if he sells the Baguio
property. Thereafter, the Transfer of Rights and Interest was drafted. The said deed was
presented to Ricardo for his signature. That before signing the same, the contents of the deed
were first explained to Ricardo by Atty. Suplico and Atty. Manuel Pama, the notary public. On
August 20, 1975, the deed was finally signed by Ricardo at the office of Atty. Pama, in the
presence of the latter, Atty. Suplico and two other witnesses. Later, on October 7, 1980, Atty.
Suplico registered the deed and obtained a title to the San Juan property under his name. Ricardo
died on October 22, 1980. After his death, his heirs filed for the settlement of Ricardos estate. In
the said proceedings, Atty. Suplico filed several claims for unpaid attorneys fees; however, all
were dismissed with finality. Also in the same case, the estates administrator, Carlos Gurrea,
filed an Inventory of Properties left by the decedent, which did not initially include the property
subject of this case. The said lot was included only subsequently in the Amended Inventory

ISSUE:
Whether or Not the Transfer of Rights and Interest were Valid.

HELD:
 The SC held that since at the time of execution of the deed of Transfer of Rights and
Interest, the subject property still formed part of the estate of Adelina, and there being no
evidence to show that material possession of the property was given to Ricardo, the probate
proceedings concerning Adelinas estate cannot be deemed to have been closed and terminated
and the subject property still the object of litigation.

Having been established that the subject property was still the object of litigation at the
time the subject deed of Transfer of Rights and Interest was executed, the assignment of rights
and interest over the subject property in favor of respondent is null and void for being violative
of the provisions of Article 1491 of the Civil Code which expressly prohibits lawyers from
acquiring property or rights which may be the object of any litigation in which they may take
part by virtue of their profession.

Article 1409 of the same Code provides, among others, that contracts which are expressly
prohibited or declared void by law are considered inexistent and void from the beginning.
 EMILIO GONZALES LAO V. REPUBLIC OF THE PHILIPPINES
G.R. NO. 160709 January 23, 2006
Topic: (B.3) Validity of Contracts

FACTS:
On May 10, 1982, GSIS and petitioner executed a "lease-purchase" agreement. GSIS
agreed to sell the same property to petitioner for P2,000,000, with a down payment of P200,000
and the balance payable within a period of 15 years at 12% interest per annum, compounded
yearly. GSIS obligated itself to construct for the OGCC a three-storey building on the Manila
Bay reclaimed area or to make available another property acceptable to the OGCC, to be
conveyed to the Republic under the same or mutually acceptable terms and conditions as those of
the first contract. In the meantime, the OGCC was allowed to continue occupying the second to
the fifth floors of the building at an annual rental of P100,000, payable to petitioner.
Furthermore, petitioner was entitled to lease out the ground floor and collect the corresponding
rentals. President Marcos approved the contract on April 11, 1982 to which the GSIS Board of
Trustees approved the same on April 23, 1982.

ISSUE:
Whether or not the contract is void ab initio.

HELD:
Yes. The Supreme Court has held that the Appellate Court's disquisition shows that the
second contract caused undue injury to the government, gave petitioner unwarranted benefits and
was grossly disadvantageous to the government. The disquisition of the CA is sufficiently
exhaustive and convincing considering that in civil cases like this one, the party with the burden
of proof (in this case, the respondents) needs only to establish its case by a preponderance of
evidence. The act of entering into the second contract was a corrupt practice and was therefore
unlawful. It was a contract expressly prohibited by RA 3019. As a result, it was null and void
from the beginning under Art. 1409 (7) of the Civil Code. As for the forfeiture of the payments
made by petitioner, the latter did not raise any substantial argument against it. He merely stated
that "there should be no reason why the amounts paid by petitioner should be forfeited in favor
of the Republic" since the property was owned by GSIS and the Republic, through the that "there
should be no reason why the amounts paid by petitioner should be forfeited in favor of the
Republic" since the property was owned by GSIS and the Republic, through the OGCC, was
merely a lessee. The amount forfeited was in favor of GSIS as owner of the property.
 ANTONIO M. SERRANO vs Gallant MARITIME SERVICES, INC. and MARLOW
NAVIGATION CO., INC.
G.R. No. 167614 March 24, 2009
Topic: (B.4) Non-impairment of obligations of contracts.

FACTS:
Petitioner was hired by Gallant Maritime Services, Inc. and Marlow Navigation Co., Ltd.
(respondents) under a Philippine Overseas Employment Administration (POEA)-approved
Contract of Employment On March 19, 1998, the date of his departure, petitioner was
constrained to accept a downgraded employment contract for the position of Second Officer with
a monthly salary of US$1,000.00, upon the assurance and representation of respondents that he
would be made Chief Officer by the end of April 1998. Respondents did not deliver on their
promise to make petitioner Chief Officer. Hence, petitioner refused to stay on as Second Officer
and was repatriated to the Philippines on May 26, 1998. Petitioners employment contract was
for a period of 12 months or from March 19, 1998 up to March 19, 1999, but at the time of his
repatriation on May 26, 1998, he had served only two (2) months and seven (7) days of his
contract, leaving an unexpired portion of nine (9) months and twenty-three (23) days. Petitioner
filed with the Labor Arbiter (LA) a Complaint against respondents for constructive dismissal and
for payment of his money claims in the total amount of US$26,442.73. The labor arbiter granted
the petition. Respondents appealed to the NLRC, whereby the NLRC granting their appeal ruled
that, R.A. No. 8042 does not provide for the award of overtime pay, which should be proven to
have been actually performed, and for vacation leave pay.

For Antonio Serrano (petitioner), a Filipino seafarer, the last clause in the 5th paragraph
of Section 10, Republic Act (R.A.) No. 8042, violates the OFWs constitutional rights in that it
impairs the terms of their contract, deprives them of equal protection and denies them due
process.

Sec. 10. Money Claims. - x x x In case of termination of overseas employment without

just, valid or authorized cause as defined by law or contract, the workers shall be entitled to the
full reimbursement of his placement fee with interest of twelve percent (12%) per annum, plus
his salaries for the unexpired portion of his employment contract or for three (3) months for
every year of the unexpired term, whichever is less.

ISSUE:
1. Whether Section 10 (par 5) of RA 8042 is violates the non-impairment clause.

HELD:
No. The enactment of R.A. No. 8042 in 1995 preceded the execution of the employment
contract between petitioner and respondents in 1998. Hence, it cannot be argued that R.A. No.
8042, particularly the subject clause, impaired the employment contract of the parties. Rather,
when the parties executed their 1998 employment contract, they were deemed to have
incorporated into it all the provisions of R.A. No. 8042.The subject clause may not be declared
unconstitutional on the ground that it impinges on the impairment clause, for the law was enacted
in the exercise of the police power of the State to regulate a business, profession or calling,
particularly the recruitment and deployment of OFWs, with the noble end in view of ensuring
respect for the dignity and well-being of OFWs wherever they may be employed. Police power
legislations adopted by the State to promote the health, morals, peace, education, good order,
safety, and general welfare of the people are generally applicable not only to future contracts but
even to those already in existence, for all private contracts must yield to the superior and
legitimate measures taken by the State to promote public welfare.
 GOLDENWAY MECHANDISING CORP vs EQUITABLE PCI BANK
G.R. No. 195540 March 13, 2013
Topic: Validity of Contractual Stipulations Non-impairment of Contracts

FACTS:
Goldenway executed a Real Estate Mortgage in favor of Equitable PCI Bank to secure
the two million-peso loan the bank granted to it. Goldenway failed to settle its obligation so
Equitable PCI extrajudicially foreclosed the mortgage on Dec. 13, 2000. During the public
auction, the mortgaged properties were sold for 3.5M pesos to the respondent bank and the
certificate of sale was issued to the respondent, along with the new certificates of title in its
name. Goldenway offered to redeem the foreclosed properties in a letter dated March 8, 2001
and tendered a check for 3.5M. However, it was told that redemption is no longer possible
because the certificate of sale has already been registered. Goldenway filed a complaint for
specific performance and damages claiming that it has a one-year period of redemption under
Act No. 3135 and not the shorter one under RA 8791 because applying the latter would result in
the impairment of the obligation of contracts. The respondent claimed that the petitioner had
ample time to redeem from the time it received the letter of demand and the notice of sale until
before the registration of the certificate of sale. The RTC held that there was no valid redemption
because the counsel of Goldenways was not authorized by the Board of Directors to transact in
its behalf when counsel made offer to redeem. The CA affirmed the RTC decision and held that
the case falls under RA 8791 with the shorter period for redemption.

In the present case, the petitioner claims that RA 8791 is not applicable since the
contracting parties expressly and categorically agreed that the foreclosure of the real estate
mortgage shall be in accordance with Act No. 3135. Goldenways claimed that applying RA 8791
would be an impairment of its right of redemption and is a modification of the intention of the
parties and thus, consequently, violative of the constitutional proscription against impairment of
contract.

ISSUE:
W/N the application of RA 8791 shortening the period of redemption as opposed to that
explicitly stated in the contract violates the prohibition against impairment of contracts

HELD:

No. The law governing extrajudicial foreclosure of mortgage is Act No. 3135 which
provides that redemption may be any time within one year from and after the date of the sale
counted from the date of the registration of the certificate. In their real estate mortgage contract,
the parties agreed that upon petitioners default and its loan being due, the bank may
immediately foreclose the mortgage judicially in accordance with the Rules of Court or
extrajudicially in accordance with Act No. 3135 as amended. However, RA 8791 (The General
Banking Law of 2000) then took effect and amended Act No. 3135. It provides that juridical
persons whose property is being sold following an extrajudicial foreclosure shall have a right of
redemption until, but not after, the registration of the registration of the certificate of the
foreclosure sale with the applicable Register of Deeds which in no case shall be more than three
months after the foreclosure, whichever is earlier. Owners of the property prior to the effectivity
of the act shall retain their redemption rights until their expiration. The question is whether the
amendment in the law may be applied to the case of Goldenways and Equitable PCI Bank when
their real estate mortgage contract was executed prior to the effectivity of the amendment and
mortgage foreclosed when it was already effective, which the Court answered in the affirmative.

The purpose of the non-impairment clause of the Constitution is to protect the integrity of
contracts against unwarranted interference of the State. There is impairment when the subsequent
law changes the terms of the contract between the parties, imposes conditions, dispenses with
those agreed upon, or withdraws remedies for the enforcement of the rights of the parties. The
amendment did not divest juridical persons of their right but only modified the time for its
exercise by reducing the one-year period provided by the prior law. The right of redemption,
being statutory, must be exercised according to what the statute prescribes. It has to yield to
police power because the freedom to contract is not absolute; all contracts and all rights are
subject to the police power of the state. Settled is the rule that the non-impairment clause of the
Constitution must yield to loftier purposes of the government. In this case, the state has authority
to regulate businesses extends to the banking industry which is imbued with public interest. As
such, Goldenway Merchandising Corporations petition is denied and the CA decision affirmed.
 HEIRS OF WILLIAM SEVILLA vs. SEVILLA
G.R. No. 150179 April 30, 2003
Topic: (C) Article 1308 - Binding Effect of Contracts

FACTS:
On December 10, 1973, Filomena Almirol de Sevilla died intestate leaving 8 children,
namely: William, Peter, Leopoldo, Felipe, Rosa, Maria, Luzvilla, and Jimmy, all surnamed
Sevilla. William, Jimmy and Maria are now deceased and are survived by their respective
spouses and children. One of the properties that Filomena left is Lot No. 653 situated at General
Luna St., Dipolog City. Lot No. 653, is the paraphernal property of Filomena Almirol de Sevilla
which she co-owned with her sisters, Honorata Almirol and Felisa Almirol, who were both single
and without issue. When Honorata died in 1982, her 1/3 undivided share in Lot No. 653 was
transmitted to her heirs, Felisa Almirol and the heirs of Filomena Almirol de Sevilla, who
thereby acquired the property in the proportion of one-half share each.

During the lifetime of Felisa and Honorata, they lived in the house of Filomena, together
with their nephew, respondent Leopoldo Sevilla and his family. Leopoldo attended to the needs
of his mother, Filomena, and his two aunts. Felisa died on July 6, 1988. Previous thereto, on
November 25, 1985, she executed a last will and testament devising her 1/2 share in Lot No. 653
to the spouses Leopoldo Sevilla and Belen Leyson. On August 8, 1986, Felisa executed another
document denominated as "Donation Inter Vivos" ceding to Leopoldo Sevilla her 1/2 undivided
share in Lot No. 653, which was accepted by Leopoldo in the same document. On September 3,
1986, Felisa and Peter Sevilla, in his own behalf and in behalf of the heirs of Filomena, executed
a Deed of Extra-judicial Partition, identifying and adjudicating the 1/3 share of Honorata Almirol
to the heirs of Filomena Almirol de Sevilla and to Felisa Almirol.

On June 21, 1990, Felipe Sevilla, Rosa Sevilla, and the heirs of William, Jimmy and
Maria, all surnamed Sevilla, filed the instant case against respondents Leopoldo Sevilla, Peter
Sevilla and Luzvilla Sevilla, for annulment of the Deed of Donation and the Deed of
Extrajudicial Partition, Accounting, Damages, with prayer for Receivership and for Partition of
the properties of the late Filomena Almirol de Sevilla. They alleged that the Deed of Donation is
tainted with fraud because Felisa Almirol, who was then 81 years of age, was seriously ill and of
unsound mind at the time of the execution thereof; and that the Deed of Extrajudicial Partition is
void because it was executed without their knowledge and consent.

Respondents denied that there was fraud or undue pressure in the execution of the
questioned documents. They alleged that Felisa was of sound mind at the time of the execution
of the assailed deeds and that she freely and voluntarily ceded her undivided share in Lot No.
653 in consideration of Leopoldo's and his family's love, affection, and services rendered in the
past.

RTC of Dipolog City, Zamboanga del Norte rendered a decision upholding the validity of
the Deed of Donation and declaring the Deed of Extra-judicial Partition unenforceable. Both
parties appealed to the CA and the CA affirmed the decision of the RTC.

ISSUE:
 Whether or not the judgment made by the RTC and CA were correct in declaring the
Deed of Donation as valid and the Deed of Extra-judicial Partition unenforceable.

HELD:
YES. Donation is an act of liberality whereby a person disposes gratuitously of a thing or
right in favor of another who accepts it. Under Article 737 of the Civil Code, the donor's capacity
shall be determined as of the time of the making of the donation. Like any other contract, an
agreement of the parties is essential, and the attendance of a vice of consent renders the donation
voidable.

There is no question that at the time Felisa executed the deed of donation she was already
the owner of 1/2 undivided portion of Lot No. 653. Petitioners insist that respondent Leopoldo
Sevilla employed fraud and undue influence on the person of the donor. The self-serving
testimony of the petitioners in this case are vague on what acts of Leopoldo Sevilla constituted
fraud and undue influence and on how these acts vitiated the consent of Felisa Almirol. Fraud
and undue influence that vitiated a party's consent must be established by full, clear and
convincing evidence, otherwise, the latter's presumed consent to the contract prevails. Moreover,
petitioners failed to show proof why Felisa should be held incapable of exercising sufficient
judgment in ceding her share to respondent Leopoldo. The notary public who notarized the Deed
of Donation, Felisa confirmed to him her intention to donate her share in the lot to Leopoldo and
stressed that though the donor was old, she was of sound mind and could talk sensibly.

Meanwhile, the Deed of Extra-judicial Partition, the Court find that the same is void ab
initio and not merely unenforceable. It was held that one of the requisites of a valid contract
under Article 1318 of the Civil Code is the consent and the capacity to give consent of the parties
to the contract. There is no effective consent in law without the capacity to give such consent.
Thus, there is said to be no consent, and consequently, no contract when the agreement is entered
into by one in behalf of another who has never given him authorization therefor unless he has by
law a right to represent the latter.

At the time Felisa executed the deed of extra-judicial partition dividing the share of her
deceased sister Honorata between her and the heirs of Filomena Almirol de Sevilla, she was no
longer the owner of the 1/2 undivided portion of Lot No. 653, having previously donated the
same to respondent Leopoldo Sevilla who accepted the donation in the same deed. A donation
inter vivos, as in the instant case, is immediately operative and final. Evidently, Felisa did not
possess the capacity to give consent to or execute the deed of partition inasmuch as she was
neither the owner nor the authorized representative of respondent Leopoldo to whom she
previously transmitted ownership of her undivided share in Lot No. 653. Considering that she
had no legal capacity to give consent to the deed of partition, it follows that there is no consent
given to the execution of the deed, and therefore, there is no contract to speak of. As such, the
deed of partition is void ab initio, hence, not susceptible of ratification.
 DARIO NACAR v GALLERY FRAMES
G.R. No. 189871 August 13, 2013
Topic: Breach of Obligations (Sorry eto talaga sya di ko alam bakit nasa syllabus ang topic
is Art. 1308)

FACTS:
On October 15, 1998, the Labor Arbiter rendered a Decisionin favor of petitioner and
found that he was dismissed from employment without a valid or just cause. Thus, petitioner was
awarded backwages and separation pay in lieu of reinstatement in the amount ofP158,919.92.

Respondents appealed to the NLRC, but it was dismissed for lack of merit. Accordingly,
the NLRC sustained the decision of the Labor Arbiter. Respondents filed a motion for
reconsideration, but it was denied. Dissatisfied, respondents filed a Petition for Review on
Certiorari before the CA but it was likewise denied. Respondents then sought relief before the
Supreme Court. Finding no reversible error on the part of the CA, this Court denied the petition
in the Resolution dated April 17, 2002.

An Entry of Judgment was later issued certifying that the resolution became final and
executory on May 27, 2002. The case was, thereafter, referred back to the Labor Arbiter for
execution. Petitioner filed a Motion for Correct Computation, praying that his backwages be
computed from the date of his dismissal on January 24, 1997 up to the finality of the Resolution
of the Supreme Court on May 27, 2002. Upon recomputation, the Computation and Examination
Unit of the NLRC arrived at an updated amount in the sum ofP471,320.31.

Respondents filed a Motion to Quash Writ of Execution, arguing, among other things,
that since the Labor Arbiter awarded separation pay ofP62,986.56 and limited backwages of
P95,933.36, no more recomputation is required to be made of the said awards. They claimed that
after the decision becomes final and executory, the same cannot be altered or amended anymore.
LA denied the motion but the decision was reversed by the NLRC on appeal.

Petitioner appealed to the CA but was denied, stating that since petitioner no longer
appealed the October 15, 1998 Decision of the Labor Arbiter, which already became final and
executory, a belated correction thereof is no longer allowed. The CA stated that there is nothing
left to be done except to enforce the said judgment. Consequently, it can no longer be modified
in any respect, except to correct clerical errors or mistakes. Thus, petitioner filed this petition for
review on certiorari claiming that he is also entitled to the payment of interest from the finality of
the decision until full payment by the respondents.

ISSUE:
Whether or not petitioner is entitled to claim the payment of interest from the finality of
the decision until full payment by the respondents.

HELD:
Yes petitioner is entitled to interests. Anent the payment of legal interest. In the landmark
case of Eastern Shipping Lines, Inc. v. Court of Appeals,the Court laid down the guidelines
regarding the manner of computing legal interest, to wit:
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest 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 extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an

interest on the amount of damages awarded may be imposed at the discretion of the court at the
rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or
damages except when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the interest shall begin
to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but
when such certainty cannot be so reasonably established at the time the demand is made, the
interest shall begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual base
for the computation of legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2,
above, shall be 12% per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit.

When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 6% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.

When an obligation, not constituting a loan or forbearance of money, is breached, an

interest on the amount of damages awarded may be imposed at the discretion of the court at the
rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or
damages, except when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the interest shall begin
to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code), but
when such certainty cannot be so reasonably established at the time the demand is made, the
interest shall begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual base
for the computation of legal interest shall, in any case, be on the amount finally adjudged.
 PLANTERS DEVELOPMENT BANK
vs SPOUSES ERNESTO LOPEZ and FLORENTINA LOPEZ
G.R. No. 186332 October 23, 2013
Topic: Binding Effect of Contracts Art. 1308

FACTS:
The Spouses Lopez applied for and obtained a real estate loan in the amount of
P3,000,000.00 from Planters Bank. The loan was intended to finance the construction of a four-
story concrete dormitory building. The loan agreement provided that the loan is payable for
fourteen years and shall bear a monetary interest at twenty one percent per annum. To secure the
payment of the loan, the spouses Lopez mortgaged a parcel of land.

The said loan agreement had three amendments, the amount of the loan became
P4,200,000.00 and the interest rate was increase to twenty seven percent. Furthermore, the term
of the loan was shortened to one year.

The spouses failed to avail the full amount of the loan because Planters bank refused to
release the remaining amount of P700,000. The spouses filed against the bank a complaint for
rescission of the loan agreements and for damages with the RTC of Makati.

Planters Bank foreclosed the mortgage properties in favor of third parties after the
spouses defaulted on their loan.

RTC ruled in Planters Banks favor. It held that the spouses had no right to rescind the
loan agreements because they were not the injured parties.

Spouses died during the pendency of the case. On appeal, compulsory heirs substituted
the deceased. CA reversed the RTC ruling. It held that Planters Banks refusal to release the loan
was a substantial breach of contract.
Hence, this petition.

ISSUES:
Whether Planters Bank substantially breached the loan agreement.

HELD:
Planters Bank only committed a slight or casual breach of the contract. The bank indeed
incurred in delay by not complying with its obligation to make further loan releases. Its refusal to
release the remaining balance, however, was merely a slight or casual breach as shown below. In
other words, its breach was not sufficiently fundamental to defeat the object of the parties in
entering into the loan agreement. The well settled rule is that rescission will not be permitted for
a slight or casual breach of the contract.
 BALLESTEROS v ABION
G.R. No. 143361 February 9, 2006
Topic: (D) Art. 1311 - Relativity of Contracts

FACTS:
The property subject of this petition is a two-door, three-story commercial building and
the 229 sq.m. parcel of land on which it stands. This was sold to Dr. Vargas on March 30, 1988
by DBP but was only registered in the names of DBP and Dr. Vargas on February 21, 1996.
Meanwhile, on March 14, 1991, petitioner entered into a contract of lease up until April 1, 1996
for one door of the building with Ronald Vargas, son of Dr. Vargas, who represented himself as
the absolute owner of the property. On September 27, 1995, Dr. Vargas sold the property to
respondent. This was evidenced by a deed of absolute sale of even date. TCT No. 949 in the
name of the respondent was subsequently issued on April 10, 1996.

On October 30, 1995, the petitioner entered into a new contract of lease with Ronald
Vargas extending the term for 5 years including the remaining door of the building in its
coverage. Subsequently, petitioner received a letter from respondent demanding him to vacate
the premises but he refused to do so. This led the respondent to file a complaint of unlawful
detainer with damages against petitioner which was dismissed for failure to state cause of action.
RTC reversed the decision to vacate the property and surrender its possession to respondent. CA
affirmed the decision. Hence, this petition.

ISSUE:
Whether or not respondent could legally eject petitioner or terminate the lease.

RULING:
Yes. The SC held that the first premise of petitioner's argument, that both lease
agreements were valid, is erroneous. As correctly observed by the RTC and the CA, Ronald
Vargas was not the owner of the property and had no authority to let it. Although the lessor need
not be the owner of the property being leased, he must have at least a right or an authority to
lease it out. Under the principle of relativity of contracts, the sale of the property by Dr. Vargas
to respondent bound Ronald Vargas as an heir of the seller. Neither did respondent authorize him
to enter into a new lease contract with petitioner. Thus, Ronald Vargas could not have validly
executed the second lease agreement upon which petitioner now bases his right to the continued
possession of the property. Hence, petition is hereby denied.
 Filipinas (Pre-Fab Bldg.) Systems, Inc. v.
MRT Development Corp.,
November 13, 2007. G.R. Nos. 167829-30
Topic:

NACPIL

Do not exceed 2 pages

 ARTEX DEVELOPMENT CO., INC., vs. WELLINGTON INSURANCE CO., INC.,
G.R. No. L-29508 June 27, 1973
Topic: (D) Article 1311 - Stipulation Pour Autrui

FACTS:
The defendant, Wellington Insurance Co., Inc. insured for P24,346,509.00 the buildings,
stocks and machinery of plaintiff Artex Development Co., Inc., against loss or damage by fire or
lighting upon payment by plaintiff of the corresponding premiums. On August 2, 1963, said
properties were insured for an additional sum of P833,034.00; on May 12, 1963 defendant
insured plaintiff against business interruption (use and occupancy) for P5,200,000.00.

