CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F.
BALANE
Article 1157
case, be adjudicated in the discretion of the court.
PROFESSIONAL SERVICES V. AGANA, 513 SCRA 478 [2007]
Facts:
On April 4, 1984, Natividad Agana was rushed to the Medical City General Hospital (Medical City) because of difficulty of bowel
movement and bloody anal discharge. After a series of medical examinations, Dr. Miguel Ampil, diagnosed her to be suffering
from "cancer of the sigmoid."
On April 11, 1984, Dr. Ampil, assisted by the medical staff of the Medical City Hospital, performed an anterior resection surgery
on Natividad. He found that the malignancy in her sigmoid area had spread on her left ovary, necessitating the removal of certain
portions of it. Thus, Dr. Ampil obtained the consent of Natividad’s husband, Enrique Agana, to permit Dr. Juan Fuentes, to
perform hysterectomy on her.
After Dr. Fuentes had completed the hysterectomy, Dr. Ampil took over, completed the operation and closed the incision.
However, the operation appeared to be flawed. In the corresponding Record of Operation dated April 11, 1984, the attending
nurses entered these remarks: "sponge count lacking – 2” and "announced to surgeon searched (sic) done but to no avail
continue for closure."
On April 24, 1984, Natividad was released from the hospital. Her hospital and medical bills, including the doctors’ fees, amounted
to P60,000.00.
After a couple of days, Natividad complained of excruciating pain in her anal region. She consulted both Dr. Ampil and Dr.
Fuentes about it. They told her that the pain was the natural consequence of the surgery. Dr. Ampil then recommended that she
consult an oncologist to examine the cancerous nodes which were not removed during the operation.
On August 31, 1984, Natividad flew back to the Philippines (they went to the US to seek further treatment and they were told
that Natividad was free of cancer), However, Natividad was still suffering from pains. Two weeks thereafter, her daughter found
a piece of gauze protruding from her vagina. Upon being informed about it, Dr. Ampil proceeded to her house where he managed
to extract by hand a piece of gauze measuring 1.5 inches in width. He then assured her that the pains would soon vanish.
Dr. Ampil’s assurance did not come true. Instead, the pains intensified, prompting Natividad to seek treatment at the Polymedic
General Hospital. While confined there, Dr. Ramon Gutierrez detected the presence of another foreign object in her vagina -- a
foul-smelling gauze measuring 1.5 inches in width which badly infected her vaginal vault. A recto-vaginal fistula had formed in
her reproductive organs which forced stool to excrete through the vagina. Another surgical operation was needed to remedy the
damage. Thus, in October 1984, Natividad underwent another surgery.
On November 12, 1984, Natividad and her husband filed with the RTC, Branch 96, Quezon City a complaint for damages against
the Professional Services, Inc. (PSI), owner of the Medical City Hospital, Dr. Ampil, and Dr. Fuentes. They alleged that the latter
are liable for negligence for leaving two pieces of gauze inside Natividad’s body and malpractice for concealing their acts of
negligence.
Meanwhile, Enrique Agana also filed with the Professional Regulation Commission (PRC) an administrative complaint for gross
negligence and malpractice against Dr. Ampil and Dr. Fuentes. The PRC Board of Medicine heard the case only with respect to
Dr. Fuentes because it failed to acquire jurisdiction over Dr. Ampil who was then in the United States.
On February 16, 1986, pending the outcome of the above cases, Natividad died and was duly substituted by her above-named
children (the Aganas).
On March 17, 1993, the RTC rendered its Decision in favor of the Aganas, finding PSI, Dr. Ampil and Dr. Fuentes liable for
negligence and malpractice.
Aggrieved, PSI, Dr. Fuentes and Dr. Ampil interposed an appeal to the Court of Appeals.
Meanwhile, on January 23, 1995, the PRC Board of Medicine rendered its Decision in the administrative case dismissing the
case against Dr. Fuentes. The Board held that the prosecution failed to show that Dr. Fuentes was the one who left the two
pieces of gauze inside Natividad’s body; and that he concealed such fact from Natividad.
On September 6, 1996, the Court of Appeals rendered its Decision, ruling that the case against Dr. Juan Fuentes be dismissed
and with the pronouncement that Dr. Ampil be liable to reimburse Professional Services, Inc., whatever amount the latter will
pay or had paid to the Spouses Agana.
Only Dr. Ampil filed a motion for reconsideration, but it was denied in a Resolution. Hence, the instant petition.
PSI alleged in its petition that the Court of Appeals erred in holding that: (1) it is estopped from raising the defense that Dr. Ampil
is not its employee; (2) it is solidarily liable with Dr. Ampil; and (3) it is not entitled to its counterclaim against the Aganas. PSI
contends that Dr. Ampil is not its employee, but a mere consultant or independent contractor. As such, he alone should answer
for his negligence.
Issue:
1. Whether the Court of Appeals erred in holding Dr. Ampil liable for negligence and malpractice – NO, Dr. Ampil is
liable because of his medical negligence in not informing Natividad of the two missing pieces of gauze
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
2. Whether the Court of Appeals erred in absolving Dr. Fuentes of any liability – NO, Dr. Fuentes is not liable. Under
the Captain of the Ship doctrine, Dr. Ampil is liable because he was the head surgeon
3. Whether PSI may be held solidarily liable for the negligence of Dr. Ampil – YES.
Held/Rationale (on issue #3 which is the relevant issue)
In this jurisdiction, the statute governing liability for negligent acts is Article 2176 of the Civil Code, which reads: Art. 2176.
Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done.
Such fault or negligence, if there is no pre-existing contractual relation between the parties, is called a quasi-delict and is
governed by the provisions of this Chapter.
A derivative of this provision is Article 2180, the rule governing vicarious liability under the doctrine of respondeat superior, thus:
ART. 2180. The obligation imposed by Article 2176 is demandable not only for one’s own acts or omissions, but also for those
of persons for whom one is responsible…The owners and managers of an establishment or enterprise are likewise responsible
for damages caused by their employees in the service of the branches in which the latter are employed or on the occasion of
their functions. Employers shall be liable for the damages caused by their employees and household helpers acting within the
scope of their assigned tasks even though the former are not engaged in any business or industry… The responsibility treated
of in this article shall cease when the persons herein mentioned prove that they observed all the diligence of a good father of a
family to prevent damage.”
A prominent civilist [Tolentino] commented that professionals engaged by an employer, such as physicians, dentists, and
pharmacists, are not "employees" under this article because the manner in which they perform their work is not within the control
of the latter (employer). In the context of the present case, "a hospital cannot be held liable for the fault or negligence of a
physician or surgeon in the treatment or operation of patients."
The nature of the relationship between the hospital and the physicians is rendered inconsequential in view of our categorical
pronouncement in Ramos v. Court of Appeals that for purposes of apportioning responsibility in medical negligence cases, an
employer-employee relationship in effect exists between hospitals and their attending and visiting physicians.
Ramos v. CA held: “In the first place, hospitals exercise significant control in the hiring and firing of consultants and in the conduct
of their work within the hospital premises. We rule that for the purpose of allocating responsibility in medical negligence cases,
an employer-employee relationship in effect exists between hospitals and their attending and visiting physicians. "
But the Ramos pronouncement is not our only basis in sustaining PSI’s liability. Its liability is also anchored upon the agency
principle of apparent authority or agency by estoppel and the doctrine of corporate negligence which have gained
acceptance in the determination of a hospital’s liability for negligent acts of health professionals.
Apparent authority, or what is sometimes referred to as the "holding out" theory, or doctrine of ostensible agency or agency by
estoppel, has its origin from the law of agency. The concept is essentially one of estoppel and has been explained in this manner:
"The principal is bound by the acts of his agent with the apparent authority which he knowingly permits the agent to assume, or
which he holds the agent out to the public as possessing.”
Our jurisdiction recognizes the concept of an agency by implication or estoppel. Article 1869 of the Civil Code reads:
ART. 1869. Agency may be express, or implied from the acts of the principal, from his silence or lack of action, or his failure to
repudiate the agency, knowing that another person is acting on his behalf without authority.
In this case, PSI publicly displays in the lobby of the Medical City Hospital the names and specializations of the physicians
associated or accredited by it, including those of Dr. Ampil and Dr. Fuentes. We concur with the Court of Appeals’ conclusion
that it "is now estopped from passing all the blame to the physicians whose names it proudly paraded in the public directory
leading the public to believe that it vouched for their skill and competence." Where negligence mars the quality of its services,
the hospital should not be allowed to escape liability for the acts of its ostensible agents.
We now proceed to the doctrine of corporate negligence or corporate responsibility. Jurisdictions held that a hospital’s corporate
negligence extends to permitting a physician known to be incompetent to practice at the hospital. With the passage of time, more
duties were expected from hospitals, among them: (1) the use of reasonable care in the maintenance of safe and adequate
facilities and equipment; (2) the selection and retention of competent physicians; (3) the overseeing or supervision of all persons
who practice medicine within its walls; and (4) the formulation, adoption and enforcement of adequate rules and policies that
ensure quality care for its patients.
In the present case, it was duly established that PSI operates the Medical City Hospital for the purpose and under the concept
of providing comprehensive medical services to the public. Unfortunately, PSI failed to perform such duty. It is worthy to note
that Dr. Ampil and Dr. Fuentes operated on Natividad with the assistance of the Medical City Hospital’s staff, composed of
resident doctors, nurses, and interns. As such, it is reasonable to conclude that PSI, as the operator of the hospital, has actual
or constructive knowledge of the procedures carried out, particularly the report of the attending nurses that the two pieces of
gauze were missing.This means that the knowledge of any of the staff of Medical City Hospital constitutes knowledge of PSI.
Now, the failure of PSI, despite the attending nurses’ report, to investigate and inform Natividad regarding the missing gauzes
amounts to callous negligence. Not only did PSI breach its duties to oversee or supervise all persons who practice medicine
within its walls, it also failed to take an active step in fixing the negligence committed. This renders PSI, not only vicariously liable
for the negligence of Dr. Ampil under Article 2180 of the Civil Code, but also directly liable for its own negligence under Article
2176.
CANTRE V. SPOUSES GO, 522 SCRA 547 [2007]
FACTS:
o Petitioner Dr. Milagros L. Cantre was the attending physician of respondent Nora S. Go.
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 CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE
o At 1:30 a.m. of April 20, 1992, Nora gave birth to her fourth child, a baby boy. However, at around 3:30 a.m., Nora suffered
profuse bleeding inside her womb due to some parts of the placenta which were not completely expelled from her womb after
delivery. Consequently, Nora suffered hypovolemic shock, resulting in a drop in her blood pressure to "40" over "0."
o Petitioner and the assisting resident physician performed various medical procedures to stop the bleeding and to restore Nora’s
blood pressure. Her blood pressure was frequently monitored with the use of a sphygmomanometer.
o While petitioner was massaging Nora’s uterus for it to contract and stop bleeding, she ordered a droplight to warm Nora and her
baby. Nora remained unconscious until she recovered.
o While in the recovery room, her husband, noticed a fresh gaping wound 2 ½ by 3 ½ inches in the inner portion of her left arm,
close to the armpit. The husband filed a request for investigation. In response, the medical director of the hospital, called
petitioner and the assisting resident physician to explain what happened. Petitioner said the blood pressure cuff caused the
injury.
o On May 7, 1992, the spouses went to the NBI for a physical examination, which was conducted by medico-legal officer Dr.
Floresto Arizala, Jr.The medico-legal officer later testified that Nora’s injury appeared to be a burn and that a droplight when
placed near the skin for about 10 minutes could cause such burn.He dismissed the likelihood that the wound was caused by a
blood pressure cuff as the scar was not around the arm, but just on one side of the arm.
o On May 22, 1992, Nora’s injury was referred to a plastic surgeon at the Dr. Jesus Delgado Memorial Hospital for skin grafting,
with skin sourced from her abdomen, which consequently bore a scar as well. About a year after, on April 30, 1993, scar revision
had to be performed at the same hospital. The surgical operation left a healed linear scar in Nora’s left arm about three inches
in length, the thickest portion rising about one-fourth (1/4) of an inch from the surface of the skin. The costs of the skin grafting
and the scar revision were shouldered by the hospital.
o Unfortunately, Nora’s arm would never be the same. Aside from the unsightly mark, the pain in her left arm remains. When
sleeping, she has to cradle her wounded arm. Her movements now are also restricted. Her children cannot play with the left side
of her body as they might accidentally bump the injured arm, which aches at the slightest touch.
o Thus, on June 21, 1993, respondent spouses filed a complaint for damages against petitioner, Dr. Abad, and the hospital.
o The TRIAL COURT ruled in favor of respondent spouses,and ordered the petitioners to pay the following: a. P500,000.00 in
moral damages; b. P150,000.00 exemplary damages; P80,000.00 nominal damages; d. P50,000.00as attorney’s fees; and e.
P6,000.00 as litigation expenses.
o Petitioners appealed to the Court of Appeals modified the RTC decision to: P200,000.00 as moral damages and deleting the
other awards.
ISSUE:
WON petitioner is liable for the injury suffered by respondent Nora Go.  YES! They are liable! The SC affirmed the award
given by the CA.
RATIO:
RES IPSA LOQUITOR APPLIES
Courts face a unique restraint in adjudicating medical negligence cases because physicians are not guarantors of care and, they
never set out to intentionally cause injury to their patients. However, intent is immaterial in negligence cases because where
negligence exists and is proven, it automatically gives the injured a right to reparation for the damage caused.
In cases involving medical negligence, the doctrine of res ipsa loquitur allows the mere existence of an injury to justify a
presumption of negligence on the part of the person who controls the instrument causing the injury, provided that the followi ng
requisites concur:
1. The accident is of a kind which ordinarily does not occur in the absence of someone’s negligence;
2. It is caused by an instrumentality within the exclusive control of the defendant or defendants; and
3. The possibility of contributing conduct which would make the plaintiff responsible is eliminated. 18
As to the first requirement, the gaping wound on Nora’s arm is certainly not an ordinary occurrence in the act of delivering a
baby
Second, whether the injury was caused by the droplight or by the blood pressure cuff is of no moment. Both instruments are
deemed within the exclusive control of the physician in charge under the "captain of the ship" doctrine. This doctrine holds
the surgeon in charge of an operation liable for the negligence of his assistants during the time when those assistants are under
the surgeon’s control. In this particular case, it can be logically inferred that petitioner, the senior consultant in charge during the
delivery of Nora’s baby, exercised control over the assistants assigned to both the use of the droplight and the taking of Nora’s
blood pressure. Hence, the use of the droplight and the blood pressure cuff is also within petitioner’s exclusive control.
Third, the gaping wound on Nora’s left arm, by its very nature and considering her condition, could only be caused by something
external to her and outside her control as she was unconscious while in hypovolemic shock. Hence, Nora could not, by any
stretch of the imagination, have contributed to her own injury.
CAPTAIN OF THE SHIP" DOCTRINE ALSO APPLIES
Petitioner’s defense that Nora’s wound was caused by the constant taking of her blood pressure, even if the latter was necessary
given her condition, does not absolve her from liability. As testified to by the medico-legal officer, Dr. Arizala, Jr., the medical
practice is to deflate the blood pressure cuff immediately after each use. Otherwise, the inflated band can cause injury to the
patient similar to what could have happened in this case. Thus, if Nora’s wound was caused by the blood pressure cuff, then the
taking of Nora’s blood pressure must have been done so negligently as to have inflicted a gaping wound on her arm, for which
petitioner cannot escape liability under the "captain of the ship" doctrine.
THE CA CORRECTLY GAVE THE AWARD OF P200,000
Based on the foregoing, the presumption that petitioner was negligent in the exercise of her profession stands unrebutted.
Clearly, under the law, petitioner is obliged to pay Nora for moral damages suffered by the latter as a proximate result of
petitioner’s negligence.
We note, however, that petitioner has served well as Nora’s obstetrician for her past three successful deliveries. This is the first
time petitioner is being held liable for damages due to. The fact that petitioner promptly took care of Nora’s wound before infection
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
and other complications set in is also indicative of petitioner’s good intentions. Also, the fact that Nora was suffering from a
critical condition when the injury happened, such that saving her life became petitioner’s elemental concern. Nonetheless, it
should be stressed that all these could not justify negligence on the part of petitioner.
Hence, considering the specific circumstances in the instant case, the award of P200,000 as moral damages in favor of
respondents and against petitioner is just and equitable.
PHIL. HAWK V TAN LEE, 612 SCRA 576 [2010]
Facts:
 Vivian Lee Tan and her husband Silvino Tan were on board a motorcycle driven by Silvino when a bus owned by Phil.
Hawk and driven by Margarito Avila hit their motorcycle.
 As a result of the accident, Silvino died on the spot while Vivian suffered physical injuries which necessitated medical
attention and hospitalization;
 Vivian filed before the RTC of QC a Complaint\against Philippine Hawk Corporation and Margarito Avila for damages
based on quasi-delict, arising from the vehicular accident that resulted in the death of Vivian’s husband and Vivian’s
physical injuries.
 She filed an Amended Complaint, in her own behalf and in behalf of her children, in the civil case for damages against
petitioner.
 She sought the payment of indemnity for the death of Silvino, moral and exemplary damages, funeral and interment
expenses, medical and hospitalization expenses, the cost of the motorcycle's repair, attorney's fees, and other just and
equitable reliefs.
 The accident involved a motorcycle, a passenger jeep, and a bus owned by petitioner Philippine Hawk Corporation, and
was then being driven by Margarito Avila.
 In its Answer, Phil. Hawk denied liability for the vehicular accident, alleging that the immediate and proximate cause of
the accident was the recklessness or lack of caution of Silvino. Phil. Hawk asserted that it exercised the diligence of a
good father of the family in the selection and supervision of its employees, including Margarito Avila.
 According to Vivian’s testimony that she was riding on their motorcycle driven by her husband, at a place after a Caltex
gasoline station in Barangay Buensoceso, Gumaca, Quezon on the way to Lopez, Quezon. They came from the Pasumbal
Machine Shop.. They were on a stop position at the side of the highway; and when they were about to make a turn, she
saw a bus running at fast speed coming toward them, and then the bus hit a jeep parked on the roadside, and their
motorcycle as well. She lost consciousness and was brought to the hospital in Quezon, where she was confined for a
week. She was later transferred to St. Luke's Hospital in Quezon City, Manila. She suffered a fracture on her left chest,
her left arm became swollen, she felt pain in her bones, and had high blood pressure. Her husband died due to the
vehicular accident. The immediate cause of his death was massive cerebral hemorrhage.
 She further testified that her husband was leasing and operating a Caltex gasoline station in Gumaca, Quezon that yielded
PhP1M a year in revenue. They also had a copra business, which gave them an income of P3k a month or P36k a year.
 The driver of the passenger jeep involved in the accident, testified that his jeep was parked on the left side of the highway
near the Pasumbal Machine Shop. He did not notice the motorcycle before the accident. But he saw the bus dragging the
motorcycle along the highway, and then the bus bumped his jeep and sped away.
 Bus driver, Margarito testified that he was driving his bus at 60 kph on the Maharlika Highway. When they were at
Barangay Buensoceso, Gumaca, Quezon, a motorcycle ran from his left side of the highway, and as the bus came near,
the motorcycle crossed the path of the bus, and so he turned the bus to the right. He heard a loud banging sound. From
his side mirror, he saw that the motorcycle turned turtle ("bumaliktad"). He did not stop to help out of fear for his life, but
drove on and surrendered to the police. He denied that he bumped the motorcycle. Avila further testified that he had
previously been involved in sideswiping incidents, but he forgot how many times.
 Operations officer of Philippine Hawk, testified that, like their other drivers, Avila was subjected to and passed the following
requirements:
(1) Submission of NBI clearance;
(2) Certification from his previous employer that he had no bad record;
(3) Physical examination to determine his fitness to drive;
(4) Test of his driving ability, particularly his defensive skill; and
(5) Review of his driving skill every six months.16cralaw
 RTC rendered judgment against petitioner and Avila, finding Avila guilty of simple negligence, and ordering Philippine
Hawk and Avila to pay them jointly and solidarily the sum of P745,575 for loss of earnings and actual damages plus
P50k as moral damages.
 The trial court held Phil Hawk liable for failing to exercise the diligence of a good father of the family in the selection and
supervision of Avila, having failed to sufficiently inculcate in him discipline and correct behavior on the road.
 On appeal by Phil. Hawk, CA affirmed the decision of the trial court with modification in the award of damages.
Philippine Hawk and Avila were ordered to pay jointly and severally the following amount: (a) P168,019.55 as actual
damages; (b) P10k as temperate damages; (c) P100k as moral damages; (d) P590k as unearned income; and (e)
P50k as civil indemnity.22cralaw
Issues:
(1) Whether or not negligence may be attributed to Phil Hawk's driver, and whether negligence on his part was the proximate
cause of the accident, resulting in the death of Silvino and causing physical injuries to Vivian; - Yes
(2) whether or not Phil Hawk is liable to respondent for damages; and - Yes
(3) whether or not the damages awarded by CA are proper. – Yes but in modified amount
Held:
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals dated August 17, 2004 in CA-G.R. CV No. 70860
is hereby AFFIRMED with MODIFICATION. Petitioner Philippine Hawk Corporation and Margarito Avila are hereby ordered to
pay jointly and severally respondent Vivian Lee Tan: (a) civil indemnity P50k; (b) actual damages P127,192.85; (c) moral
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damages P80k; (d) indemnity for loss of earning capacity in the amount of P1M; and (e) temperate damages in the amount
of P10k.
Ratio:
The Court agree[s] with the bus driver Margarito that the motorcycle was moving ahead of the bus towards the right side from
the left side of the road, but disagrees with him that it crossed the path of the bus while the bus was running on the right side of
the highway.
 If the bus were on the right side of the highway and Margarito turned his bus to the right in an attempt to avoid hitting it,
then the bus would not have hit the passenger jeep vehicle which was then parked on the left side of the road. The fact
that the bus hit the jeep too, shows that the bus must have been running to the left lane of the highway from right to the
left, that the collision between it and the parked jeep and the moving rightways cycle became inevitable. Besides,
Margarito said he saw the motorcycle before the collision ahead of the bus; that being so, an extra-cautious public utility
driver should have stepped on his brakes and slowed down. Here, the bus never slowed down, it simply maintained its
highway speed and veered to the left. This is negligence indeed.\
 A review of the records showed that it was petitioner's witness, Efren Delantar Ong, who was about 15m away from the
bus when he saw the vehicular accident. Nevertheless, this fact does not affect the finding of the trial court that petitioner's
bus driver,
Margarito Avila, was guilty of simple negligence. Foreseeability is the fundamental test of negligence. To be negligent, a
defendant must have acted or failed to act in such a way that an ordinary reasonable man would have realized that certain
interests of certain persons were unreasonably subjected to a general but definite class of risks.w
 In this case, the bus driver, who was driving on the right side of the road, already saw the motorcycle on the left side of
the road before the collision. However, he did not take the necessary precaution to slow down, but drove on and bumped
the motorcycle, and also the passenger jeep parked on the left side of the road, showing that the bus was negligent in
veering to the left lane, causing it to hit the motorcycle and the passenger jeep.
Whenever an employee's negligence causes damage or injury to another, there instantly arises a presumption that the employer
failed to exercise the due diligence of a good father of the family in the selection or supervision of its employees.
 To avoid liability for a quasi-delict committed by his employee, an employer must overcome the presumption by presenting
convincing proof that he exercised the care and diligence of a good father of a family in the selection and supervision of
his employee.
 Petitioner is liable to respondent, since it failed to exercise the diligence of a good father of the family in the selection and
supervision of its bus driver, Avila, for having failed to sufficiently inculcate in him discipline and correct behavior on the
road. Indeed, petitioner's tests were concentrated on the ability to drive and physical fitness to do so. It also did not know
that Avila had been previously involved in sideswiping incidents.
CA correctly awarded civil indemnity for the death of respondent's husband, temperate damages, and moral damages for the
physical injuries sustained by respondent in addition to the damages granted by the trial court to respondent. The trial court
overlooked awarding the additional damages, which were prayed for by respondent in her Amended Complaint. The appellate
court is clothed with ample authority to review matters, even if they are not assigned as errors in the appeal, if it finds that their
consideration is necessary in arriving at a just decision of the case.
 The indemnity for loss of earning capacity of the deceased is provided for by Article 2206 of the Civil Code.
Compensation of this nature is awarded not for loss of earnings, but for loss of capacity to earn money.w
 As a rule, documentary evidence should be presented to substantiate the claim for damages for loss of earning capacity.
By way of exception, damages for loss of earning capacity may be awarded despite the absence of documentary evidence
when:
o (1) the deceased is self-employed and earning less than the minimum wage under current labor laws, in
which case, judicial notice may be taken of the fact that in the deceased's line of work no documentary
evidence is available; or
o (2) the deceased is employed as a daily wage worker earning less than the minimum wage under current
labor laws.
 Records show that Vivian's husband was leasing and operating a Caltex gasoline station in Gumaca, Quezon. She
testified that her husband earned an annual income of Php 1M. She presented in evidence a Certificate of Creditable
Income Tax Withheld at Source for the Year 1990, which showed that respondent's husband earned a gross income of
P950,988.43 in 1990. It is reasonable to use the Certificate and Vivian's testimony as bases for fixing the gross annual
income of the deceased at one million pesos before respondent's husband died on March 17, 1999.
 However, no documentary evidence was presented regarding the income derived from their copra business; hence, the
testimony of respondent as regards such income cannot be considered.
 In the computation of loss of earning capacity, only net earnings (total earnings – necessary expenses for the creation
of such earnings – living and other expenses), not gross earnings, are to be considered;
 In the absence of documentary evidence, it is reasonable to peg necessary expenses for the lease and operation of the
gasoline station at 80 percent of the gross income, and peg living expenses at 50 percent of the net income (gross income
less necessary expenses).
 In this case, the computation for loss of earning capacity is as follows:
Life Expectancy Reasonable and
Net Earning Gross Annual
= [2/3 (80-age at the time x Necessary Expenses
Capacity Income (GAI)
of death)] (80% of GAI)
X = [2/3 (80-65)] x P1,000,000.00 - P800,000.00
X = 2/3 (15) x P200,000.00 - P100,000.00(Living
Expenses)
X = 30/3 x P100,000.00
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
X = 10 x P100,000.00
X = P1,000,000.00
 CA also awarded actual damages for the expenses incurred in connection with the death, wake, and interment of
respondent's husband in the amount of P154,575.30, and the medical expenses of respondent in the amount of
P168,019.55. Actual damages must be substantiated by documentary evidence, such as receipts, in order to prove
expenses incurred as a result of the death of the victim or the physical injuries sustained by the victim. A review of the
valid receipts submitted in evidence showed that total actual damages is P127,192.85.
 CA correctly sustained the award of moral damages in the amount of P50,000.00 for the death of respondent's
husband. Moral damages are awarded to allow the plaintiff to obtain means, diversions or amusements that will
serve to alleviate the moral suffering he/she has undergone due to the defendant's culpable action and must,
perforce, be proportional to the suffering inflicted.
 CA correctly awarded temperate damages in the amount of P10,000.00 for the damage caused on respondent's
motorcycle. Under Art. 2224 of the Civil Code, temperate damages "may be recovered when the court finds that some
pecuniary loss has been suffered but its amount cannot, from the nature of the case, be proved with certainty."
o The cost of the repair of the motorcycle was prayed for by respondent in her Complaint. However, the
evidence presented was merely a job estimate of the cost of the motorcycle's repair amounting to P17,
829.00.
o CA held that there was no doubt that the damage caused on the motorcycle was due to the negligence of
petitioner's driver. In the absence of competent proof of the actual damage caused on the motorcycle or the
actual cost of its repair, the award of temperate damages by the appellate court in the amount of P10,000.00
was reasonable under the circumstances.
 CA also correctly awarded respondent moral damages for the physical injuries she sustained due to the vehicular
accident. Under Art. 2219 of the Civil Code, moral damages may be recovered in quasi-delicts causing physical injuries.
However, the award of P50,000.00 should be reduced to P30,000.00 in accordance with prevailing jurisprudence.
 CA correctly awarded respondent civil indemnity for the death of her husband, which has been fixed by current
jurisprudence at 50k. The award is proper under Art. 2206 of the Civil Code.
LI V. SPS SOLIMAN, 651 SCRA 18 [2012]
DOCTRINE:
The type of lawsuit which has been called medical malpractice or, more appropriately, medical negligence, is that type of
claim which a victim has available to him or her to redress a wrong committed by a medical professional which has caused bodily
harm. In order to successfully pursue such a claim, a patient must prove that a health care provider, in most cases a physician,
either failed to do something which a reasonably prudent health care provider would have done, or that he or she did something
that a reasonably prudent provider would not have done; and that that failure or action caused injury to the patient.
Every human being of adult years and sound mind has a right to determine what shall be done with his own body; and a surgeon
who performs an operation without his consent, commits and assault, for which he is liable in damages.
Doctrine of Informed Consent: From a purely ethical norm, informed consent evolved into a general principle of law that a
physician has a duty to disclose what a reasonably prudent physician in the medical community in the exercise of reasonable
care would disclose to his patient as to whatever grave risks of injury might be incurred from a proposed course of treatment, so
that a patient, exercising ordinary care for his own welfare, and faced with a choice of undergoing the proposed treatment, or
alternative treatment, or none at all, may intelligently exercise his judgment by reasonably balancing the probable risks against
the probable benefits.
Proficiency in diagnosis and therapy is not the full measure of a physician’s responsibility. It is also his duty to warn of the
dangers lurking in the proposed treatment and to impart information which the patient has every right to expect. Indeed, the
patient’s reliance upon the physician is a trust of the kind which traditionally has exacted obligations beyond those associated
with armslength transactions The physician is not expected to give the patient a short medical education, the disclosure rule only
generally informing the patient in nontechnical terms as to what is at stake; the therapy alternatives open to him, the goals
expectably to be achieved, and the risks that may ensue from particular treatment or no treatment – information a reasonable
person needs to accept or reject a recommended medical procedure.
In a malpractice action based upon the doctrine of informed consent, four essential elements must be proven:
1) The physician had a duty to disclose material risks
2) S/he failed to disclose or inadequately disclosed those risks
3) As a direct and proximate result of the failure to disclose, the patient consented to treatment s/he otherwise
would not have consented to
4) Plaintiff was injured by the proposed treatment
QUICK FACTS:
Spouses Soliman’s daughter underwent knee amputation, which necessitated adjuvant chemotherapy to minimize the chances
of recurrence and prevent the disease from spreading to other parts of the body. 11 days after the administration of the first cycle
of the chemotherapy regimen, spouses Soliman’s daughter died. Medical malpractice is proved base on lack/impaired informed
consent, and reasonable expert testimony subject a breach of duty causing gross injury to its patient.
FACTS:
Name of petitioner- Dr. Rubi Li
Name of respondent- Spouses Reynaldo and Lina Soliman
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o Spouses Soliman’s daughter, Angelica Soliman, was found to be suffering from osteosarcoma, osteoblastic type,
a high-grade (highly malignant) cancer of the bone which usually affects teenage children.
o Following this diagnosis, Angelica’s right leg was amputated by Dr. Jaime Tamayo in order to remove the tumor.
As adjuvant treatment, chemotherapy was suggested. Angelica was referred to Dr. Li, a medical oncologist.
o She was discharged four days after the surgery but was instructed to return after two or three weeks for the
chemotherapy.
o On August 18, 1993, she was readmitted to St. Luke’s Medical Center (SLMC). She died 11 days later.
o SLMC refused to release a death certificate without payment of the hospital bill. Hence, the spouses brought their
daughter’s cadaver to the PNP Crime Laboratory for post-mortem examination.
o The Medico-Legal Report indicated the cause of death as “Hypovolemic shock secondary to multiple organ
hemorrhages and Disseminated Intravascular Coagulation.”
o On the other hand, the Certificate of Death issued by SLMC indicated that the immediate cause of death was
osteosarcoma.
o The spouses filed a damage suit against Dr. Li, Dr. Marbella and Dr. Ledesma (Dr. Li’s assistants in handling
Angelica’s case), Dr. Arriete, and SLMC.
 They were charged with negligence and disregard of Angelica’s safety, health, and welfare by their
careless administration of the chemotherapy drugs, their failure to observe the essential precautions
in detecting early the symptoms of fatal blood platelet decrease and stopping early on the
chemotherapy, which bleeding led to hypovolemic shock that caused Angelica’s untimely demise.
 Dr. Li assured the spouses that Angelica would recover in view of 95% chance of healing with
chemotherapy and enumerated the side effects as: (1) slight vomiting; (2) hair loss; and (3)
weakness.
 Spouses claim that they would not have given their consent to chemotherapy had Dr. Li not falsely
assured them of its side effects.
o Dr. Li denied having been negligent in administering the chemotherapy drugs to Angelica and asserted that she
had fully explained to the spouses how the chemotherapy will affect not only the cancer cells but also the patient’s
normal body parts, including the white and red blood cells and platelets.
 What happened to Angelica can be attributed to malignant tumor cells possibly left behind after
surgery. Few as they may be, these have the capacity to compete for nutrients such that the body
becomes so weak structurally (cachexia) and functionally in the form of lower resistance of the body
to combat infection.
 This infection becomes uncontrollable and triggers a chain of events (sepsis or septicemia) that may
lead to bleeding in the form of Disseminated Intravascular Coagulation (DIC), as what the autopsy
report showed in the case of Angelica.
o Witnesses presented by spouses:
 Dr. Vergara (medico-legal): the DIC can be attributed to the chemical agents in the drugs given to
the victim, which caused platelet reduction resulting to bleeding sufficient to cause the victim’s death.
The time lapse for the production of DIC (from the time of diagnosis of sarcoma) was too short,
considering the survival rate of about 3 years. Dr. Vergara admitted that she is not a pathologist but
her statements were based on the opinion of an oncologist whom she had interviewed.
 Dr. Balmaceda: it is the physician’s duty to inform and explain to the patient or his relatives every
known side effect of the procedure or therapeutic agents to be administered, before securing the
consent of the patient or his relatives to such procedure or therapy. He stressed that the patient or
relatives must be informed of all known side effects based on studies and observations, even if such
will aggravate the patient’s condition.
o Dr. Tamayo (who performed the amputation) testified for Dr. Li : Dr. Li was one of the most proficient in the
treatment of cancer and the patient was afflicted with a very aggressive type of cancer necessitating chemotherapy
as adjuvant treatment
o RTC- Dr. Li is not liable for damages as she observed the best known procedures and employed her highest skill
and knowledge in the administration of chemotherapy drugs on Angelica. Citing Picart v Smith, declared that Li
has taken the necessary precaution against the adverse effect of chemotherapy on Angelica. A wrong decision is
not by itself negligence.
o CA- awarded damages; while there was no negligence on her part, Dr. Li as her attending physician failed to fully
explain to the spouses all the known side effects of chemotherapy (doctrine of informed consent)
ISSUE:
WoN Dr. Li can be liable for failure to fully disclose serious side effects of chemotherapy, despite the absence of finding that Dr.
Li was negligent in administering said treatment.
HELD:
NO. 1) There was adequate disclosure of material risks and 2) the spouses failed to present expert testimony.
RATIO:
o The doctrine of informed consent within the context of physician-patient relationships goes far back into English
common law.
 As early as 1767, doctors were charged with “battery” (unauthorized physical contact with a patient)
if they had not gained the consent of their patients prior to performing a surgery or procedure.
 Schoendorff v Society of New York Hospital: Every human being of adult years and sound mind has
a right to determine what shall be done with his own body; and a surgeon who performs an operation
without his consent, commits and assault, for which he is liable in damages.
 Canterbury v Spence: (as to scope of disclosure) The disclosure rule only requires of the physician
a reasonable explanation, which means generally informing the patient in nontechnical terms as to
what is at stake, the therapy alternatives available to him, the goals expectably to be achieved, and
the risks that may ensue from particular treatment or no treatment.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
 The patient’s right of self-decision can only be effectively exercised if the patient possesses adequate
information to enable him in making an intelligent choice. The test therefore for determining whether
a potential peril must be divulged is its materiality to the patient’s decision.
o Four essential elements to prove in a malpractice action based upon the doctrine of informed consent: (1) The
physician had a duty to disclose material risks; (2) S/he failed to disclose or inadequately disclosed those risks; (3)
As a direct and proximate result of the failure to disclose, the patient consented to treatment s/he otherwise would
not have consented to and (4) Plaintiff was injured by the proposed treatment
o Plaintiff is required to point to significant undisclosed information relating to the treatment which would have altered
her decision to undergo it.
o On disclosure of material risks
 There was adequate disclosure of material risks inherent in the chemotherapy procedure performed
with the consent of Angelica’s parents.
 When Dr. Li informed the spouses beforehand of the side effects which include lowered counts of
WBC and RBC, decrease in blood platelets, possible kidney or heart damage and skin darkening,
there is reasonable expectation on the part of the doctor that the respondents understood very well
that the severity of these side effects will not be the same for all patients undergoing the procedure.
By the very nature of the disease, the physician cannot precisely determine each patient’s reaction
to the chemical agents.
 That death can possibly result from complications of the treatment or the underlying cancer itself is
a risk that cannot be ruled out, as with most other major medical procedures, but conclusion can be
reasonably drawn from the general side effects of chemotherapy already disclosed.
o On failure to present expert testimony
 In a medical malpractice action based on lack of informed consent, the plaintiff must prove both the
duty and the breach of that duty through expert testimony. Such testimony must show the customary
standard of care of physicians in the same practice as that of the defendant doctor.
 The testimony of Dr. Balmaceda, who is not an oncologist, does not qualify as expert testimony to
establish the standard of care in obtaining consent for chemotherapy treatment.
Carpio, dissenting.
o There are two standards by which courts determine what constitutes adequate disclosure of associated risks and
side effects of a proposed treatment:
 Physician standard- a doctor is obligated to disclose that information which a reasonable doctor in
the same field of expertise would have disclosed to his/her patient
 Patient standard- a doctor is obligated to disclose that information which a reasonable patient would
deem material in deciding whether to proceed with a proposed treatment
o Historically, courts used the physician standard. However, modern prevailing trend among courts is to use the
patient standard of materiality.
o Any definition of scope in terms of a professional standard is at odds with the patient’s prerogative to decide on
projected therapy himself.
o In order to determine what risks and side effects of a proposed treatment are material and should be disclosed to
the patient, testimony by an expert witness is unnecessary (Canterbury).
o Dr. Li admitted that she assured the spouses that there was an 80%b chance that Angelica’s cancer would be
controlled and that she disclosed to them only some of the associated risks and side effects of chemotherapy.
Thus, Dr. Li impliedly admits that she failed to disclose many of the other associated risks and side effects
of chemotherapy, including the most material—infection, sepsis, and death.
o Clearly, infection, sepsis, and death are material risks and side effects of chemotherapy. To any reasonable person,
the risk of death is one of the most important, if not the most important, consideration in deciding whether to
undergo a proposed treatment.
o Had the spouses fully known the severity of the risks and side effects of chemotherapy, they may have opted not
to go through with the treatment of their daughter. In fact, after some of the side effects of chemotherapy
manifested, they asked Dr. Li to stop the treatment.
Brion, concurring and dissenting.
o Concurs in the result and its conclusion that the respondents failed to prove by preponderance of evidence the
essential elements of a cause of action based on the doctrine of informed consent.
o Disagrees with the ponencia’s conclusion that there was adequate disclosure of material risks of the chemotherapy
administered in view of a complete absence of competent expert testimony establishing a medical disclosure
standard in the case.
o Rather, the conclusion is based on spouses’ failure to prove by competent expert testimony the first and fourth
elements of a prima facie case for lack of informed consent, specifically:
1) The scope of the duty to disclose and the violation of this duty (i.e., failure to define what should be disclosed
and to disclose the required material risks or side effects of chemotherapy that allow the patient and/or her
parents to properly decide whether to undergo chemotherapy
2) That the chemotherapy administered by Dr. Li proximately caused the death of Angelica Soliman.
CERENO V. CA, 682 SCRA 18 [2012]
FACTS:
Raymond was a victim of a stabbing incident and was subsequently rushed to the emergency room of Bicol Regional Medical
Center (BRMC), he was attended to by Nurse Balares and Dr. Realuyo. After giving initial medical treatment to Raymond, Dr.
Realuyo recommended that the undergo “emergency exploratory laparotomy,” to which he asked Raymond’s parents to procure
500 cc of type “O” blood required for the operation. Raymond was wheeled into an operating room. Because there were no other
available anesthesiologists available to assist in the operation, the doctors (Drs. Zafe and Cereno) decided to defer the operation.
They likewise conducted an examination on Raymond and found that the latter’s blood pressure was normal and “nothing in him
was significant.”
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 CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE
During the operation and after they opened Raymond’s thoracic cavity and, they found a puncture at the inferior pole of the left
lung, evacuated about 3,200 cc of blood. In his testimony, Dr. Cereno stated that considering the loss of blood suffered by
Raymond, he did not immediately transfuse blood because he had to control the bleeders first. While the operation was on-
going, Raymond suffered a cardiac arrest and was later on pronounced dead.
Claiming that there was negligence on the part of those who attended to their son, the parents of Raymond filed a complaint for
damages against Balares, Realuyo, Zafe and Cereno. The trial court dismissed the case against Balares and Realuyo for lack
of merit, but ordered Zafe and Cereno to pay damages. The trial court found petitioners negligent in not immediately conducting
surgery on Raymond. The trial court held that had the surgery been performed promptly, Raymond would not have lost so much
blood and would have survived.
ISSUE:
Whether petitioners were grossly negligent in the performance of their duties.
HELD:
No. The type of lawsuit which has been called medical malpractice or, more appropriately, medical negligence, is that type of
claim which a victim has available to him or her to redress a wrong committed by a medical professional which has caused bodily
harm. In order to successfully pursue such claim, a patient must prove that a health care provider, in most cases a physician,
either failed to do something which a reasonably prudent provider would not have done; and that the failure or action caused
injury to the patient. The complainant must prove:
1) That the health care provider, either by his act or omission, had been negligent, and
2) That such act or omission proximately caused the injury complained of.
There is nothing in the testimonies, or any evidence on the record for that matter, which shows that the petitioners were aware
of a protocol (i.e., keeping a standby anesthesiologist available on call), and that there is no evidence that proves that such
protocol is being practiced by the hospital’s surgeons at all. But even if it assumed that the petitioners were aware of such
protocol, their failure to request for assistance of a standby anesthesiologist was reasonable when taken in the proper context.
In this case considering that Dr. Tatad (the anesthesiologist that was unable to assist) was busy in another operation, the Court
ruled that it is reasonable that petitioners decided to wait for her to finish the prior surgery and not call the standby
anesthesiologist anymore. There is no evidence to show that a prudent surgeon faced with similar circumstances would decide
otherwise.
Further, Dr. Cereno aptly explained that the delay in the transfusion of blood before and during the operation was because they
did not then see the need to administer such transfusion. During the operation, however, Dr. Cereno discovered the 3,200 cc
of blood stocked in Raymond’s thoracic cavity due to the puncture on his lung. Even then, immediate blood transfusion was not
feasible because Dr. Cereno had to control the bleeders.
In medical negligence cases, it is settled that the complainant has the burden of establishing breach of duty on the part of the
doctors or surgeons. It must be proven that such breach of duty has a causal connection to the resulting death of the patient. A
verdict in malpractice action cannot be based on speculation or conjecture. Causation must be proven within a reasonable
medical probability based on competent expert testimony. (In the case of Cruz v. Court of Appeals, it was held that “[d]octors
are protected by a special law. They are not guarantors of care. They do not even warrant a good result. They are not insurers
against mishaps or unusual consequences. Furthermore, they are not liable for honest mistake of judgment…”
Article 1169
Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that delay may exist:
(1) When the obligation or the law expressly so declare; or
(2) When from the nature and the circumstances of the obligation it appears that the
designation of the time when the thing is to be delivered or the service is to be rendered
was a controlling motive for the establishment of the contract; or 
 the debtor unless the same is excused.
(3) When demand would be useless, as when the obligor has rendered it beyond his
power to perform.
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply
in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his
obligation, delay by the other begins. (1100a)
AGCAOILI V. GSIS, 165 SCRA 1
DOCTRINE
Since GSIS did not fulfill that obligation, and was not willing to put the house in habitable state, it cannot invoke Agcaoili’s
suspension of payment of amortizations as cause to cancel the contract between them. It is axiomatic that (i)n reciprocal
obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is
incumbent upon him.
FACTS
Gsis sued Marcelo Agcaoili for the purchase of the house and lot in the GSIS Housing Project at Nangka, Marikina, Rizal, but
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
said application was subject to the condition that the latter should forthwith occupy the house. Agcaoili lost no time in occupying
the house but he could not stay in it and had to leave the very next day because the house was nothing more than a shell, in
such a state that civilized occupation was not possible: ceiling, stairs, double walling, lighting facilities, water connection,
bathroom, toilet kitchen, drainage, were inexistent. Agcaoili did however asked a homeless friend, a certain Villanueva, to stay
in the premises as some sort of watchman, pending the completion of the construction of the house. He thereafter complained
to the GSIS but to no avail.
Subsequently, the GSIS asked Agcaoili to pay the monthly amortizations of P35.56 and other fees. He paid the first monthly
amortizations and incidental fees, but refused to make further payments until and unless the GSIS completed the housing unit.
Thereafter, GSIS cancelled the award and required Agcaoili to vacate the premise. The house and lot was consequently awarded
to another applicant. Agcaoili reacted by instituting suit in the Court of First Instance of Manila for specific performance and
damages. The judgment was rendered in favor of Agcaoili. GSIS then appealed from that judgment.
ISSUE:
Was the cancellation by GSIS of the award in favor of petitioner Agcaoili just and proper?
RULING:
NO. It was the duty of the GSIS, as seller, to deliver the thing sold in a condition suitable for its enjoyment by the buyer for the
purpose contemplated. There would be no sense to require the awardee to immediately occupy and live in a shell of a house,
structure consisting only of four walls with openings, and a roof. GSIS had an obligation to deliver to Agcaoili a reasonably
habitable dwelling in return for his undertaking to pay the stipulated price.
Since GSIS did not fulfill that obligation, and was not willing to put the house in habitable state, it cannot invoke Agcaoili’s
suspension of payment of amortizations as cause to cancel the contract between them. It is axiomatic that “In reciprocal
obligations, neither party incurs in delay if the other does not comply.
There was then a perfected contract of sale between the parties; there had been a meeting of the minds upon the purchase by
Agcaoili of a determinate house and lot in the GSIS Housing Project at Nangka, Marikina, Rizal at a definite price payable in
amortizations at P31.56 per month, and from the moment the parties acquired the right to reciprocally demand performance. It
was, to be sure, the duty of the GSIS, as seller, to deliver the thing sold in a condition suitable for its enjoyment by the buyer for
the purpose contemplated, in other words, to deliver the house subject of the contract in a reasonably livable state. This it failed
to do.
SSS V. MOONWALK, 221 SCRA 119
FACTS:
Moonwalk contracted an interim loan with SSS for 30M and executed several deeds of mortgage to secure such loan. About
12M was released and Moonwalk executed a promissory note and Moonwalk paid about 23.6M for the entire loan (principal and
interest) based on the statement of account prepared by SSS. SSS then released the properties from the mortgage. However,
SSS sent letters to Moonwalk stating that it committed an honest mistake for releasing Moonwalk from its obligation because
the penalty charges, as stated in the contract, were not included in the computation. SSS then sued Moonwalk but the same
was dismissed because of extinguishment by payment and the subsequent release of the mortgage. The IAC affirmed the
decision, stating that a penal clause is an accessory obligation to enforce the performance of a principal obligation. Thus, the
penalty charges being claimed cannot exist without the main obligation.
ISSUE:
WON the penalty can be collected by SSS. (When is the penalty demandable?)
HELD:
No. A penalty is demandable in case of non-performance or late performance of the main obligation. In other words, in order
that the penalty may arise, there must a breach of the obligation either by total or partial non-fulfillment or there is non-fulfillment
in point of time which is called mora or delay. Considering also that the principal obligation had been extinguished, the demand
made by SSS was therefore ineffective. According to Art. 1226 of the Civil Code, a penalty may be enforced only when it is
demandable in accordance with the Code. Thus, a distinction must be made between a positive and a negative obligation. In
positive obligations (to give or to do), the penalty is demandable when the debtor is in mora; hence, the necessity of demand by
According to Art. 1169, delay is incurred from the time the obligee judicially or extrajudicially demands from the obligor. There
are only three instances when demand is not necessary to render the obligor in default: (1) when the obligation or the law
expressly so declares; (2) when from the nature and the circumstances of the obligation it appears that the designation of the
time when the thing is to delivered or the services is to be rendered was a controlling motive for the establishment of the contract;
or (3) when the demand would be useless, as when the obligor has rendered it beyond his power to perform. The case does not
fall under the exceptions and the provision on the promissory note (providing for the time when payment by amortization is to be
made) does not excuse SSS from making a demand (considering that Moonwalk has been delinquent for a long time). Mere
delinquency in payment does not necessarily mean delay in the legal concept. To be in default, the following requisites must be
present: (1) that the obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the
creditor requires the performance judicially and extrajudicially. Default generally begins from the moment the creditor
demands the performance of the obligation. Nowhere in the case did it appear that SSS demanded from Moonwalk the
payment of its monthly amortizations, neither the payment of the stipulated penalty. Moonwalk paid its obligation in full based on
the statement of account so it was never in default because SSS never compelled performance. If the statement of account
could be interpreted as a demand, the demand was complied with on time. Thus, SSS cannot demand such penalty after the
extinguishment of the obligation.
When a government created corporation enters into a contract with a private party concerning a loan, it descends to the level of
a private person. Hence, it is subject to the rules on contracts applicable to private persons.
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 CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE
LORENZO SHIPPING V BJ MARTHEL, 443 SCRA 163
Facts:
Respondent was the supplier of spare parts for the petitioner’s engines. Sometime in 1989, petitioner asked for a quotation of
various parts for an engine. Respondent gave them formal quotation with the following terms: 1. DELIVERY: Within 2 months
after receipt of firm order 2. 25% DP upon delivery 3. Balance payable in 5 bi-monthly equal installments not to exceed 90 days.
On Nov 2, 1989 petitioner then issued a purchase order for 1 set of Cylinder Liner valued at P477,000.00 to be used for M/V
Dadiangas Express. Instead of paying the 25% downpayment, petitioner issued 10 postdated checks (Allied Bank Corporation).
The checks were suppose to represent the full payment of the aforementioned cylinder liner. Subsequently on Jan 15, 1990
petitioner then issued a 2nd purchase order for yet another unit of cylinder liner. Both purchase orders did not state the delivery
date of the cylinders. Terms were 25% DP and the balance to be paid in 5-bi monthly installments.
On January 26, 1990, respondent deposited the check that was postdated January 18, 1990. It was dishonored. The remaining
9 postdated checks were then returned by respondent to petitioner. The parties presented disparate accounts of what happened
to the check which was previously dishonored. Petitioner claimed that it replaced said check with a good one, the proceeds of
which were applied to its other obligation to respondent. For its part, respondent insisted that it returned said postdated check
to petitioner.
Anyway, despite returning the checks, respondent still placed an order for the 2 sets of cylinder liners with its principal in Japan,
opening a line of credit. Respondent then delivered the said 2 items on April 20 1990, at petitioner’s warehouse in North Harbor,
Manila. Petitioner’s warehouseman accepted the items. The sales invoices both contain the notation “subject to verification”
under which the signature of Eric Go, petitioner’s warehouseman appeared. Thus respondent sent a Statement of Account on
November 15, 1990 to petitioner which remained unpaid. Respondent then sent a demand letter on January 2, 1991. Instead of
paying, petitioners sent a letter to respondent on March 12, 1991 offering to pay only P150,000 for the cylinder liners since they
claimed that the cylinder liners were delivered late and due to the scrapping of the M/V Dadiangas Express, petitioner would
have to sell the cylinder liners in Singapore and pay the balance from the proceeds of said sale. Respondent then sent another
demand letter on March 27, 1991. After that letter, respondent filed a case with the Makati RTC for sum of money and damages.
Petitioner claims that time was of the essence in the delivery of the cylinder liners and that the delivery on April 20 1990 of said
items was late as respondent committed to deliver said items "within two (2) months after receipt of firm order" from petitioner.
Issue:
Was there late delivery of the subjects of the contract of sale to justify petitioner to disregard the terms of the contract considering
that time was of the essence thereof? NO!
Rationale:
In determining whether time is of the essence in a contract, the ultimate criterion is the actual or apparent intention of the parties
and before time may be so regarded by a court, there must be a sufficient manifestation, either in the contract itself or the
surrounding circumstances of that intention. Petitioner insists that although its purchase orders did not specify the dates when
the cylinder liners were supposed to be delivered, nevertheless, respondent should abide by the term of delivery appearing on
the quotation it submitted to petitioner. Petitioner theorizes that the quotation embodied the offer from respondent while th e
purchase order represented its (petitioner's) acceptance of the proposed terms of the contract of sale. Thus, petitioner is of the
view that these two documents "cannot be taken separately as if there were two distinct contracts."32 We do not agree.
It is a cardinal rule in interpretation of contracts that if the terms thereof are clear and leave no doubt as to the intention of the
contracting parties, the literal meaning shall control. However, in order to ascertain the intention of the parties, their
contemporaneous and subsequent acts should be considered. In the present case, we cannot subscribe to the position of
petitioner that the documents, by themselves, embody the terms of the sale of the cylinder liners. One can easily glean the
significant differences in the terms as stated in the formal quotation and the first Purchase Order with regard to the due date of
the down payment for the first cylinder liner and the date of its delivery as well as the 2 nd Purchase Order with respect to the
date of delivery of the second cylinder liner. While the quotation provided by respondent evidently stated that the cylinder liners
were supposed to be delivered within two months from receipt of the firm order of petitioner and that the 25% down payment
was due upon the cylinder liners' delivery, the purchase orders prepared by petitioner clearly omitted these significant items.
The petitioner's Purchase Order made no mention at all of the due dates of delivery of the first cylinder liner and of the payment
of 25% down payment. Its subsequent Purchase Order likewise did not indicate the due date of delivery of the second cylinder
liner.
In the case of Bugatti v. Court of Appeals, we reiterated the principle that "[a] contract undergoes three distinct stages –
preparation or negotiation, its perfection, and finally, its consummation. Negotiation begins from the time the prospective
contracting parties manifest their interest in the contract and ends at the moment of agreement of the parties. The perfection or
birth of the contract takes place when the parties agree upon the essential elements of the contract. The last stage is the
consummation of the contract wherein the parties fulfill or perform the terms agreed upon in the contract, culminating in the
extinguishment thereof." In the instant case, the formal quotation provided by respondent represented the negotiation phase of
the subject contract of sale between the parties. As of that time, the parties had not yet reached an agreement as regards the
terms and conditions of the contract of sale of the cylinder liners. Petitioner could very well have ignored the offer or tendered a
counter-offer to respondent while the latter could have, under the pertinent provision of the Civil Code, withdrawn or modified
the same. The parties were at liberty to discuss the provisions of the contract of sale prior to its perfection.
Notably, petitioner was the one who caused the preparation of 2 Purchase Orders yet it utterly failed to adduce any justification
as to why said documents contained terms which are at variance with those stated in the quotation provided by respondent. The
only plausible reason for such failure on the part of petitioner is that the parties had, in fact, renegotiated the proposed terms of
the contract of sale. Moreover, as the obscurity in the terms of the contract between respondent and petitioner was caused by
the latter when it omitted the date of delivery of the cylinder liners in the purchase orders and varied the term with respect to the
due date of the down payment, said obscurity must be resolved against it. When the time of delivery is not fixed or is stated in
general and indefinite terms, time is not of the essence of the contract. In such cases, the delivery must be made within a
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
reasonable time. In this case the SC ruled that delivery on April 20, 1990 was made within reasonable time.
Finally, the ten postdated checks issued in November 1989 by petitioner and received by the respondent as full payment of the
purchase price of the first cylinder liner supposed to be delivered on 02 January 1990 fail to impress. It is not an indication of
failure to honor a commitment on the part of the respondent. The earliest maturity date of the checks was 18 January 1990. 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 early as 02 January 1990 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. As explained by respondent, it proceeded with
the placement of the order for the cylinder liners with its principal in Japan solely on the basis of its previously harmonious
business relationship with petitioner.
As an aside, let it be underscored that "[e]ven where time is of the essence, a breach of the contract in that respect by one of
the parties may be waived by the other party's subsequently treating the contract as still in force." Petitioner's receipt of the
cylinder liners when they were delivered to its warehouse on 20 April 1990 clearly indicates that it considered the contract of
sale to be still subsisting up to that time. Indeed, had the contract of sale been cancelled already as claimed by petitioner, it no
longer had any business receiving the cylinder liners even if said receipt was "subject to verification." By accepting the cylinder
liners when these were delivered to its warehouse, petitioner indisputably waived the claimed delay in the delivery of said items.
We, therefore, hold that in the subject contracts, time was not of the essence. The delivery of the cylinder liners on 20 April 1990
was made within a reasonable period of time considering that respondent had to place the order for the cylinder liners with i ts
principal in Japan and that the latter was, at that time, beset by heavy volume of work.
Here, there is no showing that petitioner notified respondent of its intention to rescind the contract of sale between them. Quite
the contrary, respondent's act of proceeding with the opening of an irrevocable letter of credit on 23 February 1990 belies
petitioner's claim that it notified respondent of the cancellation of the contract of sale. Truly, no prudent businessman would
pursue such action knowing that the contract of sale, for which the letter of credit was opened, was already rescinded by the
other party.
BPI V. CA, 490 SCRA 168 [2006]
Facts:
Far East Bank and Trust Company (BPI) granted a total of eight (8) loans to Noah’s Arc Merchandising (Noah’s Ark), a single
proprietorship owned by Mr. Albert T. Looyuko. The loans were evidenced by identical Promissory Notes all signed by Looyuko,
Jimmy Go and Wilson Go. All the loans were secured by real estate mortgage constituted over a parcel of land covered by TCT
No. 160277 registered in the names of Mr. Looyuko and Jimmy Go. BPI, claiming that Noah’s Ark defaulted in its obligations,
extrajudicially foreclosed the mortgage. The auction sale was set but Jimmy Go filed a complaint for damages with prayer for
issuance of TRO and/or writ of preliminary injunction seeking [to] enjoin the auction sale.
Judge Urbano C. Victorio, Sr. granted the TRO and extended the same for another 15 days, for a total of 20 days. He also
granted the application for preliminary injunction which took effect upon posting of a bond in the amount of Two Hundred
Thousand Pesos (P200,000.00). Jimmy Go filed a bond as required by the order. BPI moved for a reconsideration of the order
which motion was denied on the ground that the extrajudicial foreclosure was premature as to four (4) promissory notes.
BPI filed a petition for certiorari with the Court of Appeals, praying that the orders granting the writ of preliminary injunction and
denying the motion for reconsideration be annulled and set aside and the writ of preliminary injunction be dissolved. BPI also
asked to be allowed to proceed with the auction sale of the property.
The Court of Appeals promulgated its decision which partially denied the petition for certiorari. This is a petition for review on
certiorari filed by BPI of the decision and resolution of the Court of Appeals, which in turn partially denied a petition for certiorari
questioning the temporary restraining order (TRO) and preliminary injunction issued by Judge Victorio.
Issue:
Was demand by BPI necessary upon Jimmy Go? NO. Waiver.
Court’s Ruling:
Jimmy Go was not entitled to the TRO nor to the preliminary injunction.
Rationale:
Jimmy Go claimed that demand was not made upon him, in spite of the fact that he co-signed the promissory notes. He also
argues that only four of the eight promissory notes secured by the mortgage had become due. A reading of the promissory notes
discloses that as co-signor, Jimmy Go waived demand. Furthermore, the promissory notes contain an acceleration clause:
Upon the happening of any of the following events, FAR EAST BANK AND TRUST COMPANY or the holder, may at its option,
forthwith accelerate maturity and the unpaid balance of the principal, as well as interest and other charges which have
accrued, shall become due and payable without demand or notice[:](1) default in payment or performance of any obligation of
any of the undersigned to FAR EAST BANK AND TRUST COMPANY or its affiliated companies.
I/We hereby waive any diligence, presentment, demand, protest or notice of non-payment o[r] dishonor with respect to
this note or any extension thereof.
The Civil Code in Article 1169 provides that one incurs in delay or is in default from the time the obligor demands the fulfillment
of the obligation from the obligee, thus:
Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands
from them the fulfillment of their obligation.
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However, the demand by the creditor shall not be necessary in order that delay may exist:
(1) When the obligation or the law expressly so declare
The law expressly provides that demand is not necessary under certain circumstances, and one of these circumstances is when
the parties expressly waive demand. Hence, since the co-signors expressly waived demand in the promissory notes, demand
was unnecessary for them to be in default.
ASJ CORP. V. SPOUSES EVANGELISTA, 545 SCRA 300 [2008]
Facts:
Respondents are engaged in the large-scale business of buying broiler eggs, hatching them, and selling the chicks and egg by-
products in Bulacan and Nueva Ecija. ASJ Corp, registered in the name of San Juan and his family, was engaged by the spouses
for their hatchery services.
In 1991, respondents delivered to petitioners, eggs at an agreed service fee of 80 cents per egg, whether successfully hatched
or not. Each delivery was reflected in a Setting Report that indicated the number of eggs received, etc. Initially, the service fees
were paid upon release of the eggs and by-products to respondents but later, respondents delayed on their payments. These
delays were tolerated by San Juan, who just carried over the balance.
On February 3, 1993, respondent Efren went to the hatchery to pick up the chicks and by-products, but San Juan refused to
release them for failure to settle accrued service fees on several previous setting reports. Nevertheless, San Juan accepted
10,245 more eggs and P15k in cash as partial payment.
On February 10, 1993, Efren returned to the hatchery to pick up the chicks and by-products, but San Juan again refused.
Respondent Maura, with her son Anselmo, that afternoon tendered P15k, and tried to claim the chicks and by-products. She
explained that her inability to pay was because she was hospitalized. San Juan accepted the amount, but insisted on the full
settlement of accounts before releasing the chicks and by-products.
Believing firmly that the total value of the eggs delivered was more than sufficient to cover the outstanding balance, Maura
promised to settle their accounts only upon proper accounting by San Juan. San Juan disliked the idea and threatened to
impound their vehicle and detain them at the hatchery compound if they should come back unprepared to fully settle their
accounts with him.
For fear of San Juan, respondents never went back to the hatchery. Respondents filed with the RTC an action for damages
based on petitioners’ retention of the chicks and by-products covered by Setting Report Nos. 108 to 113.
Petitioners contend that the retention was justified and did not constitute an abuse of rights since it was respondents who failed
to comply with their obligation. Respondents aver that all the elements on abuse of rights were present. They further state that
despite their offer to partially satisfy the accrued service fees, and the fact that the value of the chicks and by-products was more
than sufficient to cover their unpaid obligations, petitioners still chose to withhold the delivery.
 RTC ruled in favor of respondents and made the following findings: (1) as of Setting Report No. 107, respondents owed
petitioners P102,336.80; (2) petitioners withheld the release of the chicks and by-products covered by Setting Report
Nos. 108-113; and (3) the retention of the chicks and by-products was unjustified and accompanied by threats and
intimidations on respondents. Both parties appealed.
 In the CA, both appeals were denied for lack of merit. The RTC’s decision was affirmed, with the modification of including
an award of exemplary damages of P10k in favor of respondents.
Issue:
WON petitioners’ retention of the chicks and by-products on account of respondents’ failure to pay the corresponding service
fees unjustified?
Held:
Yes, unjustified.
Rationale:
 It was respondents who violated the very essence of reciprocity in contracts, consequently giving rise to petitioners’ right
of retention. This case is clearly one among the species of non-performance of a reciprocal obligation.
 Reciprocal obligations are those which arise from the same cause, wherein each party is a debtor and a creditor of the
other, such that the performance of one is conditioned upon the simultaneous fulfillment of the other. From the moment
one of the parties fulfills his obligation, delay by the other party begins.
 Since respondents are guilty of delay in the performance of their obligations, they are liable to pay petitioners actual
damages of computed from respondents’ outstanding balance of as of Setting Report No. 107, plus unpaid services fees.
1
5. Default. In the event of a default by the PLEDGOR in respect to the Obligations or upon the failure of the PLEDGOR to
comply with any of the provisions of this Agreement, the PLEDGEE may
(a) cause the public sale at any time as the PLEDGEE may elect at its place of business or elsewhere and the PLEDGEE may,
in all allowable cases, acquire or purchase the Pledged Seat and hold the same thereafter in its own right free from any claim of
the PLEDGOR;
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
 Nonetheless, San Juan’s subsequent acts of threatening respondents should not remain among those treated with
impunity. Under Article 19 of the Civil Code, an act constitutes an abuse of right if the following elements are present: (a)
the existence of a legal right or duty; (b) which is exercised in bad faith; and (c) for the sole intent of prejudicing or injuring
another. Here, while petitioners had the right to withhold delivery, the high-handed and oppressive acts of petitioners, as
aptly found by the two courts below, had no legal leg to stand on.
 Since it was established that respondents suffered some pecuniary loss anchored on petitioners’ abuse of rights, although
the exact amount of actual damages cannot be ascertained, temperate damages are recoverable. (There was an
extensive discussion of temperate and exemplary damages, in case you want to read the original.)
Other Civil Law matters outside of A1169:
 Respondent’s offer to partially satisfy their accounts is not enough to extinguish their obligation. 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.
 Respondents cannot substitute or apply as their payment the value of the chicks and by-products they expect to derive
because it is necessary that all the debts be for the same kind, generally of a monetary character. Needless to say, there
was no valid application of payment in this case.
RAQUEL-SANTOS V. CA, 592 SCRA 169 [2009]
Facts:
Finvest is a stock brokerage corporation duly organized under Philippine laws and is a member of the PSE with one membership
seat pledged to the latter. Raquel-Santos was Finvest’s President and nominee to the PSE from February 20, 1990 to July 16,
1998. Mallari was its administrative officer.
In the course of its trading operations, Finvest incurred liabilities to PSE representing fines and penalties for non-payment of its
clearing house obligations. PSE also received reports that Finvest was not meeting its obligations to its clients.
On June 17, 1998, PSE demanded from Finvest the payment of its obligations to the PSE in the amount of P4,267,339.99. Upon
failure of Finvest to settle its obligations, PSE sought authority from the SEC to take over the operations of Finvest in accordance
with PSE’s undertaking pursuant to Section 22(a)(5) of the Revised Securities Act. SEC authorized it to take over the operations
of Finvest in order to continue preserving the latter’s assets.
As of August 11, 1998, Finvest’s total obligation to PSE, representing penalties, charges and fines for violations of pertinent
rules, was pegged at P5,990,839.99. Finvest promised to settle all obligations to its clients and to PSE subject to verification of
the amount due, but Finvest requested a deadline of July 31, 1999. PSE granted Finvest’s request, with the warning that, should
Finvest fail to meet the deadline, PSE might exercise its right to sell Finvest’s membership seat and use the proceeds thereof to
settle its obligations to the PSE, its member-brokers and its clients.
On February 3, 1999, PSE inquired from Finvest if it had already settled all duly acknowledged claims of its clients and its
liabilities to PSE.
In its Letter of February 23, 1999, PSE informed Finvest that it would only issue a written clearance after Finvest had settled its
obligations to PSE and paid all acknowledged liabilities to various clients. On April 26, 1999, Finvest requested a hearing to
determine the amount of its liability and to exhaust the possibility of arriving at a reasonable solution, and reiterated its appeal
for the resumption of its operations.
On April 21, 1999, PSE again sent a demand letter to Finvest, reminding the aside Finvest’s request, urging it instead to settle
all of its obligations by May 31, 1999; otherwise, PSE would be forced to recommend to the SEC the liquidation of its assets and
sell its seat at public auction, pursuant to its Pledge Agreement1 with Finvest. Finvest protested the imposition of the deadline
for being arbitrary on the ground that the claims against it had not yet been established.
At this juncture, Finvest filed a Complaint with the SEC for accounting and damages with prayer for a temporary restraining order
and/or preliminary injunction and mandamus against Raquel-Santos, Mallari and PSE. Finvest prayed that Raquel-Santos and
Mallari be ordered to account for the missing stock certificates and sales proceeds and to pay the profits that would have accrued
to Finvest.
On February 4, 2000, SEC, through a Hearing Panel, rendered a Partial Judgment against Raquel-Santos and Mallari, ordering
them to account for the missing stock certificates and pay the damages that Finvest may sustain.
Consequently, notices of garnishment and sale were issued against Raquel-Santos’ Manila Golf Shares and Sta. Elena Golf
Shares. Raquel-Santos moved for the cancellation of the notice of sale, arguing that there was no basis for the sale of his shares
as there was no money judgment involved, only an accounting of the allegedly missing stock certificates. According to him, only
after it is established that there were missing certificates should he be held accountable
Meanwhile, on June 5, 2000, the SEC Hearing Panel granted Finvest’s motion for the issuance of a preliminary injunction to
enjoin PSE from initiating the liquidation of Finvest and from selling its membership seat. The SEC Hearing Panel ratiocinated
(b) apply, at its option, the proceeds of any said sale, as well as all sums received or collected by the PLEDGEE from or on
account of such Pledged Seat to (i) the payment of expenses incurred or paid by the PLEDGEE in connection with any sale,
transfer or delivery of the Pledged Seat, and (ii) payment of the Obligations and all unpaid interests, penalties, damages,
expenses, and charges accruing on the Obligations or pursuant to the By-laws and this Agreement. The balance shall be returned
to the PLEDGOR.
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that PSE’s plan to sell Finvest’s membership seat at public auction, despite the fact that its claims against Finvest were yet to
be determined in these proceedings, was reason enough for the issuance of a preliminary injunction.
With the enactment of the Securities Regulation Code, the case was transferred to the Regional Trial Court (RTC), Makati City,
On October 2, 2001, the RTC issued an Order lifting the garnishment of Raquel-Santos’ Manila Golf Club share on the ground
that there must be a proper accounting to determine the amount for which Raquel-Santos and Mallari were to be held jointly
and severally liable to Finvest before a writ of garnishment may be validly issued.
On April 28, 2003, the RTC issued a judgment in favor of Finvest. The trial court noted that Finvest had not been remiss in
addressing its dispute with the PSE. When PSE manifested its intent to liquidate Finvest and sell its seat at public auction, the
amount of Finvest’s liability was still unsettled, which thus makes it doubtful whether Section 22(a)(5) would apply. On the issue
between Finvest and its officers (Raquel-Santos and Mallari), the trial court held that Finvest could rightfully demand an
accounting from them and hold them liable for unaccounted securities since Raquel-Santos exercised control and supervision
over the trading operations of Finvest and he and Mallari had custody of all securities traded.
PSE appealed to the CA. Finvest likewise filed a partial appeal. On August 9, 2006, the CA rendered a Decision granting Finvest’s
petition. The CA opined that paragraph 5(a) of the Pledge Agreement, giving PSE the right to sell Finvest’s seat in case of
default, pertained to default in the payment of obligations already determined and established. The validity of the fines and
penalties imposed by the PSE was yet to be substantiated. PSE could not insist on selling Finvest’s seat unless its claims had
been resolved with finality. It was, thus, proper to enjoin PSE from exercising whatever rights it had under the Pledge Agreement.
Issue:
Should the Court enjoin PSE from enforcing its and excercising its right under the pledge agreement? In the present petition,
PSE insists that Finvest’s liability for fines, penalties and charges has been established, determined and substantiated, hence,
liquidated.
HELD:
YES, the COURT MUST ENJOIN! PSE’s petition is without merit.
Article 1159 of the Civil Code provides that contracts have the force of law between the contracting parties and should be
complied with in good faith. Being the primary law between the parties, the contract governs the adjudication of their rights and
obligations. A court has no alternative but to enforce the contractual stipulations in the manner they have been agreed upon and
written.
The Pledge Agreement between PSE and Finvest was entered into pursuant to PSE’s by-laws which requires a member to
pledge its membership seat to secure the payment of all debts or obligations due PSE and its other members arising out of, or
in connection with, the present or future contracts of such member with PSE and its members. In case of default in the payment
of obligations, the Pledge Agreement explicitly grants PSE the right to sell Finvest’s pledged seat.
Article 2112 of the Civil Code also gives the pledgee the same right to sell the thing pledged in case the pledgor’s obligation is
not satisfied in due time.
Under the law on contracts, mora solvendi or debtor’s default is defined as a delay in the fulfillment of an obligation, by reason
of a cause imputable to the debtor. There are three requisites necessary for a finding of default. First, the obligation is
demandable and liquidated; second, the debtor delays performance; and third, the creditor judicially or extrajudicially requi res
the debtor’s performance.
***
The findings of fact of both the trial court and the CA plainly show that the parties were negotiating to determine the exact amount
of Finvest’s obligations to PSE, during which period PSE repeatedly moved the deadlines it imposed for Finvest to pay the fines,
penalties and charges, apparently to allow for more time to thresh out the details of the computation of said penalties. In the
middle of those talks, PSE unceremoniously took steps to sell the pledged seat at public auction, without allowing the negotiations
to come to a conclusion. This sudden decision of PSE deprived Finvest a sporting chance to settle its accountabilities before
forfeiting its seat in the stock exchange. Without that seat, Finvest will lose its standing to trade and do business in the stock
exchange.
A debt is liquidated when the amount is known or is determinable by inspection of the terms and conditions of relevant
documents. Under the attendant circumstances, it cannot be said that Finvest’s debt is liquidated. At the time PSE left the
negotiating table, the exact amount of Finvest’s fines, penalties and charges was still in dispute and as yet undetermined.
Consequently, Finvest cannot be deemed to have incurred in delay in the payment of its obligations to PSE. It cannot be made
to pay an obligation the amount of which was not fully explained to it. The public sale of the pledged seat would, thus, be
premature.
J PLUS ASIAN UTILITY, GR 199650, 26 JUNE 2013
DOCTRINE
Default or mora on the part of the debtor is the delay in the fulfillment of the prestation by reason of a cause imputable to the
former. It is the nonfulfillment of an obligation with respect to time. Article 1169 of the Civil Code provides: ART. 1169. Those
obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the
fulfillment of their obligation. x x x x It is a general rule that one who contracts to complete certain work within a certain time is
liable for the damage for not completing it within such time, unless the delay is excused or waived.
In this jurisdiction, the following requisites must be present in order that the debtor may be in default: (1) that the obligation be
demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the performance
judicially or extrajudicially.
The contractor’s default in this case pertains to his failure to substantially perform the work on account of tremendous delays in
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
executing the scheduled work activities. Where a party to a building construction contract fails to comply with the duty imposed
by the terms of the contract, a breach results for which an action may be maintained to recover the damages sustained thereby,
and of course, a breach occurs where the contractor inexcusably fails to perform substantially in accordance with the terms of
the contract.
FACTS:
Petitioner, under the name and style of Seven Shades of Blue Trading and Services, entered into a Construction Agreement for
a 72-storey condominium/hotel in Boracay for P42,000,000 and to be completed within a year from day after the signing of the
agreement. A 20% downpayment (P8,400,000) was made, and the balance will be paid based on the actual work finished every
month. Petitioner paid up to the 7th month’s billings. An evaluation and status report showed that after seven months, the project
remains to be one-third complete, and that there was an overpayment made by Petitioner. After demands and arbitration,
petitioner filed a claim for the unrecouped downpayment (or over payment) and damages.
In its answer, Respondent argued that the performance bond merely guaranteed the 20% down payment and not the entire
obligation under the Construction Agreement. Since the value of the project’s accomplishment already exceeded the said
amount, respondent’s obligation under the performance bond had been fully extinguished. As to the claim for alleged
overpayment, respondent contended that it should not be credited against the 20% down payment which was already exhausted
and such application by petitioner is tantamount to reviving an obligation that had been legally extinguished by payment.
The Construction Industry Arbitration Commission (CAIC) ruled in favor of Petitioner. On appeal, CA reversed the decision, and
held that delay was incurred, which entitled petitioner to the stipulated liquidated damages and unrecouped down payment. the
appellate court said that not all requisites in order to consider the obligor or debtor in default were present in this case. It held
that it is only from December 24, 2008 (completion date) that we should reckon default because the Construction Agreement
provided only for delay in the completion of the project and not delay on a monthly basis using the work schedule approved by
petitioner as the reference point.
ISSUE:
Whether delay should be reckoned only after the lapse of the one-year contract period.
HELD:
No. Default or mora on the part of the debtor is the delay in the fulfillment of the prestation by reason of a cause imputable to
the former. It is the non-fulfillment of an obligation with respect to time. It is a general rule that one who contracts to complete
certain work within a certain time is liable for the damage for not completing it within such time, unless the delay is excused or
waived.
In this jurisdiction, the following requisites must be present in order that the debtor may be in default: (1) that the obligation be
demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the performance
judicially or extrajudicially. Records showed that as early as April 2008, or within four months after Respondent commenced
work activities, the project was already behind schedule for reasons not attributable to petitioner.
Subsequently, a joint inspection and evaluation was conducted with the assistance of the architects and engineers of petitioner
and respondent and it was found that as of November 14, 2008, the project was only 31.39% complete and that the uncompleted
portion was 68.61% with an estimated value per Construction Agreement as P27,880,419.52. Instead of doubling his efforts as
the scheduled completion date approached, respondent did nothing to remedy the delays and even reduced the deployment of
workers at the project site. Neither did respondent, at anytime, ask for an extension to complete the project. Thus, on November
19, 2008, petitioner advised respondent of its decision to terminate the contract on account of the tremendous delay the latter
incurred. This was followed by the claim against the Performance Bond upon the respondent on December 18, 2008.
CRUZ V. GRUSPE, 693 SCRA 415 [2013]
Facts:
Cruz operated a mini bus where his driver Davin caused a collision against a Toyota Corolla car owned by Gruspe. The following
day, Cruz and a certain Leonardo Ibias went to Gruspe’s office and apoligized for the incident, and executed a Joint Affidavit
of Undertaking promising jointly and severally to replace the damaged car in 20 days with the same model or of the same
quality; or alternatively, they would pay the cost of Gruspe’s car amounting to Php 350k, with interest of 12% per month for
any delayed payment beyond the agreed date (November).
Both of them failed to pay.
However, Cruz and Leonardo denied the claim against them and alleged that they were forced by Gruspe, a lawyer and the one
who prepared the affidavit, to affix their signatures without explaining and informing them of its contents. Cruz claimed that he
only signed in order to release the minibus because it was his only source of income. Leonardo, who was a barangay official
accompanying Cruz, on the other hand, claimed that he was deceived into signing the contract. He was later represented by his
widow Esperanza in this suit.
Even if the Joint Affidavit of Undertaking was considered as a contract, Cruz and Esperanza claim that it is invalid because Cruz
and Leonardo’s consent thereto was vitiated; the contract was prepared by Gruspe who is a lawyer, and its contents were never
explained to them. Moreover, Cruz and Leonardo were simply forced to affix their signatures, otherwise, the mini van would not
be released.
Also, they claim that prior to the filing of the complaint for sum of money, Gruspe did not make any demand upon them.
Hence, pursuant to Article 1169 of the Civil Code, they could not be considered in default. Without this demand, Cruz and
Esperanza contend that Gruspe could not yet take any action
Issue:
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 CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE
W/N there was a valid contract between Gruspe and Cruz
Held:
There is also no merit to the argument of vitiated consent. An allegation of vitiated consent must be proven by
preponderance of evidence; Cruz and Leonardo failed to support their allegation.
They, in fact, admitted the genuineness and due execution of the Joint Affidavit and Undertaking when they said that they signed
the same to secure possession of their vehicle. If they truly believed that the vehicle had been illegally impounded, they could
have refused to sign the Joint Affidavit of Undertaking and filed a complaint, but they did not. That the release of their mini bus
was conditioned on their signing the Joint Affidavit of Undertaking does not, by itself, indicate that their consent was
forced – they may have given it grudgingly, but it is not indicative of a vitiated consent that is a ground for the annulment
of a contract.
Contracts are obligatory no matter what their forms may be, whenever the essential requisites for their validity are present. In
determining whether a document is an affidavit or a contract, the Court looks beyond the title of the document, since the
denomination or title given by the parties in their document is not conclusive of the nature of its contents.
In the construction or interpretation of an instrument, the intention of the parties is primordial and is to be pursued. If the terms
of the document are clear and leave no doubt on the intention of the contracting parties, the literal meaning of its stipulations
shall control. If the words appear to be contrary to the parties’ evident intention, the latter shall prevail over the former. A simple
reading of the terms of the Joint Affidavit of Undertaking readily discloses that it contains stipulations characteristic of a contract.
The Court also held that the date of demand is material in computing for the amount due. “In order that the debtor may be in
default[,] it is necessary that the following requisites be present: (1) that the obligation be demandable and already liquidated;
(2) that the debtor delays performance; and (3) that the creditor requires the performance judicially and extrajudicially.”13 Default
generally begins from the moment the creditor demands the performance of the obligation. In this case, demand could be
considered to have been made upon the filing of the complaint on November 19, 1999, and it is only from this date that the
interest should be computed.
Article 1170
Article 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or
delay, and those who in any manner contravene the tenor thereof, are liable for damages. (1101)
ARRIETA V. NARIC, 10 SCRA 79
Facts:
On May 19, 1952, Arrieta participated in the public bidding called by the NARIC for the supply of 20,000 metric tons of Burmese
rice. As her bid was the lowest, she was awarded the contract for the same. Accordingly, Arrieta and NARIC entered into a
Contract of Sale of Rice, under the terms of which the former obligated herself to deliver to the latter 20,000 metric tons of
Burmess Rice at $203.00 per metric ton, CIF Manila. In turn, the defendant corporation committed itself to pay for the imported
rice "by means of an irrevocable, confirmed and assignable letter of credit in U.S. currency in favor of the plaintiff-appellee and/or
supplier in Burma, immediately." Despite the commitment to pay immediately however, it was only on July 30, 1952, or a full
month from the execution of the contract, that the defendant corporation, thru its general manager, took the first to open a letter
of credit by forwarding to the Philippine National Bank its Application for Commercial Letter Credit.
On the same day, Mrs. Paz P. Arrieta thru counsel, advised the appellant corporation of the extreme necessity for the immediate
opening of the letter credit since she had by then made a tender to her supplier in Rangoon, Burma and in compliance with the
regulations in Rangoon this 5% will be confiscated if the required letter of credit is not received by them before August 4, 1952.
On August 4, 1952, the Philippine National Bank informed the appellant corporation that its application has been approved
subject to the condition that marginal cash deposit be paid and that drafts are to be paid upon presentment. Furthermore, the
Bank represented that it "will hold your application in abeyance pending compliance with the above stated requirement."
As it turned out, however, the appellant corporation not in any financial position to meet the condition. Consequently, the credit
instrument applied for was opened only on September 8, 1952 which is more than two months from the execution of the contract.
As a result of the delay, the allocation of Arrieta’s supplier in Rangoon was cancelled and the 5% deposit was forfeited. In this
connection, it must be made of record that although the Burmese authorities had set August 4, 1952, as the deadline for the
remittance of the required letter of credit, the cancellation of the allocation and the confiscation of the 5% deposit were not
effected until August 20, 1952, or, a full half month after the expiration of the deadline. And yet, even with the 15-day grace,
appellant corporation was unable to make good its commitment to open the disputed letter of credit.
Arrieta endeavored, but failed, to restore the cancelled Burmese rice allocation. When the futility of reinstating the same became
apparent, she offered to substitute Thailand rice instead to the defendant NARIC, communicating at the same time that the offer
was "a solution which should be beneficial to the NARIC and to us at the same time." This offer for substitution, however, was
rejected by NARIC.
On the foregoing, Arrieta sent a letter to the appellant, demanding compensation for the damages caused her in the sum of
$286,000.00, U.S. currency, representing unrealized profit. The demand having been rejected she instituted this case now on
appeal.
Issue/Held:
Whether appellant's failure to open immediately the letter of credit in dispute amounted to a breach of the contract for which it
may be held liable in damages. YES. The decision appealed from is hereby affirmed, with the sole modification that the award
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
should be converted into the Philippine peso at the rate of exchange prevailing at the time the obligation was incurred or on July
1, 1952 when the contract was executed.
Rationale:
The defense that the delay, if any in opening the letter of credit was due to the failure of plaintiff to name the supplier, the amount
and the bank, is not tenable. Plaintiff stated in Court that these facts were known to defendant even before the contract was
executed because these facts were necessarily revealed to the defendant before she could qualify as a bidder. She stated too
that she had given the necessary data immediately after the execution of the contract to Mr. GABRIEL BELMONTE, General
Manager of the NARIC, both orally and in writing and that she also pressed for the opening of the letter of credit on these
occasions. These statements have not been controverted and defendant NARIC, notwithstanding its previous intention to do so,
failed to present Mr. Belmonte to testify or refute this.
What singularly delayed the opening of the stipulated letter of credit and which, in turn, caused the cancellation of the allocation
in Burma, was the inability of the appellant corporation to meet the condition importation by the Bank for granting the same. We
do not think the appellant corporation can refute the fact that had it been able to put up the 50% marginal cash deposit demanded
by the bank, then the letter of credit would have been approved, opened and released as early as August 4, 1952.
The liability of the appellant, however, stems not alone from this failure or inability to satisfy the requirements of the bank. Its
culpability arises from its willful and deliberate assumption of contractual obligations even as it was well aware of its financial
incapacity to undertake the prestation. We base this judgment upon the letter which accompanied the application filed by the
appellant with the bank. In the said accompanying correspondence, appellant admitted and owned that it did "not have sufficient
deposit with your institution (the PNB) with which to cover the amount required to be deposited as a condition for the opening of
letters of credit.
A number of logical inferences may be drawn from the aforementioned admission. First, that the appellant knew the bank
requirements for opening letters of credit; second, that appellant also knew it could not meet those requirement. When, therefore,
despite this awareness that was financially incompetent to open a letter of credit immediately, appellant agreed in paragraph 8
of the contract to pay immediately "by means of an irrevocable, confirm and assignable letter of credit," it must be similarly held
to have bound itself to answer for all and every consequences that would result from the representation.
Having called for bids for the importation of rice involving millions, it should have a certained its ability and capacity to comply
with the inevitably requirements in cash to pay for such importation. Having announced the bid, it must be deemed to have
impliedly assured suppliers of its capacity and facility to finance the importation within the required period, especially since it had
imposed the supplier the 90-day period within which the shipment of the rice must be brought into the Philippines. Having entered
in the contract, it should have taken steps immediately to arrange for the letter of credit for the large amount involved and inquired
into the possibility of its issuance.
Under Article (1170) of the Civil Code, not only debtors guilty of fraud, negligence or default in the performance of obligations a
decreed liable; in general, every debtor who fails in performance of his obligations is bound to indemnify for the losses and
damages caused thereby. The phrase "any manner contravene the tenor" of the obligation includes any illicit act which impairs
the strict and faithful fulfillment of the obligation or every kind or defective performance.
The NARIC would also have this Court hold that the subsequent offer to substitute Thailand rice for the originally contracted
Burmese rice amounted to a waiver by the appellee of whatever rights she might have derived from the breach of the contract.
We disagree. Waivers are not presumed, but must be clearly and convincingly shown, either by express stipulation or acts
admitting no other reasonable explanation. In the case at bar, no such intent to waive has been established.
TELEFAST V. CASTRO, 158 SCRA 445
Facts:
Consolacion Bravo-Castro, died on 2 November 1956. Her daughter, respondent Sofia Crouch, was on vacation in the
Philippines, addressed a telegram announcing Consolacion’s death to the rest of the respondents (her father and her siblings)
in Indiana, USA, through petitioner’s Dagupan office, which accepted it after payment of fees or charges by Sofia. However,
only Sofia was present during Consolacion’s burial. Upon her return to the USA, Sofia discovered that the telegram has not
been received by her family, prompting respondents to file an action for damages against petitioner. The latter interposed the
defense that its failure to transmit the telegram is due to "technical and atmospheric factors beyond its control," without adducing
any additional evidence showing that petitioner made any attempt to advise respondent Sofia about the reason why it could not
transmit the telegram. The CFI awarded compensatory, moral and exemplary damages to respondents, as well as attorney’s
fees and costs. On appeal, the IAC eliminated compensatory and exemplary damages, and reduced the award of moral
damages.
Relevant Issue:
 Is the petitioner liable for damages due to its failure to transmit the telegram to the USA? YES.
Held:
Art. 1170 of the Civil Code provides that "those who in the performance of their obligations are guilty of fraud, negligence or
delay, and those who in any manner contravene the tenor thereof, are liable for damages." Art. 2176 also provides that "whoever
by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done."
In this case, Sofia entered into a contract with petitioner, wherein the latter will undertake to transmit a telegram overseas for a
fee. Despite payment by Sofia of the fee to petitioner, the latter failed to fulfill its obligation, breaching the contract and
making it liable for damages.
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 CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE
Regarding damages, the amount of ₱31.92 is inequitable and prejudicial on the part of respondent since thirty (30) years
have passed since she attempted to transmit the telegram, and she incurred expenses for travelling to the Philippines.
Moreover, the gross negligence of petitioner has caused the suffering of all respondents, who were unable to be
immediately notified of the death of Consolacion and were unable to pay their last respects as a result, hence the award
of moral damages is proper.
Petition denied; amount of damages modified.
NPC V. CA, 161 SCRA 334
Facts:
Engineering Construction executed a contract with NAWASA whereby the former will construct a tunnel in Bulacan. During the
construction of the tunnel, Typhoon Welming hit Central Luzon. Strong winds struck the project area, and heavy rains
intermittently fell. Due to the heavy downpour, the water in the reservoir of the Angat Dam was rising perilously at the rate of
sixty (60) centimeters per hour. To prevent an overflow of water from the dam, since the water level had reached the danger
height of 212 meters above sea level, the defendant corporation caused the opening of the spillway gates.
Due to the opening of the spillway, an extraordinary large volume of water rushed out of the gates and caused the materials of
Engineering Construction to be lost.
Issue:
WON the destruction and loss of the ECI's equipment and facilities were due to force majeure – NO
WON NPC is liable for damages – YES
Ratio:
NPC was undoubtedly negligent because it opened the spillway gates of the Angat Dam only at the height of typhoon "Welming"
when it knew very well that it was safer to have opened the same gradually and earlier, as it was also undeniable that NPC knew
of the coming typhoon at least four days before it actually struck. And even though the typhoon was an act of God or what we
may call force majeure, NPC cannot escape liability because its negligence was the proximate cause of the loss and damage.
Thus, if upon the happening of a fortuitous event or an act of God, there concurs a corresponding fraud, negligence, delay or
violation or contravention in any manner of the tenor of the obligation as provided for in Article 1170 of the Civil Code, which
results in loss or damage, the obligor cannot escape liability.
The principle embodied in the act of God doctrine strictly requires that the act must be one occasioned exclusively by the violence
of nature and human agencies are to be excluded from creating or entering into the cause of the mischief. When the effect, the
cause of which is to be considered, is found to be in part the result of the participation of man, whether it be from active
intervention or neglect, or failure to act, the whole occurrence is thereby humanized, as it was, and removed from the rules
applicable to the acts of God. (1 Corpus Juris, pp. 1174-1175).
LEGASPI OIL V. CA, 224 SCRA 213
Facts:
Respondent Bernard Oseraos, acting through his authorized agents, had several transactions with Legaspi Oil Co. for the sale
of copra to the latter. The price at which Oseraos (appellant) sells the copra depends on the prevailing market price when the
contract is entered into. One of his authorized agents, Jose Llover, had previous transactions with Legaspi Oil (appellee) for the
sale and delivery of copra. The records show that he concluded 2 sales: 1) 70 tons of copra at P95.00 per 100 kilos; and 2) 30
tons of P102.00 per 100 kilos. Later on, another designated agent signed a contract in behalf of appellant for the sale of 100
tons of copra at P79.00 per 100 kilos with the delivery terms of 25 days effective December 15, 1975. At this point, it must be
noted that the price of copra had been fluctuating (going up and down), indicating its unsteady position in the market.
On February 16, 1976, appellant's agent Jose Llover signed a contract for the sale of 100 tons of copra at P82.00 per 100 kilos
with delivery terms of 20 days effective March 8, 1976. As compared to appellant's transaction on November 6, 1975, the current
price agreed upon is slightly higher than the last contract. In all these contracts though, the selling price had always been stated
as "total price" rather than per 100 kilos. However, the parties had understood the same to be per 100 kilos in their previous
transactions.
After the period to deliver had lapsed, appellant sold only 46,334 kilos of copra thus leaving a balance of 53,666 kilos.
Accordingly, letter demands were made upon appellant to deliver the balance with a final warning that failure to deliver will mean
cancellation of the contract, the balance to be purchased at open market and the price differential to be charged against
appellant. On October 22, 1976, since there was still no compliance, Legaspi Oil exercised its option under the contract and
purchased the undelivered balance from the open market at the prevailing price of P168.00 per 100 kilos, or a price differential
of P86.00 per 100 kilos, a net loss of P46,152.76 chargeable against appellant. Legaspi Oil then filed a complaint against
Oseraos for breach of a contract and for damages. The CFI rendered a decision holding Oseraos liable for damages. Oseraos
appealed to respondent Court which thereafter rendered a reversal decision, ordering the dismissal of the complaint. Hence,
this petition for certiorari.
Issue:
Whether or not private respondent Oseraos is liable for damages arising from fraud or bad faith in deliberately breaching the
contract of sale entered into by the parties.
Held:
Yes, Oseraos is liable for breach of contract. Petition is granted.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
Rationale:
Oseraos is guilty of fraud in the performance of his obligation under the sales contract whereunder he bound himself to deliver
to petitioner 100 metric tons of copra within twenty (20) days. Within the delivery period, Oseraos delivered only 46,334 kilograms
of copra to petitioner, leaving an undelivered balance of 53,666 kilograms. Despite the demands made by Legaspi Oil, Oseraos
was unable to comply, forcing petitioner to buy on the open market at a much higher price. Under the foregoing undisputed
circumstances, the actuality of private respondent's fraud cannot be gainsaid.
In general, fraud may be defined as the voluntary execution of a wrongful act, or a wilfull omission, knowing and
intending the effects which naturally and necessarily arise from such act or omission; the fraud referred to in Article
1170 of the Civil Code of the Philippines is the deliberate and intentional evasion of the normal fulfillment of obligation;
it is distinguished from negligence by the presence of deliberate intent, which is lacking in the latter. The conduct of private
respondent clearly manifests his deliberate fraudulent intent to evade his contractual obligation for the price of copra had in the
meantime more than doubled from P82.00 to P168 per 100 kilograms. Under Article 1170 of the Civil Code of the Philippines,
those who in the performance of their obligation are guilty of fraud, negligence, or delay, and those who in any manner contravene
the tenor thereof, are liable for damages. Pursuant to said article, private respondent is liable for damages.
In case of fraud, bad faith, malice, or wanton attitude, the guilty party is liable for all damages which may be reasonably
attributed to the non performance of the obligation. Article 1101 of the old Civil Code, later to be reproduced as Article 1170
of our present Civil Code, was the basis of our decision in an old case, Acme Films, Inc. vs. Theaters Supply Corporation,
wherein we held:
It is not denied that the plaintiff company failed to supply the defendant with the cinematographic films which
were the subject matter of the contracts entered into on March 20, 1934, and two films under the contract of
March 24, 1934, one of said films being a serial entitled "Whispering Shadow". Guillermo Garcia Bosque testified
that because the plaintiff company had failed to supply said films, the defendants had to resort to the Universal
Pictures Corporation and ask for films to replace those which said plaintiff had failed to supply under the contract,
having had to pay therefor five per cent more than for those films contracted with said plaintiff Acme Films, Inc.,
and that the total cost thereof, including the printing of programs, posters paraded through the streets with bands
of music to announce the showing of the films which the plaintiff company failed to supply, amount to from P400
to P550. The plaintiff company did not submit evidence to rebut the testimony of said witness and the fact that
the estimate of the expenses is approximate does not make said estimate inadmissible. It was incumbent upon
the plaintiff company to submit evidence in rebuttal, or at least ascertain the amount of the different items in
cross-examination. There being no evidence to the contrary, it is logical to admit that the defendant company
spent at least the sum of P400. Inasmuch as the plaintiff company had failed to comply with a part of its booking
contract, and as the defendant company had suffered damages as a result thereof, the former is liable to
indemnify the damages caused to the latter, in accordance with the provisions of Article 1101 of the Civil Code.
GO V. CA, 272 SCRA 752
Doctrine:
Those who in the performance of their obligations are guilty of fraud, negligence or delay, and those who in any manner
contravene the tenor thereof, are liable for damages.—In this regard, Article 1170 of the Civil Code provides that “those who in
the performance of their obligations are guilty of fraud, negligence or delay, and those who in any manner contravene the tenor
thereof, are liable for damages.” In the instant case, petitioners and private respondents entered into a contract whereby, for a
fee, the former undertook to cover the latter’s wedding and deliver to them a video copy of said event. For whatever reason,
petitioners failed to provide private respondents with their tape. Clearly, petitioners are guilty of contravening their obligation to
s aid private respondents and are thus liable for damages.
Facts:
Manuel Cinco obtained a commercial loan for P700,000.00 from Maasin Traders Lending Corp. (MTLC) evidenced by a
promissory note dated Dec. 11, 1987 and secured it by way of a real estate mortgage over his conjugal land and four storey
building in Maasin, Southern Leyte. The terms for payment imposed a 3%-36% per annum interest rate on the principal and was
payable within a term of 180 days or 6 months, renewable for another 180 days. As of July 16, 1989, Manuel’s outstanding
obligation ammounted to P1,071, 256.66.
To be able to pay the loan, the spouses applied for a loan from Philippine National Bank and was granted on July 8, 1989, on
the condition that the existing mortgage would be cancelled so the land could be used as security for the new loan under a new
mortgage contract.
On July 16, 1989, Manuel went to the house of MTLC’s President (Ester Servacio) and informed her that payment for the loan
was ready at PNB. Ester then proceeded to the bank but was informed by them that Manuel had no pending loan application
with them.
On July 20, 1989, Manuel executed a Special Power of Attorney authorizing Ester to collect the proceeds of his PNB loan. This
time when Ester returned to the bank the officers told her that there was indeed a loan for P1.3 million and that the proceeds
were hers as long as she signed a deed of release/cancellation of mortgage. Outraged that the spouses Go Cinco used the
same properties mortgaged to MTLC as collateral for the PNB loan, Ester refused to sign the deed and did not collect the P1.3
Million loan proceeds.
On July 24, 1989 Ester instituted foreclosure proceedings against the spouses Go Cinco while the latter filed an action for specific
performance, damages, and preliminary injuction in the RTC of Maasin.
RTC ruled in favor of spouses Go Cinco finding that Ester unjusty refused to collect the amount. On appeal the CA reversed the
RTC. Hence, the instant petition for review on certiorari.
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 CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE
Issue:
W/N the loan to MTLC was extinguished through payment or performance.
Held:
YES. PETITION Granted.
Rationale:
While Ester’s refusal was unjustified and unreasonable, Manuel’s position that this refusal had the effect of payment that
extinguished his obligation to MTLC is wrong because a refusal without just cause is not equivalent to payment; to have the
effect of payment and the consequent extinguishment of the obligation to pay, the law requires the companion acts of tender of
payment and consignation. Article 12562 is clear and unequivocal on this point.
Nevertheless, the spouses Go Cinco duly established that they have legitimately secured a means of paying off their loan with
MTLC; they were only prevented from doing so by the unjust refusal of Ester to accept the proceeds of the PNB loan through
her refusal to execute the release of the mortgage on the properties mortgaged to MTLC.
In the present case, Manuel sought to pay Ester by authorizing her, through an SPA, to collect the proceeds of the PNB loan –
an act that would have led to payment if Ester had collected the loan proceeds as authorized. Admittedly, the delivery of the
SPA was not, strictly speaking, a delivery of the sum of money due to MTLC, and Ester could not be compelled to accept it as
payment based on Article 1233. Nonetheless, the SPA stood as an authority to collect the proceeds of the already-approved
PNB loan that, upon receipt by Ester, would have constituted as payment of the MTLC loan. Had Ester presented the SPA to
the bank and signed the deed of release/cancellation of mortgage, the delivery of the sum of money would have been effected
and the obligation extinguished. Since payment was available and was unjustifiably refused, justice and equity demand that the
spouses Go Cinco be freed from the obligation to pay interest on the outstanding amount from the time the unjust refusal took
place.
RCBC V. CA, 305 SCRA 449
DOCTRINE
Article 1170 of the Civil Code states that those who in the performance of their obligations are guilty of delay are liable for
damages. The delay in the performance of the obligation, however, must be either malicious or negligent. Thus, assuming that
private respondent was guilty of delay in the payment of the value of the unsigned check, private respondent cannot be held
liable for damages. There is no imputation, much less evidence, that private respondent acted with malice or negligence in failing
to sign the check. Indeed, we agree with the Court of Appeals finding that such omission was mere inadvertence on the part of
private respondent. Toyota salesperson Jorge Geronimo testified that he even verified whether private respondent had signed
all the checks and in fact returned three or four unsigned checks to him for signing.
FACTS:
Private respondent Atty. Felipe Lustre purchased a Toyota Corolla from Toyota Shaw, Inc. for which he made a down payment
and thus issued 24 postdated checks. To secure the balance, private respondent executed a promissory note and a contract of
chattel mortgage over the vehicle in favor of Toyota Shaw, Inc. The contract of chattel mortgage, in paragraph 11 thereof,
provided for an acceleration clause stating that should the mortgagor default in the payment of any installment, the whole amount
remaining unpaid shall become due. In addition, the mortgagor shall be liable for 25% of the principal due as liquidated damages.
Toyota Shaw, Inc. thereafter assigned all its rights and interests in the chattel mortgage to petitioner (RCBC).
All the checks were thereafter encashed and debited by RCBC from private respondent's account, except for RCBC Check No.
279805 representing the payment for August 10, 1991, which was unsigned. Because of the recall, the last two checks, dated
February 10, 1993 and March 10, 1993, were no longer presented for payment.
On the theory that respondent defaulted in his payments, the check representing the payment for August 10, 1991 being
unsigned, petitioner demanded from private respondent the payment of the balance of the debt, including liquidated
damages. The latter refused, prompting petitioner to file an action for replevin and damages before the RTC. Private
respondent, in his Answer, interposed a counterclaim for damages.
The RTC dismissed the complaint for lack of cause of action which decision was affirmed by the CA thus:
Plaintiff-appellant's imputation of default to defendant-appellee rested solely on the fact that the 5th check issued by appellee xxx
was recalled for lack of signature. However, the check was recalled only after the amount covered thereby had been deducted
from defendant-appellee's account, as shown by the testimony of plaintiff's own witness. The "default" was therefore not a case
of failure to pay, the check being sufficiently funded, and which amount was in fact already debitted [sic] from appellee's account
by the appellant bank which subsequently re-credited the amount to defendant-appellee's account for lack of signature.
Clearly, appellant bank was remiss in the performance of its functions for it could have easily called the defendant's attention to
the lack of signature on the check and sent the check to, or summoned, the latter to affix his signature.
Here, the terms of paragraph 11 of the Chattel Mortgage Contractare clear. Said paragraph states:
11. In case the MORTGAGOR fails to pay any of the installments, or to pay the interest that may be due as provided in the said
promissory note, the whole amount remaining unpaid therein shall immediately become due and payable and the mortgage on
the property (ies) herein-above described may be foreclosed by the MORTGAGEE, or the MORTGAGEE may take any other
2
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.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
legal action to enforce collection of the obligation hereby secured, and in either case the MORTGAGOR further agrees to pay
the MORTGAGEE an additional sum of 25% of the principal due and unpaid, as liquidated damages, which said sum shall
become part thereof. The MORTGAGOR hereby waives reimbursement of the amount heretofore paid by him/it to the
MORTGAGEE.
Petitioner claims that private respondent's check representing the fifth installment was "not encashed,” such that the installment
for August 1991 was not paid. By virtue of paragraph 11 above, petitioner submits that it "was justified in treating the entire
balance of the obligation as due and demandable." Despite demand by petitioner, however, private respondent refused to pay
the balance of the debt. Petitioner, in sum, imputes delay on the part of private respondent.
ISSUE:
W/N RCBC is justified in treating the entire balance of the obligation as due and demandable under par.11 of the chattel
mortgage because the 5th check was an unsigned check?
HELD: NO.
Article 1170 of the Civil Code states that those who in the performance of their obligations are guilty of delay are liable
for damages. The delay in the performance of the obligation, however, must be either malicious or negligent. Thus,
assuming that private respondent was guilty of delay in the payment of the value of the unsigned check, private respondent
cannot be held liable for damages. There is no imputation, much less evidence, that private respondent acted with malice or
negligence in failing to sign the check. Indeed, we agree with the Court of Appeals' finding that such omission was mere
"inadvertence" on the part of private respondent.
Even when the checks, were delivered to petitioner, it did not object to the unsigned check. In view of the lack of malice or
negligence on the part of private respondent, petitioner's blind and mechanical invocation of paragraph 11 of the
contract of chattel mortgage was unwarranted.
Petitioner’s conduct, in the light of the circumstances of this case, can only be described as mercenary. Petitioner had already
debited the value of the unsigned check from private respondent's account only to re-credit it much later to him. Thereafter,
petitioner encashed checks subsequently dated, then abruptly refused to encash the last two. More than a year after the date
of the unsigned check, petitioner, claiming delay and invoking paragraph 11, demanded from private respondent payment of the
value of said check and. that of the last two checks, including liquidated damages. As pointed out by the trial court, this whole
controversy could have been avoided if only petitioner bothered to call up private respondent and ask him to sign the
check. Good faith not only in compliance with its contractual obligations, but also in observance of the standard in human
relations, for every person "to act with justice, give everyone his due, and observe honesty and good faith." behooved the bank
to do so.
Failing thus, petitioner is liable for damages caused to private respondent.
Article 1172
Article 1172. Responsibility arising from negligence in the performance of every kind of obligation is
also demandable, but such liability may be regulated by the courts, according to the circumstances.
(1103)
METROBANK V. CA, 237 SCRA 761
FACTS:
Isabel Katigbak was the president and director of the Rural Bank of Padre Garcia (RBPG), owning up to 65% of the shares
thereof. Petitioner bank received a credit memo from the Central Bank that its demand deposit account was credited with
P304,000 for the account of RBPG. Katigbak issued two checks from the said account amounting to P25,000 each. When the
checks were presented for clearing, they were returned with the annotation “DAIF – TNC” (Drawn Against Insufficient Funds –
Try Next Clearing), they were redeposited later on but was likewise dishonored. One of the payees (Dr. Felipe Roque) demanded
payment for the dishonored check, to which Antonio Katigbak, an officer of RBPG paid P50,000. Katigbak had to cut her vacation
short to attend to the matter, to which she received insulting replies from officers of petition bank (ex. Bakit kayo nag-issue ng
tseke na wala namang pondo, Three Hundred Thousand na.)
Petitioner bank claimed that there are no funds on the RBPG account to pay for the checks issued. (Apparently, there is
inadvertence on the part of the petitioner’s messenger to relay the advice of the Central Bank extending the P304,000 credit
memo in favor of RBPG.)
ISSUE:
Whether petitioner should be held liable for damages.
HELD:
YES. As borne out by the records, the dishonoring of the respondent’s checks committed through negligence by the petitioner
bank on April 6, 1982 was rectified only on April 15, 1992 or nine (9) days after receipt of the credit memo. Clearly, petiti oner
bank was remiss in its duty and obligation to treat private respondents’ account with the highest degree of care, considering the
fiduciary nature of their relationship.
The bank is under obligation to treat the accounts of its depositors with meticulous care, whether such account consists only of
a few hundred pesos or of millions. It must bear the blame for failing to discover the mistake of its employee despite the
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 CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE
established procedure requiring bank papers to pass through bank personnel whose duty it is to check and countercheck them
for possible errors. Responsibility arising from negligence in the performance of every kind of obligation is demandable. While
the bank’s negligence may not have been attended with malice and bad faith, nevertheless, it caused serious anxiety,
embarrassment and humiliation to private respondents for which they are entitled to recover reasonable moral damages.
There is no merit in petitioner’s argument that it should not be considered negligent, much less be held liable for damages on
account of the inadvertence of its bank employee as Article 1173 of the Civil Code only requires it to exercise the diligence of a
good pater familias.
MITSUBISHI V. MITSUBISHI, 698 SCRA 599 [2013]
DOCTRINE
As part of American personal injury law, the collateral source rule was originally applied to tort cases wherein the defendant is
prevented from benefitting from the plaintiff’s receipt of money from other sources. Under this rule, if an injured person receives
compensation for his injuries from a source wholly independent of the tortfeasor, the payment should not be deducted from the
damages which he would otherwise collect from the tortfeasor. In a recent Decision by the Illinois Supreme Court, the rule has
been described as „an established exception to the general rule that damages in negligence actions must be compensatory.
The Court went on to explain that although the rule appears to allow a double recovery, the collateral source will have a lien or
subrogation right to prevent such a double recovery.
In Mitchell v. Haldar, 883 A.2d 32, 37-38 (Del. 2005), the collateral source rule was rationalized by the Supreme Court of
Delaware: The collateral source rule is predicated on the theory that a tortfeasor has no interest in, and therefore no right to
benefit from monies received by the injured person from sources unconnected with the defendant. According to the collateral
source rule, a tortfeasor has no right to any mitigation of damages because of payments or compensation received by the injured
person from an independent source. The rationale for the collateral source rule is based upon the quasi-punitive nature of tort
law liability. It has been explained as follows: The collateral source rule is designed to strike a balance between two competing
principles of tort law: (1) a plaintiff is entitled to compensation sufficient to make him whole, but no more; and (2) a defendant is
liable for all damages that proximately result from his wrong. A plaintiff who receives a double recovery for a single tort enjoys a
windfall; a defendant who escapes, in whole or in part, liability for his wrong enjoys a windfall. Because the law must sanction
one windfall and deny the other, it favors the victim of the wrong rather than the wrongdoer. Thus, the tortfeasor is required to
bear the cost for the full value of his or her negligent conduct even if it results in a windfall for the innocent plaintiff. (Citations
omitted)
As seen, the collateral source rule applies in order to place the responsibility for losses on the party causing them. Its application
is justified so that „the wrongdoer should not benefit from the expenditures made by the injured party or take advantage of
contracts or other relations that may exist between the injured party and third persons.‰ Thus, it finds no application to cases
involving no-fault insurances under which the insured is indemnified for losses by insurance companies, regardless of who was
at fault in the incident generating the losses. Here, it is clear that MMPC is a no-fault insurer. Hence, it cannot be obliged to pay
the hospitalization expenses of the dependents of its employees which had already been paid by separate health insurance
providers of said dependents.
Article 1173
Article 1173. The fault or negligence of the obligor consists in the omission of that diligence which
is required by the nature of the obligation and corresponds with the circumstances of the persons, of
the time and of the place. When negligence shows bad faith, the provisions of articles 1171 and 2201,
paragraph 2, shall apply.
If the law or contract does not state the diligence which is to be observed in the performance, that
which is expected of a good father of a family shall be required. (1104a)
JIMENEZ V. CITY OF MANILA, 150 SCRA 510
FACTS
 Jimenez went to the market to buy bagoong at the time when it was flooded with ankle deep rainwater. On his way home, he
stepped on an uncovered opening which could not be seen because of the dirty rainwater, causing a dirty and rusty four-
inch nail, stuck inside the uncovered opening, to pierce the left leg of plaintiff-petitioner penetrating to a depth of about
one and a half inches. First aid was first administered to him but the swelling did not stop. He was then rushed to the
Hospital where he had to be confined for twenty (20) days due to high fever and severe pain.
 Upon his discharge from the hospital, he had to walk around with crutches for fifteen (15) days. His injury prevented him from
attending to the school buses he is operating. As a result, he had suffered damages.
 Petitioner sued for damages the City of Manila and the Asiatic Integrated Corporation under whose administration the
Sta. Ana Public Market had been placed by virtue of a Management and Operating Contract.
 City of Manila maintains that it cannot be held liable for the injuries sustained by the petitioner because under the
Management and Operating Contract, Asiatic Integrated Corporation assumed all responsibility for damages which may
be suffered by third persons for any cause attributable to it. Manila argued that
o It cannot be held liable under RA 409 (Revised Charter of Manila) which provides: “The City shall not be liable or
held for damages or injuries to persons or property arising from the failure of the Mayor, the Municipal Board,
or any other City Officer, to enforce the provisions of this chapter, or any other law or ordinance, or from
negligence of said Mayor, Municipal Board, or any other officers while enforcing or attempting to enforce said
provisions.”
3
“Provinces, cities and municipalities shall be liable for damages for the death of, or injuries suffered by any person by
reason of defective conditions of roads, streets, bridges, public buildings and other public works under their control or
supervision.”
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
o Jimenez should not have gone to the market during a stormy weather, so he was also negligent.
 RTC: both Manila and Asiatic Corp solidarily liable.
 CA: Modified RTC decision. Only Asiatic Integrated Corp is solely liable for damages and attorney’s fees. City of Manila is
NOT solidarily liable with it.
ISSUE:
WON City of Manila should be solidarily liable with Asiatic Integrated Corp for the injuries petitioner suffered?
HELD
YES, solidarily liable.
 SC in City of Manila v. Teotico said that RA 409 only establishes a general rule regulating the liability of the City of Manila for
"damages or injury to persons or property arising from the failure of city officers" to enforce the provisions of said Act, "or
any other law or ordinance or from negligence" of the City "Mayor, Municipal Board, or other officers while enforcing or
attempting to enforce said provisions."
 Upon the other hand, Article 21893 of the Civil Code constitutes a particular prescription making "provinces, cities and
municipalities ... liable for damages for the death of, or injury suffered by any person by reason" — specifically — "of the
defective condition of roads, streets, bridges, public buildings, and other public works under their control or supervision."
 the Charter of Manila refers to liability arising from negligence, in general, regardless of the object, thereof, while Article 2189
of the Civil Code governs liability due to "defective streets, public buildings and other public works" in particular and is
therefore decisive on this specific case.
 under Article 2189 of the Civil Code, it is not necessary for the liability therein established to attach, that the defective public
works belong to the province, city or municipality from which responsibility is exacted. What said article requires is that
the province, city or municipality has either "control or supervision" over the public building in question.
 In the case at bar, the Sta. Ana Public Market, despite the Management and Operating Contract between respondent City
and Asiatic Integrated Corporation remained under the control of the former.
o It was expressly indicated in the contract that activities for the market (eg. Reconstruction, hiring and discharge of
emloyees) shall be subject to prior approval of the City of Manila.
o In the contract, Asia Integrated Corp is also required to report on the activities and operation of the public market.
o This fact of supervision and control of the City over subject public market was also admitted by the Mayor
o In fact, the City of Manila employed a market master for the Sta. Ana Public Market whose primary duty is to take
direct supervision and control of that particular market, more specifically, to check the safety of the place for
the public.
o The city charter also specified that The treasurer shall exercise direct and immediate supervision administration
and control over public markets.
 it is an error for the trial court to attribute the negligence to Jimenez.
 As a defense against liability on the basis of a quasi-delict, one must have exercised the diligence of a good father of a family.
(Art. 1173 of CC).
 It is the duty of the City to exercise reasonable care to keep the public market reasonably safe for people going to the market.
 While it may be conceded that the fulfillment of such duties is extremely difficult during storms and floods, it must however,
be admitted that ordinary precautions could have been taken during good weather to minimize the dangers to life and
limb under those difficult circumstances.
o Eg: drainage hole could have been placed under the stalls instead of on the passage ways, should have seen to it
that openings were covered
 Sadly, the evidence indicates that long before petitioner fell into the opening, it was already uncovered, and five (5) months
after the incident happened, the opening was still uncovered. Moreover, while there are findings that during floods the
vendors remove the iron grills to hasten the flow of water, there is no showing that such practice has ever been prohibited,
much less penalized by the City of Manila. Neither was it shown that any sign had been placed thereabouts to warn
passersby of the impending danger.
 To recapitulate, it appears evident that the City of Manila is likewise liable for damages under Article 2189 of the Civil Code,
respondent City having retained control and supervision over the Sta. Ana Public Market and as tort-feasor under Article
2176 of the Civil Code on quasi-delicts
 Petitioner had the right to assume that there were no openings in the middle of the passageways and if any, that they were
adequately covered. Had the opening been covered, petitioner could not have fallen into it. Thus the negligence of the
City of Manila is the proximate cause of the injury suffered, the City is therefore liable for the injury suffered by the peti- 4
petitioner.
 Respondent City of Manila and Asiatic Integrated Corporation being joint tort-feasors are solidarily liable under Article 2194
of the Civil Code.
Article 1174
Article 1174. Except in cases expressly specified by the law, or when it is otherwise declared by
stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be
responsible for those events which could not be foreseen, or which, though foreseen, were inevitable.
(1105a)
NAKPIL & SONS V. CA, 144 SCRA 596; 160 SCRA 334
Facts:
(3 Consolidated Cases of Philippine Bar Association, United Construction and Juan F. Nakpil & Sons).
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 CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE
Philippine Bar Association decided to contract an office building, the construction of which was undertaken by United
Construction Inc. the plans and specifications for the building were prepared by Juan F. Nakpil & Sons. The building was
completed in 1966.
In 1968, an unusually strong earthquake hit Intramuros, Manila. The building sustained major damage, causing it to tilt forward
dangerously and collapse onto its side. As a remedial measure, the building was shored up by United Construction.
Philippine Bar Association filed a complaint for damages against United Construction and Juan F. Nakpil & Sons for the partial
collapse of the building, arguing that the defects in the construction, failure of the contractors to follow the specifications and
violation of the contract caused the damage to the building.
The commissioner appointed by the trial court reported that the damages sustained by the building was directly caused by both
the earthquake and defects in the plans and specifications of the contractors, architects and owners. The TC decided to make
United Construction and Juan F. Nakpil & Sons liable for the damages. The CA affirmed the decision but lowered the award of
damages. All parties appealed the decision to the SC.
(During the case, it was further it by 2 more earthquakes which led to its eventual demolition)
Issue:
Whether or not an act of God hich caused the failure of the building, exempts from liability, parties who are otherwise liable
because of their negligence. (It does not exempt the parties)
Rationale:
The general rule is that no person shall be responsible for events which could not be foreseen or which though foreseen, were
inevitable.
An act of God has been defined as an accident, due directly and exclusively to natural causes without human intervention, which
by no amount of foresight, pains or care, reasonably to have been expected, could have been prevented. There is no dispute
that the earthquake of August 2, 1968 is a fortuitous event or an act of God.
To exempt the obligor from liability under Article 1174 of the Civil Code, for a breach of an obligation due to an "act of God," the
following must concur:
(a) the cause of the breach of the obligation must be independent of the will of the debtor;
(b) the event must be either unforseeable or unavoidable;
(c) the event must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner; and
(d) the debtor must be free from any participation in, or aggravation of the injury to the creditor.
Thus, if upon the happening of a fortuitous event or an act of God, there concurs a corresponding fraud, negligence, delay or
violation or contravention in any manner of the tenor of the obligation, which results in loss or damage, the obligor cannot escape
liability.
The negligence of the United Construction and Juan F. Nakpil & Sons was established beyond dispute both in the lower court
and in the Intermediate Appellate Court. Defendant United Construction Co., Inc. was found to have made substantial deviations
from the plans and specifications. and to have failed to observe the requisite workmanship in the construction as well as to
exercise the requisite degree of supervision; while the Juan F. Nakpil & Sons were found to have inadequacies or defects in the
plans and specifications prepared by them. As correctly assessed by both courts, the defects in the construction and in the plans
and specifications were the proximate causes that rendered the PBA building unable to withstand the earthquake in 1968. For
this reason the defendant and third-party defendants cannot claim exemption from liability.
It is well settled that the findings of facts of the Court of Appeals are conclusive on the parties and on this court unless it falls
upon one of the exemptions. It is evident that the case at bar does not fall under any of the exceptions The records show that
the lower court spared no effort in arriving at the correct appreciation of facts by the referral of technical issues to a Commissioner
chosen by the parties whose findings and conclusions remained convincingly unrebutted by the intervenors/amicus curiae who
were allowed to intervene in the Supreme Court.
One who negligently creates a dangerous condition cannot escape liability for the natural and probable consequences thereof,
although the act of a third person, or an act of God for which he is not responsible, intervenes to precipitate the loss.
The destruction was not purely an act of God. Truth to tell hundreds of ancient buildings in the vicinity were hardly affected by
the earthquake. Only one thing spells out the fatal difference; gross negligence and evident bad faith, without which the damage
would not have occurred.
QUISUMBING V. CA, 189 SCRA 605
Facts:
Norberto Quisumbing, Sr. and Gunther Loeffler were among the passengers of PAL’s Fokker ‘Friendship’ PIC-536 plane in its
flight of 6 November 1968 which left Mactan City at about 7:30 in the evening with Manila for its destination. After the plane had
taken off, Florencio O. Villarin, a Senior NBI Agent who was also a passenger of the said plane, noticed a certain ‘Zaldy,’ a
suspect in the killing of Judge Valdez, seated at the front seat near the door leading to the cockpit of the plane. A check by
Villarin with the passenger’s ticket in the possession of flight Stewardess Annie Bontigao, who was seated at the last seat right
row revealed that ‘Zaldy’ had used the name ‘Cardente,’ one of his aliases known to Villarin. Villarin also came to know from the
stewardess that ‘Zaldy had three companions on board the plane.
V i l l a r i n t h e n scribbled a note addressed to the pilot of the plane requesting the latter to contact NBI duty agents in Manila for
the said agents to ask the Director of the NBI to send about 6 NBI agents to meet the plane because the
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
suspect in the killing of Judge Valdez was on board. The said note was handed by Villarin to the stewardess who in turn gave
the same in the pilot. After receiving the note, the pilot of the plane, Capt. Luis Bonnevie, Jr., came out of the cockpit and sat
beside Villarin at the rear portion of the plane and explained that he could not send the message because it would be heard by
all ground air craft stations. Villarin, however, told the pilot of the danger of commission of violent acts on board the plane by the
notorious ‘Zaldy’ and his three companions.
Soon thereafter an exchange of gunshots ensued between Villarin and ‘Zaldy’ and the latter’s companions. ‘Zaldy’ announced
to the passengers and the pilots in the cockpit that it was hold-up and ordered the pilot not to send any SOS. The hold-uppers
divested the passengers of their belongings. Specifically, Norberto Quisumbing, Sr. and Gunther Loeffler were divested of
valuables. As a result of the incident, Quisumbing, Sr. suffered shock, because a gun had been pointed at him by one of the
hold-uppers. Upon landing at the Manila International Airport, Zaldy and his three companions succeeded in escaping.
Demands were thereafter made on PAL by Quisumbing and Loeffler “to indemnify them on their loss, but PAL refused averring
that it is not liable to them in law or in fact. Quisumbing and Loeffler brought suit against PAL in the CFI of Rizal, to recover the
value of the property lost by them to the robbers as well as moral and exemplary damages, attorney’s fees and expenses of
litigation.
After trial, the CFI rendered judgment dismissing Quisumbing’s and Loeffler’s complaint withcosts against them. Quisumbing and
Loeffler appealed to the Court of Appeals. The Court affirmed the trial court’s judgment. Insisting that the evidence demonstrates
negligence on the part of the PAL crew “occurring before and exposing them to hijacking,” Quisumbing and Loeffler have come
up to the Supreme Court praying that the judgments of the trial Court and the Court of Appeals be reversed and another rendered
in their favor. The Supreme Court denied the petition, and affirmed the appealed Decision of the Court of Appeals, with costs
against Quisumbing and Loeffler.
1.Modern display of irresistible force by hijackers
The hijackers do not board an airplane through a blatant display of firepower and violent fury. Firearms, hand-grenades,
dynamite, and explosives are introduced into the airplane surreptitiously and with the utmost cunning and stealth, although there
is an occasional use of innocent hostages who will be coldly murdered unless a plane is given to the hijackers’ complete disposal.
The objective of modern-day hijackers is to display the irresistible force amounting to force majeure only when it is most effective
and that is when the jetliner is winging its way at Himalayan altitudes and ill-advised heroics by either crew or passengers would
send the multi-million peso airplane and the priceless lives of all its occupants into certain death and destruction.
2. Security measures may minimize hijackings but may prove ineffective against truly determined hijackers
The mandatory use of the most sophisticated electronic detection devices and magnetometers, the
imposition of severe penalties, the development of screening procedures, the compilation of hijacker behavioral profiles, the
assignment of sky marshals, and the weight of outraged world opinion may have minimized hijackings but all these
have proved ineffective against truly determined hijackers. World experience shows that if a group of armed hijackers want to
take over a plane in flight, they can elude the latest combined government and airline industry measures. As our own experience
in Zamboanga City illustrates, the use of force to overcome hijackers, results in the death and injury of innocent passengers and
crew members. This does not suggest, however, that the Philippine Airlines should not do everything humanly possible to
protect passengers from hijackers’ acts.
3. Acts of airline and crew, while complying with requirements of government agencies, cannot be faulted as
negligence
Where the airline has faithfully complied with the requirements of government agencies and adhered to the established
procedures and precautions of the airline industry at any particular time, its failure to take
certain steps that a passenger in hindsight believes should have been taken is not the negligence or misconduct which mingles
with force majeure as an active and cooperative cause. Herein, the acts of the airline and its crew cannot be faulted as
negligence. The hijackers had already shown their willingness to kill one passenger was in fact killed and another survived
gunshot wounds. The lives of the rest of the passengers and crew were more important than their properties. Cooperation with
the hijackers until they released their hostages at the runway end near the South Superhighway was dictated by the
circumstances.
4. Under the facts, “the highjacking-robbery was force majeure
The evidence does fail to prove any want of diligence on the part of PAL, or that, more specifically, it had failed to comply with
applicable regulations or universally accepted and observed procedures to preclude hijacking; and that the particular acts singled
out by Quisumbing and Loeffler as supposedly demonstrative of negligence were, in the light of the circumstances of the case,
not in truth negligent acts “sufficient to overcome the force majeure nature of the armed robbery.”
BACHELOR EXPRESS V. CA, 188 SCRA 216
FACTS:
On August 1, 1980, Bus No. 800 owned by Bachelor Express, Inc. and driven by Cresencio Rivera was the situs of a stampede
which resulted in the death of passengers Ornominio Beter and Narcisa Rautraut.
The evidence shows that the bus came from Davao City on its way to Cagayan de Oro City passing Butuan City; that while at
Tabon-Tabon, Butuan City, the bus picked up a passenger; that about fifteen (15) minutes later, a passenger at the rear portion
suddenly stabbed a PC soldier which caused commotion and panic among the passengers; that when the bus stopped,
passengers Ornominio Beter and Narcisa Rautraut were found lying down the road, the former already dead as a result of head
injuries and the latter also suffering from severe injuries which caused her death later. The passenger assailant alighted from
the bus and ran toward the bushes but was killed by the police.
Thereafter, the heirs of the deceased, private respondents herein, filed a complaint for "sum of money" against Bachelor Express,
Inc. its alleged owner Samson Yasay and the driver Rivera.
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 CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE
The petitioners denied liability alleging that the driver was able to transport his passengers safely to their respective places of
destination except Ornominio Beter and Narcisa Rautraut who jumped off the bus without the knowledge and consent, much
less, the fault of the driver and conductor and the defendants in this case; the defendant corporation had exercised due diligence
in the choice of its employees to avoid as much as possible accidents; the incident was not a traffic accident or vehicular accident;
it was an incident or event very much beyond the control of the defendants; defendants were not parties to the incident
complained of as it was an act of a third party who is not in any way connected with the defendants and of which the latter have
no control and supervision; ..."
Lower court dismissed the complaint, CA reversed finding appellees jointly and solidarily liable
ISSUE:
WON the deaths of the two passengers were due to a fortuitous event hence Bachelor Express should not be liable? NO.
RATIO:
There is no question that Bachelor Express, Inc. is a common carrier. Hence, from the nature of its business and for reasons of
public policy Bachelor Express, Inc. is bound to carry its passengers safely as far as human care and foresight can provide using
the utmost diligence of very cautious persons, with a due regard for all the circumstances.
In the case at bar, Beter and Rautraut were passengers of a bus belonging to petitioner Bachelor Express, Inc. and, while
passengers of the bus, suffered injuries which caused their death. Consequently, pursuant to Article 1756 of the Civil Code,
petitioner Bachelor Express, Inc. is presumed to have acted negligently unless it can prove that it had observed extraordinary
diligence in accordance with Articles 1733 and 1755 of the New Civil Code.
Bachelor Express, Inc. denies liability for the death of Beter and Rautraut on its posture that the death of the said passengers
was caused by a third person who was beyond its control and supervision. In effect, the petitioner, in order to overcome the
presumption of fault or negligence under the law, states that the vehicular incident resulting in the death of passengers Beter
and Rautraut was caused by force majeure or caso fortuito over which the common carrier did not have any control.
Article 1174 of the present Civil Code states:
Except in cases expressly specified by law, or when it is otherwise declared by stipulations, or when the nature of the obligation
requires the assumption of risk, no person shall be responsible for those events which could not be foreseen, or which though
foreseen, were inevitable.
In the case of Lasam v. Smith (45 Phil. 657 [1924]), we defined "events" which cannot be foreseen and which, having been
foreseen, are inevitable in the following manner:
... The Spanish authorities regard the language employed as an effort to define the term 'caso fortuito' and hold that the two
expressions are synonymous.
The antecedent to Article 1105 is found in Law II, Title 33, Partida 7, which defines caso fortuito as (An event that takes place
by incident and could not have been foreseen. Examples of this are destruction of houses, unexpected fire, shipwreck, violence
of robbers ...)
Escriche defines caso fortuito as an unexpected event or act of God which could neither be foreseen nor resisted, such as floods,
torrents, shipwrecks, conflagrations, lightning, compulsion, insurrections, destruction of buildings by unforeseen accidents and
other occurrences of a similar nature.
In discussing and analyzing the term caso fortuito the Enciclopedia Juridica Española says: 'In a legal sense and, consequently,
also in relation to contracts, a caso fortuito presents the following essential characteristics: (1) The cause of the unforeseen and
unexpected occurrence, or of the failure of the debtor to comply with his obligation, must be independent of the human will. (2)
It must be impossible to foresee the event which constitutes the caso fortuito, or if it can be foreseen, it must be impossible to
avoid. (3) The occurrence must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner. And
(4) the obligor (debtor) must be free from any participation in the aggravation of the injury resulting to the creditor. (5) Enciclopedia
Juridica Española, 309)
As will be seen, these authorities agree that some extraordinary circumstance independent of the will of the obligor or of hi s
employees, is an essential element of a caso fortuito. ...
The running amuck of the passenger was the proximate cause of the incident as it triggered off a commotion and panic among
the passengers such that the passengers started running to the sole exit shoving each other resulting in the falling off the bus
by passengers Beter and Rautraut causing them fatal injuries. The sudden act of the passenger who stabbed another passenger
in the bus is within the context of force majeure.
However, in order that a common carrier may be absolved from liability in case of force majeure, it is not enough that
the accident was caused by force majeure. The common carrier must still prove that it was not negligent in causing the
injuries resulting from such accident.
This principle was reiterated in a more recent case, Batangas Laguna Tayabas Co. v. Intermediate Appellate Court (167 SCRA
379 [1988]), wherein we ruled:
... [F]or their defense of force majeure or act of God to prosper the accident must be due to natural causes and exclusively
without human intervention. (Emphasis supplied)
Therefore, the next question to be determined is whether or not the petitioner's common carrier observed extraordinary diligence
to safeguard the lives of its passengers.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
Considering the factual findings of the Court of Appeals-the bus driver did not immediately stop the bus at the height
of the commotion; the bus was speeding from a full stop; the victims fell from the bus door when it was opened or gave
way while the bus was still running; the conductor panicked and blew his whistle after people had already fallen off the
bus; and the bus was not properly equipped with doors in accordance with law-it is clear that the petitioners have failed
to overcome the presumption of fault and negligence found in the law governing common carriers.
It is the prevailing rule and settled jurisprudence that transportation companies are not insurers of their passengers. The evidence
on record does not show that defendants' personnel were negligent in their duties. The defendants' personnel have every right
to accept passengers absent any manifestation of violence or drunkenness. If and when such passengers harm other
passengers without the knowledge of the transportation company's personnel, the latter should not be faulted.
However, the petitioners' argument that the petitioners "are not insurers of their passengers" deserves no merit in view of the
failure of the petitioners to prove that the deaths of the two passengers were exclusively due to force majeure and not to the
failure of the petitioners to observe extraordinary diligence in transporting safely the passengers to their destinations as
warranted by law. CA decision affirmed.
NPC V. CA, 222 SCRA 415 [MAY 1993]
DOCTRINE
When the negligence of a person concurs with an act of God in producing a loss, such person is not exempt from liability by
showing that the immediate cause of the damage was the act of God. To be exempt from liability for loss because of an act of
God, he must be free from any previous negligence or misconduct by which that loss or damage may have been occasioned.
FACTS
At the height of the typhoon “Kading”, a flash flood covered the towns near the Angat Dam, causing deaths and destructions to
residents and their properties. Respondents blamed the tragedy to the reckless and imprudent opening of the 3 floodgates by
petitioner, without prior warning to the residents within the vicinity of the dam. Petitioners denied the allegations and contended
that they have kept the water at a safe level, that the opening of floodgates was done gradually, that it exercises diligence in the
selection of its employees, and that written warnings were sent to the residents. It further contended that there was no direct
causal relationship between the damage and the alleged negligence on their part, that the residents assumed the risk by living
near the dam, and that what happened was a fortuitous event and are of the nature of damnum absque injuria.
Issues:
(1) Whether the petitioner can be held liable even though the coming of the typhoon is a fortuitous event
(2) Whether a notice was sent to the residents
(3) Whether the damage suffered by respondents is one of damnum absque injuria
Held:
(1) The obligor cannot escape liability, if upon the happening of a fortuitous event or an act of God, a corresponding fraud,
negligence, delay or violation or contravention in any manner of the tenor of the obligation as provided in Article 1170 of the Civil
Code which results in loss or damage. Even if there was no contractual relation between themselves and private respondents,
they are still liable under the law on quasi-delict. Article 2176 of the Civil Code explicitly provides "whoever by act or omission
causes damage to another there being fault or negligence is obliged to pay for the damage done." Act of God or force majeure,
by definition, are extraordinary events not foreseeable or avoidable, events that could not be foreseen, or which, though foreseen,
are inevitable. It is therefore not enough that the event should not have been foreseen or anticipated, as is commonly believed,
but it must be one impossible to foresee or to avoid. The principle embodied in the act of God doctrine strictly requires that the
act must be occasioned solely by the violence of nature. Human intervention is to be excluded from creating or entering into the
cause of the mischief. When the effect is found to be in part the result of the participation of man, whether due to his acti ve
intervention or neglect or failure to act, the whole occurrence is then humanized and removed from the rules applicable to the
acts of God. In the case at bar, although the typhoon "Kading" was an act of God, petitioners can not escape liability because
their negligence was the proximate cause of the loss and damage.
(2) The letter itself, addressed merely "TO ALL CONCERNED", would not strike one to be of serious importance, sufficient
enough to set alarm and cause people to take precautions for their safety's sake. The notices were not delivered, or even
addressed to responsible officials of the municipalities concerned who could have disseminated the warning properly. They were
delivered to ordinary employees and policemen. As it happened, the said notices do not appear to have reached the people
concerned, which are the residents beside the Angat River. The plaintiffs in this case definitely did not receive any such warning.
Indeed, the methods by which the defendants allegedly sent the notice or warning was so ineffectual that they cannot claim, as
they do in their second assignment of error, that the sending of said notice has absolved them from liability.
(3) We cannot give credence to petitioners' third assignment of error that the damage caused by the opening of the dam was in
the nature of damnum absque injuria, which presupposes that although there was physical damage, there was no legal injury in
view of the fortuitous events. There is no question that petitioners have the right, duty and obligation to operate, maintain and
preserve the facilities of Angat Dam, but their negligence cannot be countenanced, however noble their intention may be. The
end does not justify the means, particularly because they could have done otherwise than simultaneously opening the spillways
to such extent. Needless to say, petitioners are not entitled to counterclaim.
NPC V. CA, 223 SCRA 649 [JUNE 1993]
In our decision in G.R. No. 96410, we ruled that the doctrine laid down in Juan F. Nakpil & Sons vs. Court of Appeals was
correctly applied by the appellate court. In the instant case, the respondent Court relied on our 1988 decision in National Power
Corporation vs. Court of Appeals. It must be emphasized that the latter decision applied and reiterated the ruling in the Nakpil
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case.
As we stated in the exordium of this ponencia, petitioners have raised the same issues and defenses as in the other two decided
cases therein mentioned. Predictably therefore, this petition must perforce be dismissed because the losses and damages
sustained by the private respondents had been proximately caused by the negligence of the petitioners, although the typhoon
which preceded the flooding could be considered as a force majeure.
SIA V. CA, 222 SCRA 24
DOCTRINE
One liable under a contract of special deposit cannot be exempted from liability under casa fortuito when it aggravated the injury.
FACTS
Luzan Sia (Sia) deposited his stamp collection in a rented Safety Deposit Box in Security Bank and Trust Co. (bank) Binondo
Branch, under a lease agreement. The box, which was on the lowest level of the safety deposit boxes, was reached by
floodwaters in 1985/86 thereby damaging the stamp collection.
Sia tried to gain compensation from the bank, but the bank refused because (1) under the lease agreement the liability of the
bank is limited to preventing a third person from opening the box, as the bank is not a depository of the contents of the safe; (2)
it was a contract of lease, and not of deposit, therefore there was no liability as the floodwaters were beyond the bank’s control,
and there was no duty to notify the depositor.
Sia filed an action for damages, which was granted by the RTC. The court ruled that the lease contract was a contract of adhesion
and the bank had failed to exercise the required diligence expected of a bank, and awarded Sia P20,000 in damages.
On appeal the CA reversed, ruling that the lease contract governed the parties, that the contract was not one of deposit, that the
limitation of liability under the lease contract was valid, and that there was no evidence to show that the bank failed to exercise
the required diligence as the floods were fortuitous events. The CA added that the bank had not aggravated the damaged, but
even offered to secure the services of an expert to save the stamps, which Sia refused, thus Sia must bear the loss under the
principle of res perit domino.
ISSUE/S
(1) Whether the obligation is one of lease or of deposit?
(2) Whether SBTC bank failed to render the required diligence?
(3) Whether the flood was a fortuitous event?
HELD
The flood was a fortuitious event but the bank is still liable as it was guilty of negligence.
(1) A contract for the use of a safe deposit box is a special kind of deposit. The relation between the bank renting out
the safe deposit box and the customer is one of bailor and bailee, the bailment being for hire and mutual benefit (Sec. 72, R.A.
337). The primary function is still found within the parameters of a contract of deposit, i.e., the receiving in custody of funds,
documents and other valuable objects for safekeeping.
The depositary’s responsibility for the safekeeping of the objects deposited in the case at bar is governed by Title I, Book IV of
the Civil Code. Accordingly, the depositary would be liable if, in performing its obligation, it is found guilty of fraud, negligence,
delay or contravention of the tenor of the agreement [Art. 1170, id.]. In the absence of any stipulation prescribing the degree of
diligence required, that of a good father of a family is to be observed [Art. 1173, id.]. Hence, any stipulation exempting the
depositary from any liability, arising from the loss of the thing deposited on account of fraud, negligence or delay would be void
for being contrary to law and public policy.
(2) YES. The limitation of liability under the lease agreement is void for being contrary to law and public policy, SBTC
from any liability for damage, loss or destruction of the contents of the safety deposit box which may arise from its own or its
agents’ fraud, negligence or delay.
One may, by special contract, define their respective duties or provide for increasing or limiting the liability of the deposit
company, provided such contract is not in violation of law or public policy. It must clearly appear that there actually was such a
special contract, however, in order to vary the ordinary obligations implied by law from the relationship of the parties; liability of
the deposit company will not be enlarged or restricted by words of doubtful meaning.
Condition 13 stands on a wrong premise and is contrary to the actual practice of the Bank. It is not correct to assert that the
Bank has neither the possession nor control of the contents of the box since in fact, the safety deposit box itself is located in its
premises and is under its absolute control; moreover, the respondent Bank keeps the guard key to the said box. As stated earlier,
renters cannot open their respective boxes unless the Bank cooperates by presenting and using this guard key.
(3) YES. However, the element of not aggravating the damage or injury under fortuitous event (Art. 1170) is absent.
SBTC’s negligence aggravated the injury or damage to the petitioner which resulted from the loss or destruction of the stamp
collection. SBTC was aware of the floods of 1985 and 1986; it also knew that the floodwaters inundated the room where Safe
Deposit Box No. 54 was located. In view thereof, it should have lost no time in notifying the petitioner in order that the box could
have been opened to retrieve the stamps, thus saving the same from further deterioration and loss. In this respect, it failed to
exercise the reasonable care and prudence expected of a good father of a family, thereby becoming a party to the aggravation
of the injury or loss.
A caso fortuito prevents (sic)18 the following essential characteristics: (1) the cause of the unforeseen and unexpected
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
occurrence, or of the failure of the debtor to comply with his obligation, must be independent of human will; (2) it must be
impossible to foresee the event which constitutes the caso fortuito, or if it can be foreseen, it must be impossible to avoid; (3)
the occurrence must be such as to render it impossible for one debtor to fulfill his obligation in a normal manner; and (4) the
obligor must be free from any participation in the aggravation of the injury resulting to the creditor.
SOUTHEASTERN V. CA, 292 SCRA 422
Facts:
On October 11, 1989, powerful typhoon “Saling” hit Metro Manila. Buffeted by very strong winds, the roof of Southeastern
College’s building was partly ripped off and blown away, landing on and destroying portions of the roofing of private respondents
Dimaano’s house.
Private respondent alleged that the damage to their house rendered the same uninhabitable, forcing them to stay temporarily in
others’ houses.
An ocular inspection of the destroyed building was conducted by a team of engineers headed by the city building official. The
fourth floor of subject school building was declared as a “structural hazard.”
Lower court awarded damages. CA affirmed but reduced damages.
Issue:
WON the damage of the respondent’s house resulting from the impact of the falling portions of the school building’s roof ripped
off was due to fortuitous event and not the negligence or fault of petitioner? YES
Held:
There is no question that a typhoon or storm is a fortuitous event, a natural occurrence which may be foreseen but is unavoidable
despite any amount of foresight, diligence or care. In order to be exempt from liability arising from any adverse consequence
engendered thereby, there should have been no human participation amounting to a negligent act. In other words; the person
seeking exoneration from liability must not be guilty of negligence. Negligence, as commonly understood, is conduct which
naturally or reasonably creates undue risk or harm to others. It may be the failure to observe that degree of care, precaution,
and vigilance which the circumstances justify demand, or the omission to do something which a prudent and reasonable man,
guided by considerations which ordinarily regulate the conduct of human affairs, would
do. From these premises, we proceed to determine whether petitioner was negligent, such that if it were not, the damage caused
to private respondents' house could have been avoided?
At the outset, it bears emphasizing that a person claiming damages for the negligence of another has the burden of proving the
existence of fault or negligence causative of his injury or loss. The facts constitutive of negligence must be affirmatively
established by competent evidence, not merely by presumptions and conclusions without basis in fact. Private respondents, in
establishing the culpability of petitioner, merely relied on the aforementioned report submitted by a team which made an ocular
inspection of petitioner’s school building after the typhoon. As the term imparts, an ocular inspection is one by means of actual
sight or viewing. What is visual to the eye through is not always reflective of the real cause behind.
Petitioners obtained a permit from the city building official before the construction of its building. Having obtained both building
permit and certificate of occupancy is prima facie evidence of the regular and proper construction of subject school building.
When part of its roof needed repairs of the damage inflicted by typhoon Saling, the city engineer gave the go-signal for such
repairs without any deviation from the original design. It subsequently authorized the use of the entire fourth floor of the same
building. These only prove that subject building suffers from no structural defect.
Petitioner presented its vice president for finance and administration who testified that an annual maintenance inspection and
repair of subject school building were regularly undertaken. Petitioner was even willing to present its maintenance supervisor to
attest to the extent of such regular inspection but private respondents agreed to dispense with his testimony and simply stipulated
that it would be corroborative of the vice president’s narration. Besides, no complaint regarding any defect on the same structure
has ever been lodged before his office prior to the institution of the case at bench. It is a matter of judicial notice that typhoons
are common occurrences in this country. If subject school building’s roofing was not firmly anchored to its trusses, obviously, it
could not have withstood long years and several typhoons even stronger than “Saling.”
Petitioner has not been shown negligent or at fault regarding the construction and maintenance of its school building in question
and that typhoon “Saling” was the proximate cause of the damage suffered by private respondents’ house.
MINDEX V. MORILLO, 379 SCRA 144
Facts
Averbal agreement was entered into between Ephraim Morillo and Mindex Resources Corporation (MINDEX) for the lease of
the former’s 6 x 6 ten-wheeler cargo truck for use in MINDEX’s mining operations in Oriental Mindoro.
Unknown to Morillo, the truck was burned by unidentified persons while it was parked unattended at Sitio Aras, Bigaan, San
Teodoro, Oriental Mindoro, due to mechanical trouble. According to the reports it was burned by still unidentified person by
means of using coconut leaves so it was completely burned down excluding the engine which was partially damaged by still
undetermined amount.’
Upon learning of the burning incident, Morillo offered to sell the truck to MINDEX but the latter refused. He later wrote a l etter
entrusting the truck to MINDEX in the amount of P275,000.00 which is its cost price. MINDEX responded with counter offers: a)
Pay the rental of of P76,000.00. ‘b) Repair and overhaul the truck and; ‘c) Return good running condition after repair.’ Morillo did
not accept the offer.
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RTC found petitioner responsible for the destruction or loss of the leased 6 x 6 truck and ordered it to pay respondent
The CA said: MINDEX responsible. The burning of the subject truck was impossible to foresee, but not impossible to avoid.
MINDEX could have prevented the incident by immediately towing the truck to a motor shop for the needed repair or by having
it guarded day and night. Instead, the appellant just left the vehicle where its transfer case broke down. The place was about
twelve (12) kilometers away from the camp site of the appellant corporation and was sparsely populated. It was guarded only
during daytime. It stayed in that place for two (2) weeks until it was burned on April 11, 1991 while its transfer case was being
repaired elsewhere. It was only after it had been burned that the appellant had it towed to a repair shop.
Issue:
Whether or not the CA gravely erred in finding that petitioner was negligent considering that the facts show, as admitted by the
respondent, that the burning of the truck was a fortuitous event.
Ruling
The Petition is partly meritorious; the award of attorney’s fees should be deleted.
Petitioner’s Negligence
Both the RTC and the CA found petitioner negligent and thus liable for the loss or destruction of the leased truck. Contrary to its
allegations, petitioner has not adequately shown that the RTC and the CA overlooked or disregarded significant facts and
circumstances that, when considered, would alter the outcome of the disposition. Article 1667 of the Civil Code holds lessees
responsible for the deterioration or loss of the thing leased, unless they prove that it took place without their fault.
Fortuitous Event
In order for a fortuitous event to exempt one from liability, it is necessary that one has committed no negligence or
misconduct that may have occasioned the loss.10 An act of God cannot be invoked to protect a person who has failed
to take steps to forestall the possible adverse consequences of such a loss. One’s negligence may have concurred
with an act of God in producing damage and injury to another; nonetheless, showing that the immediate or proximate
cause of the damage or injury was a fortuitous event would not exempt one from liability. When the effect is found to be
partly the result of a person’s participation -- whether by active intervention, neglect or failure to act -- the whole occurrence is
humanized and removed from the rules applicable to acts of God. 11
This often-invoked doctrine of "fortuitous event" or "caso fortuito" has become a convenient and easy defense to exculpate an
obligor from liability. To constitute a fortuitous event, the following elements must concur:
(a) the cause of the unforeseen and unexpected occurrence or of the failure of the debtor to comply with obligations must be
independent of human will; (b) it must be impossible to foresee the event that constitutes the caso fortuito or, if it can be foreseen,
it must be impossible to avoid; (c) the occurrence must be such as to render it impossible for the debtor to fulfill obligations in a
normal manner; and (d) the obligor must be free from any participation in the aggravation of the injury or loss. 12
Article 1174 of the Civil Code states that no person shall be responsible for a fortuitous event that could not be foreseen or,
though foreseen, was inevitable. In other words, there must be an exclusion of human intervention from the cause of injury or
loss.13
A review of the records clearly shows that petitioner failed to exercise reasonable care and caution that an ordinarily prudent
person would have used in the same situation. Witness Alexander Roxas testified how petitioner fell short of ordinary diligence
in safeguarding the leased truck against the accident considering that the persons who actually burned the truck were the
dismissed employees of the Mindex Resources Development Corporation.
Article 1177
Art. 1177. The creditors, after having pursued the property in possession of the debtor to satisfy their claims,
may exercise all the rights and bring all the actions of the latter for the same purpose, save those which are
inherent in his person; they may also impugn the acts which the debtor may have done to defraud them.
(1111)
SIGUAN V. LIM, 318 SCRA 725
FACTS:
A criminal case was filed against Lim with RTC-Cebu city for issuing 2 bouncing checks in the amounts of P300,000
andP241,668, respectively to Siguan. Meanwhile, on 2 July 1991, a Deed of Donation conveying the following parcels of land
and purportedly executed by Lim on 10 August 1989 in favor of her children, Linde, Ingrid and Neil, was registered with the Office
of the Register of Deeds of Cebu City. New transfer certificates of title were thereafter issued in the names of the donees. On
23 June 1993, petitioner filed an accion pauliana against Lim and her children before RTC-Cebu City to rescind the questioned
Deed of Donation and to declare as null andvoid the new transfer certificates of title issued for the lots covered by the questioned
Deed.
Petitioner contends that sometime in July 1991, Lim, through a Deed of Donation, fraudulently transferred all her real property
to her children in bad faith and in fraud of creditors, including her; that Lim conspired and confederated with her children in
antedating the questioned Deed of Donation, to petitioner's and other creditors' prejudice; and that Lim, at the time of the
fraudulent conveyance, left no sufficient properties to pay her obligations.On the other hand, as regards the questioned Deed of
Donation, Lim maintained that it was not antedated but was made in good faith at a time when she had sufficient property.
Finally, she alleged that the Deed of Donation was registered only on 2 July 1991because she was seriously ill.
ISSUE:
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
Whether the Deed of Donation executed by Rosa Lim in favor of her children be rescinded for being in fraud of petitioner Maria
Antonia Siguan?
HELD:
The action to rescind contracts in fraud of creditors is known as accion pauliana. For this action to prosper, the following
requisites must be present: (1) the plaintiff asking for rescission has a credit prior to the alienation,[12] although demandable
later; (2) the debtor has made a subsequent contract conveying a patrimonial benefit to a third person; (3) the creditor has no
other legal remedy to satisfy his claim; [13] (4) the act being impugned is fraudulent;(5) the third person who received the property
conveyed, if it is by onerous title, has been an accomplice in the fraud.
The general rule is that rescission requires the existence of creditors at the time of the alleged fraudulent alienation, and this
must be proved as one of the bases of the judicial pronouncement setting aside the contract. Without any prior existing debt,
there can neither be injury nor fraud. While it is necessary that the credit of the plaintiff in the accion pauliana must exist prior
to the fraudulent alienation, the date of the judgment enforcing it is immaterial. Even if the judgment be subsequent to the
alienation, it is merely declaratory, with retroactive effect to the date when the credit was constituted.
Even assuming arguendo that petitioner became a creditor of Lim prior to the celebration of the contract of donation, still her
action for rescission would not fare well because the third requisite was not met. Under Article 1381 of the Civil Code, contracts
entered into in fraud of creditors may be rescinded only when the creditors cannot in any manner collect the claims due them.
Also, Article1383 of the same Code provides that the action for rescission is but a subsidiary remedy which cannot be instituted
except when the party suffering damage has no other legal means to obtain reparation for the same. The term "subsidiary
remedy" has been defined as "the exhaustion of all remedies by the prejudiced creditor to collect claims due him before rescission
is resorted to." It is, therefore, "essential that the party asking for rescission prove that he has exhausted all other legal means
to obtain satisfaction of his claim. Petitioner neither alleged nor proved that she did so. On this score, her action for the rescission
of the questioned deed is not maintainable even if the fraud charged actually did exist.
Article 1179
Art. 1179. Every obligation whose performance does not depend upon a future or uncertain event, or upon
a past event unknown to the parties, is demandable at once.
Every obligation which contains a resolutory condition shall also be demandable, without prejudice to the
effects of the happening of the event. (1113)
PAY V. PALANCA, 57 SCRA 618 - AKI
FACTS:
George Pay, petitioner, is the creditor of the late Justo Palanca who died in 1963. The latter and his wife, respondent Rosa
Gonzalez vda. de Palanca, issued a promissory note in 1952, in the amount of P26,900 with interest of 12% per annum. The
PN contained the following: For value received from time to time since 1947, we [jointly and severally promise to] pay to Mr.
[George Pay] at his office at the China Banking Corporation the sum of [Twenty Six Thousand Nine Hundred Pesos]
(P26,900.00),with interest thereon at the rate of 12% per annum upon receipt by either of the undersigned of cash paymen tfrom
the Estate of the late Don Carlos Palanca or u p o n d e m a n d .
ISSUE:
W/N a creditor is barred by prescription in his attempt to collect on a promissory note executed more than fifteen years earlier
with the debtor sued promising to pay either upon receipt by him of his share from a certain estate or upon demand
HELD:
YES, the creditor is barred from collecting. The SC ruling is based on Article 1179 of the Civil Code, which provides: "Every
obligation, whose performance does not depend upon a future or uncertain event, or upon a past event unknown to the parties,
is demandable at once."
From the manner in which the promissory note was executed, it would appear that petitioner was hopeful that the satisfaction of
his credit could he realized either through the debtor sued receiving cash payment from the estate of the late Carlos Palanca
presumptively as one of the heirs, or, as expressed therein, "upon demand." There is nothing in the record that would indicate
whether or not the first alternative was fulfilled. What is undeniable is that on August 26, 1967, more than fifteen years after the
execution of the promissory note on January 30, 1952, this petition was filed. The defense interposed was prescription. Its merit
is rather obvious. Article 1179 of the Civil Code provides: "Every obligation whose performance does not depend upon a future
or uncertain event, or upon a past event unknown to the parties, is demandable at once." This used to be Article 1113 of the
Spanish Civil Code of 1889.
The obligation being due and demandable (payable on demand), it would appear that the filing of the suit after fifteen years
was much too late. For again, according to the Civil Code, which is based on Section 43 of Act No.190, the prescriptive period
for a written contract is that of ten years.*N.B. This case was decided in 1974, but for some reason the SC cited the Civil Code
provision on CONTRACTS when in fact the NIL was already effective (as of June 2,1911). Nevertheless, the ruling is consistent
with Sec. 7(a) of the NIL, which states, “An instrument is payable on demand, where it is expressed to be payable on demand,
or at sight, or on presentation...”
Article 1182
Art. 1182. When the fulfillment of the condition depends upon the sole will of the debtor, the conditional
obligation shall be void. If it depends upon chance or upon the will of a third person, the obligation shall
take effect in conformity with the provisions of this Code. (1115)
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of the building on 15 August 1980 (within the contracted period) but he was compelled by a drastic increase in the cost of
construction materials to incur expenses of about P300,000.00 on top of the original cost. The additional expenses were made
SMITH BELL V. SOTELO MATTI, 44:874 known to petitioner SBTC thru its Vice-President Fely Sebastian and Supervising Architect Rudy de la Rama as early as March
1980. Respondent Ferrer made timely demands for payment of the increased cost. Said demands were supported by receipts,
FACTS: invoices, payrolls and other documents proving the additional expenses.
In August 1918, petitioner and defendant entered into contracts of sale under the following terms, which petitioner delivered on
the following dates: In March 1981, SBTC thru Assistant Vice-President Susan Guanio and a representative of an architectural firm consulted by
SBTC, verified Ferrer's claims for additional cost. A recommendation was then made to settle Ferrer's claim but only for
Item Price Delivery as in the Contract Arrival/Delivery P200,000.00. SBTC, instead of paying the recommended additional amount, denied ever authorizing payment of any amount
2 steel tanks P21,000 (total) “within three or four months” April 27, 1919 (defendant beyond the original contract price. SBTC likewise denied any liability for the additional cost based on Article IX of the building
claims non-delivery) contract which states:
2 expellers P25,000 each To be shipped from San October 26, 1918
Francisco in September If at any time prior to the completion of the work to be performed hereunder, increase in prices of construction materials and/or
1918, or as soon as possible labor shall supervene through no fault on the part of the contractor whatsoever or any act of the government and its
2 electric motors P2,000 each “Approximate delivery within February 27, 1919 instrumentalities which directly or indirectly affects the increase of the cost of the project, OWNER shall equitably make the
90 days. – This is not appropriate adjustment on mutual agreement of both parties.
guaranteed.”
Ysmael C. Ferrer then filed a complaint for breach of contract with damages. The trial court ruled for Ferrer and ordered
(In all these contracts, there is a final clause as follows: "The sellers are not responsible for delays caused by fires, riots on land defendants SBTC and Rosito C. Manhit to pay. On appeal, the Court of Appeals affirmed the trial court decision.
or on the sea, strikes or other cause known as ’Force Majeure’ entirely beyond the control of the sellers or their representatives.")
ISSUE/S
Petitioner notified defendant of the arrival of these goods but the latter refused to receive them and pay the prices as stipulated. Whether SBTC is liable.