On September 22, 1963, the buildings, stocks and machineries of plaintiff's spinning
department were burned; that notice of the loss and damage was given the defendant, and the
loss was referred to the H. H. Bayne Adjustment Co. and the Allied Adjustment Co. That as per
report of the adjusters, the total property loss of the plaintiff was the sum of P10,106,554.40 and
the total business interruption loss was P3,000,000.00. Defendant has paid to the plaintiff the
sum of P6,481,870.07 of the property loss suffered by plaintiff and P1,864,134.08 on its business
interruption loss, leaving a balance of P3,624,683.43 and P1,748,460.00, respectively.

On May 29, 1969, counsel for plaintiff-appellee filed a manifestation dated April 10,
1969, bearing the conformity of plaintiff itself under the signature of its president, Domingo G.
Castillo.

The lower court ordered defendant insurer to pay plaintiff-insured the balance of the
insured property loss of P3,624,683.43 and its ascertained business interruption loss of
P1,748,460.00 with interest and attorney's fees. However, defendant-appellant's lone assignment
of error that lower court should have ruled instead "that plaintiff-appellant cause of action (as
insured) should have been directed against the reinsurers and not against defendant-appellant."

Upon the parties' joint motion dated May 22, 1969 for temporary suspension of the
proceedings by virtue of such payment, the Court per its resolution of June 30, 1969 resolve to
suspend the proceedings until July 30, 1969.

ISSUE:
Whether or not the defendant-appellant, as the insurer, is liable to pay plaintiff-insured
the balance of the insured property loss and its business interruption loss with interest and
attorney's fees.

HELD:
In this appeal from the decision of the CFI of Rizal at Caloocan City, the Court reiterates
the establish doctrine that a third party not privy to a contract that contains no stipulations pour
autrui in its favor may NOT sue enforcement of the contract. Hence, in this case where the lower
court ordered the defendant insurer to pay plaintiff-insured the balance of the insured property
loss of and its business interruption loss, the Court AFFIRMS the correctness of the lower court's
ruling that it is no defense for the insurer as against insured that the insurer had obtained
reinsurance from other companies to cover its liability.
 With regard to the lone assignment of error of the defendant-appellant, the Court said that
it is manifestly untenable since there is no privity of contract between the insured and the
reinsurers. Plaintiff-appellee insured can only move for enforcement of its insurance contract
with its insurer, to Wellington Insurance as the defendant-appellant. UNLESS there is a specific
grant in, or assignment of, reinsurance contract in favor of the insured or a manifest intention of
the contracting parties to the insurance contrary to grant such benefit or favor to the insured, not
being privy to the reinsurance contract, has no cause of action against the reinsurer.
It is expressly provided in section 91 the Insurance Act 1 that "The original insured has no
interest in a contract of insurance."

Pursuant to Article 1311 of the Civil Code, it expresses the UNIVERSAL RULE that
"Contracts take effect only between the parties, their assigns and heirs" (with the heir being "not
liable beyond the value of the property he received from the decedent,") and provides for the
exception of stipulations pour autrui or in favor of a third person not a party to the contract, in
this wise:
If a contract should contain some stipulation in favor of a third person, he may demand its
fulfillment provided he communicated his acceptance to the obligor before its revocation. A
mere incidental benefit or interest of a person is not sufficient. The contracting parties must have
clearly and deliberately conferred favor upon a third person. (Art. 1311, Civil Code, second
paragraph).

The Court has since the early case of Uy Tam vs. Leonard that the "intent of the
contracting parties to benefit third party by means of such stipulations pour autrui must clearly
expressed, and hence, a clause in a contractor's executed solely in favor of the City of Manila and
condition pay for all labor and materials cannot be construed stipulation pour autrui available to
materialmen who supplied certain materials to the contractor for use in the performance of the
latter's contract with the city.

Plaintiff-insured, not being a party or privy to defendant insurer's reinsurance contracts,

therefore, could not directly demand enforcement of such insurance contracts.

Assuming that plaintiff-insured could avail of the reinsurance contracts and directly sue
the reinsurers for payment of the loss, still such assumption would not in any way affect or
cancel out defendant-insurer's direct contractual liability to plaintiff-insured under the insurance
policy to indemnify plaintiff for the property losses. Plaintiff's right as insured to sue defendant
as insurer directly and solely would thereby not be affected or curtailed in any way, without
prejudice to defendant in turn filing a third party complaint or separate suit against its reinsurers.
 FLORENTINO vs. ENCARNACION
G.R. No. L-27696 September 30, 1977
Topic: Stipulation Pour Autrui
FACTS:
On May 22, 1964, the petitioners-appellants filed with the Court of First Instance of
Ilocos Sur an application for the registration under Act 496 of a parcel of agricultural land
located at Barrio Lubong, Dacquel, Cabugao, Ilocos Sur. The application alleged among other
things that the applicants are the common and proindiviso owners in fee simple of the said land
with the improvements existing thereon; that to the best of their knowledge and belief, there is no
mortgage, lien or encumbrance of any kind whatsoever affecting said land, nor any other person
having any estate or interest thereon, legal or equitable, remainder, reservation or in expectancy;
that said applicants had acquired the aforesaid land thru and by inheritance from their
predecessors in interest, and for which the said land was adjudicated to them by virtue of the
deed of extrajudicial partition dated August 24, 1947; that applicants Salvador Encarnacion, Jr.
and Angel Encarnacion acquired their respective shares of the land thru purchase from the
original heirs, Jesus, Caridad, Lourdes and Dolores, all surnamed Singson, on one hand and from
Asuncion Florentino on the other.
After due notice and publication, the Court set the application for hearing. No opposition
whatsoever was filed except that of the Director of Lands which was later withdrawn, thereby
leaving the application unopposed. Thereupon, an order of general default was issued against the
whole world. Applicant Miguel Florentino asked the court to include the said stipulation (Exhibit
O-1) as an encumbrance on the land sought to be registered, and cause the entry of the same on
the face of the title that will finally be issued. All the applicants admit the truth that the products
of the land made subject matter of this land registration case had been used in answering for the
payment of expenses for the religious functions specified in the deed of extrajudicial partition,
dated August 24, 1947. And that this arrangement about the products answering for the payment
of expenses for religious functions as mentioned above was not registered in the office of the
Register of Deeds under Act No. 3344, Act 496 or any other system of registration.
Opposing its entry on the title as an encumbrance, petitioners-appellees Salvador
Encarnacion, Sr., Salvador Encarnacion, Jr. and Angel Encarnacion filed a manifestation seeking
to withdraw their application on their respective shares of the land sought to be registered. The
court denied the petitioners-appellees' motion to withdraw for lack of merit.

ISSUES:
1. Whether or not the stipulation (Exhibit O-1), as part of an extrajudicial partition duly
agreed and signed by the parties, is binding upon the contracting parties.
2. Whether or not the stipulation (Exhibit O-1) can be revoked by any of the stipulators
at their own option.
HELD:
The Supreme Court held that the same must bind the contracting parties thereto and its
validity or compliance cannot be left to the will of one of them. Article 1311 of the New Civil
Code, provides: [t]hat contracts take effect only between the parties, their assigns and heirs,
except in cases where the rights and obligations arising from the contract are not transmissible by
their nature, or by stipulation or by provision of law. The heir is not liable beyond the value of
the property he received from the decedent. If a contract should contain a stipulation in favor of a
third person, he may demand its fulfillment provided he communicated his acceptance to the
obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient.
The contracting parties must have clearly and deliberately conferred a favor upon a third person."
The present case falls under the second paragraph of Article 1311 which provides the law
on stipulations pour autrui which the Court holds that said stipulation (Exhibit O-1) is a
stipulation pour autrui. A stipulation pour autrui is a stipulation in favor of a third person
conferring a clear and deliberate favor upon him, and which stipulation is merely a part of a
contract entered into by the parties, neither of whom acted as agent of the third person, and such
third person may demand its fulfillment provided that he communicates his acceptance to the
obligor before it is revoked. The requisites are: (1) that the stipulation in favor of a third person
should be a part, not the whole, of the contract; (2) that the favorable stipulation should not be
conditioned or compensated by any kind of obligation whatever; and (3) neither of the
contracting parties bears the legal representation or authorization of third party.
To constitute a valid stipulation pour autrui, it must be the purpose and intent of the
stipulating parties to benefit the third person, and it is not sufficient that the third person may be
incidentally benefited by the stipulation. The fairest test to determine whether the interest of third
person in a contract is a stipulation pour autrui or merely an incidental interest, is to rely upon
the intention of the parties as disclosed by their contract.
In applying this test, it matters not whether the stipulation is in the nature of a gift or
whether there is an obligation owing from the promises to the third person. The evidence on
record shows that the true intent of the parties is to confer a direct and material benefit upon the
Church. The fruits of the aforesaid land were used thenceforth to defray the expenses of the
Church in the preparation and celebration of the Holy Week, an annual Church function.
While a stipulation in favor of a third person has no binding effect in itself before its
acceptance by the party favored, the law does not provide when the third person must make his
acceptance. As a rule, there is no time limit; such third person has all the time until the
stipulation is revoked. The enjoyment of benefits for almost seventeen years without question
can be construed as an implied acceptance by the Church of the stipulation pour autrui before its
revocation by some of the co-owners, namely the petitioners-appellees herein
Hence, the Court ruled that the stipulation (Exhibit O-1) cannot now be revoked by any
of the stipulators at their own option. Furthermore, the Court also allowed for the annotation of
Exhibit O-1 as an encumbrance on the face of the title to be finally issued in favor of all the
applicants (herein appellants and herein appellees) in the registration proceedings
 REBECCA C. YOUNG VS. COURT OF APPEALS
G.R. No. 79518 January 13, 1989
Topic: Stipulation Pour Autrui

FACTS:
Philippine Holding, Inc. is the former owner of a piece of land located at Soler St., Sta.
Cruz, Manila, and a two storey building erected thereon, consisting of six units; Unit 1352
occupied by Antonio Young; Unit 1354 by Rebecca C. Young.

The owner Philippine Holding, Inc. secured an order from the City Engineer of Manila to
demolish the building. Antonio Young filed an action to annul the City Engineer's demolition
The parties submitted a Compromise Agreement to the Court. Paragraph 3 of said agreement
provides that Antonio S. Young and Rebecca Young and all persons claiming rights under them
bind themselves to voluntarily and peacefully vacate the premises which they were occupying as
lessees which are the subject of the condemnation and demolition order and to surrender
possession thereof to the defendant Philippine Holding, Inc. within sixty (60) days from written
notice, subject to the proviso that should Philippine Holding, Inc. decided to sell the subject
property or portion thereof, " Antonio Young and Rebecca C. Young have the right of first
refusal thereof.

Philippine Holding, Inc. had previously sold the above said property described in the
compromise agreement to PH Credit Corporation. PH Credit Corporation sold the Units 1352
and 1354 to the Blessed Land Development Corporation represented by its President Antonio
T.S. Young.

Thereafter, petitioner Rebecca C. Young filed in the Regional Trial Court of Manila for
the annulment of the sale and for specific performance and damages against the PH Credit
Corporation and Philippine Holding, Incorporated.

The claim of Rebecca C. Young was rejected by the trial court on the following grounds
that she was not a party in the case wherein subject compromise agreement was submitted and
approved by the trial court apart from the fact that she did not even affix her signature to the said
compromise agreement.

Petitioner raised the following assignments of error in the Court of Appeals: (1) The
lower court erred in holding that Rebecca C. Young cannot enforce the stipulation in her favor in
the compromise agreement as she is not party therein; (2) The lower court erred in holding that
even if par. 3 of the compromise agreement is construed as a stipulation pour autrui Rebecca
Young cannot enforce it because she did not communicate her acceptance thereof to the obligor.

The petition is devoid of merit.

Petitioner further argued that the stipulation giving her the right of first refusal is a
stipulation pour autrui or a stipulation in favor of a third person under Article 1311 of the Civil
Code.
ISSUE:
Whether or not petitioner can enforce a compromise agreement to which she was not a
party.

HELD:
The pertinent portion of the Compromise Agreement reads: "Plaintiff Antonio T.S.
Young and the Defendant HOLDING hereby agree to implead in this action as necessary party-
plaintiff, plaintiff's daughter Rebecca C. Young who is the recognized lawful lessee of the
premises known and identified as 1354 Soller St., Sta. Cruz, Manila and whose written
conformity appears hereunder."

From the terms of this agreement, the conditions are very clear, such as: (1) that Rebecca
C. Young shall be impleaded in the action and (2) that she shall signify her written conformity
thereto.

For unknown reasons, the above conditions were not complied with. The parties did not
make any move to implead Rebecca as necessary party in the case. Neither did her written
conformity appear in said agreement. While there is the printed name of Rebecca C. Young
appearing at the end of the joint motion for approval of the Compromise Agreement, she did not
affix her signature above her printed name, nor on the left margin of each and every page
thereof.

In fact, on cross-examination, she admitted that she was not a party to the case and that she did
not sign the aforesaid joint motion because it was not presented to her.

The requisites of a stipulation pour autrui or a stipulation in favor of a third person are the
following:
(1) there must be a stipulation in favor of a third person;
(2) the stipulation must be a part, not the whole of the contract;
(3) the contracting parties must have clearly and deliberately conferred a favor upon a third
person, not a mere incidental benefit or interest;
(4) the third person must have communicated his acceptance to the obligor before its revocation;
(5) neither of the contracting parties bears the legal representation or authorization of the third
party.

Assuming that petitioner is correct in claiming that this is a stipulation pour autrui, it is
unrebutted that she did not communicate her acceptance whether expressly or impliedly. She
insists however, that the stipulation has not yet been revoked, so that her present claim or
demand is still timely.
 ASSOCIATED BANK, petitioner, vs.
COURT OF APPEALS and LORENZO SARMIENTO JR., respondents.
G.R. No. 123793 June 29, 1998
Topic: Stipulation Pour Autrui

FACTS:
[O]n or about September 16, 1975 Associated Banking Corporation and Citizens Bank
and Trust Company merged to form just one banking corporation known as Associated Citizens
Bank, the surviving bank. On or about March 10, 1981, the Associated Citizens Bank changed its
corporate name to Associated BankOn September 7, 1977, the defendant executed in favor of
Associated Bank a promissory note whereby the former undertook to pay the latter the sum of
P2,500,000.00 payable on or before March 6, 1978. As per said promissory note, the defendant
agreed to pay interest at 14% per annum, 3% per annum in the form of liquidated damages,
compounded interests, and attorney's fees, in case of litigation equivalent to 10% of the amount
due. The defendant, to date, still owes plaintiff bank the amount of P2,250,000.00 exclusive of
interest and other charges. Despite repeated demands the defendant failed to pay the amount due.

Based on the evidence presented by petitioner, the trial court ordered Respondent
Sarmiento to pay the bank his remaining balance plus interests and attorney's fees.

The appellate court, however, found no need to tackle all the assigned errors and limited
itself to the question of whether [herein petitioner had] established or proven a cause of action
against [herein private respondent]." Accordingly, Respondent Court held that the Associated
Bank had no cause of action against Lorenzo Sarmiento Jr., since said bank was not privy to the
promissory note executed by Sarmiento in favor of Citizens Bank and Trust Company (CBTC).
The court ruled that the earlier merger between the two banks could not have vested Associated
Bank with any interest arising from the promissory note executed in favor of CBTC after such
merger.

ISSUE:
Whether or not the contract contains a Stipulation Pour Autrui.

HELD:
NO. Private respondent, while not denying that he executed the promissory note in the
amount of P2,500,000 in favor of CBTC, offers the alternative defense that said note was a
contract pour autrui. A stipulation pour autrui is one in favor of a third person who may demand
its fulfillment, provided he communicated his acceptance to the obligor before its revocation. An
incidental benefit or interest, which another person gains, is not sufficient. The contracting
parties must have clearly and deliberately conferred a favor upon a third person.

Florentino vs. Encarnacion Sr. enumerates the requisites for such contract:
(1) the stipulation in favor of a third person must be a part of the contract, and not the contract
itself;
(2) the favorable stipulation should not be conditioned or compensated by any kind of obligation
and;
(3) neither of the contracting parties bears the legal representation or authorization of the third
party. The "fairest test" in determining whether the third person's interest in a contract is a
stipulation pour autrui or merely an incidental interest is to examine the intention of the parties as
disclosed by their contract.

We carefully and thoroughly perused the promissory note, but found no stipulation at all
that would even resemble a provision in consideration of a third person. The instrument itself
does not disclose the purpose of the loan contract. It merely lays down the terms of payment and
the penalties incurred for failure to pay upon maturity. It is patently devoid of any indication that
a benefit or interest was thereby created in favor of a person other than the contracting parties. In
fact, in no part of the instrument is there any mention of a third party at all. Except for his
barefaced statement, no evidence was proffered by private respondent to support his argument.
Accordingly, his contention cannot be sustained. At any rate, if indeed the loan actually
benefited a third person who undertook to repay the bank, private respondent could have availed
himself of the legal remedy of a third-party complaint. That he made no effort to implead such
third person proves the hollowness of his arguments.

WHEREFORE, the petition is GRANTED. The assailed Decision is SET ASIDE and the
Decision of RTC-Manila, Branch 48, in Civil Case No. 26465 is hereby REINSTATED.
 SOUTH PACHEM DEVELOPMENT INC., vs. COURT OF APPEALS AND MAKATI
COMMERCIAL STATE ASSOCIATION, INC.
G.R. No. 126260 December 16, 2004.
Topic: Stipulation Pour Autrui

FACTS:
Private respondent Makati Commercial Estate Association, Inc. is an association of all
real estate owners and long-term lessees of parcels of land located in the Makati commercial
area. Pursuant to its Articles of Incorporation, the members of private respondent are assessed
association dues annually, subject to penalty and interest in case of default. By virtue of two duly
notarized deeds of absolute sale, petitioner South Pachem Development, Inc. purchased from
Ayala Corporation two adjoining parcels of land.

Petitioner then stopped paying its association dues, including the interest and penalty, to
private respondent. According to petitioner, it realized that private respondent was not really
performing the services it promised to perform. It claimed that the payment of association fees
for forty-seven (47) years amounts to a perpetual imposition upon a member of private
respondent (as an association) which therefore makes it illegal.

Petitioner challenges the validity of the stipulation in the deed restrictions, as annexed to
the two deeds of absolute sale, which states that the buyer of a property shall pay the association
dues for a period of 47 years commencing from the date of purchase. It maintains that the period
of 47 years constitutes a restriction on its right to enjoy and dispose of the property under Article
428 of the Civil Code as the non-payment of the association dues would constitute a lien on the
subject property.

Petitioner insists that since the parties had no deliberate intent to clothe private
respondent with the authority to impose fees for a period of 47 years at the time the contract was
executed, it cannot make such imposition which partakes of a stipulation pour autrui.

ISSUE:
Whether or not the deed of restrictions is a can be regarded as a stipulation pour autrui

HELD:
The petition has no merit. The contention is untenable. The second paragraph of Article
1311 of the Civil Code explains that if a contract should contain some stipulation in favor of a
third person, he may demand its fulfillment provided he communicated his acceptance to the
obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient.
The contracting parties must have clearly and deliberately conferred a favor upon a third person.
Accordingly, to sustain the theory of the petitioner would result in a modification of what the
parties had expressly agreed to be bound. The imposition of the association fees in the deed of
restrictions cannot be regarded as a stipulation pour autrui clearly and deliberately conferred
upon private respondent. What was clearly stated in the contract of sale between them is that
upon purchase by the petitioner of the two parcels of land, it automatically becomes a member of
private respondent and is thus bound to comply with the rules and regulations thereof.
Additionally, the assessments collected by the private respondent would constitute a lien on the
properties of the petitioner. Nowhere can it be inferred that there was a stipulation pour autrui in
favor of private respondent.

Simply put, the requisites of a stipulation pour autrui or a stipulation in favor of a

third person are the following:
(1) there must be a stipulation in favor of a third person,
(2) the stipulation must be a part, not the whole, of the contract,
(3) the contracting parties must have clearly and deliberately conferred a favor upon a third
person, not a mere incidental benefit or interest,
(4) the third person must have communicated his acceptance to the obligor before its revocation,
and
(5) neither of the contracting parties bears the legal representation or authorization of the third
party. These requisites are not present in this case. Petition is DENIED.
 SALVADOR P. MALBAROSA VS HON COURT OF APPEALS AND SEA
DEVELOPMENT CORPORATION
G.R. No. 125761 April 30, 2003
Topic: (E) Perfection of Contracts

FACTS:
The petitioner Salvador P. Malbarosa was the president and general manager of Philitec
Corporation, and an officer of other corporation belonging to the SEADC group of companies.
The respondent company assigned to the petitioner one of its vehicles for his use and also
membership certificates in the Architectural Center Inc. However, sometime during the first
week of January 1990, the petitioner conferred to Sean Valerio his desire to retire from SEADC
group of companies and requested that his incentive compensation be given to him.

On March 14, 1990 SEADC group of companies accepted the resignation of the
petitioner. On March 28,1990 it stated that the petitioner is entitled to an incentive with the
amount of P251,057.67. On The petitioner however at that time refused to sign the letter offer at
that time. Despite the lapse of two weeks the respondent had not received a reply from the
petitioner regarding the offer. Hence on April 3 1996 the respondent company decided to
withdraw the said offer and ordered the petitioner to return the car and to take some action if
there is failure to do so.

On April 7, 1990 the petitioner wrote to respondent informing the latter that he had
already accepted the March 28, 1990 offer bearing his signature of the space provided on March
28,1990.

ISSUE:
Whether or not there is a perfected contract the moment the petitioner signs the
agreement

HELD:
No. As stated in Article 1318 of the Civil Code, there is no contract unless the following
requisites concur. First, there must be consent of the contracting parties. Second, the object
certain which is the subject matter of the contract. Third, the cause of the obligation is
established. This would mean that the consent should be manifested by the meeting of the offer
and the acceptance of the same upon the thing and the cause which are to constitute a contract.
There is no contract if an offer is not accepted. The contract will be perfected only upon the
knowledge of the offerror of the express acceptance of the offeree.

In the present case, the respondent made its offer through its Vice Chairman of the board
Sean Valerio. On March 14,1990 an offer was made to the petitioner stating that the signature of
the latter constitutes acceptance of the same. However, when the offer was delivered to the
petitioner on March 16, 1990 the petitioner asked for an extension of the same to have more time
to decide. Although according to the petitioner he affixed his signature on the offer on March
28,1990 the same was not transmitted to the respondent. By the time the said offer reached the
respondent on April 7,1990 the latter had already terminated the agreement on April 4,1990.
 PEOPLES HOMESITE & HOUSING CORPORATION
vs COURT OF APPEALS
GR. No. 61623. December 26, 1984.
Topic: Perfection of Contracts

FACTS:
Peoples Homesite & Housing Corporation Board of Directors passed a resolution
wherein it stated that subject to the approval of the Quezon City Council of the above-
mentioned Consolidation Subdivision Plan, Lot 4, as it is hereby awarded to Spouses Rizalino
Mendoza and Adelaida Mendoza, at a price of P 21.00 per square meter and that this award
shall be subject to the approval of the OEC Valuation Committee and higher authorities. The
city council disapproved of the said plan and the spouses Mendoza were informed of the
disapproval by registered mail. Another subdivision plan was submitted to the council with a
reduced are of Lot 4 and the council approved it.

The PHHC BoD passed a resolution recalling all awards of lots to persons who failed to
pay the deposit or down payment of the lots awarded to them wherein the Mendozas never paid
the price of the lot nor the initial deposit. Thus, the former passed another resolution
withdrawing the tentative award of Lot 4 to the Mendozas and reawarding it jointly to Sto.
Domingo, Esteban, Pinzon, Redublo and Fernandez, with the same price and subject to existing
PHHC rules and regulations. The 5 awardees made the intial deposit and the deeds of sale were
executed in their favor.

The Mendoza spouses asked for reconsideration of the withdrawal of the award to them
and for the cancellation of the re-award of said lot to the 5 awardess. The trial court sustained the
withdrawal of the award. However, the appellate court reversed that decision and declared void
the re-award of Lot 4 and the deeds of sale. The PHHC appealed to this Court.

ISSUE:
Whether or not there was a perfected sale of Lot 4, with the reduced area to the Mendoza
which they can enforce against the PHHC by an action for specific performance.