The plaintiff sued defendant, alleging, that it immediately notified the defendant of the arrival of the goods, and asked instructions HELD
from him as to the delivery thereof, and that the defendant refused to receive any of them and to pay their price. The pl aintiff, Petitioners’ arguments to support absence of liability for the cost of construction beyond the original contract price are not
further, alleged that the expellers and the motors were in good condition. persuasive.

Defendant and intervenor, the Manila Oil Refining and By-Products Co., Inc., denied the plaintiff’s allegations and alleged as
special defense that Mr. Sotelo had made the contracts in question as manager of the intervenor. They are also claiming for
damages as a counterclaim or setoff due to plaintiff’s delay in making delivery of the goods, which the intervenor intended to use
in the manufacture of coconut oil, and for damages it suffered for the nondelivery of the tanks and on account of the expellers
and the motors not having arrived in due time.
The lower court ruled in favor of defendant in so far as the tanks and the motors are concerned but ordered it to receive the
expellers and pay for their price with interest. Both parties appealed.
ISSUE:
WON plaintiff has fulfilled its obligation in brining the goods to Manila in due time. (Otherwise, plaintiff is liable for delay.)
HELD:
Yes. To solve the question, it is necessary to determine what period was fixed for the delivery of the goods. Under these
stipulations, it cannot be said that any definite date was fixed for the delivery of the goods.
It appears that these contracts were executed at the time of the world war when there existed rigid restrictions on the export
from the United States of articles like the machinery in question. At the time of the execution of the contracts, the parties were
not unmindful of the contingency of the United States Government not allowing the export of the goods, nor of the fact that the
other foreseen circumstances therein stated might prevent it.
The term which the parties attempted to fix is so uncertain that one cannot tell just whether, as a matter of fact, those articles
could be brought to Manila or not—the obligation must be regarded as conditional. And as the export of the machinery in
question was as stated in the contract, contingent upon the sellers obtaining certificate of priority and permission of the United
States Government, subject to the rules and regulations, as well as to railroad embargoes, then the delivery was subject to a
condition the fulfillment of which depended not only upon the effort of the herein plaintiff, but upon the will of third
persons who could in no way be compelled to fulfill the condition. In cases like this, which are not expressly provided for,
but impliedly covered, by the Civil Code, the obligor will be deemed to have sufficiently performed his part of the obligation,
if he has done all that was in his power, even if the condition has not been fulfilled in reality.
In an obligation to deliver, time is regarded unessential when the time of delivery is not fixed in the contract. In such case, the
delivery must be made within a reasonable time.
The record shows that the plaintiff did all within its power to have the machinery arrive at Manila as soon as possible, and
immediately upon its arrival it notified the purchaser of the fact and offered to deliver it to him. Taking these circumstances into
account, the said machinery was brought to Manila by the plaintiff within a reasonable time. Therefore, the plaintiff has not been
guilty of any delay in the fulfillment of its obligation, and, consequently, it could not have incurred any of the liabilities mentioned
by the intervenor in its counterclaim or set-off.
*As to the issue of agency, the court held that the Mr. Sotelo’s acts were binding upon its principal.
SECURITY BANK V. CA, 249 SCRA 206
Under the previously quoted Article IX of the construction contract, petitioners would make the appropriate adjustment to the
contract price in case the cost of the project increases through no fault of the contractor (private respondent). Private respondent
informed petitioners of the drastic increase in construction cost as early as March 1980.
Petitioners in turn had the increased cost evaluated and audited. When private respondent demanded payment of P259,417.23,
petitioner bank's Vice-President Rosito C. Manhit and the bank's architectural consultant were directed by the bank to verify and
compute private respondent's claims of increased cost. A recommendation was then made to settle private respondent's claim
for P200,000.00. Despite this recommendation and several demands from private respondent, SBTC failed to make payment. It
denied authorizing anyone to make a settlement of private respondent's claim and likewise denied any liability, contending that
the absence of a mutual agreement made private respondent's demand premature and baseless.
Under Article 1182 of the Civil Code, a conditional obligation shall be void if its fulfillment depends upon the sole will of the debtor.
In the present case, the mutual agreement, the absence of which petitioner bank relies upon to support its non-liability for the
increased construction cost, is in effect a condition dependent on petitioner bank's sole will, since private respondent would
naturally and logically give consent to such an agreement which would allow him recovery of the increased cost.
ROMERO V. CA, 250 SCRA 223
FACTS:
Private respondent entered into a “Conditional Deed of Sale” with petitioner over a parcel of land in Paranaque, the latter
advancing P50,000 for the eviction of squatters therein. An ejectment suit was then filed by the private respondent against the
squatters. Although successful, private respondent sought the return of the downpayment she received because “she could not
get rid of the squatters”.
ISSUE:
May the vendor demand the rescission of a contract for the sale of a parcel of land for a cause traceable to his own failure to
have the squatters on the subject property evicted within the contractually-stipulated period?
HELD:
A perfected contract of sale may either be absolute or conditional depending on whether the agreement is devoid of, or subject
to, any condition imposed on the passing of title of the thing to be conveyed or on the obligation of a party thereto. When
ownership is retained until the fulfillment of a positive condition the breach of the condition will simply prevent the duty to convey
title from acquiring an obligatory force. If the condition is imposed on an obligation of a party which is not complied with, the other
party may either refuse to proceed or waive said condition. Where, of course, the condition is imposed upon the perfection of
the contract itself, the failure of such condition would prevent the juridical relation itself from coming into existence.
In determining the real character of the contract, the title given to it by the parties is not as much significant as its substance. For
example, a deed of sale, although denominated as a deed of conditional sale, may be treated as absolute in nature, if title to the
property sold is not reserved in the vendor or if the vendor is not granted the right to unilaterally rescind the contract predicated
on the fulfillment or non-fulfillment, as the case may be, of the prescribed condition. The term "condition" in the context of a
perfected contract of sale pertains, in reality, to the compliance by one party of an undertaking the fulfillment of which would
beckon, in turn, the demandability of the reciprocal prestation of the other party. The reciprocal obligations referred to would
normally be, in the case of vendee, the payment of the agreed purchase price and, in the case of the vendor, the fulfillment of
certain express warranties (which, in the case at bench is the timely eviction of the squatters on the property).

FACTS It would be futile to challenge the agreement here in question as not being a duly perfected contract. A sale is at once perfected
Ysmael C. Ferrer was contracted by herein petitioners Security Bank and Trust Company (SBTC) and Rosito C. Manhit to when a person (the seller) obligates himself, for a price certain, to deliver and to transfer ownership of a specified thing or right
construct the building of SBTC in Davao City for the price of P1,760,000.00. The contract dated 4 February 1980 provided that to another (the buyer) over which the latter agrees. From the moment the contract is perfected, the parties are bound not onl y
Ferrer would finish the construction in two hundred (200) working days. Respondent Ferrer was able to complete the construction to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may be
in keeping with good faith, usage and law. Under the agreement, private respondent is obligated to evict the squatters on the
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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 CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE
property. Private respondent's failure "to remove the squatters from the property" within the stipulated period gives petitioner the
right to either refuse to proceed with the agreement or waive that condition in consonance with Article 1545 of the Civil Code.
This option clearly belongs to petitioner and not to private respondent.
In contracts of sale particularly, Article 1545 of the Civil Code allows the obligee to choose between proceeding with the
agreement or waiving the performance of the condition. Here, evidently, petitioner has waived the performance of the condition
imposed on private respondent to free the property from squatters.
The right of resolution of a party to an obligation is predicated on a breach of faith by the other party that violates the reciprocity
between them. It is private respondent who has failed in her obligation under the contract. Petitioner did not breach the
agreement. He has agreed, in fact, to shoulder the expenses of the execution of the judgment in the ejectment case and to make
arrangements with the sheriff to effect such execution.
Article 1186
Art. 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment.
(1119)
TAYAG V. CA, 219 SCRA 480
Facts:
Siblings Juan Galicia Sr. and Celerina Labuguin entered into a contract to sell a parcel of land in Nueva Ecija to a certain
Albrigido Leyva:
o 3K upon agreement
o 10K ten days after the agreement
o 10K representing vendor’s indebtedness to Phil Veterans Bank
o 27K payable within one year from execution of contract.
Leyva only paid parts of the obligation.
But even after the grace period for payment made in the contract and while litigation of such case, the petitioners still allowed
Leyva to make payments.
With regards to the obligation payable to the Phil Veterans bank by the vendee, as they deemed that it was not paid in full, such
obligation they completed by adding extra amount to fulfill such obligation. This was fatal in their case as this is Leyva’s argument
that they constructively fulfilled the obligation which is rightfully due to him. (Trivia: It was Celerina, Juan’s sister, that paid the
bank to complete such obligation).
Petitioners claim that they are only “OBLIGEES” with regards to the contract, so the principle of constructive fulfillment cannot
be invoked against them.
Petitioners, being both creditor and debtor to private respondent, in accepting piecemeal payment even after the grace period,
are barred to take action through estoppel.
Issue:
1. WON there was constructive fulfillment in the part of the petitioners that shall make rise the obligation to deliver to Leyva the
deed of sale? YES
2. WON they are still entitled to rescind the contract? NO, barred by estoppel.
Held:
1. In a contract of purchase, both parties are mutually obligors and also obligees, and any of the contracting parties may, upon
non-fulfillment by the other privy of his part of the prestation, rescind the contract or seek fulfillment (Article 1191, Civil Code).
In short, it is puerile for petitioners to say that they are the only obligees under the contract since they are also bound as obligors
to respect the stipulation in permitting private respondent to assume the loan with the Philippine Veterans Bank which petitioners
impeded when they paid the balance of said loan. As vendors, they are supposed to execute the final deed of sale upon full
payment of the balance as determined hereafter.
2. Petitioners accepted Leyva’s delayed payments not only beyond the grace periods but also during the pendency of the case
for specific performance. Indeed, the right to rescind is not absolute and will not be granted where there has been substantial
compliance by partial payments. By and large, petitioners’ actuation is susceptible of but one construction — that they are now
estopped from reneging from their commitment on account of acceptance of benefits arising from overdue accounts of private
respondent.
SPS. BONROSTRO V. SPS. LUNA, GR 172346, 24 JULY 2013
4
1. The stipulated price of P1,250,000.00 shall be paid by the VENDEE to the VENDOR in the following manner:
(a) P200,000.00 upon signing x x x the Contract To Sell,
 (b) P300,000.00 payable on or before April 30, 1993,
 (c) P330,000.00
payable on or before July 31, 1993,
 (d) P417,000.00 payable to the New Capitol Estate, for 15 years at P6,867.12 a month,
2. x x x In the event the VENDEE fails to pay the second installment on time, the VENDEE will pay starting May 1, 1993 a 2%
interest on the P300,000.00 monthly. Likewise, in the event the VENDEE fails to pay the amount of P630,000.00 on the stipulated
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
DOCTRINE
Art. 1186 speaks of a situation where it is the obligor who voluntarily prevents fulfillment of the condition, not the obligee.
Moreover, the mere intention to prevent the happening of the condition or the mere placing of ineffective obstacles to its
compliance, without actually preventing fulfillment is not sufficient for the application of Art. 1186. Two requisites must concur
for its application, to wit: (1) intent to prevent fulfillment of the condition; and, (2) actual prevention of compliance.
FACTS
Constancia Luna (Luna) bought a piece of land from Bliss Development Corporation in Diliman, Quezon City in 1992. Less than
a year later Luna executed a contract to sell4 the lot to Lourdes Bonrostro. The contract contained a stipulation that should the
vendee fails to pay the amount of P630,000.00 by July 31, 1993 the contract to sell shall be deemed cancelled and 5% of the
contract price is forfeited in favor of the vendor. After payment of the initial down payment and taking possession of the lot the
Sps Bonrostro failed to pay the subsequent installments.
Sps. Luna filed an action for recission of the contract and damages, delivery of possession of property, and payment of unpaid
obligations against the Sps. Bonrostro in 1994. In their answer, the Sps. Bonrostro alleged they are willing to pay and sought a
60-day extension to pay the price, and the Sps. They failed to show on the date of payment. A letter later sent by the Sps.
Bonrostro to the Sps. Luna’s lawyer expressing their willingness to pay was left unanswered. The Sps. Bonrosto prayed the
court to set the period within which they should settle their obligation.
Sps. Bonrostro also alleged that the Sps. Luna sent a letter to BLISS instructing the company to refuse acceptance of
amortizations of the lot from anyone other them, also paying the amortization, thereby preventing the Sps. Bonrostro from
complying with the contract..
RTC ruled that the delay could not be considered a substantial breach considering that Lourdes (1) requested for an extension
within which to pay; (2) was willing and ready to pay as early as the last week of October 1993 and even wrote Atty. Carbon
about this on November 24, 1993; (3) gave Constancia a down payment of P200,000.00; and, (4) made payment to Bliss. Interest
was imposed on the sums of P300,000.00 plus interest of 2% per month from April 1993 to November 1993 and P330,000.00
plus interest of 2% per month from July 1993 to November 1993.
On appeal, the CA affirmed and ruled that the rescission done was not the proper remedy, but instead should have followed the
form and procedure under Sec. 4, RA 6552 (Maceda Law). Under the Maceda law there is a valid cancellation when after the
failure to pay the installment the buyer again fails to pay within the 60-day grace period and the seller sends a notarized notice
to the buyer of the cancellation of the contract. The court additionally imposed the contractual 2% interest upon failure to pay
the installments, per installment price and period - 2% interest on the P300,000.00 from May 1, 1993 until fully paid and by
imposing interest at the legal rate on the P330,000.00 reckoned from August 1, 1993 until fully paid – and on the amortizations.
Sps. Bonrostro assails the imposition of the interest on petition for review on certiorari to the SC.
ISSUE/S
(1) Whether the spouses Bonrostro’s were in delay in their payment of the installments constitutes a substantial breach of their
obligation under the contract warranting rescission.
(2) Whether the imposition of the interest rate on the installments and amortizations was correct.
HELD
(1) NO. In a contract to sell, payment of the price is a positive suspensive condition, failure of which is not a breach of contract
warranting rescission under Article 119129 of the Civil Code but rather just an event that prevents the supposed seller from
being bound to convey title to the supposed buyer. Article 1191 cannot be applied to sales of real property on installment
since they are governed by the Maceda Law. There being no breach to speak of, the RTC’s factual finding that Lourdes was
willing and able to pay her obligation loses significance and cannot be used as an excuse for failure to pay their obligation on
November 24, 1993 and the interest beyond the said date.
(2) YES.
On the installments
The letter expressing willingness to pay without accompanying payment, or consignation of the payment in court produces no
effect and did not suspend the running of interest.
Tender of payment "is the manifestation by the debtor of a desire to comply with or pay an obligation. If refused without just
cause, the tender of payment will discharge the debtor of the obligation to pay but only after a valid consignation of the sum due
shall have been made with the proper court." "To have the effect of payment and the consequent extinguishment of the obligation
to pay, the law requires the companion acts of tender of payment and consignation."
On the amortizations
The spouses Bonrostro want to be relieved from paying interest on the amount of P214,492.62 which the spouses Luna paid to
Bliss as amortizations, by asserting that they were prevented by the latter from fulfilling such obligation. They invoke Art. 1186
of the Civil Code which provides that "the condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment."
However, Art. 1186 speaks of a situation where it is the obligor who voluntarily prevents fulfillment of the condition, not the
time, this CONTRACT TO SELL shall likewise be deemed cancelled and rescinded and x x x 5% of the total contract price of
P1,250,000.00 shall be deemed forfeited in favor of the VENDOR. Unpaid monthly amortization shall likewise be deducted from
the initial down payment in favor of the VENDOR.
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obligee. Moreover, the mere intention to prevent the happening of the condition or the mere placing of ineffective obstacles to
its compliance, without actually preventing fulfillment is not sufficient for the application of Art. 1186. Two requisites must concur
for its application, to wit: (1) intent to prevent fulfillment of the condition; and, (2) actual prevention of compliance.
Here, Sps. Luna is not the obligor but the obligee, and their actions were only sought to ensure and not defeat the fulfillment of
the contract. Their payment (1) avoided the cancellation of both the contract of sale, and consequently, the contract to sell; and
(2) avoid the penalty for unpaid amortizations equivalent to 1/10th of 1% per day of delay shall be imposed for all payments
made after due date (3% monthly or 36% per annum rate of interest).
Under the circumstances and considering that the spouses Bonrostro are obviously in delay in complying with their obligation to
pay the amortizations due from February 1993 to January 1995 for which the spouses Luna paid P214,492.62,45 the CA correctly
ordered the reimbursement to the latter of the said amount with interest. "Delay in the performance of an obligation is looked
upon with disfavor because, when a party to a contract incurs delay, the other party who performs his part of the contract suffers
damages thereby." As discussed, the spouses Luna obviously suffered damages brought about by the failure of the spouses
Bonrostro to comply with their obligation on time. "And, sans elaboration of the matter at hand, damages take the form of interest
x x x."
LIM V. DBP, GR 177050, 1 JULY 2013
FACTS:
Petitioners Carlos, Lim, obtained 2 loans from DBP and executed separate promissory notes for each to finance their cattle
raising business. To secure the loans, petitioners executed a Mortgage in favor of DBP over real properties in the Province of
South Cotabato. Due to violent confrontations between government troops and Muslim rebels in Mindanao petitioners were
forced to abandon their cattle ranch. As a result, their business collapsed and they failed to pay the loan amortizations.
Petitioners made a partial payment, leaving an outstanding loan balance of P610,498.30, inclusive of charges and unpaid
interest. Petitioners requested from DBP Statements of Account for both accounts which they complied but Lim requested that
it be amended to reflect his partial payment.
Lim received a Notice of Foreclosure scheduled the following day. To stop the foreclosure, he was advised to pay an interest
covering a 60-days period or the amount of P60,000.00 to postpone the foreclosure for 60 days. Lim proposed the settlement of
the accounts through dacion en pago, with the balance to be paid in equal quarterly payments over five years.
DBP rejected the proposal and informed Lim that unless the accounts are fully settled as soon as possible, the bank will pursue
foreclosure proceedings. DBP informed Lim of the bank’s new guidelines for the settlement of outstanding loan accounts and
that the bank would immediately prepare the Restructuring Agreement upon receipt of the downpayment and that the conditions
for the settlement have been "pre-cleared" with the bank’s Regional Credit Committee.
Lim agreed, however, he received a letter from DBP informing him that the Regional Credit Committee rejected the proposed
Restructuring Agreement; that it required downpayment of 50% of the total obligation; that the remaining balance should be paid
within one year; that the interest rate should be non prime or 18.5%, whichever is higher; and that the proposal is effective only
for 90 days.
DBP informed Edmundo that the previous Restructuring Agreement was reconsidered and approved by the Regional Credit
Committee subject to additional conditions. No compliance was made by Edmundo. DBP informed Edmundo that the bank
cancelled the Restructuring Agreement due to his failure to comply with the conditions within a reasonable time. DBP sent
Edmundo a Final Demand Letter asking that he pay the outstanding amount of P6,404,412.92, exclusive of interest and penalty
charges.
The Office of the Clerk of Court and Ex-Officio Provincial Sheriff of the RTC of General Santos City issued a Notice resetting the
public auction sale of the mortgaged properties and was published for three consecutive weeks in a newspaper of general
circulation in General Santos City.
The auction sale was conducted and DBP was the highest bidder. They notified Lim of the date the right of redemption ends.
Petitioners filed before the RTC of General Santos City, a Complaint against DBP for Annulment of Foreclosure and Damages
with Prayer for Issuance of a Writ of Preliminary Injunction and/or Temporary Restraining Order. Petitioners alleged that DBP’s
acts and omissions prevented them from fulfilling their obligation; thus, they prayed that they be discharged from their obligation
and that the foreclosure of the mortgaged properties be declared void.
On same date, the RTC issued a Temporary Restraining Order directing DBP to cease and desist from consolidating the titles
over petitioners’ foreclosed properties and from disposing the same.The RTC granted the Writ of Preliminary Injunction and
directed petitioners to post a bond in the amount of P3,000,000.00.
ISSUE:
WON DBP’s acts and omissions in discharging its reciprocal obligations to petitioners effectively prevented the petitioners from
paying their loan obligations in a proper and suitable manner hence the obligation should be deemed fully complied with and
extinguished in accordance with the principle of constructive fulfillment. NO.
RATIO:
1. The obligation was not extinguished or discharged.
The Promissory Notes subject of the instant case became due and demandable early on and the only reason the mortgaged
properties were not foreclosed was because of the restraining order from the court. Petitioners made a partial payment of
P902,800.00 but no subsequent payments were made. Although DBP could have foreclosed the mortgaged properties, it instead
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
agreed to restructure the loan. In fact, DBP gave several extensions for petitioners to settle their loans, but they never did, thus,
prompting DBP to cancel the Restructuring Agreement.
Petitioners, however, insist that DBP’s cancellation of the Restructuring Agreement justifies the extinguishment of their loan
obligation under the Principle of Constructive Fulfillment found in Article 1186 of the Civil Code.
We do not agree.
As aptly pointed out by the CA, Article 1186 of the Civil Code, which states that "the condition shall be deemed fulfilled when the
obligor voluntarily prevents its fulfillment," does not apply in this case, viz:
Article 1186 enunciates the doctrine of constructive fulfillment of suspensive conditions, which applies when the
following three (3) requisites concur, viz: (1) The condition is suspensive; (2) The obligor actually prevents the
fulfillment of the condition; and (3) He acts voluntarily. Suspensive condition is one the happening of which gives rise
to the obligation. It will be irrational for any Bank to provide a suspensive condition in the Promissory Note or the
Restructuring Agreement that will allow the debtor-promissor to be freed from the duty to pay the loan without paying
it.
Besides, petitioners have no one to blame but themselves for the cancellation of the Restructuring Agreement. It is significant to
point out that when the Regional Credit Committee reconsidered petitioners’ proposal to restructure the loan, it imposed
additional conditions which petitioners failed to do. DBP therefore had reason to cancel the Restructuring Agreement.
Moreover, since the Restructuring Agreement was cancelled, it could not have novated or extinguished petitioners’ loan
obligation. And in the absence of a perfected Restructuring Agreement, there was no impediment for DBP to exercise its right to
foreclose the mortgaged properties.
2. The foreclosure sale is not valid.
But while DBP had a right to foreclose the mortgage, we are constrained to nullify the foreclosure sale due to the bank’s failure
to send a notice of foreclosure to petitioners.
We have consistently held that unless the parties stipulate, "personal notice to the mortgagor in extrajudicial foreclosure
proceedings is not necessary" because Section 3 of Act 3135 only requires the posting of the notice of sale in three public places
and the publication of that notice in a newspaper of general circulation.
Paragraph 11 of the Mortgage contract requires this
However, no notice of the extrajudicial foreclosure was sent by DBP to petitioners about the foreclosure sale. The letters advising
petitioners to immediately pay their obligation to avoid the impending foreclosure of their mortgaged properties are not the notices
required in paragraph 11 of the Mortgage. The failure of DBP to comply with their contractual agreement with petitioners, i.e., to
send notice, is a breach sufficient to invalidate the foreclosure sale.
Precisely, the purpose of the foregoing stipulation is to apprise respondent of any action which petitioner might take on the
subject property, thus according him the opportunity to safeguard his rights. When petitioner failed to send the notice of
foreclosure sale to respondent, he committed a contractual breach sufficient to render the foreclosure sale on November 23,
1981 null and void. (Emphasis supplied)
Article 1191
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with 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.
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with Articles 1385 and 1388 and the Mortgage Law. (1124)
UNIVERSAL FOOD CORP V. CA, 33 SCRA 1 – NB, CONCURRING OPINION OF JBL REYES
FACTS:
In 1938, Private Respondent Magdalo Francisco, Sr. invented a formula for the manufacture of a food seasoning sauce derived
from banana fruits popularly known as Mafran. Magdalo later registered his trademark over the product as owner and inventor
and commenced the commercial manufacture of the Mafran. In 1960, due to lack of sufficient capital to finance the expansion
of the business, Magdalo secured the financial assistance of Tirso Reyes who, after a series of negotiations, formed with other
people, the Petitioner Universal Food Corporation (UFC). Later, UFC and Magdalo executed a Bill of Assignment, wherein
Magdalo was appointed chief chemist of UFC while Private Respondent Victoriano Francisco was appointed auditor and
superintendent. Since the start of UFC’s operations, Magdalo, whenever preparing the secret materials never allowed anyone
to enter the laboratory in order to keep the formula secret to himself. However, Magdalo expressed a willingness to give the
formula to UFC provided that the same should be kept inside a safe to be opened only when he is already incapacitated to
perform his duties as chief chemist, but UFC never acquired a safe for that purpose. Later, UFC’s president and general Manager
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Tirso Reyes wrote Magdalo, requesting him to permit one or two members of his family to observe the preparation of Mafran,
but the request was denied. In spite of this, Tirso did not compel or force Magdalo to accede to said request.
Subsequently, due to the alleged scarcity and high prices of raw materials, the UFC’s secretary-treasurer issued a memorandum,
duly approved by Tirso that only supervisor Ricardo Francisco should be retained in the factory and that the salary of Magdalo
should be stopped for the time being until the corporation should resume its operation. However, 5 days later, Tirso issued a
memorandum to Victoriano ordering him to report to the factory and produce Mafran Sauce at the rate of not less than 100 cases
a day and with instructions to take only the necessary daily employees without employing permanent employees. Several
memoranda were later on issued by Tirso in connection with the full swing production of Mafran and the hiring of additional
employees for the purpose. Due to these successive memoranda without Magdalo being recalled back to work, he filed against
UFC an action for the rescission of the Bill of Assignment and prayed that UFC be adjudged to be without any right to use the
Mafran trademark and formula. Tirso subsequently requested Magdalo to report for duty, but the latter declined because of the
pending action.
UFC contended that the Private Respondents are not entitled to rescission because it was Magdalo who had been remiss in the
compliance of his contractual obligation to cede and transfer to UFC the formula for Mafran sauce. UFC argued that the right to
rescind a reciprocal obligation is not absolute and can be demanded only if one is ready, willing and able to comply with his own
obligation and the other is not. UFC contends that a suit for rescission is primary, and can only be resorted to when there is no
other remedy, which is not the case here.
ISSUE:
(1) Whether Magdalo is entitled to rescind the Bill of Assignment.
(2) Whether the remedy of rescission is primary or subsidiary.
HELD:
(1) Yes. UFC violated the Bill of Assignment by terminating the services of Magdalo without lawful and justifiable cause. The
general rule is that rescission of a contract will not be permitted for a slight or casual breach, but only for such substantial and
fundamental breach as would defeat the very object of the parties in making the agreement. The question of whether a breach
of a contract is substantial depends upon the attendant circumstances. In this case the dismissal of Magdalo as the permanent
chief chemist of the corporation is a fundamental and substantial breach of the Bill of Assignment. He was dismissed without
any fault or negligence on his part. Thus, apart from the legal principle that the option to demand performance or ask for
rescission of a contract belongs to the injured party, the fact remains that the Private Respondents had no alternative but to file
the action for rescission and damages.
Magdalo would not have agreed to the other terms of the Bill of Assignment were it not for the basic commitment of UFC to
appoint him as its second vice-president and chief chemist on a permanent basis; that in the manufacture of Mafran sauce and
other food products he would have "absolute control and supervision over the laboratory assistants and personnel and in the
purchase and safeguarding of said products;" and that only by all these measures could Magdalo preserve effectively the secrecy
of the formula, prevent its proliferation, enjoy its monopoly, and, in the process afford and secure for himself a lifetime job and
steady income.
The salient provisions of the Bill of Assignment, namely: the transfer to the corporation of only the use of the formula; the
appointment of Magdalo as second vice-president and chief chemist on a permanent status, the obligation of Magdalo to continue
research on the patent to improve the quality of the products of the corporation, and the need of absolute control and supervision
over the laboratory assistants and personnel and in the purchase and safekeeping of the chemicals and other mixtures used in
the preparation of said product are so interdependent that violation of one would result in virtual nullification of the rest.
(2) The SC majority impliedly said the remedy of rescission is subsidiary to the existence of any other remedy or recourse in law.
They stated, however, as no other remedy was available to Magdalo, he can resort to rescission.
JBL Reyes, concurring:
I would like to add that the argument of petitioner, that the rescission demanded by the respondent-appellee, Magdalo Francisco,
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, is predicated on a failure to distinguish between a
rescission for breach of contract [faith] under Article 1191 of the Civil Code and a rescission by reason of lesion or economic
prejudice, under Article 1381, et seq. The rescission on account of breach of stipulations is not predicated on injury to economic
interests of the party plaintiff but on the breach of faith by the defendant, that violates the reciprocity between the parties. It is
not a subsidiary action, and Article 1191 may be scanned without disclosing anywhere that the action for rescission thereunder
is subordinated to anything other than the culpable breach of his obligations by the defendant. This rescission is in principal
action retaliatory in character, it being unjust that a party be held bound to fulfill his promises when the other violates his. As
expressed in the old Latin aphorism: "Non servanti fidem, non est fides servanda." Hence, the reparation of damages for the
breach is purely secondary.
On the contrary, in the rescission by reason of lesion or economic prejudice, the cause of action is subordinated to the existence
of that prejudice, because it is the raison d'etre as well as the measure of the right to rescind. Hence, where the defendant makes
good the damages caused, the action cannot be maintained or continued, as expressly provided in Articles 1383 and 1384. But
the operation of these two articles is limited to the cases of rescission for lesion enumerated in Article 1381 of the Civil Code of
the
Philippines, and does not apply to cases under Article 1191.
It is probable that the petitioner's confusion arose from the defective technique of the new Code that terms both instances as
rescission without distinctions between them; unlike the previous Spanish Civil Code of 1889, that differentiated "resolution" for
breach of stipulations from "rescission" by reason of lesion or damage. But the terminological vagueness does not justify
confusing one case with the other, considering the patent difference in causes and results of either action.
BALANE CASE NOTE/SUMMARY
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
Whether the suit for rescission under Art. 1191 primary or subsidiary.
UFC contends that a suit for rescission is primary, can only be resorted to when he has no other remedy. Magdalo here has no
other remedy.
SC Majority: there is no other remedy for Magdalo, so he can file for rescission. A suit for rescission under Art. 1191 is subsidiary,
available only when there is no other remedy. Suit is proper.
JBL Concurring: SC majority is confused, the remedy of rescission is a primary remedy. Rescission here means resolution. 1191
– breach of faith vs 1383 – lesion or economic damages.
CANU V. GALANG, 459 SCRA 80
Remedy of rescission in 1191 is not subsidiary, it is primary. therefore the plaintiff does not have to prove that there is no other
recourse.
MAGDALENA ESTATE V. MYRICK, 71:344
FACTS:
Magdalena Estate, Inc. sold to Louis Myrick lots No. 28 and 29 of Block 1, Parcel 9 of the San Juan Subdivision, San Juan,
Rizal. Their contract of sale provides that the Price of P7,953 shall be payable in 120 equal monthly installments of P96.39 each
on the second day of every month beginning the date of execution of the agreement.
In pursuance of said agreement, the vendee made several payments amounting to P2,596.08, the last being due and unpaid
was that of May 2, 1930. By reason of this, the vendor, through its president, notified the vendee that, in view of his inability to
comply with the terms of their contract, said agreement had been cancelled, relieving him of any further obligation thereunder,
and that all amounts paid by him had been forfeited in favor of the vendor. To this communication, the vendee did not reply, and
it appears likewise that the vendor thereafter did not require him to make any further disbursements on account of the purchase
price.
ISSUE:
Was the petitioner authorized to forfeit the purchase price paid?
RULING:
No. The contract of sale contains no provision authorizing the vendor, in the event of failure of the vendee to continue in the
payment of the stipulated monthly installments, to retain the amounts paid to him on account of the purchase price. The claim
therefore, of the petitioner that it has the right to forfeit said sums in its favor is untenable. Under Article 1124 of the Civil Code,
however, he may choose between demanding the fulfillment of the contract or its resolution. These remedies are
alternative and not cumulative, and the petitioner in this case, having elected to cancel the contract cannot avail himself of the
other remedy of exacting performance. As a consequence of the resolution, the parties should be restored, as far as
practicable, to their original situation which can be approximated only be ordering the return of the things which were
the object of the contract, with their fruits and of the price, with its interest, computed from the date of institution of the
action.
CASE NOTE
Illustrates the duty of mutual restitution.
See also GRACE PARK CASE
UP V. DE LOS ANGELES, 35 SCRA 102
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 5 years by mutual agreement.
On December 8, 1964, ALUMCO incurred an unpaid account of P219,362.94. Despite repeated demands, ALUMCO still failed
to pay, so UP sent a notice to rescind the logging agreement. On the other hand, ALUMCO executed an instrument entitled
“Acknowledgment of Debt and Proposed Manner of Payments. It was approved by the president of UP, which stipulated the
following:
3. In the event that the payments called for are not sufficient to liquidate the foregoing 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.
5. In the event that the debtor fails to comply with any of its promises, the Debtor agrees without reservation that
Creditor shall have the right to consider the Logging Agreement rescinded, without the necessity of any judicial
suit…ALUMCO continued its logging operations, but again incurred an unpaid account.
On July 19,1965, UP informed ALUMCO that it had, as of that date, considered rescinded and of no further legal effect the
logging agreement, and that UP had already taken steps to have another concessionaire take over the logging operation.
ALUMCO filed a petition to enjoin UP from conducting the bidding. The lower court ruled in favor of ALUMCO, hence, this appeal.
ISSUE:
Can petitioner UP treat its contract with ALUMCO rescinded, and may disregard the same before any judicial pronouncement to
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that effect?
RULING:
Yes. In the first place, UP and ALUMCO had expressly stipulated that upon default by the debtor, UP has the right and the power
to consider the Logging Agreement of December 2, 1960 as rescinded without the necessity of any judicial suit. As to such
special stipulation and in connection with Article 1191 of the Civil Code, the Supreme Court, stated in Froilan vs. Pan Oriental
Shipping. Co:
“There is nothing in the law that prohibits the parties from entering into agreement that violation of the terms of the contract would
cause cancellation thereof, even without court intervention. In other words, it is not always necessary for the injured party to
resort to court for rescission of the contract.”
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. Otherwise, the party injured by the other's breach will have to passively sit and watch its damages
accumulate during the pendency of the suit until the final judgment of rescission is rendered when the law itself requires that he
should exercise due diligence to minimize its own damages (Civil Code, Article 2203).
In fact, even without express provision conferring the power of cancellation upon one contracting party, the Supreme Court of
Spain, in construing the effect of Article 1124 of the Spanish Civil Code (of which Article 1191 of our own Civil; Code is practically
a reproduction), has repeatedly held that, a resolution of reciprocal or synallagmatic contracts may be made extrajudicially unless
successfully impugned in court.
BALANE CASE NOTE
Can a party unilaterally rescind a contract extrajudicially?
YES, but this extrajudicial rescission is done at the party’s own risk, as the rescission is always subject to judicial review at the
instance of the other party.
The court can rule either of two ways:
Court rules rescission is proper, court will rule that it retroacts to the date of rescission
Court rules rescission is improper, court will declare that there was no rescission in the first place.
See also: LUZON BROKERAGE V MARITIME, 43 SCRA 93
Later decisions have ruled otherwise, saying there is need for a judicial decree and it is the judicial decree that is the operative
act of rescission. (See below EDS MANUFACTURING V. HEALTH CHECK).
DEL CASTILLO V. SPOUSES MATIAS, 419 SCRA [?]
Under damages.
ZULUETA V. MARIANO, 111 SCRA 206
DOCTRINE
A stipulation entitling one party to take possession of the land and building if the other party violates the contract does not ex
proprio vigore confer upon the former the right to take possession thereof if objected to without judicial intervention and'
determination. While a violation by a party of any of the stipulations of a contract on agreement to sell real property would entitle
the other party to resolved or rescind it, proof of violation of a contract is a condition precedent to resolution or rescission. It is
only when the violation has been established that the contract can be declared resolved or rescinded.
When the contract between the parties provided for extrajudicial rescission, this takes legal effect only when the other party does
not oppose it. Where it is objected to, a judicial determination of the issue is still necessary.
 offering to update all his overdue accounts and sought consent to the assignment of his rights to a certain Lourdes Dizon.
FACTS
Jose Zulueta (Owner) and Lamberto Avellana (Buyer) entered into a contract to sell 5 Zulueta’s house and lot in Pasig, Rizal. The
contract allowed the Owner to extrajudicially recover possession of the house, lot and improvements in case the Buyer failed to
meet the conditions of the contract, and the forfeiture of money obligations with the installments already paid considered as
rentals. The parties agreed on a purchase price of P75,000.00 payable in twenty years with respondent buyer assuming to pay
a down payment of P5,000.00 and a monthly installment of P630.00 payable in advance before the 5th day of the corresponding
month, starting with December, 1964.
Avellana failed to pay and Zulueta filed an ejectment case in the MTC. Avellana averred that the MTC did not have jurisdiction
over the case as it involved the interpretation and/or rescission of a contract; and that prior to the execution of the contract to
sell, Zulueta owed him P31,269 (the cost of two movies used in his Congressional campaign in 1964) and such amount was
5
12) That upon failure of the BUYER to fulfill any of the conditions herein stipulated, BUYER automatically and irrevocably
authorizes OWNER to recover extra-judicially, physical possession of the land, building and other improvements which are the
subject of this contract, and to take possession also extra-judicially whatever personal properties may be found within the
aforesaid premises from the date of said failure to answer for whatever unfulfilled monetary obligations BUYER may have with
OWNER; and this contract shall be considered as without force and effect also from said date; all payments made by the BUYER
to OWNER shall be deemed as rental payments without prejudice to OWNER's right to collect from BUYER whatever other
monthly installments and other money obligations which may have been paid until BUYER vacates the aforesaid premises; upon
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
understood to be the down payment of the property. The court rejected the defense, ruling that it was a matter better suited for
a separate claim.
On appeal to the CFI, the court dismissed the petition, there being no showing that before filing the case in the lower court, the
plaintiff has exercised or has pursued his right pursuant to the contract which should be the basis of the action in the lower court.
On MR, the court took notice of the case as an original action before it.
ISSUE/S
Was the action before the Municipal Court one for unlawful detainer within its exclusive original jurisdiction or one for rescission
or annulment of a contract, which should be litigated before a Court of First Instance?
HELD
YES, the Municipal Court had no jurisdiction over the case as it was one for rescission or annulment of a contract. When the
contract between the parties provided for extrajudicial rescission, this takes legal effect only when the other party does not
oppose it. Where it is objected to, a judicial determination of the issue is still necessary.