HELD:
No, there was no perfected sale of Lot 4 to the Mendozas. The awarding of the said lot
was conditionally or contingently awarded to the Mendozas subject to the approval of the city
council of the subdivision plan and the approval of the award of the valuation committee and
higher authorities. And clearly, the council did not approve the plan and the Mendozas were duly
informed of the disapproval. As a remedy, the Mendozas should have manifested in writing their
interest to buy the said lot although the area was reduced. Thus, PHHC BoD acted within its
rights in withdrawing the tentative award.
Dignos v CA YU
 SARGASSO CONSTRUCTION & DEVELOPMENT CORPORATION/PICK &
SHOVEL, INC vs. PHILIPPINE PORTS AUTHORITY
G.R. No. 170530 July 5, 2010
Topic: Perfection of Contracts

FACTS:
On August 26, 1993, a Notice of Award signed by PPA General Manager Rogelio Dayan
was sent to plaintiff for the phase I Reclamation Contract in the amount of P30,794,230.89 and
instructing it to "enter into and execute the contract agreement with this Office" and to furnish
the documents representing performance security and credit line. On June 30, 1997, plaintiff
filed a complaint for specific performance and damages before the Regional Trial Court of
Manila alleging that defendant PPAs unjustified refusal to comply with its undertaking,
unnecessarily leading to the delay in the implementation of the award under the August 26, 1993
Notice of Award, has put on hold plaintiffs men and resources earmarked for the project, aside
from effectively tying its hands in undertaking other projects for fear that plaintiffs incapacity to
undertake work might be spread thinly and it might not be able to function efficiently if the PPA
project and other projects should require simultaneous attention.

Petitioner contends that the existence of "Notice of Award of Contract and Contractors
Conforme thereto," resulting from its negotiation with respondent, proves that a contract has
already been perfected, and that the other documents enumerated under the amended Rules and
Regulations13 implementing P.D. 159414 are mere physical representations of the parties
meeting of the minds; that the "Approval of Award by Approving Authority" is only a
"supporting document," and not an evidence of perfection of contract, and which merely
"facilitates the approval of the contract;"15 that PPA is bound by the acts of its general manager
in issuing the Notice of Award under the doctrine of apparent authority; and that the doctrine of
estoppel, being an equitable doctrine, cannot be invoked to perpetuate an injustice against
petitioner.

ISSUE:
Whether or not there was a perfected contract between the parties for the reclamation
project?
Whether or not the general manager of PPA is vested with authority to enter into a
contract for and on behalf of PP?.

HELD:
No, therefore also no. The agent must act within the scope of his authority to bind his
principal. Apparent authority, or what is sometimes referred to as the "holding out" theory, or
doctrine of ostensible agency, imposes liability, not as the result of the reality of a contractual
relationship, but rather because of the actions of a principal or an employer in somehow
misleading the public into believing that the relationship or the authority exists. The existence of
apparent authority may be ascertained through (1) the general manner in which the corporation
holds out an officer or agent as having the power to act or, in other words, the apparent authority
to act in general, with which it clothes him; or (2) the acquiescence in his acts of a particular
nature, with actual or constructive knowledge thereof, whether within or beyond the scope of his
ordinary powers. It requires presentation of evidence of similar act(s) executed either in its favor
or in favor of other parties.

Easily discernible from the foregoing is that apparent authority is determined only by the
acts of the principal and not by the acts of the agent. The principal is, therefore, not responsible
where the agents own conduct and statements have created the apparent authority.

In this case, not a single act of respondent, acting through its Board of Directors, was
cited as having clothed its general manager with apparent authority to execute the contract with
it..
 ROMAN MIRASOL vs MANUEL R. YUSAY, ET AL.
G.R. No. L-18862 June 30, 1964
Topic: Perfection of Contracts

FACTS:
The respondent herein, Yusay was the owner of Hacienda Retiro with an area of 58
hectares in which the petitioner herein, Mirasol leases a 10-hectare portion of said Hacienda. In
the contract of lease, the petitioner was given an option to purchase the property. On June 23,
1958, Yusay sent a letter to Mirasol which reads as follows:

"I wish to inform you that after a keen deliberation I now definitely decided to sell my hacienda
Retiro. "My price of the Hacienda Retiro is One Hundred Thousand (P100,000.00) Pesos,
Philippine Currency in Cash. "I'm now therefor giving you the first opportunity to purchase the
same and if you feel interested and willing to purchase or acquire the said Hacienda Retiro,
kindly please let me know on or before June 30, 1958, otherwise much to my regret I'll be
constrained to dispose and encumber the same in the sense that there are many interested parties
to purchase the aforesaid Hacienda Retiro. "Expecting your reply on or before the date
designated, I remain"

One June 27, 1958, Mirasol sent a reply as follows:

"I acknowledged receipt of your letter dated June 23, 1958, today, informing me that you are
definitely decided to sell your Hacienda Retiro. "For your information, I am very much
interested to buy and acquire this Hacienda of yours in the same PRICE, MANNER,
CONDITIONS and CONSIDERATIONS other buyers offer. And for further information, I have
knowledge that you already sold this said Hacienda particularly to Miss Maria Yulo. And this
information is confirmed by my actual observation that Miss Maria Yulo is exercising her right
to dominion as the present owner of the Hacienda. "Here's thanking you for your late offer, I
remain"

And on July 2, 1958, Mirasol sent to Yusay another letter which is a follow up letter to
the June 27, 1958 letter. Both of which was received by Yusay on July 5, 1958, but he did not
reply to any of them. On July 16, 1958 Yusay executed a deed of sale on the Hacienda in favor
of Maria Yulo for P35,000.00, the other good, valuable, and legal consideration therein referred
to consists of three loans previously received from her by Yusay in the aggregate sum of
P44,000.00 and of several pieces of jewelry valued at P21,000.00, totaling P100,000.00.

On August 9, 1958, Mirasol commenced the present action in the CFI against Yusay and
Yulo praying among other things, that he be declared as having the preferential right to buy the
Hacienda for the price of P35,000.00. The CFI dismissed the complaint, thereafter the case was
appealed to the CA, wherein the CA affirmed the CFIs ruling, stating that Mirasols letters to
Yusay dated June 27 and July 2, 1958 did not constitute an acceptance of said offer. Hence this
petition for review.

ISSUE:
1. Whether the letters of Mirasol to Yusay constituted a valid acceptance of Yusays offer
to sell the Hacienda.
 2. Whether the offer made by Yusay to Mirasol was in accordance with the option given
in the contract of lease.

HELD:
The Court affirmed the CAs ruling. Deciding that the two letters of Mirasol dated June
27, and July 2, 1958 did not constitute a valid acceptance of the respondents offer. This is
because of the following phrase in Mirasols letter "I am very much interested to buy and acquire
this Hacienda of yours in the same PRICE, MANNER, CONDITIONS, and
CONSIDERATIONS, other buyers will offer.", which is an indication that Mirasol would await
the offer of any prospective buyer, which is not an actual acceptance of the offer made by Yusay
to sell the Hacienda for P100,000.00. Regarding the issue on the validity of the offer. Petitioner
contends that the offer was not in accordance with the preferential right accorded to him in the
contract of lease because he was only given three days to decide on the offer (since he received
the offer on June 27, 1958 and the deadline of the offer was on June 30, 1958). The Court did not
agree, since the hacienda was only sold to Yulo on July 16, 1958 which gave the petitioner
nearly one month to assert for his right or properly accept the offer made by the respondent.
 NEREO J. PACULDO vs COURT OF APPEALS and BONIFACIO C. REGALADO
G.R. No. 123855 November 20, 2000
Topic: Article 1319 - Perfection of Contracts

FACTS:
On December 27, 1990, petitioner Nereo J. Paculdo and respondent Bonifacio C.
Regalado entered into a contract of lease of a 16,478 square meter parcel of land, located on a
wet market building, in Don Mariano Marcos Avenue, Fairview Park, Quezon City. The contract
shall run for 25 years, from January 1, 1991 to December 31, 2015. Starting on December 27,
1990, Nereo shall pay a monthly rental of Php 450,000.00, payable within the first five days of
each month with 2% penalty for every month of delayed payment, which shall be done for the
first five years. Petitioner also leased eleven properties from respondent wherein ten of it are in
Fairview, while the eleventh is in Quirino Highway, Quezon City. Petitioner also bought from
respondent eight units of heavy equipment and vehicles amounting to Php 1,020,000.00.
However, petitioner was not able to pay Php 361,895.55 its rental for the month of May 1992,
and another Php 450,00.00 for the monthly rentals of June and July 1992. On July 6, 1992,
respondent delivered a letter of demand to petitioner asking for their payment of the back rentals
and if they fail to pay within fifteen days from receipt of the letter, it would terminate the lease
contract. On July 17, 1992, another demand letter was sent to petitioner demanding for their
payment and for them to vacate the area. On August 3, 1992, without the knowledge of the
petitioner, respondent mortgaged the land leased by the former to Monte de Piedad Savings
Bank, including the improvements made by the latter. At that time, the value of the property was
Php 35,000,000.00, which was mortgaged as security for a loan of Php 20,000,000.00. Nine days
later, petitioner paid the respondent, but the latter refused to accept the payment.

Hence, petitioner filed with the trial court an action for injunction and damages seeking
to enjoin respondent from disbursing his possession of the property subject of the lease contract.
The trial court ordered the petitioner to vacate the leased premises. On February 4, 1994,
respondent, with the support of fifty armed security guards forcibly entered the property and took
possession of the wet market building. On July 14, 1994, petitioner had completely turned over
possession of subject property to respondent. Petitioner filed a petition for review to the Court of
Appeals, but was then denied. Hence, this appeal.

ISSUE:
Whether or not a perfection of contract was made with respect to the application of
payment.

HELD:
If the payment made by the respondent applied to petitioners other obligations is set
aside, and the amount petitioner paid be applied only to the rentals on the Fairview wet market
building, there would be an additional payment of Php 1,049,447.18, as of July 2, 1992. In the
letter made on November 19, 1991, respondent proposed that petitioners security deposit for the
Quirino lot costing Php 643,276.48, be applied as partial payment for his account under the
subject lot as well as to real estate taxes on the said lot. Petitioner did not object, as shown by the
signature indicating his conformity to it. In a letter dated July 15, 1991, respondent notified
petitioner that payment was applied not only to the petitioners account but also applied to the
Quirino lot and to heavy equipment bought by the latter from respondent. Petitioner claimed that
the amount applied as payment for the heavy equipment was not proper as it was amounts to
more than two months rental of the subject property. However, this letter did not bear any
signature.

Petitioner affirms that his silence is not consent, but a rejection. When petitioner made
the payments, he clarified to respondent that they were to be applied to his rental obligations on
the Fairview wet market property that all the payments made amounting to Php 11,000,000.00
were to be applied to rental and security deposit on the Fairview wet market property. The
statement of account prepared by respondent is not the receipt contemplated under the law as
such receipt is the proof of payment made at the time of payment. Thus, there was no clear
acceptance by the petitioner to the change in the manner of application of payment. The
petitioners silence on the application of payment by respondent is not tantamount to his consent.
There was no meeting of the minds. The acceptance of such offer must be unconditional and
unbounded in order that concurrence can give rise to a perfected contract. Hence, petitioner
cannot be in estoppel.
 JARDINE DAVIES INC., petitioner vs. COURT OF APPEALS and FAR EAST MILLS
SUPPLY CORPORATION, respondents
G.R. No. 128069 June 19, 2000
Topic: Perfection of Contracts

FACTS:
To remedy and curtail further losses due to the power crisis the country was
experiencing, petitioner Pure Foods Corporation decided to install two (2) 1,500KW generators
in its food processing plant in San Roque, Marikina City. The bidding for the supply and
installation was held, and only three bidders namely, respondent Far East Mills Supply
Corporation (FEMSCO), MONARK, and Advance Power submitted bid proposals and gave bid
bonds equivalent to 5% of their respective bids, as required. Thereafter, Purefoods confirmed the
award of contract to FEMSCO. The respondent submitted the required performance bond in the
amount of P1,841,187.90 and contractors all-risk insurance policy in the amount of
P6,137,293.00 which were acknowledged by Purefoods Vice-President Tope in a letter dated
December 18, 1992. FEMSCO had made arrangements with its principal and started the project
by purchasing the necessary materials. Purefoods returned the bond to FEMSCO in the amount
of P1M as requested. In a letter dated December 22, 1992, Purefoods unilaterally cancelled the
award through its Senior Vice-President Dimayuga as significant factors were brought to their
attention which was protested by FEMSCO. Before the matter could be resolved, Purefoods
awarded the project and entered into contract with Jardine Nell, a division of Jardine Davies, Inc.
which was not one of the bidders. FEMSCO wrote to Purefoods to honor their contract with the
former and to Jardine to cease and desist from delivering and installing the 2 generators. When
the demand letter was unheeded, FEMSCO sued Purefoods for reneging its contract and Jardine
for unwarranted interference. The RTC rendered a decision in favor of FEMSCO and affirmed
by the CA. The CA reversed the January 27, 1994 resolution of the lower court and directed
FEMSCO P2M payment for moral damages, and Jardine to pay P2M for moral damages and
P1M for exemplary damages as well as 20% attorneys fees. The CA denied the separate motion
for reconsideration.

ISSUE:
Whether or not there is an existing contract between FEMSCo and Purefoods

HELD:
Yes. Article 1326 which provides that advertisements for bidders are simply invitations
to make proposals, The letter dated December 12, 1992 of Petitioner Purefoods to FEMSCO
constituted acceptance of respondents offer as contemplated by law. The tenor of the letter ie
This will confirm that Pure Foods has awarded your firm the project, could not be more
categorical. The letter enumerated certain basic terms and conditions, these conditions were
imposed in the performance of the obligation rather than on the perfection of the contract. In
fine, these enumerations were prescriptions on how the obligations was to be performed, far from
being conditions imposed on the perfection of a contract. The letter also constituted a conditional
counter-offer. Respondents submission of the performance bond and contractors all-risk
insurance was an implied acceptance, if not a clear indication of its acquiescence to the
conditional counter-offer which expressly stated that the performance bond and the contractors
all-risk insurance should be given upon commencement of a contract. The acknowledgement and
the return of bidders bond was a concrete manifestation of its knowledge that respondent indeed
consented to the offer.
 ROBERTO Z. LAFORTEZA, GONZALO Z. LAFORTEZA, MICHAEL Z.
LAFORTEZA, DENNIS Z. LAFORTEZA, and LEA Z. LAFORTEZA
vs. ALONZO MACHUCA
G.R. No. 137552 June 16, 2000
Topic: Perfection of Contracts

FACTS:
The property involved consists of a house and lot located at No. 7757 Sherwood Street,
Marcelo Green Village, Paraaque, Metro Manila, covered by Transfer Certificate of Title (TCT)
No. (220656) 8941 of the Registered of Deeds of Paraaque. The subject property is registered in
the name of the late Francisco Q. Laforteza, although it is conjugal in nature.

On August 2, 1988, defendant Lea Zulueta-Laforteza executed a Special Power of

Attorney in favor of defendants Roberto Z. Laforteza and Gonzalo Z. Laforteza, Jr., appointing
both as her Attorney-in-fact authorizing them jointly to sell the subject property and sign any
document for the settlement of the estate of the late Francisco Q. Laforteza.

Likewise on the same day, defendant Michael Z. Laforteza executed a Special Power of
Attorney in favor of defendants Roberto Z. Laforteza and Gonzalo Laforteza, Jr., likewise,
granting the same authority. Both agency instruments contained a provision that in any document
or paper to exercise authority granted, the signature of both attorneys- in-fact must be affixed.

On October 27, 1988, defendant Dennis Z. Laforteza executed a Special Power of

Attorney in favor of defendant Roberto Z. Laforteza for the purpose of selling the subject
property. A year later, on October 30, 1989, Dennis Z. Laforteza executed another Special Power
of Attorney in favor of defendants Roberto Z. Laforteza and Gonzalo Laforteza, Jr. naming both
attorneys-in-fact for the purpose of selling the subject property and signing any document for the
settlement of the estate of the late Francisco Q. Laforteza. The subsequent agency instrument
contained similar provisions that both attorneys-in-fact should sign any document or paper
executed in the exercise of their authority.

In the exercise of the above authority, on January 20, 1989, the heirs of the late Francisco
Q. Laforteza represented by Roberto Z. Laforteza and Gonzalo Z. Laforteza, Jr. entered into a
Memorandum of Agreement (Contract to Sell) with the plaintiff over the subject property for the
sum of six hundred thirty thousand pesos (P630,000.00) payable as follows:
(a) P30,000.00 as earnest money, to be forfeited in favor of the defendants if the sale is
not effected due to the fault of the plaintiff;
(b) P600,000.00 upon issuance of the new certificate of title in the name of the late
Francisco Q. Laforteza and upon execution of an extra-judicial settlement of the decedent's estate
with sale in favor of the plaintiff .

On January 20, 1989, plaintiff paid the earnest money of thirty thousand pesos
(P30,000.00), plus rentals for the subject property. On September 18, 1998, defendant heirs,
through their counsel wrote a letter to the plaintiff furnishing the latter a copy of the reconstituted
title to the subject property, advising him that he had thirty (3) days to produce the balance of six
hundred pesos (P600,000.00) under the Memorandum of Agreement which plaintiff received on
the same date.

On October 18, 1989, plaintiff sent the defendant heirs a letter requesting for an extension
of the thirty (30) days deadline up to November 15, 1989 within which to produce the balance of
six hundred thousand pesos (P600,000.00). Defendant Roberto Z. Laforteza, assisted by his
counsel Atty. Romeo L. Gutierrez, signed his conformity to the plaintiff's letter request. The
extension, however, does not appear to have been approved by Gonzalo Z. Laforteza, the second
attorney-in-fact as his conformity does not appear to have been secured.

On November 15, 1989, plaintiff informed the defendant heirs, through defendant
Roberto Z. Laforteza, that he already had the balance of six hundred thousand pesos
(P600,000.00) covered by United Coconut Planters Bank Manager's Check No. 000814.
However, the defendants, refused to accept the balance. Defendant Roberto Z. Laforteza had told
him that the subject property was no longer for sale.

On November 20, 1998, defendants informed plaintiff that they were canceling the
Memorandum of Agreement (Contract to Sell) in view of the plaintiff's failure to comply with
his contractual obligations. Thereafter, plaintiff reiterated his request to tender payment of the
balance of six hundred thousand pesos (P600,000.00). Defendants, however, insisted on the
rescission of the Memorandum of Agreement. Thereafter, plaintiff filed the instant action for
specific performance. The lower court rendered judgment in favor of the plaintiff.

Petitioners appealed to the Court of Appeals, which affirmed with modification the
decision of the lower court. Motion for Reconsideration was denied but the decision was
modified so as to absolve Gonzalo Z. Laforteza, Jr. from liability for the payment of moral
damages. Hence, this petition.

ISSUE:
Whether or not the contract between the petitioners and the respondent is perfected.

HELD:
Yes. The Supreme Court ruled that a perusal of the Memorandum Agreement shows that
the transaction between the petitioners and the respondent was one of sale and lease.
A contract of sale is a consensual contract and is perfected at the moment there is a meeting of
the minds upon the thing which is the object of the contract and upon the price. From that
moment the parties may reciprocally demand performance subject to the provisions of the law
governing the form of contracts (Article 1475, Civil Code). The elements of a valid contract of
sale under Article 1458 of the Civil Code are: (1) consent or meeting of the minds; (2)
determinate subject matter and (3) price certain money or its equivalent.

In the case at bench, there was a perfected agreement between the petitioners and the
respondent whereby the petitioners obligated themselves to transfer the ownership of and deliver
the house and lot and the respondent to pay the price amounting to six hundred thousand pesos
(P600,000.00). All the elements of a contract of sale were thus present. However, the balance of
the purchase price was to be paid only upon the issuance of the new certificate of title in lieu of
the one in the name of the late Francisco Laforteza and upon the execution of an extrajudicial
settlement of his estate.

Prior to the issuance of the "reconstituted" title, the respondent was already placed in
possession of the house and lot as lessee thereof for six months at a monthly rate of three
thousand five hundred pesos (P3,500.00). It was stipulated that should the issuance of the new
title and the execution of the extrajudicial settlement be completed prior to expiration of the six-
month period, the respondent would be liable only for the rentals pertaining to the period
commencing from the date of the execution of the agreement up to the execution of the
extrajudicial settlement.

The six-month period during which the respondent would be in possession of the
property as lessee, was clearly not a period within which to exercise an option. An option is a
contract granting a privilege to buy or sell within an agreed time and at a determined price. An
option contract is a separate and distinct contract from that which the parties may enter into upon
the consummation of the option. An option must be supported by consideration.

In the present case, the six-month period merely delayed the demandability of the
contract of sale and did not determine its perfection for after the expiration of the six-month
period, there was an absolute obligation on the part of the petitioners and the respondent to
comply with the terms of the sale. The parties made a "reasonable estimate" that the
reconstitution of the lost title of the house and lot would take approximately six months and thus
presumed that after six months, both parties would be able to comply with what was reciprocally
incumbent upon them. The fact that after the expiration of the six-month period, the respondent
would retain possession of the house and lot without need of paying rentals for the use therefor,
clearly indicated that the parties contemplated that ownership over the property would already be
transferred by that time.

The issuance of the new certificate of title in the name of the late Francisco Laforteza and
the execution of an extrajudicial settlement of his estate was not a condition which determined
the perfection of the contract of sale. Petitioners' contention, that since the condition was not
met, they no longer had an obligation to proceed with the sale of the house and lot, is
unconvincing. The petitioners fail to distinguish between a condition imposed upon the
perfection of the contract and a condition imposed on the performance of an obligation. Failure
to comply with the first condition results in the failure of a contract, while the failure to comply
with the second condition only gives the other party the option either to refuse to proceed with
the sale or to waive the condition (Art. 1545 of the Civil Code).

In the case at bar, there was already a perfected contract. The condition was imposed only
on the performance of the obligations contained therein. Considering however that the title was
eventually "reconstituted" and that the petitioners admit their ability to execute the extrajudicial
settlement of their father's estate, the respondent had a right to demand fulfillment of the
petitioners' obligation to deliver and transfer ownership of the house and lot.

What further militates against petitioners' argument that they did not enter into a contract
of sale is the fact that the respondent paid thirty thousand pesos (P30,000.00) as earnest money.
Earnest money is something of value to show that the buyer was really in earnest, and given to
the seller to bind the bargain. Whenever earnest money is given in a contract of sale, it is
considered as part of the purchase price and proof of the perfection of the contract (Article 1482,
Civil Code).

There is clearly no express reservation of title made by the petitioners over the property,
or any provision which would impose non-payment of the price as a condition for the contract's
entering into force. A deed of sale is absolute in nature although denominated a conditional sale
in the absence of a stipulation reserving title in the petitioners until full payment of the purchase
price. In such cases, ownership of the thing sold passes to the vendee upon actual or constructive
delivery thereof. The mere fact that the obligation of the respondent to pay the balance of the
purchase price was made subject to the condition that the petitioners first deliver the
reconstituted title of the house and lot does not make the contract a contract to sell for such
condition is not inconsistent with a contract of sale.
 PEDRO ROMAN vs . ANDRES GRIMALT
G.R. No. 2412. April 11, 1906.
Topic: Perfection of Contracts (Article 1313)

FACTS:
The defendant stated that: On or about June 13 both parties met and the plaintiff
personally proposed to the defendant the sale of the schooner Santa Marina, the plaintiff stating
that the vessel belonged to him and that it was then in a sea worthy condition. The defendant
accepted the offer of sale on condition that the title papers be found satisfactory, also that the
vessel was in a seaworthy condition.

Both parties then called on Calixto Reyes, a notary public, who, after examining the
documents, informed them that they were insufficient to show the ownership of the vessel and to
transfer title thereto. The plaintiff then promised to perfect his title and about June 23 called on
defendant to close the sale, and the defendant believing that plaintiff had perfected his title,
wrote to him on the 23d of June and set the following day for the execution of the contract, but,
upon being informed that plaintiff had done nothing to perfect his title, he insisted that he would
buy the vessel only when the title papers were perfected and the vessel duly inspected.
Complainant alleged that purchase price had been agreed upon (1,500 pesos) and it shall be paid
on three installments and that the vessel was ready to be delivered. However the defendant
denied this.

On June 25, in the harbor of Manila, the vessel was sunk and is a total loss, as a result of
a severe storm.

On July 2, 1904, complainant Pedro Roman filed a complaint praying for the purchase price
agreed and damages against Andres Grimalt alleging that the contract of sale has already been
perfected between them and that respondent refuses to honor it.

ISSUE:
Whether or not the contract between the parties had been perfected.
HELD:

NO. They agreed upon the sale of the vessel for the sum of 1,500 pesos, payable in three
installments, provided the title papers to the vessel were in proper form. Because of the failure on
the part of the complainant to perfect the documents, the defendant did not consent to the
execution of the deed. The conversations had between the parties not establish a contract
sufficient in itself to create reciprocal rights between the parties.
Toyota Shaw, Inc v CA
BARNACHEA
 VIRGINIA PAGCO and GAUDENCIA PAGCO VS
COURT OF APPEALS and PETER QUIMSON
G.R. No. 109236 March 18, 1994
Topic: Perfection of Contract

FACTS:
Peter Quimson is the owner of a parcel of land in Manila. He acquired the property
through sale at a public auction. At that time, eleven occupants were in possession of the
property with their respective residential houses built thereon, among whom are herein
petitioners. Private respondent had earlier negotiated with petitioners for the latter to buy the
portions they occupy but petitioners backed off. Private respondent subsequently informed the
lessees to pay their back rentals and to remove their houses because he needed the property for
his own use and that of the immediate members of his family. For failure of petitioners to heed
private respondents demand, a complaint for ejectment was filed against petitioners and the
other occupants of the property in the MTC.

Petitioners denied that there were such negotiations for them to buy the property and
insisted that the property was within the area for priority development under PD 2016, hence,
they may not be evicted.

MTC dismissed the ejectment complaint, holding that there was a perfected contract of
sale over the property and being governed by the law on sales, it was the RTC which had
jurisdiction. The RTC on appeal, however, reversed the MTC decision. Petitioners thus filed a
petition for review before the CA, which likewise dismissed the petition, finding that the parties
in fact failed to agree on the purchase price of the parcel of land.

In arguing that there was a perfected contract of sale, petitioners capitalize on the
allegations of the complaint, particularly par. 10, which states: That however, after approving the
proposed subdivision plan, the defendants suddenly and abruptly changed their minds and
repudiated the agreement which is already a perfected contract, and deliberately and maliciously
refused to continue negotiating with the plaintiff as expressed in the attached letter of their
counsel marked as ANNEX E and made an integral part hereof.

ISSUE:
Whether or not there was a perfected contract of sale.

HELD:
No. There was no meeting of the minds between the parties regarding the offer by private
respondent to sell his property to the occupants. Reliance on the said paragraph in the complaint
was untenable. As the CA pointed out. Petitioners in their answer had categorically denied the
averments in specific paragraphs in the complaint, including par. 10. They never claimed in their
answer ownership of the lot; they only put up the defense that the property was for priority
development under PD 2016.
 The phrase perfected contract in paragraph 10 of the complaint is used in its loose
sense and does not connote that there was a meeting of the minds between the parties. After the
statement in said paragraph that after approving the proposed subdivision plan, the defendants
suddenly and abruptly changed their minds and repudiated the agreement which is already a
perfected contract, there immediately follows the qualifying allegation that [defendants]
deliberately and maliciously refused to continue negotiating with the plaintiff as expressed in the
attached letter of their counsel marked as Annex E and made an integral part thereof.

The words refused to continue negotiating with the plaintiff have no other meaning
except that there was a negotiation regarding the offer to sell, but the negotiation fell through
because of the refusal of petitioners and the other occupants to talk further as evidenced by the
letter of their counsel, which is Annex C of the complaint.

Even granting that there was a perfected contract of sale, it can be implied that there was
subsequently a mutual withdrawal or mutual backing out from the contract. This conclusion
may be drawn from the fact of the filing by private respondent of the complaint for ejectment, in
which he alleged ownership of the property in question and from the averments in petitioners
answer wherein they never claimed ownership of the property by purchase from private
respondent.
 SPOUSES RAET AND SPOUSES MITRA VS. COURT OF APPEALS
G.R. No. 128016 September 17, 1998
Topic: Perfection of Contracts

FACTS:
Petitioners, spouses Raet and the spouses Mitra negotiated with Amparo Gatus
concerning the possibility of buying the rights of the latter to certain units at the Las Villas de
Sto. Nio Subdivision in Meycauayan, Bulacan. This subdivision was developed by private
respondent Phil-Ville Development and Housing Corporation (PVDHC) primarily for parties
qualified to obtain loans from the Government Service Insurance System (GSIS). The spouses
Raet and the spouses Mitra paid Gatus the total amounts of P40,000.00 and P35,000.00,
respectively, for which they were issued receipts by Gatus in her own name.

In early 1985 the spouses Raet and the spouses Mitra applied directly with private
respondent PVDHC for the purchase of units in the said subdivision. As they were not GSIS
members, they looked for members who could act as accommodation parties by allowing them to
use their policies. Private respondent PVDHC would process the applications for the purchase of
the units upon the approval by the GSIS of petitioners loan applications.

Meanwhile, the spouses Raet and the spouses Mitra were allowed to occupy the units
built on the aforementioned subdivisions. It appears, however, that the GSIS disapproved the
loan applications of petitioners. For this reason, they were advised by private respondent
PVDHC to seek other sources of financing. In the meantime, they were allowed to remain in the
subject premises.

Owing to the failure of petitioners to raise money, private respondent PVDHC asked
them, in separate demand letters, dated November 10, 1988, to vacate the units they were
occupying. As petitioners refused to do so, it filed ejectment cases against them before the
Municipal Trial Court of Meycauayan, Bulacan, which eventually ordered them on May 24,
1991 to surrender the possession of the subject units and to pay the fees, litigation expenses, and
costs of suit. The decision of the Municipal Trial Court of Meycauayan, Bulacan was affirmed,
first by the Regional Trial Court of Malolos, Bulacan and then by the Court of Appeals.

ISSUE:
Whether or not there were perfected contracts of sale between petitioners and private
respondent PVDHC over the subject units.

HELD:
No. The parties in this case had not reached any agreement with regard to the sale of the
units in question.

First, the records do not show the total costs of the units in question and the payment
schemes therefor. In his decision of October 8, 1991, the Housing and Land Use Arbiter gave
credence to the allegations of petitioners that there were agreements between them and private
respondent PVDHC as to the prices of the disputed units. However, as pointed out by private
respondent PVDHC, the figures referred to by petitioners were mere estimates given to them by
Amparo Gatus. The parties transactions, therefore, lacked the requisites essential for the
perfection of contracts.

Second, petitioners dealt with Gatus. But Gatus was not the agent of private respondent
PVDHC. Art. 1874 of the Civil Code requires for the validity of a sale involving land that the
agent should have an authorization in writing, which Gatus did not possess. Petitioners knew
from the beginning that Gatus was negotiating with them in her own behalf, and not as an agent
of private respondent PVDHC. There is, therefore, no basis in fact for the finding of the Housing
and Land Use Arbiter that Gatus was the agent of private respondent PVDHC with respect to the
transactions in question.

Third, since private respondent PVDHC had no knowledge of the figures Amparo Gatus
gave to petitioners as estimates of the costs of the units in question, it could not have ratified the
same at the time the latter applied for the purchase of the units. At any rate, private respondent
PVDHC was to enter into agreements concerning the subject units with petitioners only upon the
approval of the latters loan applications with the GSIS which, as mentioned earlier, failed to
materialize.

Fourth, there are no written contracts to evidence the alleged sales. If petitioners and
private respondent PVDHC had indeed entered into contracts involving the subject units, it is
rather strange that contracts of such importance have not been reduced to writing.

As the Court of Appeals correctly held:

To our mind, the determinative issue in this case is whether or not petitioners and private
respondents have a perfected and enforceable contract of sale or at least an agreement to sell over
the disputed housing units. For, without a perfected contract as an independent source of
obligation, the binding prestation to do or give and the corollary right to exact compliance do not
arise. There can be no specific performance of a contractual obligation as yet non-existent.
Without dispute, no written deed of conveyance has been executed by PHIL-VILLE in
favor of private respondents involving the units in question.

As this Court sees it, there was no contract of sale perfected between the private parties
over the said property, there being no meeting of the minds as to terms, especially on the price
thereof. At best, only a proposed contract to sell obtained which did not even ripen into a
perfected contract due at the first instance to private respondents inability to secure approval of
their GSIS housing loans. As it were, petitioners and private respondents have not hurdled the
negotiation phase of a contract, which is the period from the time the prospective contracting
parties indicate interest on the contract to the time the contract comes into existence - the
perfection stage - upon the concurrence of the essential elements thereof.

Finally, the occupation by petitioners of the units in question for more than three years prior to
the ejectment case was merely by virtue of the forbearance of private respondent PVDHC. Since
this matter pertains to the issue of possession of the subject premises, the ruling on this point of
the Municipal Trial Court of Meycauayan, Bulacan in the ejectment case is conclusive. No
presumption as to the existence of any right that may have been acquired by virtue of such
occupation can arise from this circumstance.
Beaumont vs. Prieto
 Beaumont vs. Prieto
G.R. 8988 30 March 1916
Topic: (E.1) ARTICLE 1324(in relation to Art 1479) Option Contract/Option Money

FACTS:

Before 4 Dec 11, negotiations ensued between Borck and Valdes regarding the sale of a
part of NAGTAJAN HACIENDA (Nagtajan).
The portion of Nagtajan was owned by Benito Legarda but eventually later on its
entirety.
Valdes sent a letter to Borck stating that the former is giving the latter the option for 3
months to buy the property of Legarda for the price as assessed by the government.
Borck addressed several letters related to that sale but he did not obtain what he expected
or believed that he was entitled to obtain from Valdes.
Borck filed a complaint against Valdes and Legarda.
Borck claim that:
o While the offer or option still stood, he accepted the terms of it and requested to
Valdes that he be allowed to inspect the property titles and other documents.
o He also offer payment immediately and in cash as soon as he examined the said
documents
o He made demands but Valdes refuses to show the said documents.
o Due to that refusal he suffered damages.
Demurrer was filed by Valdes and Legarda but was overruled
The court ordered that Borck be substituted in the proceedings by Beaumont as a trustee
of Borcks creditors.
Valdes claim that:
o The option given by him was without consideration and subject to the approval of
Legarda
o Legarda did not approve the option
o The option was not accepted within a reasonable time nor during the offer was in
force
o No proof of solvency nor offered to pay
Legarda contends that:
o Valdes has instruction from him not to gove any option without his knowledge
and consent.
o Valdes had given the option without his knowledge or consent
o He disapproved the option as soon as he learned of it
o The tender of payment made was not legally accepted
o That Borck was insolvent at the date of answer
Trial court ruled that the letter constituted a contract and there is a sufficient tender of
performance. Hence, ruled in favor of Borck (now Beaumont)
Legarda and Valdes prayed for the decision be set aside and be granted for new trial. This
was denied.
Hence, this case with the Supreme Court
ISSUE:
WON there is a contract to sell trough the letter containing option to buy.

HELD:

As there can be no contract without the concurrence, among others, of the requisites of
consent of the parties and cause or consideration of the obligation created, in order that a
proposition or offer for sale may acquire the character of a contract it is necessary that
there appear the expression of the will of the offeror and that of the offeree and the
consent of both as well as the fact that there was a cause or consideration for the
obligation which is the object of what was agreed upon.
Promises being binding when and so long as they are accepted in the exact terms in
which they are madeit not being legally proper to modify the conditions imposed by
the promisor without his consentthen in order that the acceptance of a proposition or
offer may be efficacious and the option be perfect and binding upon the parties thereto, it
is necessary that such acceptance should be unequivocal and unconditional and the
acceptance and proposition shall be without any variation whatsoever, so that whatever
modification or deviation from the terms of the offer annuls the latter and frees the
offeror.
When the time and place of payment have been fixed, payment should be made in cash at
the time the thing sold is delivered to the vendee, and when the latter is real property,
then at the moment the corresponding public document is executed, for the execution
thereof amounts to the delivery of the thing which is the object of the contract.

Here,
o it is not shown that there was any cause or consideration for that agreement, and
this omission is a bar which precludes our holding that the stipulations contained
in Exhibit E is a contract of option, for, pursuant to article 1261 of the Civil Code,
there can be no contract without the requisite, among others, of the cause for the
obligation to be established
o Valdes introduced evidence to prove that the withdrawal of the offer was made
before the plaintiff had accepted it, that is, before January 17, 1912, and for this
purpose presented a letter from the defendant Legarda (p. 103, part 1 of the
record), dated November 13, 1911, and addressed from Paris to Mauro Prieto,
also one of Legarda's attorneys in fact.
o there was no mutual conformity between the person who made the proposal or
offer, Valdes, and the person who accepted it, Borck, in the same sense with
respect to the form of payment, and Borck deviated from the terms of the
proposition with regard to the form of payment and the record does not show that
Valdes assented to such variance.
 FLORENCIA CRONICO VS J.M. TUASON & CO.,
G.R. L-35272 AUGUST 26, 1977
TOPIC: ARTICLE 1324(in relation to Art 1479) Option Contract/Option Money

FACTS:
J.M. Tuason & Co. Inc. was the registered owner of lot in Quezon City. In March, 1962,
Florencia Cronico offered to buy the low from the company with the help of Mary E.
Venturanza. They personally talked to Bautista, Manager of the Real Estate Department of
Gregorio Araneta, Inc. the appellant companys attorney-in-fact, proposing to buy the lot. She
was required to present proofs to show her rights to the lot. On March 8, 1962, Florencia Cronico
exhibited certain documents showing her priority rights to buy the lot.
In the first week of March 1962, Claudio Ramirez also learned that the lot in questions
was being sold by the company. The occupants thereof who also had priority rights to buy the
land informed Claudio Ramirez about the intended sale. Juanita Semilla and Pedro Fernandez,
who were the occupants of the said lot expressed their willingness to waive their rights although
Fernandez reserved a condition that a small portion of the land whereon his house stands to be
sold to him. In the same month, March, 1962, plaintiff Cronico and Ramirez sent separate
individual letters to company wherein they expressed their desire to purchase the land and
requested information concerning the area, the price and other terms and conditions of the
contract to sell.
On March 20, 1962, the company sent separate reply letters via post office to prospective
buyers including plaintiff Cronico and Ramirez. The following day, Cronico was able to claim
the letter at the Post Office. Cronico and Venturanza went to Gregorio Araneta Inc and presented
the letter to Bautista. Since they had no money, Cronico requested Venturanza to issue a check in
the amount of P 33, 572,00 to cover the down payment for the lot. However, Bautista did not
accept and advised that it is Gregorio Araneta II would decide whose offer to buy may be
accepted after company receives registry retum cards attached to the registered letters sent to the
offerors.
On March 22, Ramirez received from the post office the letter saying that the land was
available for sale under the conditions therein set forth and that the said lot was being offered for
sale on a first come first serve basis. Ramirez proceeded to Bautista the same morning stating
that he accepted the conditions stated in the letter. Bautista advised him to wait on the decision of
Gregorio Araneta II. The next day, Ramirez presented his letter confirming his verbal acceptance
of the terms and conditions in connection with the sale. Ramirezs counsel wrote to the company
and attached a check of P 33, 572.00 covering the down payment. It was favourably considered.
On March 27, Cronicos counsel requested the land be sold to her, that the check issued was
returned to her. On April 4, the company sent a letter informing her that the land has been
decided to sell to Ramirez.
Judgement was rendered in favor of Cronico and Ramirez was declared Null and Void of
the owner of law. Said company to execute a Contract to sell in favor of Cronico who is
substituted by Venturanza

ISSUE:
 Whether or not the Court of Appeals Erred in Holding Cronico not principally nor
subsidiarily obliged under the contract to sell and hence may not bring suit to annul the same

RULING:
NO. In order that a unilateral promise may be binding upon the promisor, Article 1479, Civil
Code of the Philippines, requires the concurrence of the condition that the promise be "supported
by a consideration distinct from the price." Accordingly, the promisee can not compel the
promisor to comply with the promise, unless the former establishes the existence of said distinct
consideration. The promisee has the burden of proving such consideration. The petitioner,
Florencia Cronico, has not established the existence of a consideration distinct from the price of
the lot.
The contention of the petitioner that she has become the obligee or creditor of the
respondent company because she was the first to comply with the terms of the letter offer has no
merit. Her so-called acceptance has no effect because she violated the condition of "first come,
first served" by taking delivery of the reply letter of the respondent company in the entry section
of the Manila post office and of the fact that her formal letter of acceptance was only received by
the respondent company on March 27, 1962.
The petitioner maintains that the contract to sell executed by the respondent company in
favor of the respondent, Claudio R. Ramirez, contains a stipulation for her benefit, which reads:
"b) that the buyer Claudio Ramirez has been fully informed by the company of all the
circumstances relative to the offer of Florencia Cronico to buy said lot and that he agrees and
binds himself to hold the company absolutely free and harmless from all claims and damages to
said Florencia Cronico in connection with this sale of the lot to him."
The foregoing clause can not by any stretch of the imagination be considered as a clause
"pour autrui" or for the benefit of the petitioner. The stipulation does not confer any right arising
from the contract that may be enforced by the petitioner against any of the parties thereto.
Neither does it impose any obligation arising from the contract that may be enforced by any of
the parties thereto against the petitioner. The petitioner is not "obliged principally or
subsidiarily" by the contract to sell executed between the respondent company and the
respondent Claudio R. Ramirez. The said stipulation is for the benefit of the respondent
company.
 NATINO VS. CA
G.R. NO. 73573 May 23, 1991
Topic: ARTICLE 1324(in relation to Art 1479) Option Contract/Option Money
FACTS:
On 12 October 1970 petitioners executed a real estate mortgage in favor of respondent
bank as security for a loan of P2,000.00. Petitioners failed to pay the loan on due date. The bank
applied for the extrajudicial foreclosure of the mortgage. At the foreclosure sale on 11 December
1974 the respondent bank was the highest and winning bidder with a bid of P2,945.11. A
certificate of sale was executed in its favor by the sheriff and the same was registered with the
Office of the Register of Deeds on 29 January 1975. The certificate of sale, a copy of which was
furnished the petitioners by registered mail, expressly provided that the redemption period shall
be two years from the registration thereof.

Since no redemption was made by petitioners within the two-year period, which expired
on 29 January 1977, the sheriff issued a Final Deed of Sale on 15 February 1977.

Petitioners has shown that there was an agreement between them and the defendant bank
through its personnel and its president and manager, acting as its agent to extend the period for
redemption for the plantiffs. However, the plantiffs were not given a specific time to pay and
redeem but were given by the president given by the president and manager of the bank such
time when their means permit them to do so. This created an obligation with a period under Art.
1180 of NCC.

ISSUE:
W/N the bank is bound by the promise to allow petitioners to buy the property as soon as
they have the money.

HELD:
We find the petition to be devoid of merit. Petitioners have failed to demonstrate that the
conclusion made by the respondent IAC from the proven facts is wrong. We agree with said
court, and set aside the conclusion of trial court, that the attempts to redeem the property were
done after the expiration of the redemption period and that no extensions of that period was
granted to petitioners.

The bank was not bound by the promise not only because it was not approved or ratified
by the Board of Directors but also because, and more decisively, it was a promise unsupported
by a consideration distinct from the re-purchase price.
 ATKINS, KROLL and CO., INC., petitioner, vs.
B. CUA HIAN TEK, respondent
G.R. No. L-9871 January 31, 1958
Topic: ARTICLE 1324(in relation to Art 1479) Option Contract/Option Money

FACTS:
Petitioner failed to deliver one thousand cartons of sardines, which it had sold to B. Cua
Hian Tek. Petitioner was sued, and after trial was ordered by the Manila Court of First Instance
to pay damages.

Petitioner contends that there was no such contract of sale, but only an option to buy,
which was not enforceable for lack of consideration because in accordance with Art. 1479 of the
New Civil Code "an accepted unilateral promise to buy or to sell a determinate thing for a price
certain is binding upon the promisor if the promise is supported by a consideration distinct from
the price.

The court of first instance and the Court of Appeals found that B. Cua Hian Tek accepted
the offer unconditionally and delivered his letter of acceptance on September 21, 1951. However,
due to shortage of catch of sardines by the packers in California, Atkins, Kroll & Co., Inc., failed
to deliver the commodities it had offered for sale. Petitioner does not dispute such timely
acceptance. It merely raises the point that the acceptance only created an option, which, lacking
consideration, had no obligatory force.

The offer, petitioner argues, "was a promise to sell a determinate thing for a price certain.
Upon its acceptance by respondent, the offer became an accepted unilateral promise to sell a
determinate thing for price certain. Inasmuch as there was no consideration to support the
promise to sell distinct from the price, it follows that under Art. 1479, the promise is not binding
on the petitioner even if it was accepted by respondent.
.
ISSUE:
Whether or not the offer was a mere offer of option.

HELD:
No. An option is unilateral: a promise to sell at the price fixed whenever the offeree
should decide to exercise his option within the specified time. After accepting the promise and
before he exercises his option, the holder of the option is not bound to buy. He is free either to
buy or not to later. In this case, however, upon accepting herein petitioner's offer a bilateral
promise to sell and to buy ensued, and the respondent ipso facto assumed the obligations of a
purchaser. He did not just get the right subsequently to buy or not to buy. It was not a mere
option then; it was bilateral contract of sale.

If the option is given without a consideration, it is a mere offer of a contract of sale,

which is not binding until accepted. If, however, acceptance is made before a withdrawal, it
constitutes a binding contract of sale, even though the option was not supported by a sufficient
consideration.
 Southwestern Sugar & Molasses v Atlantic Gulf Pacific Co.
G.R. No. L-7382 June 29, 1955
Topic: ARTICLE 1324(in relation to Art 1479) Option Contract/Option Money

FACTS:
On March 1953, Atlantic granted Southwestern an option period of 90 days to buy the
formers barge for the sum of P30,000. On May 11 of the same year, Southwestern communicated
its acceptance of the option to Atlantic through a letter, to which the latter replied that their
understanding was that the "offer of option" is to be a cash transaction and to be effected "at the
time the lighter is available." On June 25, Atlantic advised the Southwestern Company that since
there is still further work for it, the barge could not be turned over to the latter company.

On June 27, 1953, the Southwestern filed this action to compel Atlantic to sell the barge
in line with the option, depositing with the court a check covering the sum of P30,000, but said
check was later withdrawn with the approval of the court. On June 29, the Atlantic withdrew its
"offer of option" with due notices to Southwestern stating that the option was granted merely as a
favor. Atlantic contended that the option to sell it made to Southwestern Company is null and
void because said option to sell is not supported by any consideration.

The trial court granted herein Southwesterns action for specific performance and ordered
herein defendant-appellant Atlantic to pay damages equivalent to 6 per centum per annum on the
sum of P30,000 from the date of the filing of the complaint.

ISSUE:
Whether or Not the defendant -appellant can be compelled upon their offer to option to
grant their acceptance from the offerer.

HELD:
No. The SC held that it is true that under article 1324 of the new Civil Code, the general
rule regarding offer and acceptance is that, when the offerer gives to the offeree a certain period
to accept, "the offer may be withdrawn at any time before acceptance" except when the option is
founded upon consideration, but this general rule must be interpreted as modified by the
provision of article 1479 above referred to, which applies to "a promise to buy and sell"
specifically. As already stated, this rule requires that a promise to sell to be valid must be
supported by a consideration distinct from the price.
 SANCHEZ V. RIGOS
G.R. NO. L-25494 June 14, 1972
Topic: ARTICLE 1324(in relation to Art 1479) Option Contract/Option Money

FACTS:
On April 3, 1961, plaintiff Nicolas Sanchez and defendant Severina Rigos executed an
instrument, entitled "Option to Purchase," whereby Mrs. Rigos "agreed, promised and committed
. . . to sell" to Sanchez, for the sum of P1,510.00, a parcel of land situated in the barrios of Abar
and Sibot, municipality of San Jose, province of Nueva Ecija, and more particularly described in
Transfer Certificate of Title No. NT-12528 of said province, within two (2) years from said date
with the understanding that said option shall be deemed "terminated and elapsed," if "Sanchez
shall fail to exercise his right to buy the property" within the stipulated period. Inasmuch as
several tenders of payment of the sum of P1,510.00, made by Sanchez within said period, were
rejected by Mrs. Rigos, on March 12, 1963, the former deposited said amount with the Court of
First Instance of Nueva Ecija and commenced against the latter the present action, for specific
performance and damages.

ISSUE:
Whether or not the option impose upon plaintiff the obligation to purchase.

HELD:
No. The Supreme Court has held that the option did not impose upon plaintiff the
obligation to purchase defendant's property. It merely granted plaintiff an "option" to buy. And
both parties so understood it, as indicated by the caption, "Option to Purchase," given by them to
said instrument. Under the provisions thereof, the defendant "agreed, promised and committed"
herself to sell the land therein described to the plaintiff for P1,510.00, but there is nothing in the
contract to indicate that her aforementioned agreement, promise and undertaking is supported by
a consideration "distinct from the price" stipulated for the sale of the land.
 RURAL BANK OF PARAAQUE, INC vs ISIDRA REMOLADO and COURT OF
APPEALS
No. L62051. March 18, 1985
Topic: ARTICLE 1324(in relation to Art 1479) Option Contract/Option Money

Facts:
This case is about the repurchase of mortgaged property after the period of redemption
had expired. Isidra Remolado, 64, a widow, and resident of Makati, Rizal, owned a lot with an
area of 308 square meters, with a bungalow thereon, which was leased to Beatriz Cabagnot. The
lot is located at 41 Molave Street, United Paraaque Subdivision, Barrio Ibayo, Paraaque, Rizal.
In 1966 she mortgaged it to the Rural Bank of Paraaque, Inc. as security f or a loan of P1 5,000.
She paid the loan. she mortgaged it again to the bank She eventually secured loans totalling
18,000Php. The loans become overdue. The bank foreclosed the mortgage on July 21, 1972 and
bought the property at the foreclosure sale for P22,192.70. The oneyear period of redemption
was to expire on August 21, 1973. On August 8, 1973 the bank advised Remolado that she had
until August 23 to redeem the property On August 9, 1973 or 14 days before the expiration of the
oneyear redemption period, the bankgave her a statement showing that she should pay
P25,491.96 for the redemption of the property, No redemption was made on august 23. On
September 3, 1973 the bank consolidated its ownership over the property. On September 24,
1973, the bank gave Remolado up to ten oclock in the morning of October 31, 1973, or 37 days,
within which to repurchase (not redeem since the period of redemption had expired) the
property. The bank did not specify the price. On October 26, 1973 Remolado and her daughter,
Patrocinio Gomez, promised to pay the bank P33,000 on October 31 for the repurchase of the
property. Contrary to her promise, Remolado did not repurchase the property on October 31.
Five days later, or on November 5, Remolado and her daughter delivered P33,000 cash to the
banks assistant manager as repurchase price, The amount was returned to them the next day,
November 6, 1973. The assistant manager had no intention of receiving the money. It was just
left with her by Remolado. At that time, the bank was no longer willing to allow the repurchase.