In his Complaint, petitioner had alleged violation by respondent Avellana of the stipulations of their agreement to sell and thus
unilaterally considered the contract rescinded. Respondent Avellana denied any breach on his part and argued that the principal
issue was one of interpretation and/or rescission of the contract as well as of set-off.
Under those circumstances, proof of violation is a condition precedent to resolution or rescission. It is only when the violation
has been established that the contract can be declared resolved or rescinded. Upon such rescission, in turn, hinges a
pronouncement that possession of the realty has become unlawful. Thus, the basic issue is not possession but one of rescission
or annulment of a contract. which is beyond the jurisdiction of the Municipal Court to hear and determine. And if this is proved a
justice of the peace court might make a finding to that effect, but it certainly cannot declare and hold that the contract is resolved
or rescinded. It is beyond its power so to do.
The illegality of the possession of realty by a party to a contract to sell is premised upon the resolution of the contract, it follows
that an allegation and proof of such violation, a condition precedent to such resolution or rescission, to render unlawful the
possession of the land or building erected thereon by the party who has violated the contract, cannot be taken cognizance of by
a justice of the peace court.
A stipulation entitling one party to take possession of the land and building if the other party violates the contract does not ex
proprio vigore confer upon the former the right to take possession thereof if objected to without judicial intervention and'
determination. While a violation by a party of any of the stipulations of a contract on agreement to sell real property would entitle
the other party to resolved or rescind it, proof of violation of a contract is a condition precedent to resolution or rescission. It is
only when the violation has been established that the contract can be declared resolved or rescinded.
BALANE CASE NOTE
When the contract between the parties provided for extrajudicial rescission, this takes legal effect only when the other party does
not oppose it. Where it is objected to, a judicial determination of the issue is still necessary.

PALAY INC V. CLAVE, 124 SCRA 638
Facts:
1. On March 28, 1965, petitioner Palay, Inc., through its President, Albert Onstott sold a parcel of land owned by the
corporation to the private respondent, Nazario Dumpit, by virtue of a Contract to Sell. The sale price was P23,300.00 with 9%
interest per annum, payable with a down payment of P4,660.00 and monthly instalments of P246.42 until fully paid. Paragraph
6 of the contract provided for automatic extrajudicial rescission upon default in payment of any monthly instalment after the lapse
of 90 days from the expiration of the grace period of one month, without need of notice and with forfeiture of all instalments paid.
2. Respondent Dumpit paid the down payment and several instalments amounting to P13,722.50 with the last payment was
made on December 5, 1967 for instalments up to September 1967. Almost six (6) years later, private respondent wrote petitioner
Petitioners informed respondent that his Contract to Sell had long been rescinded pursuant to paragraph 6 of the contract, and
that the lot had already been resold.
3. Respondent filed a letter complaint with the National Housing Authority (NHA) questioning the validity of the rescission.
The NHA held that the rescission is void in the absence of either judicial or notarial demand. Palay, Inc. and Onstott in his
capacity as President of the corporation, jointly and severally, was ordered to refund Dumpit the amount paid plus 12% interest
from the filing of the complaint. Petitioners' MR was denied by the NHA. Respondent Presidential Executive Assistant, on May
2, 1980, affirmed the Resolution of the NHA. Reconsideration sought by petitioners was denied for lack of merit. Thus, the
present petition.
Issue:
W/N demand is necessary to rescind a contract
his failure to comply with any of the herein conditions BUYER forfeits all money claims against OWNER and shall pay a monthly
rental equivalent to his monthly installment under Condition 1 of this Contract from the date of the said failure to the date of
recovery of physical possession by OWNER of the land, building and other improvements which are the subject of this Contract;
BUYER shall not remove his personal properties without the previous written consent of OWNER, who, should he take
possession of such properties following the aforesaid failure of BUYER, shall return the same to BUYER only after the latter
shall have fulfilled all money claims against him by OWNER; in all cases herein, demand is waived;
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Ruling:
As held in previous jurisprudence, the 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. However, even in the cited cases, there was
at least a written notice sent to the defaulter informing him of the rescission. A written notice is indispensable to inform the
defaulter of the rescission. Hence, the resolution by petitioners of the contract was ineffective and inoperative against private
respondent for lack of notice of resolution (as held in the U.P. vs. Angeles case). The act of a party in treating a contract as
cancelled should be made known to the other.
Later, RA 6551 6551 entitled "An Act to Provide Protection to Buyers of Real Estate on Instalment Payments,” emphasized the
indispensability of notice of cancellation to the buyer when it specifically provided:
Sec. 3(b) ... the actual cancellation of the contract shall take place after thirty days from receipt by the buyer of the notice of
cancellation or the demand for rescission of the contract by a notarial act and upon full payment of the cash surrender value to
the buyer. (Emphasis supplied).
Moreover, there was no waiver on the part of the private respondent of his right to be notified under paragraph 6 of the contract
since it was a contract of adhesion, a standard form of petitioner corporation, and private respondent had no freedom to stipulate.
Finally, it is a matter of public policy to protect buyers of real estate on instalment payments against onerous and oppressive
conditions. Waiver of notice is one such onerous and oppressive condition to buyers of real estate on instalment payments.
As a consequence of the resolution by petitioners, rights to the lot should be restored to private respondent or the same should
be replaced by another acceptable lot but since the property had already been sold to a third person and there is no evidence
on record that other lots are still available, private respondent is entitled to the refund of instalments paid plus interest at the
legal rate of 12% computed from the date of the institution of the action. It would be most inequitable if petitioners were to be
allowed to retain private respondent's payments and at the same time appropriate the proceeds of the second sale to another.
Onstott not personally liable
Onstott was made liable because he was then the President of the corporation and the controlling stockholder but there was no
sufficient proof that he used the corporation to defraud private respondent. He cannot, therefore, be made personally liable just
because he "appears to be the controlling stockholder". Mere ownership by a single stockholder or by another corporation is not
of itself sufficient ground for disregarding the separate corporate personality.
2014A
its phraseology, condemnable in its lopsidedness and injurious in its effect which, in essence, and its entirety is most unfair to
the buyers.
Thus, since the principal obligation under the contract is only P3,920.00 and the plaintiffs-appellees have already paid an
aggregate amount of P4,533.38, the courts should only order the payment of the few remaining installments but not uphold the
cancellation of the contract. Upon payment of the balance of P671.67 without any interest thereon, the defendant must
immediately execute the final deed of sale in favor of the plaintiffs and execute the necessary transfer of documents, as provided
in par.12 of the contract.
BOYSAW V. INTERPHIL PROMOTIONS, 148 SCRA 635
FACTS:
On May 1, 1961 Solomon Boysaw and his then Manager, Willie Ketchum, signed with Interphil Promotions, Inc. represented by
Lope Sarreal, Sr., a contract to engage Gabriel "Flash" Elorde in a boxing contest for the junior lightweight championship of the
world.
It was stipulated that the bout would be held at the Rizal Memorial Stadium in Manila on September 30, 1961 or not later than
thirty [30] days thereafter should a postponement be mutually agreed upon, and that Boysaw would not, prior to the date of the
boxing contest, engage in any other such contest without the written consent of Interphil Promotions, Inc.
Boysaw fought Louis Avila on June 19, 1961 in Las Vegas Nevada. Ketchum assigned to J. Amado Araneta the managerial
rights over Solomon Boysaw. J. Amado Araneta assigned to Alfredo J. Yulo, Jr. the managerial rights over Boysaw that he earlier
acquired from Ketchum and Ruskay. Yulo, Jr. wrote to Sarreal informing him of his acquisition of the managerial rights over
Boysaw and indicating his and Boysaw's readiness to comply with the boxing contract of May 1, 1961.
On the same date, on behalf of Interphil Sarreal wrote a letter to the Games and Amusement Board [GAB] expressing concern
over reports that there had been a switch of managers in the case of Boysaw, of which he had not been formally notified, and
requesting that Boysaw be called to an inquiry to clarify the situation.