Issue:
1. Whether Remolado may repurchase the land when the period for repurchase had
expired.

Ruling:
There was no binding agreement for its repurchase. Even on the assumption that the bank
should be bound by its commitment to allow repurchase on or before October 31, 1973, still
Remolado had no cause of action because she did not repurchase the property on that date In the
instant case, the bank acted within its legal rights when it refused to give Remolado any
extension to repurchase after October 31, 1973, It had given her about two years to liquidate her
obligation. She failed to do so. Even if it is assumed that the banks commitment to resell the
property was accepted by Remolado, that option was not supported by a consideration distinct
from the price (Art. 1479, Civil Code). Lacking such consideration, the option is void. Order of
courts directing reconveyance of property, not proper, absent a binding agreement for its
repurchase by the bank and the parties. No cause of action exists to allow repurchase of the
property where the parties failed to repurchase the property on a specified date
 EQUATORIAL REALTY DEVT & CARMELO & BAUERMANN
vs MAYFAIR THEATER, INC.
G.R. No. 106063 November 21, 1996
Topic: (E.2) Perfection of Contracts Right of First Refusal Need for Distinct
Consideration

FACTS:
Carmelo entered a contract of lease with Mayfair Theatre where the latter would lease a
portion of Carmelos property for a term of 20 years. Two years later, they entered into another
contract of lease of another portion of Carmelos property for similar use as a movie theater. The
contracts contained a provision (paragraph 8) which stated that if the lessor, Carmelo, desires to
sell the premises, the lessee shall be given a 30-day option to purchase and if it wants to sell the
premises to someone other than the lessee, the lessor is obligated to stipulate in the Deed of Sale
that the purchaser shall recognize the lease.

Mr. Pascal of Carmelo informed Mr. Yang, the President of Mayfair, that Jose Araneta
the property and asked Mayfair if it wanted to buy the property for 6-7M pesos. Mr. Yang
replied that he would let them know of his decision, since there is a 30-day period of option to
purchase. Carmelo, however, did not reply. Mayfair then sent a letter expressing its interest in
buying but Carmelo and Equatorial only questioned the authenticity of the letter. Four years
later, the land is sold to Equatorial, including the premises rented by Mayfair. Mayfair then filed
an action for specific performance and annulment of the sale which Carmelo opposed claiming
that it had informed Mayfair of the sale yet it intended only to purchase its leased space in the
land which was impossible and that the option to purchase is null and void for lack of
consideration because, as claimed by Equatorial, there is impossibility because the leased
premises could not be sold separately from the rest of the property.

ISSUE:
W/N the CA erred in concluding that the option clause in the contracts of lease is actually
a right of first refusal proviso and in doing so, the CA disregarded the contracts of lease which
provide an option

HELD:
No. The CA was right in holding that the contractual stipulation provides for a right of
first refusal in favor of Mayfair. It is not an option clause or option contract. It is a right of first
refusal. An option is a contract granting privilege to buy or sell within an agreed time and a
determined price. It is a separate and distinct contract from that which the parties may enter into
upon the consummation of the option. It must be supported by consideration; in this case, the
right of first refusal is an integral part of the contracts of lease. The consideration is built into the
reciprocal obligations of the parties. Moreover, it is not correct to say that there is no
consideration in an agreement of right of first refusal. The stipulation is part and parcel of the
entire contract of lease. The consideration for the lease includes the consideration for the right of
first refusal.

The sale to Equatorial, it being a buyer in bad faith, is rescissible. It claimed that the
portions leased by Mayfair and the rest of the property is indivisible; hence, the right of first
refusal includes both. Carmelo acted in bad faith when it sold the property to Equatorial without
informing Mayfair which is a violation of its rights as Carmelo failed to give Mayfair the full 30-
day opportunity to buy the property.

The right of first refusal should also be enforced according to the law on contracts and
not the codal provisions on human relations since in this case, the obligation of Carmelo to first
offer the property to Mayfair is embodied in the contract, with paragraph 8 creating the
obligation to do so.

With regard to Art. 1324 in relation to 1479, no option to purchase in contemplation of

the second paragraph of Art. 1479 of the Civil Code has been granted to Mayfair.

Art. 1324 provides that, when the offerer has allowed the offeree a certain period to
accept, the offer may be withdrawn at any time before acceptance by communicating such
withdrawal, except when the option is founded upon a consideration, as something paid or
promised.

Paragraph 2 of Art. 1479 provides that, an accepted unilateral promise to buy or to sell a
determinate thing for a price certain is binding upon the promisor if the promise is supported by
a consideration distinct from the price. The court stated that if the period has a separate
consideration, a contract of option is deemed perfected. There is nothing in the paragraph 8 (of
the contracts of the parties) that would bring the case within the scope of the usual offer or option
requiring an independent consideration. To reiterate, in this case, the right of first refusal is an
integral part of the contracts of lease. The consideration is built into the reciprocal obligations of
the parties. Thus, the nature of paragraph 8 is of a contractual grant of a right of first refusal to
Mayfair and not an option.
 PARAAQUE KINGS ENTERPRISES, INCORPORATED vs.
COURT OF APPEALS, CATALINA L. SANTOS, represented by her
attorney-in-fact, LUZ B. PROTACIO, and DAVID A. RAYMUNDO
G.R. No. 111538 February 26, 1997
Topic: Right of First Refusal

FACTS:
On November 28, 1977, a certain Frederick Chua leased the eight parcels of land in
Paranaque owned by the defendant Catalina Santos, the said lease was registered in the Register
of Deeds. On February 12, 1979, Frederick Chua assigned all his rights and interest participation
in the leased property to Lee Ching Bing, by virtue of a deed of assignment and with the
conformity of defendant Santos, the said assignment was also registered. On August 6, 1979, Lee
Ching Bing also assigned all his rights and interest in the leased property to Paranaque Kings
Enterprises, Incorporated by virtue of a deed of assignment and with the conformity of defendant
Santos, the same was duly registered.

The assigned lease contract contained a stipulation that in case the properties subject of
the lease agreement are sold or encumbered, Lessors shall impose as a condition that the buyer or
mortgagee thereof shall recognize and be bound by all the terms and conditions of this lease
agreement and shall respect this Contract of Lease as if they are the LESSORS thereof and in
case of sale, LESSEE shall have the first option or priority to buy the properties subject of the
lease.

Later, defendant Santos sold the parcels of land to defendant David Raymundo for 5
Million Pesos,in contravention of the lease for the option or priority to buy was not offered by
defendant Santos to the plaintiff. 8. On March 5, 1989, defendant Santos wrote a letter to the
plaintiff informing the same of the sale of the properties to defendant Raymundo. Upon learning
of this fact plaintiffs representative wrote a letter to defendant Santos, requesting her to rectify
the error and consequently realizing the error, she had it reconveyed to her for the same
consideration. Subsequently the property was offered for sale to plaintiff by the defendant for
P15,000,000. Plaintiff was given ten days to make good of the offer. Before the said period
expired another letter came from the counsel of defendant Santos with the same contents as the
first letter. Before the period expired, plaintiffs counsel wrote counsel of defendant Santos
offering to buy the properties for P5,000,000. Before a reply to the offer can be made, another
deed of sale was executed by defendant Santos in favor of defendant Raymundo for P9,000,000.
Despite repeated demands to rectify their unlawful acts that they committed, the defendants
refused and failed to comply. The plaintiff instituted an action and the trial court issued an order
dismissing the complaint for a lack of a valid cause of action. The petitioners appealed to the CA
which affirmed the ruling in the trial court.

ISSUE:
Whether or not there was a compliance with the right of first refusal assigned to plaintiff.

HELD:
 No. The petition is granted. The decision of the trial court and CA are reversed and set
aside.

In order to have full compliance with the contractual right granting petitioner the first
option to purchase, the sale of the properties for the amount of P9,000,000, the price for which
they were finally sold to respondent Raymundo, should have likewise been first offered to the
petitioner. The basis of the right of the first refusal must be the current offer to sell of the seller
or offer to purchase of any prospective buyer. Only after the grantee fails to exercise its right of
first priority under the same terms and within the period contemplated, could the owner validly
offer to sell the property to a third person, again, under the same terms as offered to the grantee.
 SPS. LITONJUA vs. L & R CORPORATION
G.R. No. 130722 December 9, 1999
Topic: Right of First Refusal

FACTS:
This stems from loans obtained by the spouses Litonjua from L&RCorporation in the
aggregate sum of P400,000.00; P200,000.00 of which was obtained on August 6, 1974 and the
remaining P200,000.00obtained on March 27, 1978. The loans were secured by a mortgage
constituted by the spouses upon their two parcels of land and the improvements thereon. The
mortgage was duly registered with the Register of Deeds. Spouses Litonjua sold to Philippine
White House Auto Supply, Inc.(PWHAS) the parcels of land they had previously mortgaged to L
& RCorporation for the sum of P430,000.00. Meanwhile, with the spouses Litonjua having
defaulted in the payment of their loans, L & RCorporation initiated extrajudicial foreclosure
proceedings with the Ex-Oficio Sheriff of Quezon City. The mortgaged properties were sold at
public auction to L & R Corporation as the only bidder for the amountof P221,624.58. On April
22, 1981, L & R Corporation wrote a letter to the Sheriff, copy furnished to the Register of
Deeds, stating: (1) that the sale of the mortgaged properties to PWHAS was without its consent,
incontravention of paragraphs 8 and 9 of their Deed of Real EstateMortgage; and (2) that it was
not the spouses Litonjua, but PWHAS, who was seeking to redeem the foreclosed properties,
when under Articles 1236 and 1237 of the New Civil Code, the latter had no legal personality or
capacity to redeem the same. On the other hand, the spouses Litonjua asked the Register of
Deeds to annotate their Certificate of Redemption as an adverse claim on the titles of the subject
properties on account of the refusal of L & R Corporation to surrender the owners duplicate
copies of the titles to the subject properties. With the refusal of the Register of Deeds toannotate
their Certificate of Redemption, the Litonjua spouses filed aPetition on July 17, 1981 against L
& R Corporation for the surrender of the owners duplicate of Transfer Certificates of Title No.
197232 and197233 before the then CFI.

ISSUE:
WON there was a Valid and enforceable stipulation granting the mortgagee the right of
first refusal.

HELD:
While petitioners question the validity of paragraph 8 of their mortgage contract, they
appear to be silent insofar as paragraph 9 thereof isconcerned. Said paragraph 9 grants upon L &
R Corporation the right of first refusal over the mortgaged property in the event the
mortgagordecides to sell the same. We see nothing wrong in this provision. The right of first
refusal has long been recognized as valid in our jurisdiction. The consideration for the loan-
mortgage includes the consideration forthe right of first refusal. L & R Corporation is in effect
stating that itconsents to lend out money to the spouses Litonjua provided that in case they
decide to sell the property mortgaged to it, then L & RCorporation shall be given the right to
match the offered purchase price and to buy the property at that price. Thus, while the spouses
Litonjua had every right to sell their mortgaged property to PWHASwithout securing the prior
written consent of L & R Corporation, it hadthe obligation under paragraph 9, which is a
perfectly valid provision,to notify the latter of their intention to sell the property and give
itpriority over other buyers. It is only upon failure of L & R Corporationto exercise its right of
first refusal could the spouses Litonjua validlysell the subject properties to others, under the
same terms andconditions offered to L & R Corporation.It was then held that the Contract of
Sale there, which violated the right of first refusal, was rescissible.In the case at bar, PWHAS
cannot claim ignorance of the right of firstrefusal granted to L & R Corporation over the subject
properties sincethe Deed of Real Estate Mortgage containing such a provision was dulyregistered
with the Register of Deeds. As such, PWHAS is presumed tohave been notified thereof by
registration, which equates to notice tothe whole world. That it did not duly exercised its right of
first refusal at the opportunetime cannot be taken against it, precisely because it was not
notifiedby the spouses Litonjua of their intention to sell the subject propertyand thereby, to give
it priority over other buyers
 POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
vs COURT OF APPEALS
G.R. No. 143513 November 14, 2001
Topic: Right of First Refusal Need for distinct consideration

FACTS:
Petitioner National Development Corp, a government owned and controlled corporation,
had in its disposal a 10 hectares property. Private respondent Firestone Corporation manifested
its desire to lease a portion of it for ceramic manufacturing business. On August 24, 1965, both
parties entered into a contract of lease for a term of 10 years renewable for another 10 years.
Prior to the expiration of the aforementioned contract, Firestone wrote NDC requesting for an
extension of their lease agreement. It was renewed with an express grant to Firestone of the first
option to purchase the leased premise in the event that it was decided "to dispose and sell the
properties including the lot..." Cognizant of the impending expiration of the leased agreement,
Firestone informed NDC through letters and calls that it was renewing its lease. No answer was
given. Firestone's predicament worsened when it learned of NDC's supposed plans to dispose the
subject property in favor of petitioner Polytechnic University of the Philippines. PUP referred to
Memorandum Order No. 214 issued by then President Aquino ordering the transfer of the whole
NDC compound to the National Government. The order of conveyance would automatically
result in the cancellation of NDC's total obligation in favor of the National Government.
Firestone instituted an action for specific performance to compel NDC to sell the leased property
in its favor.

ISSUES:
Whether or not there is a valid sale between NDC and PUP.

HELD:
A contract of sale, as defined in the Civil Code, is a contract where one of the parties
obligates himself to transfer the ownership of and to deliver a determinate thing to the other or
others who shall pay therefore a sum certain in money or its equivalent. It is therefore a general
requisite for the existence of a valid and enforceable contract of sale that it be mutually
obligatory, i.e., there should be a concurrence of the promise of the vendor to sell a determinate
thing and the promise of the vendee to receive and pay for the property so delivered and
transferred. The Civil Code provision is, in effect, a "catch-all" provision which effectively
brings within its grasp a whole gamut of transfers whereby ownership of a thing is ceded for a
consideration. All three (3) essential elements of a valid sale, without which there can be no sale,
were attendant in the "disposition" and "transfer" of the property from NDC to PUP - consent of
the parties, determinate subject matter, and consideration therefor. Consent to the sale is obvious
from the prefatory clauses of Memorandum Order No. 214 which explicitly states the
acquiescence of the parties to the sale of the property. Furthermore, the cancellation of NDC's
liabilities in favor of the National Government constituted the "consideration" for the sale.
 MONTINOLA v VICTORIAS MILLING CO., INC.
G.R. No. 31973 July 2, 1930
Topic: (F) Essential Requisites of Contract [Art. 1319 1346]
(F.1) Consent

FACTS:
The Victorias Milling Co., Inc., operating a Sugar Central within the jurisdiction of the
municipality of Victorias, Province of Occidental Negros, organized a premium contest for the
most efficient production of sugar among those of its affiliated planters who desired to take part
therein for the milling season of 1926-1927, and strict rules for conducting the contest were
formulated. These rules were reduced to writing and agreed to by the competitors.

The herein plaintiff, Ruperto Montinola, was the owner of four plantations, "Nasipunan,"
"F," "Maria Luisa," and "Toreno". He entered Nasipunan and Fe into the contest. He was
later disqualified. The sum and substance of the complaints in the two cases is that the plaintiff
had the largest production of sugar in plantation groups Nos. (b) and (c) and was entitled to the
prizes or premiums offered by the Victorias Milling Co., but that he was deprived of his right to
said premiums through the fraud of the manager of the central, C. J. H. Penning, and that the
disqualification of the plaintiff was unjust and illegal.

The lower court ruled in favor of the plaintiff. Hence, this petition.

ISSUE:
Whether or not plaintiff is entitled to premiums of the contest.

RULING:
No. The basis of the right to a reward is in the nature of a contract and rests on one side
upon a valid offer and on the other side upon an acceptance of such offer, including its terms and
conditions. In competitive contests for reward, the acceptance must be in strict conformity with
the offer, and a qualified acceptance does not create a contract. The offerer of the reward may
make his offer subject to any legal condition he may see fit, and all conditions so imposed will
be material elements of the offer and contract. The Victorias Milling Co. laid down clear and
comprehensive terms and conditions for the competitive reward, and the plaintiff was furnished a
copy of the rules embracing said terms and conditions. It is evident that the management of the
central was in effect the referee of the contest and, if so, it had the power to enforce the rules. In
the absence of fraud or bad faith on the part of a referee, his findings of facts will not be
disturbed by the courts unless he has misinterpreted the terms and conditions of the contest. In
the instant cases there was no such misinterpretation. Hence, appealed judgments are hereby
reversed.
 Rafael Enriquez v. Sun Life Insurance Company of Canada
G.R. No. L-15895. November 29, 1920
Topic: (F.1) Consent

FACTS:
The undisputed facts are these: On September 24, 1917, Joaquin Herrer made application
to the Sun Life Assurance Company of Canada through its office in Manila for a life annuity.
Two days later he paid the sum of P6,000 to the manager of the company's Manila office and
was given a receipt.

The application was immediately forwarded to the head office of the company at
Montreal, Canada. On November 26, 1917, the head office gave notice of acceptance by cable to
Manila. (Whether on the same day the cable was received notice was sent by the Manila office of
Herrer that the application had been accepted, is a disputed point, which will be discussed later.)
On December 4, 1917, the policy was issued at Montreal. On December 18, 1917, attorney
Aurelio A. Torres wrote to the Manila office of the company stating that Herrer desired to
withdraw his application. The following day the local office replied to Mr. Torres, stating that
the policy had been issued, and called attention to the notification of November 26, 1917. This
letter was received by Mr. Torres on the morning of December 21, 1917. Mr. Herrer died on
December 20, 1917.

ISSUE:
Whether or not the Contract of Life Annuity has been perfected.

HELD:
No, the contract for a life annuity in the case at bar was not perfected because it has not
been proved satisfactorily that the acceptance of the application ever came to the knowledge of
the applicant.

Our deduction from the evidence on this issue must be that the letter of November 26,
1917, notifying Mr. Herrer that his application had been accepted, was prepared and signed in
the local office of the insurance company, was placed in the ordinary channels for transmission,
but as far as we know, was never actually mailed and thus was never received by the applicant.
Until quite recently, all of the provisions concerning life insurance in the Philippines
were found in the Code of Commerce and the Civil Code. In the Code of the Commerce, there
formerly existed Title VIII of Book III and Section III of Title III of Book III, which dealt with
insurance contracts. In the Civil Code there formerly existed and presumably still exist, Chapters
II and IV, entitled insurance contracts and life annuities, respectively, of Title XII of Book IV.
On the after July 1, 1915, there was, however, in force the Insurance Act. No. 2427. Chapter IV
of this Act concerns life and health insurance. The Act expressly repealed Title VIII of Book II
and Section III of Title III of Book III of the code of Commerce. The law of insurance is
consequently now found in the Insurance Act and the Civil Code.

While, as just noticed, the Insurance Act deals with life insurance, it is silent as to the
methods to be followed in order that there may be a contract of insurance. On the other hand, the
Civil Code, in article 1802, not only describes a contact of life annuity markedly similar to the
one we are considering, but in two other articles, gives strong clues as to the proper disposition
of the case. For instance, article 16 of the Civil Code provides that "In matters which are
governed by special laws, any deficiency of the latter shall be supplied by the provisions of this
Code." On the supposition, therefore, which is incontestable, that the special law on the subject
of insurance is deficient in enunciating the principles governing acceptance, the subject-matter of
the Civil code, if there be any, would be controlling. In the Civil Code is found article 1262
providing that "Consent is shown by the concurrence of offer and acceptance with respect to the
thing and the consideration which are to constitute the contract. An acceptance made by letter
shall not bind the person making the offer except from the time it came to his knowledge. The
contract, in such case, is presumed to have been entered into at the place where the offer was
made." This latter article is in opposition to the provisions of article 54 of the Code of
Commerce.

If no mistake has been made in announcing the successive steps by which we reach a
conclusion, then the only duty remaining is for the court to apply the law as it is found. The
legislature in its wisdom having enacted a new law on insurance, and expressly repealed the
provisions in the Code of Commerce on the same subject, and having thus left a void in the
commercial law, it would seem logical to make use of the only pertinent provision of law found
in the Civil code, closely related to the chapter concerning life annuities.

The Civil Code rule, that an acceptance made by letter shall bind the person making the
offer only from the date it came to his knowledge, may not be the best expression of modern
commercial usage. Still it must be admitted that its enforcement avoids uncertainty and tends to
security. Not only this, but in order that the principle may not be taken too lightly, let it be
noticed that it is identical with the principles announced by a considerable number of respectable
courts in the United States. The courts who take this view have expressly held that an acceptance
of an offer of insurance not actually or constructively communicated to the proposer does not
make a contract. Only the mailing of acceptance, it has been said, completes the contract of
insurance, as the locus poenitentiae is ended when the acceptance has passed beyond the control
of the party.

In resume, therefore, the law applicable to the case is found to be the second paragraph of
article 1262 of the Civil Code providing that an acceptance made by letter shall not bind the
person making the offer except from the time it came to his knowledge. The pertinent fact is, that
according to the provisional receipt, three things had to be accomplished by the insurance
company before there was a contract: (1) There had to be a medical examination of the applicant;
(2) there had to be approval of the application by the head office of the company; and (3) this
approval had in some way to be communicated by the company to the applicant. The further
admitted facts are that the head office in Montreal did accept the application, did cable the
Manila office to that effect, did actually issue the policy and did, through its agent in Manila,
actually write the letter of notification and place it in the usual channels for transmission to the
addressee. The fact as to the letter of notification thus fails to concur with the essential elements
of the general rule pertaining to the mailing and delivery of mail matter as announced by the
American courts, namely, when a letter or other mail matter is addressed and mailed with
postage prepaid there is a rebuttable presumption of fact that it was received by the addressee as
soon as it could have been transmitted to him in the ordinary course of the mails. But if any one
of these elemental facts fails to appear, it is fatal to the presumption. For instance, a letter will
not be presumed to have been received by the addressee unless it is shown that it was deposited
in the post-office, properly addressed and stamped.
MAMERTO LAUDICO & FRED M. HARDEN vs. MANUEL ARIAS RODRIGUEZ, ET
AL.
G.R. No. 16530 March 31, 1922
Topic: (F.1) Consent

FACTS:
On February 5, 1919, the defendant, Vicente Arias, who, with his co-defendants, owned
the building Nos. 205 to 221 on Carriedo Street, on his behalf and that of his co-owners, wrote a
letter to the plaintiff, Mamerto Laudico, giving him an option to lease the building to a third
person, and transmitting to him for that purpose a tentative contract in writing containing the
conditions upon which the proposed lease should be made.

Later, Mr. Laudico presented his coplaintiff, Mr. Fred. M. Harden, as the party desiring
to lease the building. On one hand, other conditions were added to those originally contained in
the tentative contract, and, on the other, counter-propositions were made and explanations
requested on certain points in order to make them clear. These negotiations were carried verbally
at interviews held with Mr. Vicente Arias, no definite agreement having been arrived at until the
plaintiff finally wrote a letter to Mr. Arias on March 6, 1919, advising him that all his
propositions, as amended and supplemented, were accepted. It is admitted that this letter was
received by Mr. Arias by special delivery. On that same day, Mr. Arias had written a letter to the
plaintiff withdrawing the offer to lease the building.

The chief prayer of plaintiff in this action is that the defendants be compelled to execute
the contract of lease of the building in question. It thus results that when Arias sent his letter of
withdrawal to Laudico, he had not yet received the letter of acceptance, and when it reached him,
he had already sent his letter of withdrawal. Under these facts we believe that no contract was
perfected between the plaintiffs and the defendants.

The parties agree that the circumstances under which that offer was made were such that
the offer could be withdrawn at any time before acceptance.

ISSUE:
Whether or not there was a consent and contract perfected between the contracting parties

HELD:
Under article 1262, par. 2, of the Civil Code, an acceptance by letter does not have any
effect until it comes to the knowledge of the offerer. Therefore, before he learns of the
acceptance, the latter is not yet bound by it and can still withdraw the offer. Consequently, when
Mr. Arias wrote Mr. Laudico, withdrawing the offer, he had the right to do so, inasmuch as he
had not yet receive notice of the acceptance. And when the notice of the acceptance was received
by Mr. Arias, it no longer had any effect, as the offer was not then in existence, the same having
already been withdrawn. There was no meeting of the minds, through offer and acceptance,
which is the essence of the contract. While there was an offer, there was no acceptance, and
when the latter was made and could have a binding effect, the offer was then lacking. Though
both the offer and the acceptance existed, they did not meet to give birth to a contract.
 The attention of the court has been called to a doctrine laid down in some decisions that
ordinarily notice of revocation of an offer must be given in order to avoid an acceptance which
may convert in into a binding contract, and that no such notice can be deemed to have been given
to the person to whom the offer was made unless the revocation was in fact brought home to his
knowledge.

However, this said doctrine has NO application in the case at bar, because when Arias
received the letter of acceptance, his letter of revocation had already been received. The latter
was sent through a messenger directly to the office of Laudico and should have been received
immediately on that same morning, or at least, before Arias received the letter of acceptance. On
this point the Court do not give any credence to the testimony of Laudico that he received this
letter of revocation in the afternoon of that day. Laudico is interested in destroying the effect of
this revocation so that the acceptance may be valid, which is the principal ground of his
complaint.

In Article 1262, par. 2. of the Civil Code means that BEFORE the acceptance is known,
the offer can be revoked in order for the revocation to have the effect of impeding the perfection
of the contract, that it be known by the acceptant.

Q. Mucius Scaevola says apropros: "To our mind, the power to revoke is implied in the
criterion that no contract exists until the acceptance is known. As the tie or bond springs from
the meeting or concurrence of the minds, since up to that moment there exists only a unilateral
act, it is evident that he who makes it must have the power to revoke it by withdrawing his
proposition, although with the obligation to pay such damages as may have been sustained by
the person or persons to whom the offer was made and by whom it was accepted, if he in turn
failed to give them notice of the withdrawal of the offer.

This view is confirmed by the provision of article 1257, par. 2, concerning the case where
a stipulation is made in favor of a third person, which provision authorizes the contracting
parties to revoke the stipulation before the notice of its acceptance. That case is quite similar to
that under comment, as said stipulation in favor of a third person (who, for the very reason of
being a third person, is not a contracting party) is tantamount to an offer made by the makers of
the contract which may or may not be accepted by him, and which does not have any effect until
the obligor is notified, and may, before it is accepted, be revoked by those who have made it;
therefore, the case being similar, the same rule applies."
 GOMEZ MARINO vs. LINTON
G.R. No. 20744 January 28, 1924
Topic: (F) Essential Requisites of Contract [Art. 1319 1346]
(F.1.A) Mistake

FACTS:
Jose Gomez Marino, plaintiff alleges that on October 11, 1921, he entered into a contract
with the defendants in which they agreed to purchase 320,000 square meters of land in the
Province of Cavite for the sum of Php 222,000; that the defendants failed to carry out the
contract and to consummate the purchase; that by reason thereof he lost Php 61,000, which
would have been the amount of his profit and commission on the deal, together with an advance
payment of Php 2,000 cover from the defendants.
In their answer, Linton, Lambert, Northcott, and Haygood, defendants, made a general
denial and alleged, first, that the plaintiff falsely represented the boundaries of the land; second,
that he falsely represented that certain buildings were included in the description; third, that he
had no authority to sell a large portion of the land; and, fourth, that he represented the entire tract
shown to the defendants as the property to be sold, when in truth and in fact various parcels
thereof had previously been sold to other person; that, by reason of such false representations,
the defendants were deceived in making the contract to purchase, and that upon discovery of
their falsity, and for such reason, they refused to consummate the deal. The trial court found the
allegations made by the defendants to be true and dismissed the complaint. Thus, the plaintiff
filed the present case.

ISSUE:
Whether or not the consent obtained by the plaintiff from the defendants shall be void.

HELD:
Yes. The Supreme Court held that the consent given shall be void because the evidence is
conclusive that there was both error and deceit. Article 1265 the Civil Code, provides "[t]hat
consent given by reason of error, violence, intimidation, or deceit shall be void." The defendants
were misled and deceived by the plaintiff as to the actual boundaries of the land, and, as to the
important fact, that plaintiff could not make a goof title to all of the land within the boundaries.
The defendants-appellees admit the signing of the contract in and by which they agreed
to purchase certain land at an agreed price of Php 222,000. They claim that before the signing of
the contract, the plaintiff took them out over the land, which he proposed to sell, and showed
them the corners and its exterior boundaries. After the contract was signed, and upon making
further examination of the record title, it was found that a large portion of the most valuable part
of the tract was not included in the land, which the plaintiff could or proposed to convey.
Art. 1331. In order that, it should refer to the substance of the thing which is the object of
the contract, or to those conditions which have principally moved one or both parties to
enter into the contract.
 Mistake as to the identity or qualifications of one of the parties will vitiate consent only
when such identity or qualifications have been the principal cause of the contract.
A simple mistake of account shall give rise to its correction.
Where plaintiff took defendants to and upon the land which is the object of the contract,
and misled and deceived them as to its true boundaries being the condition that moved the
defendants to enter and sign the contract, which they later relied upon, were misrepresentations
that they believed to be true. As consequence, such mistake invalidates consent.
Art. 1318. There is no contract unless the following requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established
Thus it is conclusive that since the consent of the defendants-appellees was secured
through deceit which made it void, there is now an absence of the first essential requisite of
contracts. A a result of such absence, there can be no contract to speak of in the first place.
Sylvia Lichauco De
Leon v CA SALUD
 DOMINGO REALTY, INC. and AYALA STEEL MANUFACTURING CO., INC. vs.
COURT OF APPEALS and ANTONIO M. ACERO
G.R. No. 126236 January 26, 2007
Topic: (F.1.A) Mistake

FACTS:
On November 19, 1981, petitioner Domingo Realty filed its November 15, 1981
Complaint with the Pasay City RTC against Antonio M. Acero, who conducted business under
the firm name A.M. Acero Trading, David Victorio, John Doe, and Peter Doe, for recovery of
possession of three (3) parcels of land located in Cupang, Muntinlupa, Metro Manila, On January
4, 1982, defendants Acero and Victorio filed their December 21, 1981 Answer to the Complaint.
Acero alleged that he merely leased the land from his co-defendant David Victorio, who, in turn,
claimed to own the property on which the hollow blocks factory of Acero stood.
The records of the case reveal the following:

1. December 3, 1987 the parties signed the Compromise Agreement;

2. December 7, 1987 a decision/judgment was rendered based on the December 3, 1987
Compromise Agreement;
3. February 2, 1988 Acero filed a Motion to Nullify the Compromise Agreement;
4. December 6, 1991 the trial court denied Aceros Motion to Nullify the Compromise
Agreement;
5. December 11, 1991 defendant Acero received the December 6, 1991 Order which denied
said motion;
6. December 26, 1991 the 15-day period to appeal to the CA expired by the failure of
defendant Acero to file an appeal with said appellate court;
7. January 15, 1992 the trial court issued the Order which granted petitioners motion for the
issuance of a Writ of Execution;
8. October 6, 1992 the trial court reiterated its January 15, 1992 Order directing the issuance of
a Writ of Execution after the records of the case were lost in a fire that gutted the Pasay City
Hall;
9. January 12, 1994 the trial court issued the Order which directed the implementation of the
Writ of Execution prayed for by petitioners;
10. February 1, 1994 the trial court issued the Order which denied respondents Motion for
Reconsideration of its January 12, 1994 Order; and
11. April 4, 1994 Acero filed with the CA a petition for certiorari in CA-G.R. SP No. 33407
entitled Antonio M. Acero v. Domingo Realty, Inc., et al.

ISSUE:
Whether or not the compromise agreement executed may be set aside due to mistake.

HELD:
NO. Petitioners question the finding of the CA that the compromise judgment can be
set aside on the ground of mistake under Article 2038 of the Civil Code, because respondent
Acero gave his consent to the Compromise Agreement in good faith that he would only vacate a
portion of his lot in favor of petitioner Domingo Realty.
We rule otherwise.
 Articles 2038 and 1330 of the Civil Code allow a party to a contract, on the ground of
mistake, to nullify a compromise agreement:

Article 1330. A contract where the consent is given through mistake, violence,
intimidation, undue influence, or fraud is voidable.

"Mistake" has been defined as a "misunderstanding of the meaning or implication of

something" or "a wrong action or statement proceeding from a faulty judgment x x x.

Article 1333 of the Civil Code of the Philippines however states that "there is no
mistake if the party alleging it knew the doubt, contingency or risk affecting the object of the
contract."
Under this provision of law, it is presumed that the parties to a contract know and
understand the import of their agreement.

Prior to the execution of the Compromise Agreement, respondent Acero was already
aware of the technical description of the titled lots of petitioner Domingo Realty and more so, of
the boundaries and area of the lot he leased from David Victorio. Before consenting to the
agreement, he could have simply hired a geodetic engineer to conduct a verification survey and
determine the actual encroachment of the area he was leasing on the titled lot of petitioner
Domingo Realty. Had he undertaken such a precautionary measure, he would have known that
the entire area he was occupying intruded into the titled lot of petitioners and possibly, he would
not have signed the agreement. In this factual milieu, respondent Acero could have easily averted
the alleged mistake in the contract; but through palpable neglect, he failed to undertake the
measures expected of a person of ordinary prudence. Without doubt, this kind of mistake cannot
be resorted to by respondent Acero as a ground to nullify an otherwise clear, legal, and valid
agreement, even though the document may become adverse and even ruinous to his business.

WHEREFORE, the petition is hereby GRANTED and the assailed Decision and
Resolution of the CA are REVERSED. The questioned Orders of the Pasay City RTC dated
December 6, 1991, January 15, 1992, October 6, 1992, January 12, 1994, and February 1, 1994,
including the Decision dated December 7, 1987, are AFFIRMED. The case is remanded to the
Pasay RTC, Branch III for further proceedings with respect to petitioner Domingo Realtys
November 15, 1981 Complaint against one of the defendants, David Victorio. No costs.
 JOCELYN TOLEDO vs. MARILOU HYDEN
G.R. No. 172139 December 8, 2010
Topic: Topic: (F) Essential Requisites of Contract [Art. 1319 1346]
(F.1.B) Violence, Intimidation and Undue Influence

FACTS:
Petitioner Jocelyn M. Toledo obtained several loans from respondent Marilou M. Hyden.
Jocelyn had been religiously paying Marilou the stipulated monthly interest by issuing checks
and depositing sums of money in the bank account of the latter. However, the total principal
amount of P290,000.00 remained unpaid. Thus, in April 1998, Marilou visited Jocelyn in her
office asked Jocelyn and the other employees who were likewise indebted to her to acknowledge
their debts. A document entitled "Acknowledgment of Debt" for the amount of P290,000.00 was
signed by Jocelyn with two of her subordinates as witnesses. The said amount represents the
principal consolidated amount of the aforementioned previous debts. After honoring several
checks, Jocelyn ordered the stop payment on the remaining checks and filed a complaint against
Marilou for Declaration of Nullity and Payment, Annulment, Sum of Money, Injunction and
Damages.

Jocelyn averred that Marilou forced, threatened and intimidated her into signing the
"Acknowledgment of Debt" and at the same time forced her to issue the seven postdated checks.
She claimed that Marilou even threatened to sue her for violation of Batas Pambansa (BP) Blg.
22 or the Bouncing Checks Law if she will not sign the said document and draw the above-
mentioned checks. On November 23, 1998, Marilou led an Answer with Special Affirmative
Defenses and Counterclaim alleging that Jocelyn voluntarily obtained the said loans knowing
fully well that the interest rate was at 6% to 7% per month. In fact, a 6% to 7% advance interest
was already deducted from the loan amount given to Jocelyn.

ISSUES:
I. Whether the CA gravely erred when it held that the imposition of interest at the rate of
six percent (6%) to seven percent (7%) is not contrary to law, morals, good customs, public order
or public policy.
II. Whether the CA gravely erred when it failed to declare that the "Acknowledgment of
Debt" is an inexistent contract that is void from the very beginning pursuant to Article 1409 of
the New Civil Code.

HELD:
The petition is without merit.
I. The 6% to 7% interest per month paid by Jocelyn is not excessive under the
circumstances of this case.

The court cannot consider the disputed 6% to 7% monthly interest rate to be iniquitous or
unconscionable. It was clearly shown that before Jocelyn availed of said loans, she knew fully
well that the same carried with it an interest rate of 6% to 7% per month, yet she did not
complain. In fact, when she availed of said loans, an advance interest of 6% to 7% was already
deducted from the loan amount, yet she never uttered a word of protest. After years of benefiting
from the proceeds of the loans bearing an interest rate of 6% to 7% per month and paying for the
same, Jocelyn cannot now go to court to have the said interest rate annulled on the ground that it
is excessive, iniquitous, unconscionable, exorbitant, and absolutely revolting to the conscience of
man.
II. The document "Acknowledgment of Debt" is valid and binding.
Jocelyn is misguided. Even if there was indeed such threat made by Marilou, the same is not
considered as threat that would vitiate consent. Jocelyn has failed to prove her claim that she
was made to sign the document "Acknowledgment of Debt. Said document was signed in the
office of Jocelyn and it was Jocelyn herself who went to the table of her two subordinates to
procure their signatures as witnesses to the execution of said document. If indeed, she was forced
to sign said document, then Jocelyn should have immediately taken the proper legal remedy. But
she did not.

Petition denied.
 FRANCIS LEE VS COURT OF APPEALS
G.R. No. 90423 September 6,1991
Topic: (F.1.B) Violence, Intimidation and Undue Influence

FACTS :
On June 20, 1984 the complainant Maria De Chin was accused of having forged Midland
National Cashier Check which she later deposited to an account of one Honorario Carpio. Upon
the arrival of De Chin to the Pacific Banking Corporation, the petitioner did not attend to her
directly for he is entertaining other bank clients. After an hour, the petitioner confronted De
Chin. He was shouting at her with piercing looks and even threatened to file charges against her
unless she returned all the money equivalent of the subject cashier check. Hence, the De Chin
later signed an affidavit stating that she had swindled the said amount and also signed a prepared
withdrawal slip.

ISSUE:
Whether or not the act of the petitioner in shouting at the complainant with piercing looks
and threats constitutes grave coercion

HELD:
No. The act of Francis Lee does not constitute grave coercion. In the present case, Article
1335 of the New Civil Code applies. The said law states that there is intimidation when one of
the contracting parties is compelled by a reasonable and well-grounded fear of an imminent and
grave evil upon his person or property. One becomes a victim of coercion when there is a
disappearance of the personality of the actor. The actor ceases to exist as an entity having his
own faculties of judgment when there is a disappearance of his personality.

In the present case, the act of the petitioner of demanding the private respondent to
return the proceeds of the check accompanying it by a threat of criminal charge was not
improper. It is within power of the creditor to demand payment of their accounts with the threat
that failure to do so would warrant a case instituted in the court. The act of the respondent in
being nervous upon signing the affidavit and the withdrawal slip does not negate the fact that she
voluntarily signed the said documents.

There was also no restriction with the movement of the respondent in the said bank. She
was able to move freely unguarded from the office of the petitioner which is on the ground floor
to the mezzanine area. The complainant also readily admitted that there was nothing which
prevented her from leaving the area despite the threats of the petitioner.
 MANUEL DE GUIA, for himself and as Attorney-in-Fact of FE MARAMBA, RENATO
DAVIS, FLORDELIZA YEH, JOCELYN QUEBLATIN AND BETTY DAVIS vs HON.
PRESIDING JUDGE, RTC BULACAN; SPOUSES TEOFILO MORTE, ANGELINA
VILLARICO; SPOUSES RUPERTO AND MILAGROS VILLARICO; AND DEPUTY
SHERIFF BENJAMIN HAO
GR. No. 61623 December 26, 1984.
Topic: Topic: (F.1.B) Violence, Intimidation and Undue Influence

FACTS:
Petitioners Maramba, Davis, Queblatin are the heirs of the late Primitiva Davis, the
owner of th undivided portion of 2 parcels of land situated in Bulacan. Petitioner de Guia
alleged to be the owner of the subject property, having acquired the same from his co-petitioners.

Primitiva executed a deed of mortgage in favor of the respondent Spouses Morte over
the subject property in consideration of the formers loan of P 20 000. Primitiva also executed
another document, a deed of sale, over the same subject property in favor of the Spouses
Villarico for and in consideration of the amount of P 33 000. Respondent spouses Villarico then
executed a deed of sale wherein they sold back the subject property to Primitiva for the same
amount of P 33k. Primitiva again executed another document, a deed of sale, wherein she again
sold the subject property to respondent spouses Villarico for the amount of P 180 000 and she
executed a deed of mortgage over the subject property in favor of the respondents Spouses Morte
in consideration of a loan amounting to P180k. Except for the deed of sale for the amount of
P180k in favor of the Spouses Villarico, all documents were duly notarized and petitioner Renato
Davis was one of the instrumental witnesses in all these documents.

Primitiva failed to pay her loan in the amount of P 500 000 to Spouses Morte as secured
by a real estate mortgage on the subject property. Thus, the latter filed with the Sheriff, a petition
for extrajudicial foreclosure of real estate mortgage. Petitioner De Guia and other co-petitioners
filed with RTC Bulacan an Amended Complaint for annulment of real estate mortgage and
contract of lease with preliminary injunction against respondents Spouses Morte, Spouses
Villarico and the Sheriff. Peitioners contend that the documents were null and void since
Primitiva signed them under threat of immediate foreclosure of mortgage on the property and
without any valuable consideration.

Respondents argued that these documents were executed for valuable consideration and
that petitioner Renato was one of the instrumental witnesses in the documents. They clarified
that the documents executed at the latter were executed to avoid confusion and to show that the
latest documents represented the actual and subsistting transactions between the parties.

RTC issued and Order issuing the writ of preliminary injunction. Trial ensued and it
rendered its decision dismissing the complaint. It found that petitioner Renato did not deny the
outstanding obligations of his mother to respondents and that no force and intimidation were
used against Primitiva. Petitioners appealed. The Court of Appeals affirmed the decision of the
RTC.

ISSUE:
 Whether or not force or intimidation was attendant in this case.

HELD:
No, petitioners claim that he and his mother were threatened of foreclosure of the
property if his mother would not sign the deed of mortgage thus, their consent were vitiated, is
not persuading. Last paragraph of Art. 1335 of the New Civil Code was applicable in this case,
which provides that a threat to enforce ones claim through competent authority, if the claim is
just or legal, does not vitiate consent. It has been held that foreclosure of mortgaged properties in
case of default in payment of a debtor is a legal remedy afforded by law to a creditor. Hence, a
threat to foreclose mortgage would not per se vitiate consent.
DBP v CA
Topic: Topic: (F.1.B) Violence, Intimidation and
Undue Influence

- YU
 ALEJANDRO V. TANKEH vs. DEVELOPMENT BANK OF THE PHILIPPINES
G.R. No. 171428 November 11, 2013
(F.1.B) Fraud

FACTS:
On 1980, Alejandro was approached by his brother, Ruperto, who is the president of SSL,
informing him that the latter was operating a new shipping line business and offered him 1000
shares worth P1M to be a director of the business. Alejandro accepted the offer based on the
promised that he be part of the admin staff so that he can oversee the operation of the business
plus his son, who is a practicing lawyer would be given a position in the company.

A loan was applied from DBP for financing of an ocean-going vessel with the conditions
that the first mortgage is obtained over the vessel, the future earnings of the mortgage including
proceeds should be assigned to DBP and DBP is assigned to no less than 67% of the voting
shares of the company. Alejandro signed the Assignment of Shares of Stock with Voting Rights
and the promissory note making him liable jointly and severally for the amount of the loan. After
the vessel is acquired, a deed of assignment was executed in favor of DBP. On 1983, upon
realizing that he was only being made a tool to realize the purposes of Ruperto, Alejandro
officially informed the company by means of letter that he has severed his connection with the
company and asking the board to pass a resolution to released him from his liabilities with DBP
and notify the latter about this.

On 1986, the account of SSL in the DBP was transferred to Asset Privatization Trust by
virtue of Presidential Proclamation No. 50. The asset including loan in favor of DBP were
ordered to be transferred to the national government.
Despite the assignment and cash equity contribution of SSL to cover part of the acquisition cost
of the vessel and the like, the promissory note still subsisted. Hence, Alejandro is still bound as a
debtor because of the promissory note.

ISSUE:
Whether or not the fraud perpetrated by Ruperto is serious enough to warrant annulment
of the contract.

HELD:
NO. The Court held that only incidental fraud exists in this case. Therefore it is not
sufficient to warrant the annulment of the contracts petitioner entered into but respondent
Ruperto is liable to pay him damages. The distinction between fraud as a ground for rendering a
contract voidable or as basis for an award of damages is provided in Article 1344: In order that
fraud may make a contract voidable, it should be serious and should not have been employed by
both contracting parties. Incidental fraud only obliges the person employing it to pay damages.
There are two types of fraud contemplated in the performance of contracts: dolo incidente or
incidental fraud and dolo causante or fraud serious enough to render a contract voidable. If there
is fraud in the performance of the contract, then this fraud will give rise to damages. If the fraud
did not compel the imputing party to give his or her consent, it may not serve as the basis to
annul the contract, which exhibits dolo causante. However, the party alleging the existence of
fraud may prove the existence of dolo incidente. This may make the party against whom fraud is
alleged liable for damages.

Article 1340 of the Civil Code recognizes the reality of some exaggerations in trade
which negates fraud. It reads: The usual exaggerations in trade, when the other party had an
opportunity to know the facts, are not in themselves fraudulent. Given the standing and stature of
the petitioner, he was in a position to ascertain more information about the contract.

The following facts show that petitioner was fully aware of the magnitude of his
undertaking: First, petitioner was fully aware of the financial reverses that SSL had been
undergoing, and he took great pains to release himself from the obligation. Second, his
background as a doctor, as a bank organizer, and as a businessman with experience in the textile
business and real estate should have apprised him of the irregularity in the contract that he would
be undertaking. This meant that at the time petitioner gave his consent to become a part of the
corporation, he had been fully aware of the circumstances and the risks of his participation.
Intent is determined by the acts. Finally, the records showed that petitioner had been fully aware
of the effect of his signing the promissory note. The bare assertion that he was not privy to the
records cannot counteract the fact that petitioner himself had admitted that after he had severed
ties with his brother, he had written a letter seeking to reach an amicable settlement with
respondent Rupert. Petitioners actions defied his claim of a complete lack of awareness
regarding the circumstances and the contract he had been entering.

The required standard of proof clear and convincing evidence was not met. There was
no dolo causante or fraud used to obtain the petitioners consent to enter into the contract.
Petitioner had the opportunity to become aware of the facts that attended the signing of the
promissory note. He even admitted that he has a lawyer-son who the petitioner had hoped would
assist him in the administration of Sterling Shipping Lines, Inc. The totality of the facts on record
belies petitioners claim that fraud was used to obtain his consent to the contract given his
personal circumstances and the applicable law.

However, in refusing to allow petitioner to participate in the management of the business,

respondent Ruperto V. Tankeh was liable for the commission of incidental fraud. In Geraldez,
this Court defined incidental fraud as "those which are not serious in character and without
which the other party would still have entered into the contract. Although there was no fraud that
had been undertaken to obtain petitioners consent, there was fraud in the performance of the
contract.
Abandon v Lozada (GR No. L-82564)
 DOMINGO REALTY, INC. and AYALA STEEL MANUFACTURING CO., INC. vs
COURT OF APPEALS and ANTONIO M. ACERO
G.R. No. 126236 January 26, 2007
Topic: (F.2) Article 1349 - Object of Contracts

FACTS:

On November 19, 1981, petitioner Domingo Realty filed a complaint with the Pasay City
RTC against Antonio M. Acero, who conducted business under the firm name A.M. Acero
Trading, David Victorio, John Doe, and Peter Doe, for recovery of possession of three parcels of
land located in Cupang, Muntinlupa. The said lots have an aggregate area of 26,705 square
meters, more or less, on a portion of which Acero had constructed a factory building for the
manufacture of hollow blocks, as alleged by Domingo Realty. On January 4, 1982. Acero and
Victorio filed their answer to the Complaint stating that he merely leased the land from Victorio
who, in turn, claimed to own the property on which the hollow blocks factory of Acero stood.
Victorio assailed the validity of the TCTs of Domingo Realty, alleging that the said TCTs
emanated from spurious deeds of sale, and claimed that he and his predecessors-in-interest had
been in possession of the property for more than 70 years.