Finally, there are no badges of fraud on the petitioners' part. They had literally relied, albeit mistakenly, on paragraph 6 (supra)
of the contract when it rescinded the contract to sell extrajudicially and had sold it to a third person.
Petitioner Palay, Inc. is liable to refund to respondent Dumpit the amount of P13,722.50, with interest at twelve (12%) p.a. from
November 8, 1974, the date of the filing of the Complaint.
BALANE CASE NOTE
You cannot unilaterally rescind without giving notice to the other party.
ANGELES V. CALASANZ, 135 SCRA 323
The GAB called a series of conferences of the parties concerned culminating in the issuance of its decision to schedule the
Elorde-Boysaw fight for November 4, 1961. Yulo, Jr. refused to accept the change in the fight date, maintaining his refusal even
after Sarreal on September 26, 1961, offered to advance the fight date to October 28, 1961 which was within the 30-day period
of allowable postponements provided in the principal boxing contract of May 1, 1961.
While an Elorde-Boysaw fight was eventually staged, the fight contemplated in the May 1, 1961 boxing contract never
materialized.
As a result of the foregoing occurrences, on October 12, 1961, Boysaw and Yulo, Jr. sued Interphil, Sarreal, Sr. and Manuel
Nieto, Jr. in the CFI of Rizal [Quezon City Branch] for damages allegedly occasioned by the refusal of Interphil and Sarreal,
aided and abetted by Nieto, Jr., then GAB Chairman, to honor their commitments under the boxing contract of May 1,1961.

FACTS: ISSUE:
On December 19, 1957, defendants-appellants Ursula Torres Calasanz and plaintiffs-appellees Buenaventura Angeles and WON there was a violation of the fight contract of May 1, 1961; and if there was, who was guilty of such violation.
Teofila Juani entered into a contract to sell a piece of land located in Cainta, Rizal for the amount of P3,920.00 plus 7% interest
per annum. The plaintiffs-appellees made a downpayment of P392.00 upon the execution of the contract. They promised to pay HELD:
the balance in monthly installments of P41.20 until fully paid, YES. Boysaw and his manager violated the contract themselves
the installment being due and payable on the 19th day of each month. The plaintiffs-appellees paid the monthly installments
until July 1966, when their aggregate payment already amounted to P4,533.38. RATIO:
On the issue pertaining to the violation of the May 1, 1961 fight contract, the evidence established that the contract was violated
On December 7, 1966, the defendants-appellants wrote the plantiffs-appellees a letter requesting the remittance of past due by appellant Boysaw himself when, without the approval or consent of Interphil, he fought Louis Avila on June 19, 1961 in Las
accounts. On January 28, 1967, the defendants-appellants cancelled the said contract because the plaintiffs failed to meet Vegas Nevada.
subsequent payments. The plaintiffs’ letter with their plea for reconsideration of the said cancellation was denied by the
defendants. While the contract imposed no penalty for such violation, this does not grant any of the parties the unbridled liberty to breach it
with impunity. Our law on contracts recognizes the principle that actionable injury inheres in every contractual breach. Thus:
The plaintiffs-appellees filed a case before the Court of First Instance to compel the defendant to execute
in their favor the final deed of sale alleging inter alia that after computing all subsequent payments for the land in question, they Those who in the performance of their obligations are guilty of fraud, negligence or delay, and those
found out that they have already paid the total amount including interests, realty taxes and who in any manner contravene the terms thereof, are liable for damages. [Art. 1170, Civil Code].
incidental expenses. The defendants alleged in their answer that the plaintiffs violated par. 6 of the contract to Also:
sell when they failed and refused to pay and/or offer to pay monthly installments corresponding to the month of The power to rescind obligations is implied, in reciprocal ones, in case one of the obligors
August, 1966 for more than 5 months, thereby constraining the defendants to cancel the said contract. should not comply with what is incumbent upon him. [Part 1, Art. 1191, Civil Code].

The Court of First Instance rendered judgment in favor of the plaintiffs, hence this appeal. There is no doubt that the contract in question gave rise to reciprocal obligations. "Reciprocal obligations are those which arise
from the same cause, and in which each party is a debtor and a creditor of the other, such that the obligation of one is dependent
ISSUE: upon the obligation of the other. They are to be performed simultaneously, so that the performance of one is conditioned upon
Has the Contract to Sell been automatically and validly cancelled by the defendants-appellants? the simultaneous fulfillment of the other" [Tolentino, Civil Code of the Philippines, Vol. IV, p. 175.1

RULING: The power to rescind is given to the injured party. "Where the plaintiff is the party who did not perform the undertaking
No. While it is true that par.2 of the contract obligated the plaintiffs-appellees to pay the defendants the which he was bound by the terms of the agreement to perform, he is not entitled to insist upon the performance of the
sum of P3,920 plus 7% interest per annum, it is likewise true that under par 12 the seller is obligated to transfer the title to the contract by the defendant, or recover damages by reason of his own breach " [Seva vs. Alfredo Berwin 48 Phil. 581,
buyer upon payment of the said price. Emphasis supplied].

The contract to sell, being a contract of adhesion, must be construed against the party causing it. The Another violation of the contract in question was the assignment and transfer, first to J. Amado Araneta, and subsequently, to
Supreme Court agree with the observation of the plaintiffs-appellees to the effect that the terms of a contract must be interpreted appellant Yulo, Jr., of the managerial rights over Boysaw without the knowledge or consent of Interphil.
against the party who drafted the same, especially where such interpretation will help effect justice to buyers who, after having
invested a big amount of money, are now sought to be deprived of the same thru the prayed application of a contract clever in
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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The assignments, from Ketchum to Araneta, and from Araneta to Yulo, were in fact novations of the original contract which, to
be valid, should have been consented to by Interphil.
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.
[Art. 1293, Civil Code, emphasis supplied].
That appellant Yulo, Jr., through a letter, advised Interphil on September 5, 1961 of his acquisition of the managerial rights over
Boysaw cannot change the fact that such acquisition, and the prior acquisition of such rights by Araneta were done without the
consent of Interphil. There is no showing that Interphil, upon receipt of Yulo's letter, acceded to the "substitution" by Yulo of the
original principal obligor, who is Ketchum. The logical presumption can only be that, with Interphil's letter to the GAB expressing
concern over reported managerial changes and requesting for clarification on the matter, the appellees were not reliably informed
of the changes of managers. Not being reliably informed, appellees cannot be deemed to have consented to such changes.
Under the law when a contract is unlawfully novated by an applicable and unilateral substitution of the obligor by another, the
aggrieved creditor is not bound to deal with the substitute.
The consent of the creditor to the change of debtors, whether in expromision or delegacion is an,
indispensable requirement . . . Substitution of one debtor for another may delay or prevent the
fulfillment of the obligation by reason of the inability or insolvency of the new debtor, hence, the
creditor should agree to accept the substitution in order that it may be binding on him.
In a show of accommodation, the appellees offered to advance the November 4, 1961 fight to October 28, 1961 just to place it
within the 30- day limit of allowable postponements stipulated in the original boxing contract.
The refusal of Yulo to accept a postponement without any other reason but the implementation of the terms of the original boxing
contract entirely overlooks the fact that by virtue of the violations they have committed of the terms thereof, they have forfeited
any right to its enforcement.
On the validity of the fight postponement, the violations of the terms of the original contract by Yulo vested the Interphil with the
right to rescind and repudiate such contract altogether. That they sought to seek an adjustment of one particular covenant of the
contract, is under the circumstances, within the appellee's rights.
PILIPINAS BANK V. IAC, 151 SCRA 546
DOCTRINE
A contractual provision allowing "automatic rescission", without prior need of judicial rescission, resolution or cancellation, is
VALID. The remedy of one who feels aggrieved in a contract with an “automatic rescission” clause is to go to Court for the
cancellation of the rescission itself, in case the rescission is found unjustified under the circumstances.
An “automatic rescission” clause in a contract, while valid, may be waived through the actions of the obligee when the obligee
allows the obligor to continue the fulfillment of the terms of the contract despite the initial breach bringing into force the automatic
rescission clause.
FACTS
Hacienda Benito, Inc. entered into a contract to sell with Manufacturers Bank and Trust Company, predecessor in interest of
Pilipinas Bank, over a parcel of land in Antipolo, Rizal. The contract contained an automatic rescission clause that allowed the
vendor to resell the property and to forfeit installments already made in favor of the vendor when the vendee fails to pay
installments when due, “three or more consecutive installments as stipulated therein or to comply with any of the terms and
conditions thereof…”
During the contract, Hacienda sent series of notices to the Bank for the latter’s balances/arrearages. From time to time, the Bank
partially complied with this and requested for extensions.
On May 19, 1970, the petitioner, for the last time, reminded the Bank to pay their balance. After more than two years [1973], the
Bank sent a letter expressing their desire to settle their desire to fully settle their obligation.
On March 27, 1974, petitioner wrote a letter to the Bank, informing them that the contract to sell had been rescinded. The Bank
filed Complaint for Specific Performance with Damages to compel petitioner to execute a deed of sale.
After trial, the lower court rendered a decision in the Bank’s favor, holding that petitioner could not rescind the contract to sell,
because: (a) petitioner waived the automatic rescission clause by accepting payment and by sending letters advising private
respondents of the balances due, thus, looking forward to receiving payments thereon. Said decision was affirmed on appeal.
Hence, this Petition For Review on Certiorari.
ISSUE/S
Whether or not the Contract to Sell was rescinded, under the automatic rescission clause contained therein.
HELD
YES. An “automatic rescission” clause in a contract, while valid, may be waived through the actions of the obligee when the
obligee allows the obligor to continue the fulfillment of the terms of the contract despite the initial breach bringing into force the
automatic rescission clause. Hacienda’s many extensions granted to the Bank never called attention to the proviso on "automatic
rescission." Hacienda, by it’s own actions, waived the automatic rescission clause. The assailed decision is affirmed.
A contractual provision allowing "automatic rescission", without prior need of judicial rescission, resolution or cancellation, is
VALID. The remedy of one who feels aggrieved in a contract with an “automatic rescission” clause is to go to Court for the
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
cancellation of the rescission itself, in case the rescission is found unjustified under the circumstances.
ONG V. CA, 310 SCRA 1
Facts:
Ong entered into an “Agreement of Purchase and Sale” with the Robles spouses concerning two parcels of land in San Antonio,
Quezon. The contract price was for P2M, where Ong, as buyer, will make an initial payment of 600,000 and the remaining
balance to be paid in four quarterly installments. The initial payment was to be made by Ong to BPI to settle the loan of the
spouses (about almost 500,000) and the remaining amount (100,000) was paid to the spouses. Ong took possession of the said
parcels of land together with their improvements, including a rice mill and a piggery. The spouses undertook to deliver the titles
upon full payment.
However, the post-dated checks issued by Ong for the installment payments were dishonored due to insufficiency of funds. To
make the matters worse, Ong was not able to fully pay the loan of the spouses with BPI so the latter threatened to foreclose the
mortgage. Thus, the spouses were compelled to sell three transformers of the rice mill with Ong’s consent. Ong voluntarily
permitted the spouses to operate the rice mill.
The spouses then demanded from Ong the return of the properties, after which they filed for rescission and recovery of properties
with damages. During the pending of the suit, petitioner Ong introduced improvements on the property which prompted the
spouses to file for an injunction. The trial court ruled in favor of the spouses, which was affirmed on appeal.
ISSUES: WON the contract entered into by the parties may be validly rescinded under Article 1191 of the New Civil Code; and
HELD:
A careful reading of the parties' "Agreement of Purchase and Sale" shows that it is in the nature of a contract to sell, as
distinguished from a contract of sale. In a contract of sale, the title to the property passes to the vendee upon the delivery of
the thing sold; while in a contract to sell, ownership is, by agreement, reserved in the vendor and is not to pass to the vendee
until full payment of the purchase price. In a contract to sell, the payment of the purchase price is a positive suspensive
condition, the failure of which is not a breach, casual or serious, but a situation that prevents the obligation of the
vendor to convey title from acquiring an obligatory force.
The promise of the spouses to sell was subject to the fulfillment of the suspensive condition of full payment of the purchase price
by the petitioner. Petitioner, however, failed to complete payment of the purchase price. The non-fulfillment of the condition of
full payment rendered the contract to sell ineffective and without force and effect. It must be stressed that the breach
contemplated in Article 1191 of the New Civil Code is the obligor's failure to comply with an obligation. Failure to pay, in this
instance, is not even a breach but merely an event which prevents the vendor's obligation to convey title from acquiring
binding force. Hence, the agreement of the parties in the case at bench may be set aside, but not because of a breach
on the part of petitioner for failure to complete payment of the purchase price. Rather, his failure to do so brought about
a situation which prevented the obligation of respondent spouses to convey title from acquiring an obligatory force.
Discussion on rescission under Article 1191 in relation to rescission under Article 1383.
Petitioner contends that Article 1191 of the New Civil Code is not applicable since he has already paid respondent spouses a
considerable sum and has therefore substantially complied with his obligation. He cites Article 1383 instead, to the effect that
where specific performance is available as a remedy, rescission may not be resorted to.
Rescission, as contemplated in Articles 1380, et seq., of the New Civil Code, is a remedy granted by law to the contracting
parties and even to third persons, to secure the reparation of damages caused to them by a contract, even if this should be valid,
by restoration of things to their condition at the moment prior to the celebration of the contract. It implies a contract, which even
if initially valid, produces a lesion or a pecuniary damage to someone.
On the other hand, Article 1191 of the New Civil Code refers to rescission applicable to reciprocal obligations. Reciprocal
obligations are those which arise from the same cause, and in which each party is a debtor and a creditor of the other, such that
the obligation of one is dependent upon the obligation of the other. They are to be performed simultaneously such that the
performance of one is conditioned upon the simultaneous fulfillment of the other. Rescission of reciprocal obligations under
Article 1191 of the New Civil Code should be distinguished from rescission of contracts under Article 1383. Although both
presuppose contracts validly entered into and subsisting and both require mutual restitution when proper, they are not entirely
identical.
While Article 1191 uses the term "rescission," the original term which was used in the old Civil Code, from which the article was
based, was "resolution. Resolution is a principal action which is based on breach of a party, while rescission under
Article 1383 is a subsidiary action limited to cases of rescission for lesion under Article 1381 of the New Civil Code,
which expressly enumerates the following rescissible contracts:
1. Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than
one fourth of the value of the things which are the object thereof;
2. Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number;
3. Those undertaken in fraud of creditors when the latter cannot in any manner collect the claims due them;
4. Those which refer to things under litigation if they have been entered into by the defendant without the knowledge
and approval of the litigants or of competent judicial authority;
5. All other contracts specially declared by law to be subject to rescission.
FIL-ESTATE V. VERTEX, 698 SCRA 272 [2013]
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 CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE
FACTS:
FEGDI is a stock corporation whose primary business is the development of golf courses. FELI is also a stock corporation, but
is engaged in real estate development. FEGDI was the developer of the Forest Hills Golf and Country Club (Forest Hills) and, in
consideration for its financing support and construction efforts, was issued several shares of stock of Forest Hills.
Sometime in August 1997, FEGDI sold, on installment, to RS Asuncion Construction Corporation (RSACC) one Class "C"
Common Share of Forest Hills for P1,100,000.00. Prior to the full payment of the purchase price, RSACC sold, on February 11,
1999 the Class "C" Common Share to respondent Vertex Sales and Trading, Inc. (Vertex). RSACC advised FEGDI of the sale
to Vertex and FEGDI, in turn, instructed Forest Hills to recognize Vertex as a shareholder. For this reason, Vertex enjoyed
membership privileges in Forest Hills.
Despite Vertex’s full payment, the share remained in the name of FEGDI. Seventeen (17) months after the sale (or on July 28,
2000), Vertex wrote FEDGI a letter demanding the issuance of a stock certificate in its name. FELI replied, initially requested
Vertex to first pay the necessary fees for the transfer. Although Vertex complied with the request, no certificate was issued. This
prompted Vertex to make a final demand on March 17, 2001. As the demand went unheeded, Vertex filed on January 7, 2002 a
Complaint for Rescission with Damages and Attachment against FEGDI, FELI and Forest Hills. It averred that the petitioners
defaulted in their obligation as sellers when they failed and refused to issue the stock certificate covering the subject share
despite repeated demands. On the basis of its rights under Article 1191 of the Civil Code, Vertex prayed for the rescission of the
sale and demanded the reimbursement of the amount it paid (or P1,100,000.00), plus interest. During the pendency of the
rescission action (or on January 23, 2002), a certificate of stock was issued in Vertex’s name, but Vertex refused to accept it.
ISSUE/S:
Given the parties’ arguments, the sole issue for the Court to resolve is whether the delay in the issuance of a stock certificate
can be considered a substantial breach as to warrant rescission of the contract of sale.
THE COURT’S RULING
The petition lacks merit. Physical delivery is necessary to transfer ownership of stocks.
Section 63 of the Corporation Code provides:
SEC. 63. Certificate of stock and transfer of shares. - The capital stock of stock corporations shall be divided into shares for
which certificates signed by the president or vice-president, countersigned by the secretary or assistant secretary, and sealed
with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are personal property
and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person
legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is
recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number
of the certificate or certificates and the number of shares transferred.
No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. In
this case, Vertex fully paid the purchase price by February 11, 1999 but the stock certificate was only delivered on January 23,
2002 after Vertex filed an action for rescission against FEGDI.
GOTESCO V. SPS. FAJARDO, 692 SCRA 319 [2013]
FACTS:
Sps. Fajardo entered into a Contract to Sell with petitioner-corporation Gotesco Properties, Inc. (GPI) for the purchase of a lot
in Evergreen Executive Village, a subdivision project owned and developed by GPI located at Novaliches, Caloocan City. The
subject lot is a portion of a bigger lot covered by Transfer Certificate of Title (TCT) No. 244220 (mother title). Under the contract,
Sps. Fajardo undertook to pay the purchase within a 10-year period, including interest at the rate of nine percent (9%) per annum
while GPI, on the other hand, agreed to execute a final deed of sale (deed) in favor of Sps. Fajardo upon full payment of the
stipulated consideration.
However, despite its full payment of the purchase price and subsequent demands, GPI failed to execute the deed and to deliver
the title and physical possession of the subject lot.
Thus, Sps. Fajardo filed before the Housing and Land Use Regulatory Board-Expanded National Capital Region Field Office
(HLURBENCRFO) a complaint for specific performance or rescission of contract with damages against GPI and the members
of its Board of Directors.
10
Sps. Fajardo averred that GPI violated Section 20 of Presidential Decree No. 957 (PD 957) due to its failure to construct and
provide water facilities, improvements, infrastructures and other forms of development including water supply and lighting
facilities for the subdivision project. They also alleged that GPI failed to provide boundary marks for each lot and that the mother
title including the subject lot had no technical description and was even levied upon by the Bangko Sentral ng Pilipinas (BSP)
without their knowledge. They thus prayed that GPI be ordered to execute the deed, to deliver the corresponding certificate of
title and the physical possession of the subject lot within a reasonable period, and to develop Evergreen Executive Village; or in
the alternative, to cancel and/or rescind the contract and refund the total payments made plus legal interest.
For their part, claimed that the failure to deliver the title to Sps. Fajardo was beyond their control because while GPI's petition
for inscription of technical description was favorably granted by the Regional Trial Court the same was reversed by the CA; this
caused the delay in the subdivision of the property into individual lots with individual titles. Given the foregoing incidents,
petitioners thus argued that Article 1191 of the Civil Code (Code) – the provision on which Sps. Fajardo anchor their right of
rescission – remained inapplicable since they were actually willing to comply with their obligation but were only prevented from
doing so due to circumstances beyond their control. Separately, petitioners pointed out that BSP's adverse claim/levy which was
annotated long after the execution of the contract had already been settled.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
ISSUE:
WON Sps. Fajardo have no right to rescind the contract considering that GPI's inability to comply therewith was due to reasons
beyond its control and thus, should not be held liable to refund the payments they had received.
HELD:
NO. Sps. Fajardo have a right to rescind the contract.
RATIO:
It is settled that in a contract to sell, the seller's obligation to deliver the corresponding certificates of title is simultaneous and
reciprocal to the buyer's full payment of the purchase price. In this relation, Section 25 of PD 957, which regulates the subject
transaction, imposes on the subdivision owner or developer the obligation to cause the transfer of the corresponding certificate
of title to the buyer upon full payment.
A perusal of the records shows that GPI acquired the subject property through a Deed of Partition and Exchange executed
between it and the former registered owner of the property. However, no plausible explanation was advanced by the petitioners
as to why the petition for inscription was filed only after almost eight (8) years from the acquisition of the subject property.
Neither did petitioners sufficiently explain why GPI took no positive action to cause the immediate filing of a new petition for
inscription within a reasonable time from notice of the July 15, 2003 CA Decision which dismissed GPI’s earlier petition based
on technical defects, this notwithstanding Sps. Fajardo's full payment of the purchase price and prior demand for delivery of title.
Clearly, the long delay in the performance of GPI's obligation from date of demand was unreasonable and unjustified. It cannot
therefore be denied that GPI substantially breached its contract to sell with Sps. Fajardo which thereby accords the
latter the right to rescind the same pursuant to Article 1191 of the Code, viz:
ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with
what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with 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.
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with articles
1385 and 1388 and the Mortgage Law.
It is noteworthy to point out that rescission does not merely terminate the contract and release the parties from further obligations
to each other, but abrogates the contract from its inception and restores the parties to their original positions as if no contract
has been made.31 Consequently, mutual restitution, which entails the return of the benefits that each party may have received
as a result of the contract, is thus required.32 To be sure, it has been settled that the effects of rescission as provided for in Article
1385 of the Code are equally applicable to cases under Article 1191, to wit:
xxxx
Mutual restitution is required in cases involving rescission under Article 1191.1âwphi1 This means bringing the parties
back to their original status prior to the inception of the contract. Article 1385 of the Civil Code provides, thus:
ART. 1385. Rescission creates the obligation to return the things which were the object of the contract, together with
their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission
can return whatever he may be obligated to restore.
Neither shall rescission 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.
In this case, indemnity for damages may be demanded from the person causing the loss.
This Court has consistently ruled that this provision applies to rescission under Article 1191:
Since Article 1385 of the Civil Code expressly and clearly states that "rescission creates the obligation to return the things which
were the object of the contract, together with their fruits, and the price with its interest," the Court finds no justification to sustain
petitioners’ position that said Article 1385 does not apply to rescission under Article 1191. x x x
In this light, it cannot be denied that only GPI benefited from the contract, having received full payment of the contract price plus
interests as early as January 17, 2000, while Sps. Fajardo remained prejudiced by the persisting non-delivery of the subject lot
despite full payment. As a necessary consequence, considering the propriety of the rescission as earlier discussed, Sps.
Fajardo must be able to recover the price of the property pegged at its prevailing market value.
REYES V. ROSSI, 691 SCRA 57 [2013]
Facts:
Petitioner Reyes and Advanced Foundation, represented by respondent Ettore Rossi, executed a deed of conditional sale
involving the purchase by Reyes of equipment consisting of a Dredging Pump. The parties agreed therein that Reyes would pay
the sum of P3,000,000.00 as down payment, and the balance of P7,000,000.00 through four post-dated checks. Reyes complied,
but he requested the restructuring of his obligation under the deed of conditional sale by replacing the four post-dated checks
with nine post-dated checks that would include interest accruing on the unpaid portion of the obligation.
Reyes issued and delivered the following nine postdated checks drawn against the United Coconut Planters Bank. Rossi
deposited three of the post-dated checks but two of the checks were denied payment ostensibly upon Reyes’ instructions to stop
their payment, while the third was dishonored for insufficiency of funds. Rossi likewise deposited two more checks but the checks
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were returned with the notation Account Closed stamped on them. He did not anymore deposit the three remaining checks on
the assumption that they would be similarly dishonored.
Reyes commenced an action for rescission of contract and damages and sought judgment declaring the deed of conditional sale
"rescinded and of no further force and effect," and ordering Advanced Foundation to return the down payment with legal interest
and to pay to him attorney’s fees, and various kinds and amounts of damages.
Rossi charged Reyes with five counts of estafa and five counts of violation of Batas Pambansa Blg. 22 for the dishonor of the
checks.
Reyes submitted his counter-affidavit claiming that the checks had not been issued for any valuable consideration; that he had
discovered from the start of using the dredging pump involved in the conditional sale that the Caterpillar diesel engine powering
the pump had been rated at only 560 horsepower instead of the 1200 horsepower; that welding works on the pump had neatly
concealed several cracks; that he had written to Advanced Foundation complaining about the misrepresentations on the
specifications of the pump and demanding documentary proof of Advanced Foundation’s ownership of the pump; that he had
caused the order to stop the payment of three checks; that Advanced Foundation had replied to his letter saying that the pump
had been sold to him on an as is, where is basis.
The Assistant City Prosecutor handling the preliminary investigation recommended the dismissal of the charges of estafa and
the suspension of the proceedings relating to the violation of Batas Pambansa Blg. 22 based on a prejudicial question which the
City Prosecutor of Makati approved.
Issues
W/N the civil action for rescission of the contract of sale raised a prejudicial question that required the suspension of the criminal
prosecution for violation of Batas Pambansa Blg. 22.
Ruling
The petition for review is without merit.
The action for the rescission of the deed of sale on the ground that Advanced Foundation did not comply with its obligation
actually seeks one of the alternative remedies available to a contracting party under Article 1191 of the Civil Code, to wit:
Article 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with
what is incumbent upon him.
The injured party may choose between the fulfilment and the rescission of the obligation, with the payment of damages in either
case. He may also seek rescission, even after he has chosen fulfilment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with Articles
1385 and 1388 and the Mortgage Law.
Article 1191 of the Civil Code recognizes an implied or tacit resolutory condition in reciprocal obligations. The condition is
imposed by law, and applies even if there is no corresponding agreement thereon between the parties. The explanation for this
is that in reciprocal obligations a party incurs in delay once the other party has performed his part of the contract; hence, the
party who has performed or is ready and willing to perform may rescind the obligation if the other does not perform, or is not
ready and willing to perform.19
It is true that the rescission of a contract results in the extinguishment of the obligatory relation as if it was never created, the
extinguishment having a retroactive effect. The rescission is equivalent to invalidating and unmaking the juridical tie, leaving
things in their status before the celebration of the contract. 20 However, until the contract is rescinded, the juridical tie and the
concomitant obligations subsist.
Accordingly, we agree with the holding of the CA that the civil action for the rescission of contract was not determinative of the
guilt or innocence of Reyes. We consider the exposition by the CA of its reasons to be appropriate enough, to wit:
A careful perusal of the complaint for rescission of contract and damages reveals that the causes of action advanced by
respondent Reyes are the alleged misrepresentation committed by the petitioner and AFCSC and their alleged failure to comply
with his demand for proofs of ownership. On one hand, he posits that his consent to the contract was vitiated by the fraudulent
act of the company in misrepresenting the condition and quality of the dredging pump. Alternatively, he claims that the company
committed a breach of contract which is a ground for the rescission thereof. Either way, he in effect admits the validity and the
binding effect of the deed pending any adjudication which nullifies the same.
Indeed, under the Jaw on contracts, vitiated consent does not make a contract unenforceable but merely voidable, the remedy
of which would be to annul the contract since voidable contracts produce legal effects until they are annulled. On the other hand,
rescission of contracts in case of breach pursuant to Article 1191 of the Civil Code of the Philippines also presupposes a valid
contract unless rescinded or annulled.
EDS MANUFACTURING V. HEALTH CHECK, GR 162802, OCT. 9, 2013
Facts:
Healthcheck (HCI) is a health maintenance organization that provides health and medical insurance to its clients. It maintains a
network of accredited hospitals and medical clinics, one of which is the De La Salle University Medical Center (DLSUMC) located
at Dasmariñas, Cavite. Eds Manufacturing (EMI) entered into a one-year contract with HCI for the insurance coverage of the
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
former’s employees. After two months within the program, problems began to arise as HCI’s accreditation with DLSUMC was
suspended because of the financial crisis. It happened again in two more instances and with other hospitals, prompting EMI to
rescind the agreement. However, EMI’s failed to collect the HMO cards and surrender them to HCI as stipulated in the agreement
in order for the latter to finalize the reconciliation of the accounts. Thus, EMI employees were still using HCI’s services beyond
the pre-termination date. HCI reminded EMI that it would consider the agreement ongoing and subsisting until the cards are
surrendered. Without responding to this reminder, EMI sent two letters demanding the payment of the premiums that remained
unutilized from the date the agreement was rescinded.
Pre-empting EMI’s threats of legal action, HCI instituted the present action based on the unlawful pre-termination of the
agreement and EMI’s failure to submit to a joint reconciliation of accounts and deliver such assets belonging to HCI. EMI
responded by alleging that HCI reneged on its duty to provide adequate medical coverage after paying the premium in full and
interposed a counterclaim for damages and unutilized premiums. The trial court ruled in favor of HCI. The same was reversed
on appeal, stating that although HCI substantially breached its obligations, EMI did not validly rescind the agreement. Thus, the
CA dismissed both the complaint by HCI and the counterclaim of EMI.
The trial court ruled in favor of HCI. It found that EMI’s rescission of the Agreement on September 3, 1998 was not done through
court action or by a notarial act and was based on casual or slight breaches of the contract. Moreover, despite the announced
rescission, the employees of EMI continued to avail of HCI’s services until March 1999. The services rendered by HCI from May
1998 to March 1999 purportedly came to a total of P10,149,821.13. The court deducted from this figure the premium paid by
EMI, leaving a net payable to HCI of P1,323,513.63, in addition to moral damages and attorney’s fees. EMI’s counterclaims, on
the other hand, were dismissed for lack of merit.3
On appeal, the CA reversed the decision of the Regional Trial Court (RTC) of Pasig City and ruled that although Healthcheck
International, (HCI) substantially breached their agreement, it also appears that Eds Manufacturing, Inc. (EMI) did not validly
rescind the contract between them. Thus, the CA dismissed the complaint filed by HCI, while at the same time dismissing the
counterclaim filed by EMI.
ISSUE:
WON there was a valid rescission of the agreement between the parties.
HELD:
No. The general rule is that rescission (more appropriately, resolution) of a contract will not be permitted for a slight or casual
breach, but only for such substantial and fundamental violations as would defeat the very object of the parties in making the
agreement.
In his concurring opinion in Universal Food Corporation v. Court of Appeals, Justice J.B.L. Reyes clarifies:
It is probable that the petitioner’s confusion arose from the defective technique of the new Code that terms both
instances as "rescission" without distinction between them; unlike the previous Spanish Code of 1889 that
differentiated between "resolution" for breach of stipulations from "rescission" by reason of lesion or damage. But
the terminological vagueness does not justify confusing one case with the other, considering the patent difference
in causes and results of either action.
Thus, the rescission referred to in Article 1191, more appropriately referred to as resolution, is on the breach of faith by one
of the parties which is violative of the reciprocity between them.
In the present case, it is apparent that HCI violated its contract with EMI to provide medical service to its employees in a
substantial way. As aptly found by the CA, there was gross denial of services to EMI’s employees at a time when the delivery
was crucial to their health and lives. However, although a ground exists to validly rescind the contract between the parties, it
appears that EMI failed to judicially rescind the same. In Iringan v. Court of Appeals, the SC reiterated the rule that in the
absence of a stipulation, a party cannot unilaterally and extrajudicially rescind a contract.
Clearly, a judicial or notarial act is necessary before a valid rescission can take place, whether or not automatic
rescission has been stipulated. It is to be noted that the law uses the phrase "even though" emphasizing that when no
stipulation is found on automatic rescission, the judicial or notarial requirement still applies.
But in the SC’s view, even if Article 1191 were applicable, petitioner would still not be entitled to automatic rescission. The
requirement for the right to resolve reciprocal obligations under the old provision has been retained in the third paragraph of
Article 1191, which states that "the court shall decree the rescission claimed, unless there be just cause authorizing the fixing of
a period." Consequently, even if the right to rescind is made available to the injured party, the obligation is not ipso facto
erased by the failure of the other party to comply with what is incumbent upon him.
The party entitled to rescind should apply to the court for a decree of rescission. The right cannot be exercised solely on a
party’s own judgment that the other committed a breach of the obligation. The operative act which produces the resolution
of the contract is the decree of the court and not the mere act of the vendor. Since a judicial or notarial act is required by
law for a valid rescission to take place, the letter written by respondent declaring his intention to rescind did not operate to validly
rescind the contract.
What is more, it is evident that EMI had not rescinded the contract at all. The reports submitted by show entries as late as March
1999 (beyond pre-termination), signifying that EMI employees were availing of the services until the contract period were almost
over. The continued use by them of their privileges under the contract, with the apparent consent of EMI, belies any intention to
cancel or rescind it, even as they felt that they ought to have received more than what they got.
CASE NOTE: HARMONIZING UP CASE WITH EDS MARKETING:
In UP, the court said that parties are not prevented from agreeing that a contract is deemed cancelled (or resolved) in
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case of breach of the other party. This emanates from the reciprocal nature of the obligation under Art. 1191. Thus, a party
may consider the contract rescinded but does so at its own risk because the court may subsequently rule that rescission is not
proper if the other party impugns such rescission. Thus, if there is automatic rescission and the injured party rescinds without
objection from the alleged violator, then no judicial act is necessary. But in case the other party impugns the validity of the other
party's rescission, the former is not precluded from seeking relief from the court even if there's an automatic rescission provision.
In effect, there's only a transfer of the initiative to sue--the defaulter will sue to question the rescission. In the normal course
of things, it is the injured party who is supposed to file for rescission. "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." Therefore, one party cannot
unilaterally rescind based on its own determination that there is breach and such breach warranted a rescission because only
the court can do that.
Thus, a party may go to court to question the rescission despite the automatic provision unless such party (defaulter) is barred
by "acquiescence, estoppel, or prescription." Thus, it is the court's determination that produces effect. So if one party considers
it rescinded without judicial determination and the court finds rescission is not proper, such party may be liable for such action
(own risk). Thus, the court said in Eds that "even if the right to rescind is made available to the injured party, the obligation is not
ipso facto erased by the failure of the other party to comply with what is incumbent upon him."
In Eds, Eds unilaterally rescinded and it appears that Healthcheck was supposed to return the unused premiums upon delivery
of the HMO cards (allow rescission so to speak) but Eds did not deliver so the employees were still able to use the cards (so
this pertains to the risk that Eds took for unilaterally rescinding). SC said there was indeed substantial breach by HCI but it is the
judicial act that produces the effect. So when Eds "rescinded," such "rescission" was not yet operative and the continued use of
Eds of HCI's services beyond the contract period belied its intention to rescind.
Article 1192
Art. 1192. In case both parties have committed a breach of the obligation, the liability of the first infractor
shall be equitably tempered by the courts. If it cannot be determined which of the parties first violated
the contract, the same shall be deemed extinguished, and each shall bear his own damages. (n)
 ISB is now prohibited from doing further business by Monetary Board Resolution No. 967.
CENTRAL BANK V. CA, 139 SCRA 46
CASE SUMMARY
Tolentino made a loan from Island Savings Bank secured by a mortgage. The Bank did not release the whole amount but only
a portion thereof. Later, the Bank experienced liquidity problems and the Monetary Board of Central Bank prohibited it from
making new loans and much later, from doing business in the Philippines. Thereafter, the Acting Superintendent of Central Bank
took charge of its assets. Upon expiration of the loan term, the Bank filed extrajudicial foreclosure of the mortgage. Was there a
perfected contract of loan when only a portion of the amount was delivered?
The Supreme Court held that there was only partial delivery. As such, the contract is deemed perfect only in so far as what has
been delivered. The mortgage cannot be entirely foreclosed, except for up to the amount of the actual amount released, but the
Bank can recover the interest of the partial loan. Tolentino cannot anymore demand the remaining amount of the loan from the
Bank because he defaulted on his payment. His liability offsets the liability of the Bank to him.
FACTS
Apr 28, 1965: Tolentino’s loan application of P80k w/the Island Savings Bank (ISB) was approved. As security, he executed a
real estate mortgage over his 100-hec land in Cubo, Las Nievas, Agusan. Terms of the loan:
1.lump sum loan of P80k
2.repayable in semi-annual installments for 3 yrs w/12% annual interest
3.loan to be used solely as an additional capital to develop his other property into a subdivision
May 22, 1965: P17k partial release. Tolentino & his wife signed a promissory note for such amount at 12% annual interest
payable in 3yrs from date of execution of contract at semi-annual installments of P3,459.00. Advance 6-month interest for the
P80k loan was deducted from the P17k amounting to P4,800.00. But such amount was refunded to Tolentino on July 23, 1965.
No fund available yet for the P63k balance.
Aug. 13, 1965: Monetary Board of Central Bank issued Resolution No. 1049 finding ISB suffering liquidity problems. Bank was
prohibited making new loans & investments except in gov’t securities & loans already approved subj to the review of the Supt
of Banks who may impose certain limitations.
June 14, 1968: Monetary Board issued Resolution No. 967 finding that ISB failed to put up required capital to restore its solvency.
Bank prohibited from doing business in RP & Acting Supt of Banks to take charge of ISB’s assets.
Aug. 1, 1968: due to Tolentino’s failure to pay P17k covered by promissory note, ISB filed for extra judicial foreclosure of the
real estate mortgage. Sheriff scheduled auction for Jan. 22, 1969.
Jan. 20, 1969: Tolentino filed a petition for injunction, specific performance or recission & damages w/prelim injunction alleging
that since ISB failed to deliver P63k balance, he’s entitled to specific performance by ordering delivery of balance w/12% per
annum interest from Apr. 28, 1965 & if such can’t be done, to rescind mortgage.
Court issued TRO.
CFI: ordered Tolentino to pay ISB P17k + legal interest & charges due and TRO lifted so foreclosure may proceed.
CA: Affirmed dismissal of Tolentino’s petition but ruled that ISB can neither foreclose mortgage nor collect P17k loan.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
Issues & Ratio:
1.WON ISB’s defenses in its failure to fulfill its obligation are acceptable – NO
In reciprocal obligations such as in this case, obligation/promise of each party is the consideration for that of the other. When
one party has performed or is ready & willing to perform his part, the other party who has not yet performed or is not ready &
willing incurs in delay (CC Art. 1169). Thus, consideration for Tolentino’s promise to pay was ISB’s obligation to furnish P80k
loan. Oblig began when Tolentino executed real estate mortgage and it lasted until Central Bank issued Resolution No. 967 w/c
made it legally impossible for ISB to furnish the balance. Resolution No. 1049 can’t interrupt ISB’s default in complying w/its
oblig since it did not prohibit bank from releasing the loan balance of loan agreements previously contracted.
Mere pecuniary inability to fulfill an engagement does not discharge the oblig of the contract nor does it constitute any defense
to a decree of specific performance (Gutierrez Repide v. Afzelius) and mere fact of insolvency of a debtor is never an excuse for
the non-fulfillment of an oblig but instead it’s taken as a breach of contract by him (CJS).
Fact that Tolentino demanded & accepted the refund of pre-deducted 6-month interest of P4,800 can’t be taken as a waiver of
his rt to collect balance. In fact, collection of the pre-deducted interest was improper considering that only P17k was released. A
person can’t be legally charged interest for a non-existing debt. In accepting the refund, Tolentino was only exercising his right.
ISB claims that there was an overvaluation of the loan collateral. But such does not exempt it from complying w/its reciprocal
oblig. Bank officials should exercise caution & prudence in the discharge of their functions by investigating existence & valuation
of properties being offered as loan security. They can’t rely merely on the customer’s representation. Besides, lower court
prevented petitioner from presenting proof on alleged over-valuation because of their failure to raise the same in their pleadings
in effect waiving their right to do so (ROC Sec. 9, Rule 9). Thus, such can’t be raised in the SC.
2.WON a an action for specific performance can prosper – NO
3.WON recission is proper – YES
But only for the P63k balance w/c ISB failed to deliver.
Tolentino is bound by the promissory note he released WRT the P17k loan. He has a reciprocal oblig to pay such when it falls
due. So WRT to this amount, he’s not entitled to recission since he’s also a party in default (CC Art. 1191). As a matter of fact,
rt to rescind belongs to the aggrieved party, ISB. Had he not signed a promissory note, Tolentino would be entitled to ask for
recission of entire loan there being no date for him to perform his reciprocal oblig to pay.
Since both parties were in default, they’re both liable for damages.
CC Art. 1192: In case both parties committed a breach of their reciprocal obligations, the liability of the first infractor
shall be equitably tempered by the courts. Thus, ISB’s liability for damages is offset by Tolentino’s liability for damages
in the form of penalties & surcharges.
The liability of Tolentino for the interest of the P17k debt shall not be included in offsetting the liabilities of both parties since he
derived some benefit for his use of said amount. But Tolentino’s real estate mortgage can’t be entirely foreclosed to satisfy his
P17k debt. Note that the consideration of the accessory contract of the real estate mortgage is the same as that of the principal
contract. In both instances, the consideration of the debtor’s oblig to pay is the existence of a valid, voidable or unenforceable
debt (CC Art. 2086 in relation to Art. 2052). The consideration in executing a mortgage may either be a prior or subsequent
matter. But when the consideration is subsequent, the mortgage can only take effect when the debt secured by it is created as
a binding contract to pay. And when there’s partial failure of consideration, the mortgage becomes unenforceable to the extent
of such failure.
The mortgage can’t be enforced for more than the actual sum due (Metropolitan Life Ins. v Peterson). Since ISB failed to furnish
the P63k balance, the mortgage is unenforceable to such extent w/c is 78.75% of the total loan. Thus, 78.75 of the 100-hec
mortgage is unenforceable. The remaining 21.25 hec is more than sufficient to secure the P17k debt.
CC Art. 2089’s rule on indivisibility of real estate mortgage is not applicable since such rule presupposes several heirs of the
debtor/creditor w/c is not the case here.
Holding:
1.Tolentino to pay ISB P17k + P41,210.00 as 12% interest per annum from May 22, 1965 to Aug. 22, 1985 and 12% interest on
total amount counted from Aug. 22, 1985 until paid.
2.In case Tolentino fails to pay, his real estate mortgage of 21.25 hectares shall be foreclosed to satisfy his total indebtedness.
3.78.75 hectares real estate mortgage is unenforceable & ordered released in favor of Tolentino.
Article 1197
Art. 1197. If the obligation does not fix a period, but from its nature and the circumstances it can be
inferred that a period was intended, the courts may fix the duration thereof.
The courts shall also fix the duration of the period when it depends upon the will of the debtor.
In every case, the courts shall determine such period as may under the circumstances have been
probably contemplated by the parties. Once fixed by the courts, the period cannot be changed by them.
(1128a)
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 CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE
CHAVES V. GONZALES, 32 SCRA 547
FACTS:
In the early part of July, 1963, the plaintiff delivered to the defendant, who is a typewriter repairer, a portable typewriter for
routine cleaning and servicing. The defendant was not able to finish the job after some time despite repeated reminders made
by the plaintiff. The defendant merely gave assurances, but failed to comply with the same. In October, 1963, the defendant
asked from the plaintiff the sum of P6.00 for the purchase of spare parts, which amount the plaintiff gave to the defendant.
2014A
The appealed judgment thus made no findings on these claims, nor on the fraud or malice charged to the appellee. As no findings
of fact were made on damages and attorney's fees, there is no factual basis upon which to make an award therefor. Appellant
is bound by such judgment of the court, a quo, by reason of his having resorted directly to the Supreme Court on questions of
law.
IN VIEW OF THE FOREGOING REASONS, the appealed judgment is hereby modified, by ordering the defendants-appellee to
pay, as he is hereby ordered to pay, the plaintiff-appellant the sum of P89.85, with interest at the legal rate from the filing of the
complaint. Costs in all instances against appellee Fructuoso Gonzales.