On December 3, 1987, Mariano Yu representing Domingo Realty, Luis Recato Dy, and
Antonio M. Acero, all assisted by counsels, executed a Compromise Agreement. On December
7, 1987, the trial court approved the six stipulations in the said agreement. Subsequently,
Domingo Realty filed a Motion to conduct a re-survey of the properties to implement its
decision, which was granted on January 22, 1988. However, respondent filed a Motion to Nullify
the Compromise Agreement since the survey plan of petitioner as the basis of re-survey would
violate the Compromise Agreement as the entire lot he occupies would be adjudged as owned by
is realty firm. Then, Acero filed a Motion to Resurvey on March 8, 1988 directing the Director of
Lands to conduct a re-survey of the subject properties. On June 9, 1989, Elpidio de Lara of the
DENR submitted a Verification Survey Plan to the trial court, stating that the petitioners TCT
covered the entire land occupied by the respondents hollow block factory. On April 10, 1990,
petitioner Ayala Steel Manufacturing Co., Inc. (Ayala Steel) filed its Motion for Subsititution
alleging that it had purchased the said lots attaching the motion with the corresponding TCTs as
proof of purchase. Acero opposed the Motion as the case has already been terminated by the
compromise agreement of the parties. On December 28, 1990, the trial court directed Acero to
conduct his own re-survey of the lots and have it approved by the Bureau of Lands. The Order
resulted from Aceros contention that he occupied only 2,000 square meters of petitioners
property. He employed the services of Engr. Eligio Cruz, but was subsequently rejected since he
failed to comply with the requirement of the Bureau. On January 15, 1992, the trial court
approved the issuance of a Writ of Execution to enforce the December 7, 1987 Decision.
However, on the Pasay City Hall was gutted by fire, destroying the records of the lower court,
including the said case. The court issued another Order of Execution to reiterate the same.
Furthermore, the Bureau of Lands Director claimed that the correct survey plan was that of Engr.
Lara of the Bureau of Lands, rejecting the one submitted by Engr. Cruz. Hence, this appeal.

ISSUE:
 Whether or not the judgment rendered on the Compromise Agreement shall be set aside
due to vagueness.

HELD:

No.

The object of the contract, in order to be considered as certain need not specify such object with
absolute certainty. It is enough that the object is determinable in order for it to be considered as
certain.

Article 1349 of the Civil Code provides,

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

The title over the subject property contains a technical description that provides the metes
and bounds of the property of petitioners. Such technical description is the final determinant of
the extent of the property of petitioners. Thus, the area of the petitioners property is
determinable based on the technical descriptions contained in the TCTs. The determination made
by the Bureau of Lands is controlling and shall prevail over the Verification Survey Plan
submitted by Acero. Even if the exact area of encroachment is not specified in the agreement, it
can still be determined from the technical description of the title of plaintiff which Acero
admitted to be correct. Therefore, the object of the Compromise Agreement is considered
determinate and specific. It must be remembered that in the interpretation of contracts, an
instrument must be construed so as to give effect to all the provisions of these contracts. Hence,
the Compromise Agreement must be considered as a whole.
 WILFREDO T. VAGILIDAD and LOLITA VAGILIDAD, petitioners vs. GABINO
VAGILIDAD, JR. and DOROTHY VAGILIDAD, respondents
G.R. No. 161136 November 16, 2006
TOPIC: (F.2) Object of Contracts

FACTS:
Zoilo Labiao owned a parcel of land in Atabay, San Jose, Antique which measured 4,280
sq. meters. Sometime in April 1931, he died. The three children of Zoilo executed an
extrajudicial settlement of state adjudicating the entire lot to Loreto, and TCT No. 16694 was
issued in the name of Loreto alone. A portion of the lot was sold to Gabino Jr. on May 12, 1986
by Loreto, measuring 1,604 sq. meters as evidenced by the Deed of Absolute Sale. Gabino Jr, as
petitioner, filed a surrender of the TCT No. T-16694, covering Lot No. 1253 with the RTC of
San Jose by virtue of the sale, alleging that as the owner, he is entitled to ask for the surrender of
owners copy of TCT No. T-16694 to the Register of Deeds in Antique to effect the transfer of
title to the name of petitioner. The trial court issued an Order dated March 21, 1994 sending the
case to the archives, as per motion of their counsels who had not known of the amicable
settlement both parties reached.

Thereafter, the property was sold to Wilfredo Vagilidad as per Deed of Absolute Sale of a
Portion of Land involving the opt-described property was also executed by Loreto in favor of
Wilredo. The sale of the lot to Wilfredo was registered with the Registry of Deeds of the
Province of Antique under Entry No. 18045, consequently cancelling TCT No. T-16694 issued
in favor of Wilfredo pursuant to the Deed of Sale.

Spouses Wilfredo and Lolita obtained a loan from the PNB in the amount of P150,000
and mortgaged the lot as collateral of the said loan, and was later cancelled. Wilfredo obtained
another loan from DBP, mortgaging the same lot.

Spouses Gabino and Dorothy Vagilidad filed a Complaint for Annulment of Document,
Reconveyance, and Damages, with the RTC of Antique against petitioners, claiming that they are
the rightful owners of the lot, and that it was transferred to petitioner Wilfredo for loaning
purposes and it would be returned when the respondents need the same. Gabino also added that
Dorothy executed the Deed of Sale without his knowledge, and receiving nothing as payment.
They pointed out that after petitioner mortgaged the lot, they demanded that they return the
property but petitioner refused to. Respondents claimed the document was null and void for
consideration of the same does not bind the non-consenting spouse, and prayed for damages and
attorneys fees.

The RTC ruled in favor of the petitioners, declaring that Loreto did not validly convey
the lot to Gabino as Zoilos heirs had not partitioned the lot. The CA reversed the ruling of the
RTC, and declared that the rights of Loreto to succession are transmitted from the moment of
Zoilos death.

ISSUES:
Whether or not the CA erred in applying the Article 1349 and 1460 of the NCC.
RULING:
No. The petitioners erred when they contended that the Deed of Absolute Sale between
Loreto and Gabino had no determinate object. The subject parcel of land, and the lot described
between Loreto and Gabino are the same. It is uncorroborated by any evidence in record that the
description of the Lot, the object of the Deed of Absolute Sale as not registered under the Land
Registration Act, nor under the Spanish Mortgage Law is a stray description of the subject
parcel. The discrepancy was not explained by Loreto who when it solely appeared in the Deed of
Absolute Sale, and the existence of such was not denied by Loreto.

The petitioners should have shown that Loreto owned the properties other than the lot to
bolster their claim that the object was indeed different from the disputed lot.
Aurora Fe Camacho v CA
(GR No 127520)
 ELIAS L. PENACO vs. ZOILO H. RUAYA and FELICITAS E. RUAYA, (appellants)
G.R. No. L-28102 December 14, 1981
Topic: Cause or Considerations (Art 1350 - 1355)

FACTS:
On January 14, 1957, the defendants, spouses Zoilo H. Ruaya and Felicitas E. Ruaya,
executed a document denominated: "PACTO DE RETRO SALE OF RESIDENTIAL
BUILDING WITH GUARANTY TO RELINQUISH RIGHTS AS PUBLIC LAND
APPLICANT ON THE LOT ON WHICH CONSTRUCTED. Which stated that the spouses
will sell (for P1,000) to Pershing Tan Queto by way of pacto de retro one (1) two-story
residential building erected on a public land on the condition that (1) they reserve the right to
repurchase within one year from the date of execution; (2) that upon failure to exercise such right
within the stipulated time, the title to the building shall pass to and become vested unto the
vendee; and (3) that in the event of consolidation of title to the building unto the vendee, they
promise to relinquish and effect complete legal transfer of all their rights, interests and
participation in and to the lot on which the building is constructed.

The vendors a retro failed to exercise their right to repurchase within the stipulated period
so the vendee a retro filed an action for consolidation of title.

On September 30, 1960, the trial court rendered judgment declaring that the title of the
building sold a retro is consolidated in the vendee a retro.

On April 18, 1961, Pershing Tan Queto assigned his rights and interests over the property
in favor of the herein plaintiff Elias L. Penaco, in consideration of the amount of P2,800.00.
Thereafter, Elias L. Penaco demanded that the defendants relinquish and effect complete legal
transfer of all their rights, interests and participation over the land on which the residential land
sold a retro is constructed.

When the defendants refused, Penaco filed an action for specific performance on
November 3, 1965. The defendants answered that the condition in the contract of sale with pacto
de retrowhereby they promised, covenanted and guaranteed to relinquish and transfer all their
rights, interests and participation in the lot on which the building sold a retro is constructed upon
the consolidation of title in the vendee a retrois void and unenforceable for want of
consideration, there being no price mentioned therein.

On June 20, 1967, CFI rendered decision in favor of Penaco and ordered the spouses to
convey, relinquish and transfer all their rights, interests and participation over the subject land.
Hence, the present recourse wherein the defendants maintain that the promise to relinquish rights
and interests over the land on which the building sold a retro is constructed is null and void for
want of consideration; and that the parcel of land which is sought to be transferred has not been
identified.

ISSUE:
 Whether or not CFI erred in rendering judgment in favor of Penaco.
Whether or not the promise to relinquish rights and interests over the land on which the building
sold a retro is constructed is null and void for want of consideration.

HELD:
NO. The judgment is affirmed.
In reciprocal contracts, like in this case, the obligation or promise of each party is the
consideration for that of the other. In the language of Article 1350 of the Civil Code, "in onerous
contracts the cause is understood to be, for each contracting party, the prestation or promise of a
thing or service by the other." Under Article 1354 of the Civil Code, it is presumed that
consideration exists and is lawful, unless the debtor proves the contrary.

In the instant case, the appellants failed to present evidence to disprove the presumption.
The appellants contend that the consideration is for the house only and since the land on which it
is constructed is public land, they can only transfer their rights, interests and participation a
public claimants. The inadequacy of the price is not sufficient proof that the consideration of
P1,000.00 was for the house alone. The vendee a retro could not have possibly bought the house
alone without securing from the vendors a retro a specific and fixed arrangement regarding the
lot on which the house is built, otherwise, he could be ejected therefrom at the will of the
vendors a retro.

By the said contract, the appellants have undertaken to effect legal transfer of all their
rights over the lot to the vendee a retro and his assigns upon the consolidation of the title over the
building in the vendee. Qualifications of the vendee to acquire the land should be raised in an
administrative proceeding.
Angel Jose Warehousing Co v Chelda Enterprises ( Gr No L-25704)
GR No. L-27905
F.3.A

GR No. 163687
GR No. 115734
GR No. L-2277
G.

GR No. 152411
GR No. L-13602
GR No. L-27010
GR No. 74978
GR No. 149322
 BIENVENIDO TEOCO and JUAN TEOCO, JR. vs.
METROPOLITAN BANK AND TRUST COMPANY
G.R. No. 162333 December 23, 2008
Topic: (G) Form of Contracts [Art. 1356 1358]

FACTS:
Lydia Co owned two parcels of land which her husband Ramon Co mortgaged to
Metrobank. The properties were then sold to Metrobank in an extrajudicial foreclosure sale. One
year after, the titles to the properties were consolidated in the name of Metrobank for Ramon
Cos failure to redeem within one year as provided by law. Metronbank then filed a petition for
the issuance of a writ of possession against the Spouses Co but they were no longer residing in
the Philippines. The trial court then ordered Metrobank to effect summons by publication against
the spouses. The brothers Teoco filed and answer-in-intervention claiming that they are
successors-in-interest of the spouses and that they had validly redeemed the properties within the
period provided by law. The RTC rendered judgment accordingly and ordered the transfer of the
titles in their name. Metrobank appealed to the CA claiming that the RTC erred in finding that
the brothers Teoco effectively redeemed the properties in question. The CA decided in favor of
Metrobank and ordered a writ of possession in its favor. The Court of Appeals also held that the
brothers Teoco have not sufficiently shown that the spouses Cos right of redemption was
properly transferred to them because the assignment of the right of redemption only stated that
the spouses are transferring their right of redemption to their parents, brothers, and sisters and
did not specifically include the brothers Teoco who were brothers-in-law of Ramon Co.
Furthermore, the spouses Co no longer reside in the Philippines and as such, the assignment of
the right of redemption was not properly executed and/or authorized.

ISSUE:
W/N the exercise of the right of redemption by the brothers Teoco is precluded by the
fact that the assignment of the right of redemption was not contained in a public instrument

HELD:
No, the exercise is not precluded. Sec. 25, Rule 132 of the Rules of Court provides that
an official record, when admissible, may be evidenced by an official publication thereof or by a
copy attested by the officer having the legal custody of the record, or by his deputy, and
accompanied, if the record is not kept in the Philippines, with a certificate that such officer has
the custody. If the office in which the record is kept is in a foreign country, the certificate may be
made by a secretary of embassy or legation consul general, consul, vice consul, or consular agent
or by any officer in the foreign service of the Philippines stationed in the foreign country in
which the record is kept, and authenticated by the seal of his office. However, even if the right
was not assigned in a public instrument, it does not mean that the private document containing
the assignment has no probative value.

Art. 1358 of the Civil Code requires that acts and contracts which have for their object
the creation, transmission, modification, or extinguishment of real rights over immovable
property appear in a public instrument. The assignment of the rights in this case is not in a public
instrument. In connection to this, Art. 1625 provides that an assignment of a right shall produce
no effect as against a third person unless it appears in a public instrument or is recorded in the
Registry of Property if involving real property. However, the necessity of a public instrument for
contracts which transmit or extinguish real rights is only for convenience and it is not essential
for its validity or enforceability. Jurisprudence shows that the only effect of noncompliance is
that a party may be compelled to execute a public document. With regard to Art. 1625, the Court
has interpreted the phrase effect against a third person to be damage or prejudice to such third
person. Being not registered or not appearing as a public instrument is not significant there
being no showing that the respondent was damaged or could be damaged. Metrobank would not
be prejudiced by the assignment of the right of redemption to the brothers Teoco; in fact, it
would be beneficial as the former would not lose security for the loan of the spouses Co, and it
can foreclose the properties as long as it proves that loans entered into by spouses are covered by
the mortgage contract. The brothers merely step in the shoes of the spouses.
 CEBU CONTRACTORS CONSORTIUM CO. vs.
COURT OF APPEALS and MAKATI LEASING & FINANCE CORPORATION
G.R. No. 107199 July 22, 2003
Topic: (H) Reformation of Instruments

FACTS:
On August 25, 1976, a lease agreement relating to various equipment was entered into
between respondent Makati Leasing and Finance Corporation (MLFC) as lessor, and petitioner
Cebu Contractors Consortium Company (CCCC) as lessee.

CCCC had a contract with the then Ministry of Public Highways for the construction of
the Iligan-Cagayan de Oro-Butuan Road. Being in need of additional capital, it approached
MLFC for the purpose of securing a loan. MLFC agreed to extend financial assistance to CCCC
but, instead of a customary loan covered by a security, MLFC induced CCCC to adopt and apply
a sale and lease back scheme. The arrangement provided for the equipment of CCCC to be made
to appear as sold to MLFC and then leased back to CCCC which will then pay lease rentals to
MLFC. The rentals will be treated as installment payments to repurchase the equipment.

To facilitate payment of the rentals, MLFC required CCCC to executed a deed of

assignment of its collectibles from the Ministry of Public Highways as well as a chattel mortgage
over its other properties as a security to MLFC.

On June 30, 1977, CCCC began defaulting on the lease rentals. When the demand letters
by MLFC were not heeded, MLFC filed a complaint for the payment of the rentals due and
prayed that a writ of replevin be issued in order to obtain possession of the equipment leased and
to foreclose on the equipment mortgaged.

CCCC contended that it is no longer indebted to MLFC because the total amounts
collected by the latter from the Ministry of Public Highways, by virtue of the deed of
assignment, and proceeds of the foreclosed chattels were more than enough to cover their
liability.

Trial court rendered a decision upholding the lease agreement and finding CCCC liable to
MLFC in lease rentals. Appellate Court affirmed the trial courts decision.

CCCC contends that their arrangement with MLFC was an equitable mortgage not a lease
contract and asked for reformation of the instrument.

ISSUE:
. Whether or not CCCC can ask for reformation of the instrument

HELD:
Yes.
The Supreme Court held that the agreement between CCCC and MLFC was not a
financial lease but rather an ordinary loan secured by a chattel mortgage. In a true financial
leasing, the lessee has insufficient funds to purchase the equipment such that the finance
company purchases the equipment on behalf of the lessee, who will then pay through
installments to purchase it from the finance company (lessor). In this case, CCCC already owned
the equipment and only needed additional working capital; the lease agreement was only used to
disguise the true transaction which was a loan with security. It is clear that the intention of the
parties was not to enable the client to acquire ad use the equipment, but to extend to him a loan.

When the true intention of the parties to a contract is not expressed in the instrument
purporting to embody their agreement by reason of mistake, fraud, inequitable conduct or
accident, the remedy of the aggrieved party is to ask for reformation of the instrument under
Articles 1359 and 1362 of the Civil Code, to the end that their true agreement may be expressed
therein.

Under Article 1144 of the Civil Code, the prescriptive period for actions based upon a
written contract and for reformation of an instrument is 10 years. The right of action for
reformation accrued from the date of execution of the contract of lease in 1976. Because the true
intention of the parties of the contract was not expressed in the instrument, and the right of action
for reformation has been exercised within the prescriptive period of 10 years, the reformation of
the instrument requested by CCCC in its counterclaim to MLFCs complaint in 1978 was
considered valid.
Yolanda Roselle-Bentir v Hon. Mateo Landa

(GR No. 128991)

 PROCESO and LEONARDA VILLEGAS
vs MARCELO ARJONA et. al
G.R. No. 158901 March 9, 2004
Topic: (H) Reformation of Instruments

FACTS:
In Dec 1996, petitioners Proceso Quiros and Leonarda Villegas filed with the office of
the barangay captain of Labney, Pangasinan, a complaint for recovery of ownership and
possession of a parcel of land located at Labney, Pangasinan. Petitioners sought to recover from
their uncle Marcelo Arjona, one of the respondents herein, their lawful share of the inheritance
from their late grandmother Rosa Arjona Quiros alias Doza. In 1997, an amicable settlement was
reached between the parties. By reason thereof, respondent Arjona executed a document
denominated as "PAKNAAN" ("Agreement", in Pangasinan dialect). Petitioners filed a
complaint with the MCTC with prayer for the issuance of a writ of execution of the compromise
agreement which was denied because the subject property cannot be determined with certainty.
RTC reversed the decision of the municipal court on appeal and ordered the issuance of the writ
of execution.

Respondents appealed to the CA, which reversed the decision of the RTC and reinstated
the decision of the MCTC.

ISSUE:
Whether or not the failure to include in the Paknaan a sufficient description of the
property to convey calls for nullification of the Paknaan or for reformation only.

HELD:
The court ruled that it is for reformation only. Although both parties agreed to transfer
one-hectare real property, they failed to include in the written document a sufficient description
of the property to convey. This error is not one for nullification of the instrument but only for
reformation since there is no question that there was meeting of the minds between the
contracting parties. Clearly, the Paknaan has all the earmarks of a valid contract. The inability of
the municipal court to identify the exact location of the inherited property did not negate the
principal object of the contract. This is an error occasioned by the failure of the parties to
describe the subject property, which is correctible by reformation and does not indicate the
absence of the principal object as to render the contract void. It cannot be disputed that the object
is determinable as to its kind and can be determined without need of a new contract or
agreement. Reformation is a remedy in equity whereby a written instrument is made or construed
so as to express or conform to the real intention of the parties where some error or mistake has
been committed. In granting reformation, the remedy in equity is not making a new contract for
the parties, but establishing and perpetuating the real contract between the parties.

In order that an action for reformation of instrument as provided in Article 1359 of the
Civil Code may prosper, the following requisites must concur:
(1) there must have been a meeting of the minds of the parties to the contract;
(2) the instrument does not express the true intention of the parties; and
(3) the failure of the instrument to express the true intention of the parties is due to mistake,
fraud, inequitable conduct or accident. Both parties acknowledge that petitioners are entitled to
their inheritance, hence, the remedy of nullification, which invalidates the Paknaan, would
prejudice petitioners and deprive them of their just share of the inheritance. Respondent can not,
as an afterthought, be allowed to renege on his legal obligation to transfer the property to its
rightful heirs. A refusal to reform the Paknaan under such circumstances would have the effect of
penalizing one party for negligent conduct, and at the same time permitting the other party to
escape the consequences of his negligence and profit thereby. No person shall be unjustly
enriched at the expense of another.
I.

Wood Technology Corp v Equtable Banking Corp

Torquator v Bernabe
 MARTHA R. HORRIGAN v TROIKA COMMERCIAL INC.
G.R. No. 148411 November 29, 2005
Topic: (I) Interpretation of Contracts [Art. 1370-1379]

FACTS:
Troika Commercial, Inc., (Troika), herein respondent, is the lessee of the entire ground
floor of a two-story building located at 53-A Annapolis St., San Juan, Metro Manila. Respondent
then sub-let a portion of the ground floor to Martha Horrigan, petitioner, to be used for her
restaurant Tia Maria. The contract of sub-lease dated April 20, 1983 between the parties was
prepared by Martha's husband. It provides, among others, the following stipulations:

2. In consideration thereof, Martha R. Horrigan undertakes, promises and guarantees

payment to Troika of the following:
2.1. P 12,500 monthly starting March 15, 1983 and every month thereafter until
December 31, 1989 payable every ___day of the month.
2.2. In addition to the above (sub-par 2.1), P4,500 monthly starting August 1, 1983 and
every month thereafter for seven (7) years until December 31, 1989 plus a guaranteed
yearly increase equivalent to 10% thereof.

The instant case stemmed from the parties different interpretations of the phrase "a
guaranteed yearly increase equivalent to 10% thereof" in relation to sub-paragraphs 2.1 and 2.2
of their agreement.

Respondent construed the 10% guaranteed yearly increase to apply to both the original
monthly rental under sub-paragraph 2.1 and the additional rental under sub-paragraph 2.2. On the
other hand, petitioner claimed that the 10% guaranteed yearly increase is applicable only to the
additional rental contained in subparagraph 2.2 of the sub-lease contract. Respondent sent
petitioner letters, together with its billing statements, explaining the application of the 10%
yearly increase of rental rates. But petitioner ignored them.

On May 3, 1991, respondent sent petitioner a final demand letter asking her to pay
P318,489.00 corresponding to the unpaid rental adjustments. When petitioner refused to pay,
respondent filed with the RTC of Makati City, a complaint for sum of money. However,
petitioner averred that the 10% yearly guaranteed increase applies only to her additional rental of
P 4,500.00 starting August 1, 1983 and that she has been paying the corresponding amounts
since 1984. She also claimed that even assuming that she still owed respondent, under sub-
paragraph 2.2, the amount due is only P58,485.50. She stopped paying the yearly increase since
August 1986 because of respondents demand that she should also pay the yearly increase
equivalent to 10% of the original P 12,500.00 monthly rental.

On May 18, 1995, the trial court rendered its Decision in favor of respondent. It ordered
petitioner to pay respondent her unpaid rental adjustments in the sum of P318,489.00 with
interest at 12% per annum from September 2, 1991 until the obligation is fully paid.

On appeal, the Court of Appeals, in its assailed Decision, affirmed the trial courts
judgment in toto.
ISSUE:
Whether or not the CA erred in ruling that the 10% guaranteed yearly increase of rental
rates applies to both the original monthly rental of P 12,500.00 and the additional monthly rental
of P4,500.00.

HELD: NO
Article 1377 of the Civil Code provides:
ART. 1377. The interpretation of obscure words or stipulations in a contract shall not
favor the party who caused the obscurity.

In a long line of cases, the Court have consistently held that the party who draws up the
contract, in which obscure words or phrases appear, bears the responsibility for causing the
ambiguity or obscurity, and hence, these must be construed against him.

In this case, it was petitioners spouse who prepared the sub-lease contract in question.
Consequently, the ambiguity must be construed against herein petitioner as she is presumed to
have confirmed the same. There is also no question that the 10% guaranteed yearly increase of
rents provided for in sub-paragraph 2.2 of the sub-lease agreement is for the benefit of
respondent herein, being the sub-lessor of the premises. As such, any doubt in its interpretation
must be interpreted in its favor.

This is in line with Section 17, Rule 130 of the Revised Rules of Court which states:
SEC. 17. Of two constructions, which preferred. When the terms of an agreement have been
intended in a different sense by the different parties to it, that sense is to prevail against either
party in which he supposed the other understood it, and when different constructions of a
provision are otherwise equally proper, that is to be taken which is the most favorable to the
party in whose favor the provision was made.

Hence, the CA is correct in affirming the decision of the trial court.

Huibonhoa v CA
Reynaldo Florendino v MBTC
(GR No. 148325)
10TH CASE
FIRST PHILIPPINE HOLDINGS CORPORATION vs TRANS MIDDLE EAST (PHILS.)
EQUITIES, INC.
G.R. No. 179505 December 4, 2009
Topic: (K) Voidable Contracts

FACTS:
FPHC, formerly known as Meralco Securities Corporation, which was incorporated on
June 30, 1961 by Filipino entrepreneurs led by Eugenio Lopez, Sr. is a holding company
engaged in power generation and distribution, property development and manufacturing. It is
owed by the Lopez family. It is also a domestic corporation allegedly owned by Benjamin
Romualdez. On May 25, 1984, FPHC allegedly sold its 6,299,179 shares of common stock in
Philippine Commercial International Bank, now Equitable-PCI Bank, to TMEE. The said stocks
are part of the sequestered properties that were allegedly illegally amassed by Benjamin
Romualdez during the twenty-year reign of former President Ferdinand E. Marcos, and one of
the purportedly ill-gotten wealth sought to be recovered by the Presidential Commission on
Good Government. These shares were allegedly obtained through fraud and acts contrary to law,
morals, good customs and public policy. Thus, there acquisition is either voidable or void or
unenforceable. On December 28, 1988, FPHC filed before the Sandiganbayan its Motion for
Leave to Intervene and to Admit Complaint in Intervention, but was denied by the latter.
However, it was reversed by a previous ruling and directed the said court to admit the proposed
Complaint-in-Intervention of FPHC.

On June 27, 2006, TMEE filed a Motion to Dismiss the Complaint-in-Intervention of

FPHC as it had already prescribed. TMEE argued that under Article 1391 of the Civil Code,
FPHC only had four years from May 24, 1984, the date of the sale or until May 24, 1988 within
which to annul the validity of the sale transaction on the ground of fraud. The action was thus
seven months late from the prescriptive period. FPHC disagreed claiming that the counting of
four years should commence from the time the intimidation or the defect of consent ceased.
Sandiganbayan ruled in TMEEs favor by granting its motion to dismiss. They found no credible
reason why FPHC could not institute the complaint to annul the sale of the disputed shares of
stock, simply for the alleged fear engendered by the Marcos rule since, in 1984 when the sale
was consummated, martial rule was already lifted and in the same year, protests against the then
president were already mounting and boisterous. Since FPHCs effort to recover the PCIB shares
would have to be addressed by the court, the element of fear would have been neutralized since
the judiciary did not lack in gallant magistrates who refused to be cowed into silence by the
dictator. They also found that FPHCs late pursuit of the recovery of the shares were in fact, two
years late after the dictator was deposed.

FPHC filed a motion for reconsideration maintaining that the sale of PCIB shares was
void ab initio since the said transaction was allegedly by the dummy board and signed by the
dummy officers of FPHC, hence imprescriptible. FPHC also insisted that it was impossible for it
to successfully institute an action during the Marcos regime. When former President Marcos was
deposed from power and left the country, it was only from that date onwards that the cause of
vitiation of consent ceased. Sandiganbayan denied FPHCs motion for reconsideration stressing
anew that the subject sale was not void ab initio, but merely voidable. Hence, this petition.
ISSUE:
Whether or not the contract in the case is void ab initio.

HELD:
No. A contract is void if one of the essential requisites of contract under Article 1318 of
the New Civil Code is lacking. The article provides that,

There is no contract unless the following requisites concur:

1. Consent of the contracting parties;

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

All these elements must be present to constitute a valid contract. Consent is essential to
the existence of a contract. In a contract of sale, its perfection is consummated at the moment
there is a meeting of the minds upon the thing that is the object of the contract and upon the
price. Consent is manifested by the meeting of the offer and the acceptance of the thing and the
cause which are to constitute the contract. To enter a valid contract of sale, the parties must have
the capacity to do so. Every person is presumed to be capacitated to enter into a contract until a
proof to the contrary is presented. The burden of proof is on the individual asserting a lack of
capacity to contract and must be satisfied with clear and convincing evidence.

While a corporation is a juridical person, it cannot act except through its board of
directors as a collective body, which is vested with the power and responsibility to decide
whether the corporation should enter into a contract that will bind the corporation, subject to the
articles of incorporation, by-laws or relevant provisions of law. Sandiganbayan affirmed that the
consent by the Board of Directors who had the legal capacity to enter into said contract with a
third person, was duly obtained. The supposed fraud employed by Benjamin Romualdez and
alleged cohorts on the Lopezes constitutes the root cause of the alleged nullity of the sale of the
PCIB shares. Defendants were found to have taken undue advantage of their relationship,
influence and connection with former President Marcos to unjustly enrich themselves at the
expense of the others.

Hence, contracts where consent is given through fraud are voidable. These are not void
ab initio since voidable or annullable contracts are existent, valid and binding, although they can
be annulled because of want of capacity or the vitiated consent of one of the parties. However,
before such annulment, they are considered effective and obligatory between parties. Hence, the
contract is voidable and four-year prescriptive period of Article 1391 of the New Civil Code will
apply.
 CHINA BANKING CORPORATION, petitioner vs. COURT OF APPEALS, PAULINO
ROXAS CHUA, and KIANG MING CHU CHUA, respondents
G.R. No. 129644 March 7, 2000
TOPIC: (L) Rescissbile Contracts

FACTS:
A lot in San Juan, Metro Manila is owned by Alfonso Chua and his wife Kiang Ming Chu
Chua. A notice of levy was issued in connection to a Civil Case entitled, Metropolitan Bank and
Trust Company v. Pacific Multi Commercial Corporation and Alfonso Roxas Chua before the
RTC of Manila. Private respondent Kiang Ming Chu Chua filed a complaint against the City
Sheriff of Manila and Metropolitan Bank and Trust Company, questioning the levy of the
property for it cannot be enforced because the subject land is a conjugal property.

China Bank filed an action for collection of sum of money against Pacific Multi Agro-
industrial Corp, and Alfonso Roxas Chua, anchored on three promissory notes with an aggregate
amount of P2.5M plus stipulated interest.

An alias of levy on the undivided portion of TCT No. 410603 which belonged to A.
Chua was issued in connection with Civil Case 82-14134. He also executed a public instrument
denominated as Assignment of Rights to Redeem, whereby he assigned his rights pertaining to
the portion to his son, Paulino Roxas Chua, who redeemed the property on the same day.

Private respondents instituted a Civil Case before the RTC of Pasig against China bank,
and averred that Paulino has prior and better right over the rights, title, interest, and participation
of China Banking Corp of the TCT, and that Alfonso Roxas Chua sold his right to redeem of
the aforesaid conjugal property in his favor on November 21, 1988 while the bank acquired its
right to levy on 1991.

ISSUE:
Whether or not the contract can be rescinded if the assignment of right was done in order
to defraud the creditors of Alfonso Roxas Chua

HELD:
Yes. As provided for in Article 1381 par 1 of the NCC, contracts which are undertaken in
fraud of creditors when the latter cannot, in any manner, collect the claims due them, are
rescissible. The existence of fraud may either be presumed in accordance with the provisions of
1387 of the NCC.

It is presumed that there is fraud of creditors when there is alienation of property by

gratuitous title by the debtor who has not reserved sufficient property to pay his debts contracted
before such alienation or when alienation is by onerous title made by a debtor against whom
judgment has been rendered in any instance or some writ of attachment has been issued. Such
need not to refer to property alienated and need not have obtained by the party seeking
rescission. Despite the knowledge that his share in the conjugal property is the only property
which his creditors can levy, Alfonso still assigned the property in favor of his son. The intent to
fraud became more apparent when he assigned his rights to his son after CA rendered its
resolution favoring China Bank.
Jesus Campos and Rosemarie Campos-Bautista v Buenvenida Pastrana

and Rosemarie Campos- (GR No. 175994)

 ROSENCOR DEVELOPMENT CORPORATION and RENE JOAQUIN
vs . PATERNO INQUING, IRENE GUILLERMO, FEDERICO
BANTUGAN, FERNANDO MAGBANUA and LIZZA TIANGCO,
G.R. No. 140479 March 8, 2001.
Topic: TOPIC: (L) Rescissbile Contracts

FACTS:
Plaintiffs and plaintiffs-intervenors are the lessees since 1971 of the subject property owned by
spouses Faustino and Cresencia Tiangco. The lessees were renting the premises then for P150.00
a month and were verbally granted by the lessors the pre-emptive right to purchase the property
if ever they decide to sell the same.

Upon the death of the spouses Tiangcos in 1975, the management of the property was
adjudicated to their heirs who were represented by Eufrocina de Leon. The lessees were
allegedly promised the same pre-emptive right by the heirs of Tiangcos. The lessees continued
to stay in the premises and introduced some improvements therein.

In June 1990, the lessees received a letter from Atty. Erlinda Aguila demandingthat they
vacate the premises so that the demolition of the building be undertaken. They refused to leave
the premises.

In October 1990, they received a letter from Eufrocina de Leon offering to sell to them
the property they were leasing for P2,000,000.00. The lessees offered to buy the property from
de Leon for the amount of P1,000,000 but no answer was given by de Leon as to their offer to
buy the property.

In January 1991, the lessees again received another letter from Atty. Aguila demanding
that they vacate the premises. A month thereafter, the lessees received a letter from de Leon
advising them that the heirs of the late spouses Tiangcos have already sold the property to
Rosencor, Rene Joaquin as Vice Presendent. The following month Atty. Aguila wrote them
another letter demanding the rental payment and introducing herself as counsel for
Rosencor/Rene Joaquin, the new owners of the premises. When the lessees were furnished with
the Deed of Sale, they learned that the sale took place on September 4, 1990, a month before
they were offered to by the same property. They offered de Leon 1M but the latter refused.

ISSUE:
1. Whether or not a right of first refusal is indeed covered by the provisions of the New
Civil Code on the statute of frauds. NO
2. Whether or not respondents have satisfactorily proven their right of first refusal over
the subject property. YES
3. Whether or not a Contract of sale, to a third person, may be rescinded on the ground
that the right of first refusal, i.e. in favor of the lessee, was not respected. YES
4. Whether or not Deed of Absolute Sale dated September 4, 1990 is rescissible: NO

HELD:
 1. The statute of frauds (Art. 1403) does not contemplate cases involving a right of first
refusal. As such, a right of first refusal need not be written to be enforceable and may be proven
by oral evidence.
2. Federico Bantugan, Irene Guillermo, and Paterno Inquing uniformly testified that they
were promised by the late spouses Faustino and Crescencia Tiangco and, later on, by their heirs a
right of first refusal over the property they were currently leasing should they decide to sell the
same. Also, petitioners did not present evidence before the trial court contradicting the existence
of the right of first refusal of respondents.

3. Based on the ruling of the Court in Guzman, Bocaling and Co., Inc. vs. Bonnevie, a
contract otherwise valid may nonetheless be subsequently rescinded by reason of injury to third
persons, like criditorsRescission implies a contract which, even if initially valid, produces a
lesion or pecuniary damage to someone that justifies its invalidation for reasons of equity. and
Equatorial Realty and Development, Inc. vs. Mayfair Theater, Inc., the right of first refusal, in
this case, can only be exercised is the fraudulent sale is first set aside or rescinded.
The by vendees in both cases, despite having knowledge of the right of first refusal in favor of
the respondents, they still pushed through with the purchase of the subject properties, thus acting
in bad faith.

In both cases, the fraudulent sales were ordered to be rescinded and that the respondents
be allowed to exercise their right of first refusal.

4. Under Article 1381 of the New Civil Code, paragraph 3, a contract validly agreed upon
may be rescinded if it is "undertaken in fraud of creditors when the latter cannot in any manner
collect the claim due them." In relation to Article 1385, rescission shall not take place "when the
things which are the object of the contract are legally in the possession of third persons who did
not act in bad faith.

The Court held that the evidence on record fails to show that petitioners acted in bad faith
in entering into the deed of sale over the disputed property with the heirs of the spouses Tiangco.
There is no showing that Rosencor was aware at that time that such a right of first refusal
existed.Although deLeon knew about the right of the lessees and it evidence does not show that
she communicated it to Rosencor, bad faith on the part of de Leon does not mean that petitioner
Rosencor likewise acted in bad faith. Thus it will be presumed to have acted in good faith in
entering into the Deed of Absolute Sale over the disputed property.

Thus the Deed of Sale dated September 4, 1990 cannot be rescinded.

GR No. L-67548
GR No. 173441
GR No. 144169
M.

Pua v CA
M.1

Torquator v Bernabe
Cordial v Miranda
Municipality of Hagonoy, Bulacan v Dumdum

(GR No. 168289)

Ker & Co. v Lingad
GR No. 128120
N

Villegas v Rural Bank of Tanjay

 AMADO BELTRAN vs. MA. AMELITA VILLAROSA
G.R. No. 165376 April 16, 2009
Topic: (N) Void Contracts

FACTS:
Ana Marie Calimbas bought a Chrysler Town and Country van from Nevada. It was
shipped from Los Angeles to Manila and consigned to her. To facilitate its release, her husband
Francis sought the help of Teresita Edu of a brokerage corporation who then referred them to
Beltran who was then the Supervising Assessor of the Liquidation Division of the Bureau of
Customs. Francis agreed with Beltran that the latter would facilitate the release of the van for
Php 750,000.00 including the payment of duties, taxes, and registration of the van. Being in need
of money, Francis sold the van to Villarosa. She then gave Php 750,000 to Beltran. Villarosa
then sought to register it with the LTO but was refused because its documents were alleged to be
fake. The Bureau of Customs issued a Warrant of Seizure and Detention for violation of the
Tariffs and Customs Code. The Customs Intelligence and Investigation Service found that the
documents were not processed by the Bureau of Customs. This was supported by the
certification of a Records Clerk stating that the entry pertaining to Ana Calimbas was not
received by the office and no payment of duties and taxes were made. Villarosa then filed a
collection suit against Beltran but he claimed that she had no cause of action against him, stating
that no contract existed between them and claiming that her allegations were fabricated. He
argued that if the allegations were true, they were in pari delicto because both parties engaged in
an illegal transaction involving tax evasion and bribery among others.

ISSUE:
W/N the contract was void for being illegal

HELD:
No, the contract is not illegal and therefore not void. Article 1411 of the Civil Code
provides that when the nullity proceeds from the illegality of the cause or object of the contract,
and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no
action against each other, and both shall be prosecuted. Moreover, the provisions of the Penal
Code relative to the disposal of effects or instruments of a crime shall be applicable to the things
or the price of the contract. This rule shall be applicable when only one of the parties is guilty;
but the innocent one may claim what he has given, and shall not be bound to comply with his
promise. It must be shown that the nullity of the contract proceeds from an illegal cause or
object which are two separate elements. Object is the subject matter of the agreement while
cause is the essential reason which moves the parties to enter into the transaction. In this case,
the object of the agreement was to facilitate the release of the van and in fact, payment of the
duties and taxes were deemed included in the consideration. Also an object is to have the van
registered with the LTO. The respondents cause for entering into the transaction was the non-
release of the van while the petitioners was the consideration or payment given for his service.
Both object and cause of the contract are not illegal since Villarosa is entitled to the release of
the van upon payment of duties and taxes. As such, the contract is not void. Beltran is liable to
Villarosa for Php 740,940.00 as shown in the spurious Certificate of Payment.
 UY SIU PIN and CHUA HUE vs. CASIMIRA CANTOLLAS, ET AL.
G.R. No. 46850 June 20, 1940
Topic: (N) Void Contracts

FACTS:
In the year 1929 spouses Pedro Velegao and Casimira Cantollas were indebted to El
Hogar Filipino in the sum of P2,000 secured by a mortgage on certain land covered by original
certificate of title No. 1017. Upon the death of Pedro Velegao in the same year, there remained
an unpaid balance of P1,300.

On April 2, 1932 Casimira Cantollas and her son Blas Velegao, who succeeded to the
mortgaged land, entered into a contract with Uy Siu Pin by which Casimira and Blas agreed to
deliver the latter to possess and enjoy the same with its improvements during the period of
fifteen years from April 2, 1932, on condition that Uy Siu Pin would pay to El Hogar Filipino the
unpaid balance of the indebtedness of Casimira and Blas, together with all other expenses
including realty taxes. It was further covenanted that after the lapse of fifteen years, Uy Siu Pin
would return the land to Casimira and Blas without any obligation on the part of the latter to pay
anything to Uy Siu Pin, but that, if after the expiration of five years from April 2, 1932, Casimira
and Blas would be in a position to do so, they had the right to redeem said land by paying to Uy
Siu Pin or his successors in interest the sum of P1,750.

On April 2, 1932, Uy Siu Pin took possession of the land and proceeded to make
payments to El Hogar Filipino. The payments made amounted to P600 up to July 1993. When
Uy Siu Pin ceased to make further payments, El Hogar Filipino foreclosed the mortgage. In the
foreclosure sale, the land was bought by El Hogar Filipino for P1,062.66. Casimira and Blas
failed to redeem the land within the statutory period and a final deed of sale was issued in favor
of El Hogar Filipino on December 24, 1934. On December 26, 1934 or 2 days after, the latter
sold the aforesaid land to Uy Siu Pin for P1,198.17. On December 28, 1934 Uy Siu Pin in turn
sold the land to his wife Chua Hue in consideration of P4,000. Transfer certificate of title was
issued in favor of Uy Siu Pin but it was later cancelled and was issued in the name of Chua Hue.

Casimira and Blas filed in the CFI of Tayabas a complaint against Uy Siu Pin and Chua
Hue praying that the sale and transfer of certificate of title in favor of Chua Hue be cancelled.
CFI of Tayabas rendered judgment setting aside the sale executed by Uy Siu Pin in favor of
Chua Hue, ordering the register of deeds to cancel transfer of certificate of title. CA affirmed the
judgement of CFI.

ISSUE:
Whether the sale from Uy Siu Pin to his wife Chua Hue is null and void.

HELD:
The sale from Uy Siu Pin to his wife Chua Hue is null and void not only because the
former had no right to dispose of the land in controversy in view of the existence of the contract
between Uy Siu Pin and Casimira and Blas, but because such sale comes within the prohibition
of article 1458 of the Civil Code.
 The respondents Casimira and Blas performed their part of the contract when they
delivered on April 2, 1932 the land involved herein to the petitioner Uy Siu Pin. Thereafter it
was incumbent upon the latter to fulfill his obligation to pay the debt owing by said respondents
to El Hogar Filipino and to return said land to them, after the period of 15 years. It cannot be
contended with fairness that Uy Siu Pin acquired the land in his own right from El Hogar
Filipino after the latter had foreclosed the mortgage thereon, because the foreclosure was brought
about by Uy Siu Pins own failure to pay the indebtedness of Casimira and Blas. Neither could
the latter be blamed for their failure to redeem the land from El Hogar Filipino after the
foreclosure sale, for the reason that they had the perfect right to rely on their contract with Uy
Siu Pin. Uy Siu Pin is still bound, under the circumstances of this case, to reconvey the same to
Casimira and Blas after the expiration of the period stipulated in the existing contract between
them.
Maharlika Pub. Co. v Tagle
Bautista v Montilla
Rubias v Batiller
Krivenko v Reg. of Deeds
 POTENCIANO RAMIREZ v MA. CECILIA RAMIREZ
G.R. No. 165088 March 17, 2007
Topic: (N) Void Contracts ---- (N.1) In Pari Delicto Rule

FACTS:
On October 8, 1996, petitioner Potenciano Ramirez filed a complaint against respondent
Ma. Cecilia Ramirez before the RTC of Olongapo City for annulment of:
1) a Deed of Donation; 2) Waiver of Possessory Rights; and 3) Transfer Certificates of Title
(TCT) Nos. T-5618 and T-5617. Petitioner claimed that respondent caused the execution of the
Deed of Donation and Waiver of Possessory Rights to acquire ownership over the land and
improvements then covered by TCT Nos. T-4575 and T-4576. Using the Deed of Donation,
respondent allegedly succeeded in having TCT Nos. T-4575 and T-4576 cancelled and TCT Nos.
T-5618 and T-5617 issued in her name. Furthermore, petitioner alleged that with the Waiver of
Possessory Rights, respondent was able to cause the Office of the City Assessor to transfer to her
name the tax declarations on the improvements in the land.

The Deed of Donation and Waiver of Possessory Rights were allegedly executed by
petitioner and his wife, Dolores Ramirez, on January 29, 1993 and October 24, 1995. However,
the death certificate presented showed that Dolores died on April 5, 1991 and so she could not
have executed the assailed documents. Petitioner repudiated the other signatures appearing on
the two documents that were purportedly his and insisted that he did not intend to transfer the
properties to respondent. However, the respondent alleged that her father, petitioner, would not
have filed the case were it not for the fact that he remarried despite his age of 84 years. She
further claimed that it was her fathers idea to cause the preparation of the Deed of Donation and
Waiver of Possessory Rights to save on expenses for publication and inheritance taxes.

After trial, the RTC ruled that the signature of Dolores on the Deed of Donation was a
forgery while her signature on the Waiver of Possessory Rights was genuine. It also found
petitioners signatures on both documents to be genuine. It then held petitioner and respondent in
pari delicto, as participants to the forgery, and ruled that they must bear the consequences of their
acts without cause of action against each other in accordance with Article 1412 of the Civil
Code. Petitioner went to the CA, which held that Doloress signature on the Deed of Donation as
well as her alleged signature appearing in the Waiver of Possessory Rights were forgeries. The
CA likewise held both parties in pari delicto.

ISSUE:
Whether or not the petitioner and respondent in this case are in pari delicto.

HELD: YES
The Court agrees with the rulings of the CA and the RTC that petitioner and respondent
are in pari delicto. Nevertheless, both courts erred on the applicable law particularly Article 1412
of the Civil Code, which refers to a situation where the cause of the contract is unlawful or
forbidden but does not constitute a violation of the criminal laws, thus:
ARTICLE 1412. If the act in which the unlawful or forbidden cause consists does not
constitute a criminal offense, the following rules shall be observed:
 (1) When the fault is on the part of both contracting parties, neither may recover what he
has given by virtue of the contract, or demand the performance of the other's undertaking;
(2) When only one of the contracting parties is at fault, he cannot recover what he has
given by reason of the contract, or ask for the fulfillment of what has been promised him.
The other, who is not at fault, may demand the return of what he has given without any
obligation to comply with his promise.

On the other hand, when the act involved constitutes a criminal offense, the applicable provision
is Article 1411:
ARTICLE 1411. When the nullity proceeds from the illegality of the cause or object of
the contract, and the act constitutes a criminal offense, both parties being in pari delicto,
they shall have no action against each other, and both shall be prosecuted. Moreover, the
provisions of the Penal Code relative to the disposal of effects or instruments of a crime
shall be applicable to the things or the price of the contract. This rule shall be applicable
when only one of the parties is guilty; but the innocent one may claim what he has given,
and shall not be bound to comply with his promise.

Petitioner alleged that the signatures of Dolores on the Deed of Donation and on the
Waiver of Possessory Rights are forgery. Respondent does not deny this allegation. Forging a
persons signature corresponds to the felony of falsification under Section 4, Title IV of the
Revised Penal Code. Hence, the act of forging Doloress signature constitutes a criminal offense
under the terms of Article 1411 of the Civil Code. The Court now proceeds to determine if there
is ground to hold the parties in pari delicto under Article 1411 of the Civil Code. Under this
article, it must be shown that the nullity of the contract proceeds from an illegal cause or object,
and the act of executing said contract constitutes a criminal offense. The second requirement has
already been discussed and is found to be present.

On the 1st element, petitioner claims that the object or cause of the Deed of Donation and
of the Waiver of Possessory Rights is the transferred real properties and that there is nothing
illegal about them. He maintains that the illegality instead stems from the act of forgery which
pertains to consent, which is not material to the application of Article 1411. The argument is
untenable. Object and cause are two separate elements of a donation and the illegality of either
element gives rise to the application of the doctrine of pari delicto. Object is the subject matter of
the donation, while cause is the essential reason which moves the parties to enter into the
transaction.

Petitioner wrongly asserts that the donated real properties are both the object and cause of
the donation. In fact, the donated properties pertain only to the object. The cause which moved
the parties to execute the Deed of Donation and the Waiver of Possessory Rights, the motive
behind the forgery, is the desire to evade the payment of publication expenses and inheritance
taxes, which became due upon the death of Dolores. Undeniably, the Deed of Donation and the
Waiver of Possessory Rights were executed for an illegal cause, thus completing all the
requisites for the application of Article 1411.

Therefore, both petitioner and respondent are in pari delicto. Neither one may expect
positive relief from the courts from their illegal acts and transactions.
(end)