On October 26, 1963, after getting exasperated with the delay of the repair of the typewriter, the plaintiff went to the house of Concepcion, C.J., Dizon, Makalintal, Zaldivar, Ruiz Castro, Fernando, Teehankee and Villamor, JJ., concur.
the defendant and asked for the return of the typewriter. The defendant delivered the typewriter in a wrapped package. On Barredo J., did not take part.
reaching home, the plaintiff examined the typewriter returned to him by the defendant and found out that the same was in
shambles, with the interior cover and some parts and screws missing. On October 29, 1963, the plaintiff sent a letter to
the dependant formally demanding the return missing parts, the interior cover and the sum of P6.00 (Exhibit D). The following ENCARNACION V. BALDOMAR, 77:470
day, the defendant returned to the plaintiff some of the missing parts, the interior cover and the P6.00.
FACTS:
On August 29, 1964, the plaintiff had his typewriter repaired by Freixas Business Machines, and the repair job cost him a total Vicente Singson Encarnacion leased his house to Jacinta Baldomar and her son, Lefrando Fernando upon a month-to-month
of P89.85, including labor and materials basis. After Manila was liberated in the last war, Singson Encarnacio notified Baldomar and her son Fernando to vacate the
house because he needed it for his office as a result of the destruction of the building where he had his office before. Despite
On August 23, 1965, the plaintiff commenced this action before the City Court of Manila, demanding from the defendant the the demand,
payment of P90.00 as actual and compensatory damages, P100.00 for temperate damages, P500.00 for moral damages, and Baldomar and Fernando continued their occupancy.
P500.00 as attorney's fees.
The defense of Baldomar and Fernando was that the contract with Singson Encarnacion authorized them to continue occupancy
"In his answer as well as in his testimony given before this court, the defendant made no denials of the facts narrated above, indefinitely while they should faithfully fulfill their obligation with respect to payment of rentals. Singson Encarnacion contended
except the claim of the plaintiff that the typewriter was delivered to the defendant through a certain Julio Bocalin, which the that the lease had always and since the beginning been upon a month-to-month basis.
defendant denied allegedly because the typewriter was delivered to him personally by the plaintiff.
ISSUE:
"The repair done on the typewriter by Freixas Business Machines with the total cost of P89.85 should not, however, be fully Was it tenable for Singson Encarnacion to discontinue the lease of Baldomar and her son?
chargeable against the defendant. The repair invoice, Exhibit C, shows that the missing parts had a total value of only P31.10.
Judgment was rendered ordering the defendant to pay the plaintiff the sum of P31.10, and the costs of suit. RULING:
The continuance and fulfillment of the contract of lease cannot be made to depend solely and exclusively upon the free and
The error of the court a quo, according to the plaintiff-appellant, Rosendo O. Chaves, is that it awarded only the value of the uncontrolled choice of the lessees between continuing paying the rentals or not, completely depriving the owner of all say in the
missing parts of the typewriter, instead of the whole cost of labor and material that went into the repair of the machine, matter. Furthermore, carried to its logical conclusion, the defense thus set up by defendant Lefrado Fernando would leave to
as provided for in Article 1167 of the Civil Code, reading as follows: the sole and exclusive will of one of the contracting parties (defendants in this case) the validity and fulfillment of the contract of
lease, within the meaning of article 1256 of the Civil Code, since the continuance and fulfillment of the contract would then
"Art. 1167. If a person obliged to do something fails to do it, the same shall be executed at his cost. depend solely and exclusively upon their free and uncontrolled choice between continuing paying the rentals or not, completely
"This same rule shall be observed if he does it in contravention of the tenor of the obligation. Furthermore, it may be decreed depriving the owner of all say in the matter. If this defense were to be allowed, so long as defendants elected to continue the
that what has been poorly done be undone." lease by continuing the payment of the rentals, the owner would never be able to discontinue it; conversely, although the owner
should desire the lease to continue, the lessees could effectively thwart his purpose if they should prefer to terminate the contract
On the other hand, the position of the defendant-appellee, Fructuoso Gonzales, is that he is not liable at all, not even for the by the simple expedient of stopping payment of the rentals. This, of course, is prohibited by the aforesaid article of the Civil
sum of P31.10 because his contract with plaintiff-appellant did not contain a period, so that plaintiff appellant did not Code.
contain a period, so that plaintiff-appellant should have first filed a petition for the court to fix the period, under Article
1197 of the Civil Code, within which the defendant-appellee could be held liable for breach of contract.
ELEIZEGUI V. LAWN TENNIS CLUB, 2:309
HELD: [note: taken from http://lawsandfound.blogspot.com/2013/07/eleizegui-v-manila-lawn-tennis-club.html]
The appealed judgment states that the "plaintiff delevered to the defendant... a portable typewriter for routine cleaning and
servicing"; that the "defendant was not able to finish the job after some time despite repeated reminders made by the plaintiff"; FACTS:
that the "defendant merely gave assurances, but failed to comply with the same"; and that "after getting exasperated with the A contract of lease was executed on January 25, 1980 over a piece of land owned by the plaintiffs Eleizegui (Lessor) to the
delay of the repair of the typewriter," the plaintiff went to the house of the defendant and asked for its return, which was done. Manila Lawn Tennis Club, an English association (represented by Mr. Williamson) for a fixed consideration of P25 per month
The inferences derivable from these findings of fact are that the appellant and the appellee had a perfected contract for and accordingly, to last at the will of the lessee. Under the contract, the lessee can make improvements deemed desirable for
cleaning and servicing a typewriter; that, they intended that the defendant was to finish it at some future time, although the comfort and amusement of its members. It appeared that the plaintiffs terminated the lease right on the first month. The
such time was not specified; and that such time had, passed without the work having been accomplished, for the defendant is in the belief that there can be no other mode of terminating the lease than by its own will, as what they believe has
defendant returned the typewriter cannibalized and unrepaired, which in itself is a breach of his obligation, without been stipulated.
demanding that he should be given more time to finish the job, or compensation for the work he had already done. The
time for compliance having evidently expired, and there being a breach of contract by non-performance, it was As a result the plaintiff filed a case for unlawful detainer for the restitution of the land claiming that article 1569 of the Civil Code
academic for the plaintiff to have first petitioned the court to fix a period for the performance of the contract before provided that a lessor may judicially dispossess the lessee upon the expiration of the conventional term or of the legal term; the
filing his complaint in this case. Defendant cannot invoke Article 1197 of the Civil Code for he virtually admitted conventional term — that is, the one agreed upon by the parties; the legal term, in defect of the conventional, fixed for leases by
nonperformance by returning the typewriter that he was obliged to repair in a non-working condition, with essential articles 1577 and 1581. The Plaintiffs argued that the duration of the lease depends upon the will of the lessor on the basis of
parts missing. The fixing of a period would thus be a mere formality and would serve no purpose that to delay (cf. Art. 1581 which provides that, "When the term has not been fixed for the lease, it is understood to be for years when an annual
Tiglao, et al. v. Manila Railroad Co., 98 Phil. 181). rental has been fixed, for months when the rent is monthly. . . ." The second clause of the contract provides as follows: "The rent
of the said land is fixed at 25 pesos per month."
It is clear that the defendant-appellee contravened the tenor of his obligation because he not only did not repair the typewriter
but returned it "in shambles," according to the appealed decision. For such contravention, as appellant contends, he is liable The lower court ruled in favor of the Plaintiffs on the basis of Article 1581 of the Civil Code, the law which was in force at the
under Article 1167 of the Civil Code, jam quot, for the cost of executing the obligation in a proper manner. The cost of the time the contract was entered into. It is of the opinion that the contract of lease was terminated by the notice given by the plaintiff.
execution of the obligation in this case should be the cost of the labor or service expended in teh repair of the The judgment was entered upon the theory of the expiration of a legal term which does not exist, as the case requires that a
typewriter, which is in the amount of P58.75, because the obligation or contract was to repair it. term be fixed by the courts under the provisions of article 1128 with respect to obligations which, as is the present, are terminable
at the will of the obligee.
In addition, the defendant-appellee is likewise liable, under Article 1170 of the Code , for the cost of the missing parts,
in the amount P31.10, for in his obligaiton to repair the typewriter he was bound, but failed or neglected, to return it in ISSUES:
the same condition it was when he received it. Whether or not the parties have agreed upon the duration of the lease, and that the lease depends upon the will of the lessee.

Appellant's claims for moral and temperate damages and attorney's fees were, however correctly rejected by the trial court, for HELD:
these were not alleged in his complaint (Record on Appeal, pages 105). Claims for damages and attorney's fees must be YES, the parties have agreed upon a term hence Art. 1581 is inapplicable. The legal term cannot be applied under Art 1581 as
pleaded, and the existence of, the actual basis thereof must be proved. it appears that there was actually an agreement between the parties as to the duration of the lease, albeit implied that the lease
is to be dependent upon the will of the lessee. It would be absurd to accept the argument of the plaintiff that the contract was
terminated at its notice, given this implication.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
27
 CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE
Interestingly, the contract should not be understood as one stipulated as a life tenancy, and still less as a perpetual lease since
the terms of the contract express nothing to this effect, even if they implied this idea. If the lease could last during such time as
the lessee might see fit, because it has been so stipulated by the lessor, it would last, first, as long as the will of the lessee —
that is, all his life; second, during all the time that he may have succession, inasmuch as he who contracts does so for himself
and his heirs. (Art. 1257 of the Civil Code.) The lease in question does not fall within any of the cases in which the rights and
obligations arising from a contract cannot be transmitted to heirs, either by its nature, by agreement, or by provision of law.
Moreover, being a lease, then it must be for a determinate period. (Art. 1543.) By its very nature it must be temporary, just as by
reason of its nature, an emphyteusis must be perpetual, or for an unlimited period. (Art. 1608.)
The duration of the lease does not depend solely upon the will of the Lessee (defendant).
It cannot be concluded that the termination of the contract is to be left completely at the will of the lessee simply because it has
been stipulated that its duration is to be left to his will.
The Civil Code has made provision for such a case in all kinds of obligations. In speaking in general of obligations with a term it
has supplied the deficiency of the former law with respect to the "duration of the term when it has been left to the will of the
debtor," and provides that in this case the term shall be fixed by the courts. (Art. 1128, sec. 2.) In every contract, as laid down
by the authorities, there is always a creditor who is entitled to demand the performance, and a debtor upon whom rests the
obligation to perform the undertaking. In bilateral contracts the contracting parties are mutually creditors and debtors. Thus, in
this contract of lease, the lessee is the creditor with respect to the rights enumerated in article 1554, and is the debtor with
respect to the obligations imposed by articles 1555 and 1561. The term within which performance of the latter obligation is due
is what has been left to the will of the debtor. This term it is which must be fixed by the courts.
The only action which can be maintained under the terms of the contract is that by which it is sought to obtain from the judge the
determination of this period, and not the unlawful detainer action which has been brought — an action which presupposes the
expiration of the term and makes it the duty of the judge to simply decree an eviction. To maintain the latter action it is sufficient
to show the expiration of the term of the contract, whether conventional or legal; in order to decree the relief to be granted in the
former action it is necessary for the judge to look into the character and conditions of the mutual undertakings with a view to
supplying the lacking element of a time at which the lease is to expire.
The lower court’s judgment is erroneous and therefore reversed and the case was remanded with directions to enter a judgment
of dismissal of the action in favor of the defendant, the Manila Lawn Tennis Club.
PHILBANKING V. LUI SHE, 21 SCRA 53
Facts:
Justina Santos y Canon Faustino and her sister Lorenzo were the owners in common of a piece of land in Manila. The sisters
lived in one of the houses, while Wong Heng, a Chinese, lived with his family in the restaurant. Wong had been a long-time
lessee of a portion of the property, paying a monthly rental of P2,620. Justina Santos then became the owner of the entire
property as her sister died with no other heir. Wong became Justina’s entrusted person to whom she delivered various amounts
for safekeeping, including rentals from her property at the corner of Ongpin and Salazar streets and the rentals which Wong
himself paid as lessee of a part of the Rizal Avenue property. Justina Santos executed on November 15, 1957 a contract of
lease (Plff Exh. 3) in favor of Wong, covering the portion then already leased to him and another portion fronting Florentino
Torres street for 50 years, although the lessee was given the right to withdraw at any time from the agreement. Ten days later
(November 25), the contract was amended (Plff Exh. 4) so as to make it cover the entire property, including the portion on which
the house of Justina Santos stood, at an additional monthly rental of P360. For his part Wong undertook to pay, out of the rental
due from him.
On December 21 she executed another contract (Plff Exh. 7) giving Wong the option to buy the leased premises. The option,
written in Tagalog, imposed on him the obligation to pay for the food of the dogs and the salaries of the maids in her household,
the charge not to exceed P1,800 a month. The option was conditioned on his obtaining Philippine citizenship, a petition for which
was then pending in the Court of First Instance of Rizal.
On November 18, 1958 she executed two other contracts, one (Plff Exh. 5) extending the term of the lease to 99 years, and
another (Plff Exh. 6) fixing the term of the option of 50 years. In two wills executed on August 24 and 29, 1959 (Def Exhs. 285 &
279), she bade her legatees to respect the contracts she had entered into with Wong, but in a codicil (Plff Exh. 17) of a later date
(November 4, 1959) she claims that the various contracts were made by her because of machinations and inducements practiced
by him, she now directed her executor to secure the annulment of the contracts.
Security Bank & Trust Co was then appointed the guardian of Justina’s properties.
Issue:
WON the contracts were freely entered into? YES
RATIO:
So it was held in Melencio v. Dy Tiao Lay that a "provision in a lease contract that the lessee, at any time before he erected any
building on the land, might rescind the lease, can hardly be regarded as a violation of article 1256 [now art. 1308] of the Civil
Code."
Here, the right of the lessee to continue the lease or to terminate it is so circumscribed by the term of the contract that it cannot
be said that the continuance of the lease depends upon his will. At any rate, even if no term had been fixed in the agreement,
this case would at most justify the fixing of a period but not the annulment of the contract.
Indeed, the charge of undue influence in this case rests on a mere inference drawn from the fact that Justina Santos could not
read (as she was blind) and did not understand the English language in which the contract is written, but that inference has been
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
overcome by her own evidence. As it was with the lease contract (Plff Exh. 3), so it was with the rest of the contracts (Plff Exhs.
4-7) — the consent of Justina Santos was given freely and voluntarily.
LIM V. PEOPLE, 133 SCRA 333
Facts:
... The appellant is a businesswoman. On January 10, 1966, the appellant went to the house of Maria Ayroso and proposed to
sell Ayroso's tobacco. Ayroso agreed to the proposition of the appellant to sell her tobacco consisting of 615 kilos at P1.30 a kilo.
The appellant was to receive the overprice for which she could sell the tobacco. This agreement was made in the presence of
plaintiff's sister, Salud G. Bantug. Salvador Bantug drew the document, Exh. A, dated January 10, 1966.
XxxThis is to certify that I have received from Mrs. Maria de Guzman Vda. de Ayroso. of Gapan, Nueva Ecija, six hundred fifteen
kilos of leaf tobacco to be sold at Pl.30 per kilo. The proceed in the amount of Seven Hundred Ninety Nine Pesos and 50/100 (P
799.50) will be given to her as soon as it was sold.xxx
Whether or not the Honorable Court of Appeals was legally right in holding that the foregoing document (Exhibit "A") "fixed a
period" and "the obligation was therefore, immediately demandable as soon as the tobacco was sold" (Decision, p. 6) as against
the theory of the petitioner that the obligation does not fix a period, but from its nature and the circumstances it can be inferred
that a period was intended in which case the only action that can be maintained is a petition to ask the court to fix the duration
thereof
Issue:
Whether the receipt, Exhibit "A", is a contract of agency to sell or a contract of sale of the subject tobacco between petitioner
and the complainant, Maria de Guzman Vda. de Ayroso, thereby precluding criminal liability of petitioner for the crime charged.
Held:
Contract of agency,
It is clear in the agreement, Exhibit "A", that the proceeds of the sale of the tobacco should be turned over to the complainant as
soon as the same was sold, or, that the obligation was immediately demandable as soon as the tobacco was disposed of. Hence,
Article 1197 of the New Civil Code, which provides that the courts may fix the duration of the obligation if it does not fix a period,
does not apply.
ARANETA INC V. PHIL. SUGAR ESTATES, 20 SCRA 330
FACTS:
J. M. Tuason & Co., Inc. is the owner of a big tract land situated in Quezon City, otherwise known as the Sta. Mesa Heights
Subdivision, and covered by a Torrens title in its name. On July 28, 1950, through Gregorio Araneta, Inc., it (Tuason & Co.) sold
a portion thereof to Philippine Sugar Estates Development Co., Ltd. The parties stipulated, among in the contract of purchase
and sale with mortgage, that the buyer will —
Build on the said parcel land the Sto. Domingo Church and Convent
while the seller for its part will —
Construct streets on the NE and NW and SW sides of the land herein sold so that the latter will be a block
surrounded by streets on all four sides; and the street on the NE side shall be named "Sto. Domingo Avenue;"
The buyer, Philippine Sugar Estates Development Co., Ltd., finished the construction of Sto. Domingo Church and Convent, but
the seller, Gregorio Araneta, Inc., which began constructing the streets, is unable to finish the construction of the street in the
Northeast side named (Sto. Domingo Avenue) because a certain third-party, by the name of Manuel Abundo, who has been
physically occupying a middle part thereof, refused to vacate the same; hence, on May 7, 1958, Philippine Sugar Estates
Development Co., Lt. filed its complaint against J. M. Tuason & Co., Inc., and instance, seeking to compel the latter to comply
with their obligation, as stipulated in the above-mentioned deed of sale, and/or to pay damages in the event they failed or refused
to perform said obligation.
Both defendants J. M. Tuason and Co. and Gregorio Araneta, Inc. answered the complaint, the latter particularly setting up the
principal defense that the action was premature since its obligation to construct the streets in question was without a definite
period which needs to he fixed first by the court in a proper suit for that purpose before a complaint for specific performance will
prosper.
The lower court rendered a decision giving defendant Gregorio Araneta, Inc., a period of two (2) years from notice hereof, within
which to comply with its obligation under the contract. Defendant Gregorio Araneta, Inc. presented a motion to reconsider the
above quoted order, which motion, plaintiff opposed.
Gregorio Araneta, Inc. contended mainly that the relief granted, i.e., fixing of a period, under the amendatory decision of July 16,
1960, was not justified by the pleadings and not supported by the facts submitted at the trial of the case in the court below and
that the relief granted in effect allowed a change of theory after the submission of the case for decision.
Ruling on the above contention, the appellate court declared that the fixing of a period was within the pleadings and that there
was no true change of theory after the submission of the case for decision since defendant-appellant Gregorio Araneta, Inc.
itself squarely placed said issue by alleging in paragraph 7 of the affirmative defenses contained in its answer which reads —
7. Under the Deed of Sale with Mortgage of July 28, 1950, herein defendant has a reasonable time within which to
comply with its obligations to construct and complete the streets on the NE, NW and SW sides of the lot in question;
that under the circumstances, said reasonable time has not elapsed;
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 CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE
ISSUE:
WON fixing a period for Araneta fulfill the obligation was justified
HELD: NO
RATIO:
The decision of the Court of Appeals, affirming that of the Court of First Instance is legally untenable. The fixing of a period by
the courts under Article 1197 of the Civil Code of the Philippines is sought to be justified on the basis that petitioner (defendant
below) placed the absence of a period in issue by pleading in its answer that the contract with respondent Philippine Sugar
Estates Development Co., Ltd. gave petitioner Gregorio Araneta, Inc. "reasonable time within which to comply with its obligation
to construct and complete the streets." Neither of the courts below seems to have noticed that, on the hypothesis stated,
what the answer put in issue was not whether the court should fix the time of performance, but whether or not the
parties agreed that the petitioner should have reasonable time to perform its part of the bargain. If the contract so
provided, then there was a period fixed, a "reasonable time;" and all that the court should have done was to determine if that
reasonable time had already elapsed when suit was filed if it had passed, then the court should declare that petitioner had
breached the contract, as averred in the complaint, and fix the resulting damages. On the other hand, if the reasonable time had
not yet elapsed, the court perforce was bound to dismiss the action for being premature. But in no case can it be logically
held that under the plea above quoted, the intervention of the court to fix the period for performance was warranted,
for Article 1197 is precisely predicated on the absence of any period fixed by the parties.
Even on the assumption that the court should have found that no reasonable time or no period at all had been fixed (and the trial
court's amended decision nowhere declared any such fact) still, the complaint not having sought that the Court should set
a period, the court could not proceed to do so unless the complaint in as first amended; for the original decision is
clear that the complaint proceeded on the theory that the period for performance had already elapsed, that the contract
had been breached and defendant was already answerable in damages.
Granting, however, that it lay within the Court's power to fix the period of performance, still the amended decision is defective in
that no basis is stated to support the conclusion that the period should be set at two years after finality of the judgment. The list
paragraph of Article 1197 is clear that the period can not be set arbitrarily. The law expressly prescribes that —
the Court shall determine such period as may under the circumstances been probably contemplated by the parties.
All that the trial court's amended decision says in this respect is that "the proven facts precisely warrant the fixing of such a
period," a statement manifestly insufficient to explain how the two period given to petitioner herein was arrived at.
It must be recalled that Article 1197 of the Civil Code involves a two-step process. The Court must first determine that
"the obligation does not fix a period" (or that the period is made to depend upon the will of the debtor)," but from the
nature and the circumstances it can be inferred that a period was intended" (Art. 1197, pars. 1 and 2). This preliminary
point settled, the Court must then proceed to the second step, and decide what period was "probably contemplated by
the parties" (Do., par. 3). So that, ultimately, the Court can not fix a period merely because in its opinion it is or should be
reasonable, but must set the time that the parties are shown to have intended. As the record stands, the trial Court appears to
have pulled the two-year period set in its decision out of thin air, since no circumstances are mentioned to support it. Plainly, this
is not warranted by the Civil Code.
In this connection, it is to be borne in mind that the contract shows that the parties were fully aware that the land described
therein was occupied by squatters, because the fact is expressly mentioned therein. As the parties must have known that they
could not take the law into their own hands, but must resort to legal processes in evicting the squatters, they must have realized
that the duration of the suits to be brought would not be under their control nor could the same be determined in advance. The
conclusion is thus forced that the parties must have intended to defer the performance of the obligations under the contract until
the squatters were duly evicted, as contended by the petitioner Gregorio Araneta, Inc.
The Court of Appeals objected to this conclusion that it would render the date of performance indefinite. Yet, the circumstances
admit no other reasonable view; and this very indefiniteness is what explains why the agreement did not specify any exact
periods or dates of performance.
It follows that there is no justification in law for the setting the date of performance at any other time than that of the eviction of
the squatters occupying the land in question; and in not so holding, both the trial Court and the Court of Appeals committed
reversible error. It is not denied that the case against one of the squatters, Abundo, was still pending in the Court of Appeals
when its decision in this case was rendered.
In view of the foregoing, the decision appealed from is reversed, and the time for the performance of the obligations of petitioner
Gregorio Araneta, Inc. is hereby fixed at the date that all the squatters on affected areas are finally evicted therefrom.
MILLARE V. HERNANDO, 151 SCRA 484
[note: taken from https://sites.google.com/site/1213digests/home/case-list/millare-v-hernando]
FACTS:
Petitioner Pacifica Millare as lessor and private respondent Elsa Co, as lessee executed a 5-year contract of lease. The parties
agreed to rent out a commercial unit for a monthly rate of P350. Before the expiration of the lease contract, the lessor informed
them that the lessee can continue renting the unit as they were amenable to paying increased rentals of P1,200.00 a month. In
response, a counteroffer of P700.00 a month was made by the lessee. At this point, the lessor allegedly stated that the amount
of monthly rentals could be resolved at a later time since "the matter is simple among us", which alleged remark was supposedly
taken by the spouses Co to mean that the Contract of Lease had been renewed. On 22 July 1980, Mrs. Millare wrote the Co
spouses requesting them to vacate the leased premises as she had no intention of renewing the Contract of Lease. Lessees
responded by reiterated their unwillingness to pay the P1,200.00 monthly rentals and by depositing the P700 monthly rentals in
court. on 1 September 1980, Mrs. Millare filed an ejectment case against the Co spouses in the Municipal Court of Bangued,
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
Abra. The judge rendered a "Judgment by Default" ordering the renewal of the lease contract for a term of 5 years counted from
the expiration date of the original lease contract, and fixing monthly rentals thereunder at P700.00 a month, payable in arrears.
ISSUES:
Whether or not private respondents have a valid cause of action against petitioner, and whether the trial court acquired
jurisdiction over Civil Case No. 1434.
HELD:
In the instant case, the lessor and the lessee conspicuously failed to reach agreement both on the amount of the rental to be
payable during the renewal term, and on the term of the renewed contract. The respondent judge cited Articles 1197 and 1670
of the Civil Code to sustain the "Judgment by Default" by which he ordered the renewal of the lease for another term of five years
and fixed monthly rentals thereunder at P700.00 a month. The first paragraph of Article 1197 is clearly inapplicable, since the
Contract of Lease did in fact fix an original period of five years. The second paragraph of Article 1197 is equally clearly
inapplicable since the duration of the renewal period was not left to the will of the lessee alone, but rather to the will of both the
lessor and the lessee. The implied new lease during the continued occupancy could not possibly have a period of five years, but
rather would have been a month-to-month lease since the rentals (under the original contract) were payable on a monthly basis.
It follows that the respondent judge's decision requiring renewal of the lease has no basis in law or in fact since courts have no
authority to prescribe the terms and conditions of a contract for the parties. WHEREFORE, the Petition for Certiorari, Prohibition
and mandamus is granted.
Article 1207
Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and the same
obligation does not imply that each one of the former has a right to demand, or that each one of the latter
is bound to render, entire compliance with the prestation. There is a solidary liability only when the
obligation expressly so states, or when the law or the nature of the obligation requires solidarity. (1137a)
RONQUILLO V. CA, 132 SCRA 274
Facts: INDIVIDUALLY AND JOINTLY IS SOLIDARY CASE
Ernesto Ronquillo (“Ronquillo”) was one of four defendants in a Civil Case filed by respondent Antonio So (“So”) for the collection
of P118,498.98, the value of the check issued by the said defendant in payment for foodstuffs delivered to and received by them.
The said checks were dishonored by the drawee bank.
The lower court rendered a decision based on the compromise agreement by the parities. The agreement reduced the claim to
P110,000 and bound the defendants to initially pay P55,000 of the debt before December 24, 1978. The defendants agreed to
pay the balance “individually and jointly” within a period of six months or before June 30, 1980.
So filed a Motion for Execution on the ground that the defendants failed to make the initial payment of P55,000 as provided in
the abovementioned decision. Ronquillo opposed the motion for execution alleging that his inability to make the payment was
due to So’s own act of making himself inaccessible.
Ronquillo tendered the amount of P13,750 as his share of the P55,000 initial payment. Another defendant, Pilar Tan (“Tan”)
offered to pay the same amount. Because So refused to accept their payments, demanding the full initial payment. Ronquillo
and Tan deposited the amount with the court. The court ordered the issuance of a writ of execution for the balance of the initial
amount payable to the two other defendants.
So sought the reconsideration of the Order and prayed for the execution of the decision in its entirety against all defendants,
jointly and severally. So opposed the motion arguing that the lower court held that the liability of the 4 defendants was not
expressly declared to be solidary, consequently each defendant is obliged to pay only his own pro-rata or 1/4 of the amount due
and payable.
A writ of execution was issued by the court for the payment of P82,500 [P55,000 (balance from the whole debt) + 27500 (unpaid
shares of initial payment from two other defendants or P13,750 + P13750)] against the properties of the defendants including
Ronquillo, “singly or jointly liable.” The sheriff issued a notice for the sale of certain furniture and appliances found in Ronquillo’s
residence to satisfy the sum of P82,500.
Issue:
W/N the liability of the 4 defendants including Ronquillo solidary.
Held:
Yes.
The pertinent provisions are Art. 1207 and Art. 1208. By the terms of the compromise agreement and the decision based upon
it, the defendants obligated themselves to pay their obligation “individually and jointly.”
An agreement to be “individually liable” undoubtedly creates a several obligation. A several obligation is one by which one
individual binds himself to perform the whole obligation.
MALAYAN INSURANCE V. CA, 165 SCRA 536
DOCTRINE
An insurer is not a solidary debtor in a case of joint tortfeasors where a third party liability insurance contract exists as their
liability for payment is based on different obligations – one is based on tort and the other on contract.
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The law states that the responsibility of two or more persons who are liable for a quasi-delict is solidary, however jurisprudence
has interpreted this to mean that only be the owner and the driver of the vehicle who are guilty of tort [joint tortfeasors] who will
be solidarily liable, and this liability will not include the insurance company. While it is true that where the insurance contract
provides for indemnity against liability to third persons, such third persons can directly sue the insurer, however, the direct liability
of the insurer under indemnity contracts against third party liability does not mean that the insurer can be held solidarily liable
with the insured and/or the other parties found at fault. The liability of the insurer is based on contract; that of the insured is
based on tort.
If the insurer were solidarily liable with said two joint tortfeasors by reason of the indemnity contract against third party liability,
under which an insurer can be directly sued by a third party, this will result in a violation of the principles underlying solidary
obligation and insurance contracts.
In solidary obligation, the creditor may enforce the entire obligation against one of the solidary debtors. On the other hand,
insurance is defined as „a contract whereby one undertakes for a consideration to indemnify another against loss, damage, or
liability arising from an unknown or contingent event.
FACTS
On 29 March 1967, Malayan Insurance Co., Inc., issued in favor of Sio Choy a personal (P600) and third party liability (P20,000)
insurance policy over Choy’s Willy’s jeep, effective from 18 April 1967 to 18 April 1968. The jeep had a Motor No. ET-03023,
Serial No. 351672, and Plate No. J-21536, Quezon City, 1967.
During the effectivity of said insurance policy, on 19 December 1967, at about 3:30 o’clock in the afternoon, the insured jeep
collided with a passenger bus at the national highway in Barrio San Pedro, Rosales, Pangasinan. The jeep was driven by Juan
P. Campollo, employee of San Leon Rice Mill, Inc., and the bus was owned by Pangasinan Transportation Co., Inc.
(PANTRANCO, for short). Damage was caused to the insured vehicle and injuries to the driver Campollo, and jeepney passenger
Martin C. Vallejos. Campollo later died.
Vallejos filed an action for damages against Sio Choy, Malayan Insurance Co., Inc. and the PANTRANCO before the Court of
First Instance of Pangasinan. Vallejos prayed that defendants be ordered to pay him, jointly and severally, the amount of
P15,000.00, as reimbursement for medical and hospital expenses; P6,000.00, for lost income; P51,000.00 as actual, moral and
compensatory damages; and P5,000.00, for attorney’s fees.
Answering, PANTRANCO laid the blame on the jeep of Sio Choy, which was then operated at an excessive speed and bumped
the PANTRANCO bus which had moved to, and stopped at, the shoulder of the highway in order to avoid the jeep; and that it
had observed the diligence of a good father of a family to prevent damage, especially in the selection and supervision of its
employees and in the maintenance of its motor vehicles. It prayed that it be absolved from any and all liability.
Sio Choy Malayan also denied liability, claiming that the fault in the accident was solely imputable to the PANTRANCO. Sio
Choy, however, later filed a separate answer with a cross-claim against Malayan, alleging that he had actually paid Vallejos, the
amount of P5,000.00 for hospitalization and other expenses. Sio Choy also alleged that Malayan had issued in his favor a private
car comprehensive policy obligating itself to indemnify Sio Choy, as insured, for the damage to his motor vehicle, as well as for
any liability to third persons arising out of any accident during the effectivity of such insurance contract, which was in effect when
the vehicular accident complained of occurred.
Malayan also filed a third-party complaint against San Leon Rice Mill, Inc. on the basis of Art. 2180 of the Civil Code, and prayed
that the Mill be liable for reimbursing Malayan any sum ordered to be paid to Vallejos.
TC ruled for Vallejos, and adjudged Sio Choy, Malayan and third-party defendant San Leon Rice Mill, Inc., held jointly and
severally liable. The court limited Malayan’s liability to P20,000.00, following the terms of the insurance contract.
CA affirmed, adding only that San Leon Rice Mill, Inc. has no obligation to indemnify or reimburse the Malayan for whatever
amount it has been ordered to pay on its policy, since the Mill is not a privy to the contract of insurance.
ISSUE/S
(1) Whether Malayan, Sio Choy and San Leon Rice Mill, Inc. are solidarily liable to respondent Vallejos.
(2) Whether Malayan is entitled to be reimbursed by San Leon Rice Mill, Inc. for whatever amount petitioner has been adjudged
to pay respondent Vallejos on its insurance policy.
HELD
(1) NO. Only respondents Sio Choy and San Leon Rice Mill, Inc, to the exclusion of insurer Malayan, are solidarily liable to
Vallejos for the damages awarded to Vallejos as the basis of their liabilities differ.
Sio Choy is made liable to said plaintiff as owner of the ill-fated Willys jeep, pursuant to Article 2184 of the Civil Code [OWNER];
The basis of liability of San Leon Rice Mill, Inc. is by being the employer of the driver of the Willys jeep at the time of the motor
vehicle mishap, under Article 2180 of the Civil Code [EMPLOYER]; - Sio Choy and San Leon Rice Mill, Inc. are the principal
tortfeasors who are primarily liable to respondent Vallejos, as the law states that the responsibility of two or more persons who
are liable for a quasi-delict is solidary.
In the Guingon case, the court clarified that in cases of tort where the vehicle is insured it is only the owner and the driver of the
jeepney at fault, not the insurance company, who are solidarily liable to the heirs of the victim.
While it is true that where the insurance contract provides for indemnity against liability to third persons, such third persons can
directly sue the insurer, however, the direct liability of the insurer under indemnity contracts against third party liability does not
mean that the insurer can be held solidarily liable with the insured and/or the other parties found at fault. The liability of the
insurer is based on contract; that of the insured is based on tort.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
In the case at bar, Malayan as insurer of Sio Choy, is liable to respondent Vallejos, but is not solidarily liable with the two principal
tortfeasors. For if Malayan were solidarily liable with the tortfeasors by reason of the indemnity contract against third party liability
(under which an insurer can be directly sued by a third party) this will result in a violation of the principles underlying solidary
obligation and insurance contracts.
In solidary obligation, the creditor may enforce the entire obligation against one of the solidary debtors. On the other hand,
insurance is defined as „a contract whereby one undertakes for a consideration to indemnify another against loss, damage, or
liability arising from an unknown or contingent event.
(2) YES, this follows the principle of subrogation in insurance contracts.
When the insurance company pays for the loss, such payment operates as an equitable assignment to the insurer of the property
and all remedies which the insured may have for the recovery thereof. That right is not dependent upon, nor does it grow out of,
any privity of contract,
(italics supplied) or upon written assignment of claim, and payment to the insured makes the insurer an assignee in equity.
Malayan, upon paying respondent Vallejos the amount of not exceeding P20,000.00, shall become the subrogee of the insured,
the respondent Sio Choy; as such, it is subrogated to whatever rights the latter has against respondent San Leon Rice Mill, Inc.
Article 1217 of the Civil Code gives to a solidary debtor who has paid the entire obligation the right to be reimbursed by his co-
debtors for the share which corresponds to each.
RCBC V. CA, 178 SCRA 739
DOCTRINE:
Where an obligation expressly states a solidary liability, the concurrence of two or more creditors or two or more debtors in one
and the same obligation implies that each one of the former has a right to demand, or that each one of the latter is bound to
render, entire compliance with the prestation (Article 1207, Civil Code). The creditor may proceed against any one of the solidary
debtors or some or all of them simultaneously (Article 1216, Civil Code).
As held in Zenith Insurance Corporation vs. Court of Appeals (No. L-57957, 29 December 1982,119 SCRA 485), the extent of a
surety's liability is determined only by the clause of the contract of suretyship. It cannot be extended by implication, beyond the
terms of the contract. Conversely, liability therefor may not be restricted unless expressly so stated.
FACTS:
On 4 May 1979, Alfredo Ching signed a 'Comprehensive Surety Agreement' with Rizal Commercial Banking Corporation (RCBC),
binding himself to jointly and severally guarantee the prompt payment of all Philippine Blooming Mills [PBM] obligations owing
RCBC in the aggregate sum of Forty Million (P40,000,000.00) Pesos.
Between 8 September to 30 October 1980, (PBM) filed several applications for letters of credit with RCBC. Through said
applications, PBM obligated itself, among other things, to pay on demand for all draft(s) drawn under or purporting to be drawn
under the credits. Everything being in order, RCBC opened the corresponding letters of credit and imported various goods for
PBM's account. In due time the imported goods arrived and were released, in trust, to PBM who acknowledged receipt thereof
through various trust receipts. All in all, PBM's obligations stood at P7,982,649.08.
Less than a year later, or on 7 August 1981, RCBC filed a Complaint for collection of said sum against respondents PBM and
Alfredo Ching with the then Court of First Instance of Pasig, docketed as CV-42333. Upon filing of a bond satisfactory to the
Court, a Writ of Preliminary Attachment was issued against the assets and properties of respondents PBM and Ching on the
same day. By way of special and affirmative defenses they alleged that "although the trust receipts stipulate due dates, the true
intent and agreement of the parties was that the maturity dates of the trust receipts were to be extended at the end of the
stipulated dates, as had been the customary practice of RCBC with PBM."
On 23 September 1981, PBM and Ching moved to discharge the attachment, which RCBC opposed. On 4 December 1981 the
Court issued an Order lifting the attachment upon their filing of a satisfactory counter-bond.
Meanwhile, on 1 April 1982, PBM filed a Petition for Suspension of Payments with the Securities and Exchange Commission,
docketed as SEC Case No. 2250, seeking at the same time its rehabilitation.
In an injunctive Order, dated 6 July 1982, all actions for claims against PBM pending before any Court or tribunal, in whatever
stage the same may have been, were ordered suspended by the SEC in order to give the Commission the opportunity to pass
upon the feasibility of any rehabilitation plans. And on 26 April 1982, SEC approved the revised rehabilitation plan and ordered
its implementation.
On 14 October 1982, RCBC pursued its claims with the Trial Court and filed, unopposed, a Motion for Summary Judgment in
CV-42333, a motion for extension to file said opposition having been earlier withdrawn. RCBC contended that respondents PBM
and Ching had not denied their indebtedness to RCBC and, therefore, no genuine issue was raised in the pleadings.
On 25 November 1982, the CFI rendered such summary judgment** in RCBC's favor, declaring:
WHEREFORE, judgment is hereby rendered against the defendants (PBM and Ching) in favor of plaintiff (RCBC)
ordering defendants to pay plaintiff jointly and severally the following:
a) P7,982,649.08 inclusive of interest, service charges and penalties as of August 7, 1981 on account
of their liability in solidum arising from the trust receipts and comprehensive surety agreements
plus such other additional amount by way of interest, service charges and penalties from August
7,1981 until fully paid; and
b) P10,000.00 as attorney's fees.
With costs against the defendants.
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 CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE
SO ORDERED (p. 192, Original Record).
On appeal, respondent Court of Appeals,*** ruling that it was precipitate and improper for the lower Court to have continued with
the proceedings despite the SEC Order of suspension, set aside the lower Court Decision and ordered it to hold in abeyance
the determination of the merits invoked in CV-42333 pending the outcome of SEC Case No. 2250. On 6 October 1988, the
Appellate Court denied RCBC's Motion for Reconsideration.
Hence, this Petition for Review, to which we gave due course on 31 May 1989, and required the filing of Memoranda by the
parties, the last of which was submitted on 27 July 1989.
RCBC takes the position that the SEC injunctive Order pertains and affects only PBM, the corporation under rehabilitation, and
that its right, as creditor, to proceed against respondent Ching, as Surety, is not affected by said Order. In fine, RCBC avers that
to hold the injunctive Order applicable to both respondents PBM and Ching is to deprive RCBC of its right to proceed against
the Surety based on the latter's separate and independent undertaking.
PBM and Ching counter that the liabilities incurred by PBM were corporate in character and, hence, as a corporate officer,
Alfredo Ching cannot be held liable therefor; that the pendency of SEC Case No. 2250 and the rendition of an Order therein on
26 April 1988 implementing respondent PBM's rehabilitation plan must necessarily benefit the Surety, inasmuch as payment of
PBM obligations must be made pursuant to that plan; and that the liability of the Surety can not be more than what would remain
after payment of all the obligations of the principal. Moreover, they continue, it is usual for majority stockholders to act as co-
signors with their respective corporations where promissory notes, collaterals or guaranty or security agreements are involved.
Respondent Ching's action may, it is claimed, be classified as a corporate act.
ISSUE:
Will a Securities and Exchange Commission (SEC) Order suspending, during the pendency of a rehabilitation proceeding,
payment of all claims against the principal debtor bar or preclude the creditor from recovering from the surety?
HELD:
NO. Where an obligation expressly states a solidary liability, the concurrence of two or more creditors or two or more debtors in
one and the same obligation implies that each one of the former has a right to demand, or that each one of the latter is bound to
render, entire compliance with the prestation (Article 1207, Civil Code). The creditor may proceed against any one of the solidary
debtors or some or all of them simultaneously (Article 1216, Civil Code).
That there exists a Comprehensive Surety Agreement between RCBC and respondent Ching is admitted. There is no escaping
the attendant liability that binds respondent Ching, as Surety. He is charged as an original promissor by virtue of his primary
obligation under the Suretyship Agreement. That Agreement is bare of words imputing to respondent Ching any liability other
than that of a Surety who binds himself to insure a debt in his personal capacity, lacking consideration therefor notwithstanding
(p. 94, Original Record). That respondent Ching acted for and on behalf of respondent PBM as part of its usual corporate
procedure is not supported by the evidence nor the pleadings on record, nor the Agreement itself .We can not give any additional
meaning to the plain language of the subject agreement. It is basic that the parties are bound by the terms of their contract,
which is the law between them. As held in Zenith Insurance Corporation vs. Court of Appeals (No. L-57957, 29 December
1982,119 SCRA 485), the extent of a surety's liability is determined only by the clause of the contract of suretyship. It cannot be
extended by implication, beyond the terms of the contract. Conversely, liability therefor may not be restricted unless expressly
so stated.
Neither can respondent Ching seek refuge behind the SEC injunctive Order. Under Section 3 of P.D. 902-A, as amended by
P.D. 1758, the Commission is given absolute jurisdiction, supervision and control only over corporations or associations, which
are grantees of a primary franchise and/or a license or permit issued by the government to operate in the Philippines. The SEC
injunctive Order can not effect a suspension of payment of respondent Surety's due and demandable obligation, it being clear
therefrom that the rehabilitation receivers were limited "to tak(ing) custody and control over all the existing assets and property
of PBM." Nothing in said Order puts respondent Ching within its scope.
QUIOMBING V. CA, 189 SCRA 325
DOCTRINE
Where the obligation of the parties is solidary, either one of the parties is indispensable, and the other is not even necessary
because complete relief may be obtained from either.
FACTS
This case stemmed from a "Construction and Service Agreement" 1 concluded on August 30, 1983, whereby Nicencio Tan
Quiombing and Dante Biscocho, as the First Party, jointly and severally bound themselves to construct a house for private
respondents Francisco and Manuelita Saligo, as the Second Party, for the contract price of P137,940.00, which the latter agreed
to pay.
On October 10, 1984, Quiombing and Manuelita Saligo entered into a second written agreement 2 under which the latter
acknowledged the completion of the house and undertook to pay the balance of the contract price in the manner prescribed in
the said second agreement.
On November 19, 1984, Manuelita Saligo signed a promissory note for P125,363.50 representing the amount still due from her
and her husband, payable on or before December 31, 1984, to Nicencio Tan Quiombing. 3 On October 9, 1986, Quiombing filed
a complaint for recovery of the said amount, plus charges and interests, which the private respondents had acknowledged and
promised to pay but had not, despite repeated demands as the balance of the contract price for the construction of their house.
Instead of filing an answer, the defendants moved to dismiss the complaint on February 4, 1987, contending that Biscocho was
an indispensable party and therefore should have been included as a co-plaintiff. The motion was initially denied but was
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
subsequently reconsidered and granted by the trial court. The complaint was dismissed, but without prejudice to the filing of an
amended complaint to include the other solidary creditor as a co-plaintiff.
Rather than file the amended complaint, Quiombing chose to appeal the order of dismissal to the respondent court, where he
argued that as a solidary creditor he could act by himself alone in the enforcement of his claim against the private respondents.
Moreover, the amounts due were payable only to him under the second agreement, where Biscocho was not mentioned at all.
The respondent court sustained the trial court and held that it was not correct at that point to assume that Quiombing and
Biscocho were solidary obliges only. It noted that as they had also assumed the reciprocal obligation of constructing the house,
they should also be considered obligors of the private respondents under the contract. If, as was possible, the answer should
allege a breach of the agreement, "the trial court cannot decide the dispute without the involvement of Biscocho whose rights
will necessarily be affected since he is a part of the First Party." Refuting the petitioner's second contention, the respondent court
declared that the "second agreement referred to the Construction and Service Agreement as its basis and specifically stated
that it (was) merely a `part of the original agreement.'"
ISSUE/S
(1) May one of the two solidary creditors sue by himself alone for the recovery of amounts due to both of them without joining
the other creditor as a co-plaintiff? YES
(2) In such a case, is the defendant entitled to the dismissal of the complaint on the ground of non-joinder of the second creditor
as an indispensable party? NO.
(3) More to the point, is the second solidary creditor an indispensable party? NO.
HELD
(1) Either solidary creditor may sue by himself. Although he signed the original Construction and Service Agreement, Biscocho
need not be included as a co-plaintiff in the complaint filed by the petitioner against the private respondents. Quiombing as
solidary creditor can by himself alone enforce payment of the construction costs by the private respondents and as a solidary
debtor may by himself alone be held liable for any possible breach of contract that may be proved by the private respondents.
In either case, the participation of Biscocho is not at all necessary, much less indispensable.
According to Justice Jose Y. Feria, "where the obligation of the parties is solidary, either one of the parties is
indispensable, and the other is not even necessary (now proper) because complete relief may be obtained from either."
The question of who should sue the private respondents was a personal issue between Quiombing and Biscocho in
which the spouses Saligo had no right to interfere. It did not matter who as between them filed the complaint because the
private respondents were liable to either of the two as a solidary creditor for the full amount of the debt. Full satisfaction of a
judgment obtained against them by Quiombing would discharge their obligation to Biscocho, and vice versa; hence, it
was not necessary for both Quiombing and Biscocho to file the complaint. Inclusion of Biscocho as a co-plaintiff, when
Quiombing was competent to sue by himself alone, would be a useless formality. Article 1212 of the Civil Code provides:
Each one of the solidary creditors may do whatever may be useful to the others, but not anything which may be prejudice to the
latter. Suing for the recovery of the contract price is certainly a useful act that Quiombing could do by himself alone.
Parenthetically, it must be observed that the complaint having been filed by the petitioner, whatever amount is awarded
against the debtor must be paid exclusively to him, pursuant to Article 1214. This provision states that "the debtor may
pay any of the solidary creditors; but if any demand, judicial or extrajudicial, has been made by any one of them, payment should
be made to him." If Quiombing eventually collects the amount due from the solidary debtors, Biscocho may later claim his share
thereof, but that decision is for him alone to make. It will affect only the petitioner as the other solidary creditor and not the private
respondents, who have absolutely nothing to do with this matter. As far as they are concerned, payment of the judgment debt to
the complainant will be considered payment to the other solidary creditor even if the latter was not a party to the suit. Regarding
the possibility that the private respondents might plead breach of contract in their answer, we agree with the petitioner that it is
premature to consider this conjecture for such it is at this stage. The possibility may seem remote, indeed, since they have
actually acknowledged the completion of the house in the second agreement, where they also agreed to pay the balance of the
contract price. At any rate, the allegation, if made and proved, could still be enforceable against the petitioner alone as one of
the solidary debtors, subject to his right of recourse against Biscocho.
Solidary Obligation distinguished from joint obligation
The concept of the solidary obligation requires a brief restatement. Distinguishing it from the joint obligation, Tolentino makes
the following observations in his distinguished work on the Civil Code: A joint obligation is one in which each of the debtors is
liable only for a proportionate part of the debt, and each creditor is entitled only to a proportionate part of the credit. A solidary
obligation is one in which each debtor is liable for the entire obligation, and each creditor is entitled to demand the whole
obligation. Hence, in the former, each creditor can recover only his share of the obligation, and each debtor can be made to pay
only his part; whereas, in the latter, each creditor may enforce the entire obligation, and each debtor may be obliged to pay it in
full.
The same work describes the concept of active solidarity thus: The essence of active solidarity consists in the authority of
each creditor to claim and enforce the rights of all, with the resulting obligation of paying every one what belongs to him; there
is no merger, much less a renunciation of rights, but only mutual representation.
(2&3) As either party is indispensible, there is no non-joinder nor is the secondary solidary creditor be considered an indispensible
party.
The complaint could have been filed alone by the petitioner. The rest of the pieces should easily fall into place. Section 7, Rule
3 of the Rules of Court mandates the inclusion of indispensable parties as follows: Sec. 7. Compulsory joinder of indispensable
parties. Parties in interest without whom no final determination can be had of an action shall be joined either as plaintiffs or
defendants. Indispensable parties are those with such an interest in the controversy that a final decree would necessarily affect
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their rights, so that the court cannot proceed without their presence. Necessary parties are those whose presence is necessary
to adjudicate the whole controversy, but whose interests are so far separable that a final decree can be made in their absence
without affecting them. 9 (Necessary parties are now called proper partiesunder the 1964 amendments of the Rules of Court.).
REPUBLIC PLANTERS BANK V. CA, 216 SCRA 738
FACTS:
In 1979, World Garment Manufacturing, through its board authorized Shozo Yamaguchi (President) and Fermin Canlas
(Treasurer) to obtain credit facilities from Republic Planters Bank (RPB). For this, 9 promissory notes were executed. They were
authorized to apply for credit facilities with the petitioner bank. The two officers signed the promissory notes issued to secure
the payment of the obligations.
The note became due and no payment was made. RPB eventually instituted an acitio for collection of money against Yamaguchi
and Canlas. Canlas, in his defense, averred that he should not be held personally liable for such authorized corporate acts that
he performed inasmuch as he signed the promissory notes in his capacity as officer of the defunct Worldwide Garment
Manufacturing.
ISSUE:
Whether Yamaguchi and Canlas are solidarily liable.
HELD:
Yes. Canlas is solidarily liable on each of the promissory notes to which his signature appears. The solidary liability of
private respondent Fermin Canlas is made clearer and certain, without reason for ambiguity, by the presence of the phrase “joint
and several” as describing the unconditional promise to pay to the order of Republic Planters Bank.
Where an instrument containing the words “I promise to pay” is signed by two or more persons, they are deemed to be jointly
and severally liable thereon. Canlas is solidarily liable on each of the promissory notes bearing his signature for the following
reasons: The promissory notes are negotiable instruments and must be governed by the Negotiable Instruments Law.
Under the Negotiable Instruments Law, persons who write their names on the face of promissory notes are makers and are
liable as such. By signing the note, the maker promises to pay to the order of the payee or any holder the tenor of the obligation.
Based on the above provisions of the law, there is no denying that Canlas is one of the co-makers of the promissory note.
INCIONG V. CA, 257 SCRA 578
DOCTRINE
Where the promissory note expressly states that the three signatories therein are jointly and severally liable, any one, some or
all of them may be proceeded against for the entire obligation - the choice is left to the solidary creditor to determine against
whom he will enforce collection.
FACTS
Baldomero Inciong, Jr. executed a promissory note for P50,000.00 together with Rene C. Naybe and Gregorio D. Pantanosas
on February 3, 1983, holding themselves jointly and severally liable to private respondent Philippine Bank of Communications
[PBC/the bank], Cagayan de Oro City branch. The promissory note was due on May 5, 1983.
The due date expired without the promissors having paid their obligation, consequently several letters of demand were sent via
telegram (on November 14, 1983; June 8, 1984), with the final letter of demand sent by registered mail on December 11, 1984
to Rene C. Naybe. Since both obligors did not respond to the demands made, the bank filed on January 24, 1986 a complaint
for collection of the sum of P50,000.00 against the three obligors.
The complaint was initially dismissed on On November 25, 1986, for failure to prosecute the case. On reconsideration, January
9, 1987, the lower court reversed and required the sheriff to serve the summonses. On January 27, 1987, the lower court
dismissed the case against defendant Pantanosas as prayed for by the private respondent herein. Meanwhile, only the summons
addressed to petitioner was served as the sheriff learned that defendant Naybe had gone to Saudi Arabia.
Inciong alleged in his defense that he had only signed the promissory notes as a favor to a friend, Rudy Campos, who
approached him in January 1983 for his help for the grant of the approval of a loan for his falcata logs operation business.
Campos said he and his partner Pio Tio (branch manager PBC, Cagayan de Oro City) needed his help as co-maker of the loan
that will be used for expanding the business with Rene C. Naybe. Naybe was interested in the business, would contribute a
chainsaw to the venture, and had been promised by Pio Tio that although Naybe had no money, the loan to be co-signed by
Campos would be approved. Campos then persuaded petitioner to act as a co-maker in the said loan. Inciong acceded, but with
the understanding that he would only be a co-maker for the loan to the extent of P5,000.00. Inciong said 5 copies of a blank
promissory note were brought to him by Campos at his office, and he affixed his signature to all of them, writing in one copy that
he bound himself only for the amount of P5,000.00.
The TC ruled for PBC, adjudged Inciong solidarily liable for “the amount of FIFTY THOUSAND PESOS (P50,000.00), with
interest thereon from May 5, 1983 at 16% per annum until fully paid; and 6% per annum on the total amount due, as liquidated
damages or penalty from May 5, 1983 until fully paid; plus 10% of the total amount due for expenses of litigation and attorneyÊs
fees; and to pay the costs.”
6
Ninety one (91) days after date, for value received, I/we, JOINTLY and SEVERALLY promise to pay to the
PHILIPPINE BANK OF COMMUNICATIONS at its office in the City of Cagayan de Oro, Philippines the sum of
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
The TC also noted that the typewritten figure 50,000· clearly appears directly below the admitted signature of the petitioner in
the promissory note. Hence, the latter’s uncorroborated testimony on his limited liability cannot prevail over the presumed
regularity and fairness of the transaction, under Sec. 5 (q) of Rule 131. The lower court added that it was rather odd for petitioner
to have indicated in a copy and not in the original, of the promissory note, his supposed obligation in the amount of P5,000.00
only. Finally, the lower court held that, even granting that said limited amount had actually been agreed upon, the same would
have been merely collateral between him and Naybe and, therefore, not binding upon the private respondent as creditor-bank.
Cross-claim and counter-claim dismissed.
On appeal to the CA, the court affirmed. The MR was denied.
In the present appeal Inciong presented new evidence, the affidavit of co-maker MTCC judge Pantanosas, executed on 3 May
1988, after the rendition of judgment by the TC.
The affidavit is clearly intended to buttress petitioner’s contention in the instant petition that the Court of Appeals should have
declared the promissory note null and void on the following grounds: (a) the promissory note was signed in the office of Judge
Pantanosas, outside the premises of the bank; (b) the loan was incurred for the purpose of buying a secondhand chainsaw which
cost only P5,000.00; (c) even a new chainsaw would cost only P27,500.00; (d) the loan was not approved by the board or credit
committee which was the practice, as it exceeded P5,000.00; (e) the loan had no collateral; (f) petitioner and Judge Pantanosas
were not present at the time the loan was released in contravention of the bank practice, and (g) notices of default are sent
simultaneously and separately but no notice was validly sent to him. Finally, petitioner contends that in signing the promissory
note, his consent was vitiated by fraud as, contrary to their agreement that the loan was only for the amount of P5,000.00, the
promissory note stated the amount of P50,000.00.
Petitioner also argued on appeal that the dismissal of the complaint against Naybe, the principal debtor, and against Pantanosas,
his co-maker, constituted a release of his obligation, especially because the dismissal of the case against Pantanosas was upon
the motion of private respondent itself. He cites as basis for his argument, Article 2080 of the Civil Code which provides that:
The guarantors, even though they be solidary, are released from their obligation whenever by some act of the creditor, they
cannot be subrogated to the rights, mortgages, and preferences of the latter.
ISSUE/S
Whether Inciong is solidarily liable under the promissory note.
HELD
YES.
1. The SC is not a trier of facts
First, it is too late for petitioner to present the affidavit this late in the course of the trial, the SC is not a trier of facts. Having lost
the chance to fully ventilate his factual claims below, petitioner may no longer be accorded the same opportunity in the absence
of grave abuse of discretion on the part of the court below. Had he presented Judge Pantanosas’ affidavit before the lower court,
it would have strengthened his claim that the promissory note did not reflect the correct amount of the loan.
2. The parol evidence rule does not require that the written document be a public document.
What is required is that the agreement be in writing as the rule is in fact founded on „long experience that written evidence is so
much more certain and accurate than that which rests in fleeting memory only, that it would be unsafe, when parties have
expressed the terms of their contract in writing, to admit weaker evidence to control and vary the stronger and to show that the
parties intended a different contract from that expressed in the writing signed by them. Thus, for the parol evidence rule to apply,
a written contract need not be in any particular form, or be signed by both parties. As a general rule, bills, notes and other
instruments of a similar nature are not subject to be varied or contradicted by parol or extrinsic evidence.
By alleging fraud in his answer, petitioner was actually in the right direction towards proving that he and his co- makers agreed
to a loan of P5,000.00 only considering that, where a parol contemporaneous agreement was the inducing and moving cause of
the written contract, it may be shown by parol evidence. However, fraud must be established by clear and convincing evidence,
mere preponderance of evidence, not even being adequate. Petitioner’s attempt to prove fraud must, therefore, fail as it was
evidenced only by his own uncorroborated and, expectedly, self-serving testimony.
3. Dismissal of the action against the co-maker’s of the promissory note did not release Inciong’s liability, as he is a
solidary debtor and not a mere guarantor.
Petitioner signed the promissory note as a solidary co-maker and not as a guarantor. This is patent even from the first sentence
of the promissory note.6
A solidary or joint and several obligation is one in which each debtor is liable for the entire obligation, and each creditor is entitled
to demand the whole obligation. On the other hand, Article 2047 of the Civil Code states: 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 a case the contract is called a suretyship.
While a guarantor may bind himself solidarily with the principal debtor, the liability of a guarantor is different from that of a
solidary debtor. Thus, Tolentino explains: A guarantor who binds himself in solidum with the principal debtor under the
provisions of the second paragraph does not become a solidary co-debtor to all intents and purposes. There is a difference
between a solidary co-debtor and a fiador in solidum (surety). The latter, outside of the liability he assumes to pay the debt
before the property of the principal debtor has been exhausted, retains all the other rights, actions and benefits which pertain to
FIFTY THOUSAND ONLY (P50,000.00) Pesos, Philippine Currency, together with interest x x x at the rate of
SIXTEEN (16) per cent per annum until fully paid.
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him by reason of the fiansa; while a solidary co-debtor has no other rights than those bestowed upon him in Section 4, Chapter
3, Title I, Book IV of the Civil Code
Section 4, Chapter 3, Title I, Book IV of the Civil Code states the law on joint and several obligations. Under Art. 1207 thereof,
when there are two or more debtors in one and the same obligation, the presumption is that the obligation is joint so that each
of the debtors is liable only for a proportionate part of the debt. There is a solidary liability only when the obligation expressly so
states, when the law so provides or when the nature of the obligation so requires.
Because the promissory note involved in this case expressly states that the three signatories therein are jointly and severally
liable, any one, some or all of them may be proceeded against for the entire obligation. The choice is left to the solidary creditor
to determine against whom he will enforce collection. Consequently, the dismissal of the case against Judge Pantanosas may
not be deemed as having discharged petitioner from liability as well. As regards Naybe, suffice it to say that the court never
acquired jurisdiction over him. Petitioner, therefore, may only have recourse against his co-makers, as provided by law.
Article 1216
Art. 1216. 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. (1144a)
PNB v. Independent Planters, 122 SCRA 113
Facts:
Appeal by PNB from the CFI of Manila dismissing PNB's complaint against several solidary debtors for the collection of a sum
of money on the ground that one of the defendants (Ceferino Valencia) died during the pendency of the case and therefore the
complaint, being a money claim based on contract, should be prosecuted in the testate or intestate proceeding for the settlement
of the estate of the deceased defendant pursuant to Section 6 of Rule 86 of the Rules of Court.
The appellant assails the order of dismissal, invoking its right of recourse against one, some or all of its solidary debtors under
Article 1216 of the Civil Code — ART. 1216. 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.
Issue:
Whether in an action for collection of a sum of money based on contract against all the solidary debtors, the death of one
defendant deprives the court of jurisdiction to proceed with the case against the surviving defendants.
Held:
NO. Section 6, Rule 86 of the Revised Rules of Court cannot be made to prevail over Article 1216 of the New Civil Code, the
former being merely procedural, while the latter, substantive.
It is now settled that the quoted Article 1216 grants the creditor the substantive right to seek satisfaction of his credit from one,
some or all of his solidary debtors, as he deems fit or convenient for the protection of his interests; and if, after instituting a
collection suit based on contract against some or all of them and, during its pendency, one of the defendants dies, the court
retains jurisdiction to continue the proceedings and decide the case in respect of the surviving defendants.
Similarly, in PNB vs. Asuncion, A cursory perusal of Section 6, Rule 86 of the Revised Rules of Court reveals that nothing therein
prevents a creditor from proceeding against the surviving solidary debtors. Said provision merely sets up the procedure in
enforcing collection in case a creditor chooses to pursue his claim against the estate of the deceased solidary, debtor.
It is crystal clear that Article 1216 of the New Civil Code is the applicable provision in this matter. Said provision gives the creditor
the right to 'proceed against anyone of the solidary debtors or some or all of them simultaneously.' The choice is undoubtedly
left to the solidary, creditor to determine against whom he will enforce collection. In case of the death of one of the solidary
debtors, he (the creditor) may, if he so chooses, proceed against the surviving solidary debtors without necessity of filing a claim
in the estate of the deceased debtors. It is not mandatory for him to have the case dismissed against the surviving debtors and
file its claim in the estate of the deceased solidary debtor.
Article 1222
Art. 1222. A solidary debtor may, in actions filed by the creditor, avail himself 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. (1148a) 
 DOCTRINE
UNIVERSAL MOTORS V. CA, 205 SCRA 448
FACTS:
On December 15, 1962 private respondents Rafael Verendia, Teodoro Galicia and Marcelina Galicia purchased from petitioner
Universal Motors Corporation two (2) Mercedes Benz trucks at a cash price of P33,608.27 each payable within ninety (90) days.
Private respondents failed to pay the cash price within the 90-day period however they re-scheduled their account giving them
30 months to comply with payment.On June 3, 1963 private respondents executed a promissory note in favor of the petitioner
covering the re-scheduled account thereby promising to pay the same in monthly installments at the rates stipulated on the
promissory note with interest thereon at 12% per annum until said promissory note is fully paid.
But despite repeated demands, the private respondents failed to comply with their foregoing undertaking, so that on January 4,
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
1966 the petitioner commenced a complaint for the recovery of the unpaid balance among others with the Court of First Instance
of Manila.
The lower court ordered respondents to pay, jointly and severally to the Plaintiff, Universal Motors Corporation, the sum of
P47,732.35, with interest at the rate of 12% per annum on one-half of the principal balance of P69,672.66 from February 10,
1967, until fully paid, plus the further sum equivalent to 25% of the amount due as attorney's fees and the costs of the suit.
Only respondent Verendia appealed and the decision was reversed and set aside and ordered restitution to the defendants by
the plaintiff of whatever amounts received in excess of the amount due under the promissory note, with interest at the legal rate
from the date with overpayment. Petitioner filed a motion for reconsideration.
ISSUES:
WON the result of the appeal of respondent Verendia will inure to the benefit of the other respondents who have not appealed
the decision.
HELD:
YES, the decision will inure to the benefit of the other respondents
RATIO:
Petitioner's claim that the result of the appeal interposed by private respondent Verendia, one of the solidary debtors will not
inure to the benefit of the other private respondents who did not appeal is devoid of merit.
In the recent case of Citytrust Banking Corporation v. The Court of Appeals and William Samara, G.R. No. 92591, April 30, 1991,
196 SCRA 553, 563, We already ruled that "the Court will not allow the absurd situation where a co-defendant who is adjudged
to be primarily liable for sums of money and for tort would be charged for an amount lesser than what its co-defendant is bound
to pay to the common creditor and allowed to collect from the first co-defendant. Such a situation runs counter to the principle of
solidarity in obligations as between co-defendants established by a judgment for recovery of sum of money and damages . . ."
The Court therein noted the modification made by the respondent court which ordered not only the appellant therein but both
"defendants jointly and severally" to pay the new amount. It explained that though, as a matter of procedure, the modification
shall be applied only to the appellant, substantial justice and equity also demand that the decision should be interpreted to refer
to the non-appealing defendant as well. There exists a strong and compelling reason to warrant an exception to the rule that a
judgment creditor is entitled to execution of a final and executory judgment against a party especially if that party failed to appeal.
(Olacao v. National Labor Relations Commission, 177 SCRA 38 [1989]; Quigui v. Boncaros, 151 SCRA 416 [1987]; Orata v.
Intermediate Appellate Court, 185 SCRA 148 [1990])
It is obvious that the respondent court committed no error in ruling that its decision inures to the benefit of all the private
respondents regardless of the fact that only one appealed. It is erroneous to rule that the decision of the trial court could be
reversed as to the appealing private respondent and continue in force against the other private respondents. The latter could
not remain bound after the former had been released; although the other private respondents had not joined in the appeal, the
decision rendered by the respondent court inured to their benefit. When the obligation of the other solidary debtors is so
dependent on that of their co-solidary debtor, the release of the one who appealed, provided it be not on grounds
personal to such appealing private respondent, operates as well as to the others who did not appeal. It is for this reason,
that a decision or judgment in favor of the private respondent who appealed can be invoked as res judicata by the other private
respondents.
All premises considered, the Court is convinced that the respondent court committed no error in reversing the decision of the
trial court and in dismissing the complaint in favor of the private respondents.
Article 1226
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. (1152a)
BACHRACH V. ESPIRITU, 52 PHIL. 346
Article 1152 of the Civil Code permits the agreement upon a penalty apart from the interest. Should there be such an agreement,
the penalty, as was held in the case of Lopez vs. Hernaez (32 Phil., 631), does not include the interest, and as such the two are
different and distinct things which may be demanded separately. The penalty is not to be added to the interest for the
determination of whether the interest exceeds the rate fixed by the law, since said rate was fixed only for the interest.
When the obligation has been partly performed, article 1154 of the Civil Code authorizes the court to reduce the penalty imposed
therein.
FACTS:
This is a consolidated case(Cases no. 28497 and 28948) involving two separate sale transactions. One made in Feb. 18, 1925
(case 28498), when the defendant earlier bought a truck on installment from the petitioner and said truck was mortgaged together
with the two others (no. 77197 & 92744 in the the subsequent sale transaction dated July 28, 1925. The said two of the other
trucks were also purchased (but already paid previously) from the plaintiff.
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The defendant failed to pay the balance. In July 1925, defendant again purchased another truck from Bachrach. The said truck,
together with the 3 other vehicles were mortgaged to the plaintiff to secure the remaining balance. The defendant failed to pay
the balance for the latest truck obtained. It was agreed in both sales that 12% interest will be paid on the unpaid price, and in
case of the non-payment of the total debt at maturity, 25% shall be the penalty. The defendant also signed a promissory note
solidarily with his brother Rosario (acting as intervenor), the sums secured by the mortgages. Rosario is alleged to be the owner
of the two white trucks no. 77197 & 92744 mortgaged.
While these two cases were pending in the lower court the mortgaged trucks were sold by virtue of the mortgage, all of them
together bringing in, after deducting the sheriff's fees and transportation charges to Manila, the net sum of P3,269.58. The lower
court ordered the defendants and the intervenor to pay plaintiff in case 28497 the sum of P7,732.09 with interest at the rate of
12 per cent per annum from May 1, 1926 until fully paid, and 25 per cent thereof in addition as penalty. In case 28498, the trial
court ordered the defendant and the intervenor to pay plaintiff the sum of P4,208.28 with interest at 12 per cent per annum from
December 1, 1925 until fully paid, and 25 per cent thereon as penalty.
2014A
A penal clause is an accessory undertaking to assume greater liability in case of breach. From this alone, the 4% provision does
not come to be penal in character, hence, Robes Corporation’s contention that the penalty shall substitute the indemnity for
damages and the payment of interest in case of non-compliance does not hold water.
Unfortunately, Millan failed to show the actual damages she suffered as a result of the nonperformance. Nonetheless, the facts
show that the right of the vendee was violated and this entitles her at the very least to nominal damages.
“In the situation before Us, We are of the view that the amount of P20,000.00 is excessive.” Bad faith can not be presumed.
Petitioner Corporation expected that arrangements were possible for the GSIS to make partial releases of the subdivision lots
from the overall real estate mortgage. It was only unfortunate for it not to succeed in that regard. Hence, the sum of ten thousand
pesos by way of nominal damages is fair and just.
PAMINTUAN V. CA, 94 SCRA 556

The appellants contend that trucks 77197 and 92744 were not mortgaged, because, when the defendant signed the mortgage
deeds these trucks were not included in those documents, and were only put in later, without defendant's knowledge. Appellants
also alleged that on February 4, 1925, the defendant sold his rights in said trucks Nos. 77197 and 92744 to the intervenor, and
that as the latter did not sign the mortgage deeds, such trucks cannot be considered as mortgaged. But there is positive proof
that they were included at the time the defendant signed these documents. Besides, there were presented two of defendant's
letters to Hidalgo, an employee of the plaintiff's written a few days before the transaction, acquiescing in the inclusion of all his
White trucks already paid for, in the mortgage (Exhibit H-I).
ISSUE:
Whether the 25% penalty upon the debt in addition to the 25% p.a. is usurious. (NOTE: Art. 1226 would be whether a penalty
clause be allowed to be imposed separately from the interest.)
DOCTRINE
The theory that penal and liquidated damages are the same cannot be sustained where the obligor is guilty of fraud in the
fulfillment of his obligation. The second sentence of Article 1226 itself provides that nevertheless, damages shall be paid if the
obligor x x x is guilty of fraud in the fulfillment of the obligation. Responsibility arising from fraud is demandable in all obligations
(Art. 1171, Civil Code). In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all damages
which may be reasonably attributed to the nonperformance of the obligation (Ibid, Art. 2201).
FACTS
In 1960, Pamintuan was authorized to export to Japan one thousand metric tons of white flint corn valued at forty-seven thousand
US dollars in exchange for a collateral importation of plastic sheetings of an equivalent by virtue of a barter license. Pamintuan
entered into an agreement to ship his corn to Tokyo Menka Kaisha, Ltd. of Osaka, Japan in exchange for plastic sheetings.

Ruling:
No (NOTE: yes on Art. 1226), Article 1152 of the Civil Code permits the agreement upon a penalty apart from the interest. Should
there be such an agreement, the penalty, as was held in the case of Lopez vs. Hernaez (32 Phil., 631), does not include the
interest, and which may be demanded separately. The penalty is not to be added to the interest for the determination of whether
the interest exceeds the rate fixed by the law, since said rate was fixed only for the interest. But considering that the obligation
was partly performed, and making use of the power given to the court by article 1154 of the Civil Code, this penalty is reduced
to 10 per cent of the unpaid debt. The penalty is however reduced from 25 % upon the sum owed, the defendants need pay only
10 % thereon as penalty. (Judgment appealed from is affirmed in all other respects).
BALANE NOTE
Is not a penal clause because the interest imposed is even lower than the legal rate of interest, “that’s not a penalty, that’s a
reward!”
Pamintuan contracted to sell the plastic sheetings to Yu Ping Kun Co., Inc. for P265,050.00. The company undertook to open
an irrevocable domestic letter of credit for that amount in favor of Pamintuan. Pamintuan would deliver the plastic sheetings to
the company at its bodegas in Manila or suburbs directly from the piers within one month upon arrival of the carrying vessels.
Any violation of the contract of sale would entitle the aggreived party to collect from the offending party liquidated damages in
the sum of ten thousand pesos.
On July 28, 1960, the company received a copy of the letter from the Manila branch of Toyo Menka Kaisha, Ltd. confirming the
acceptance by Japanese suppliers of firm offers for the consignment to Pamintuan of plastic sheetings valued at $47,000.00.
The company secured an irrevocable letter of credit in favor of Pamintuan for P265,050.00. The bank gave notice to Pamintuan
about the existence of the letter of credit.
The cargo was shipped from Japan to the Philippines on September 27 and 30 and October 4, 1960, through Toyo Menka
Kaisha, Ltd., four shipments.

ROBES-FRANCISCO V. CFI, 86 SCRA 59 The plastic sheetings arrived in Manila and were received by Pamintuan. Out of the shipments, Pamintuan delivered to the
DOCTRINE company’s warehouse only certain quantities of plastic sheetings, and withheld delivery of the rest.
A contract of sale which stipulate payment of interest at 4% per annum in case vendor fails to issue a certificate of title to vendee
is not a penal clause because even without it vendee would be entitled to interest at the legal rate of 6% per annum.—The Shipments from Japan Shipments delivered Shipments withheld
foregoing argument of petitioner is totally devoid of merit. We would agree with petitioner if the clause in question were to be 1) Firm Offer No. 327 for 50,000 yards November 11, 1960·140 cases, size Pamintuan withheld delivery of
considered as a penal clause. Nevertheless, for very obvious reasons, said clause does not convey any penalty, for even without valued at $9,000; 48 inches by 50 yards. (1) 50 cases of plastic sheetings
it, pursuant to Article 2209 of the Civil Code, the vendee would be entitled to recover the amount paid by her with legal rate of (2) Firm Offer No. 328 for 70,000 November 14, 1960·258 cases out of containing 26,000 yards valued at
interest which is even more than the 4% provided for in the clause. It is therefore inconceivable that the aforecited provision in yards valued at $8,050; 352 cases. $5,200;
the deed of sale is a penal clause which will preclude an award of damages to the vendee Millan. In fact the clause is so worded (3) Firm Offers Nos. 329 and 343 for November 15, 1960·11 cases out of (2) 37 cases containing 18,440 yards
as to work to the advantage of petitioner corporation. 175,000 and 18,440 yards valued at 352 cases. valued at $2,305;
$22,445 and $2,305, respectively, and November 15, 1960·10 cases out of (3) 60 cases containing 30,000 yards
Facts: (4) Firm Offer No. 330 for 26,000 100 cases. valued at $5,400 and
This is an appeal from the decision of the CFI of Rizal rendering judgment against Robes-Francisco Corporation to register the yards valued at $5,200. November 15, 1960·30 cases out of (4) 83 cases containing 40,850 yards
deed of absolute sale in favor of Millan with the Register of Deeds of Caloocan City and secure the corresponding title within ten 100 cases. valued at $5,236.97.
days and if not possible said Corporation shall pay Millan the total amount she paid P5,193.63 with interest at 4% per annum
from June 22, 1972 until fully paid. In either case Robes Corporation is sentenced to pay Millan nominal damages of P20,000.00 TOTAL : 339,440 yards with an TOTAL : 449 cases out of 1,044 cases. TOTAL: 115,290 yards valued at
plus P5,000.00 attorney’s fees. aggregate value of $47,000 (pp. 4-5 [224,150 yards valued at $18,141.9 or P102,502.13.
and 239-40, Record on Appeal). P163,047.87, of inferior quality]
Petitioner Corporation questions the award of P20,000.00 nominal damages and P5,000.00 attorney’s fees alleging such to be
excessive and unjustified. While the plastic sheetings were arriving in Manila, Pamintuan informed the president of Yu Ping Kun Co., Inc., Benito Y.C.
Espiritu, that he was in dire need of cash with which to pay his obligations to the Philippine National Bank, and alleged that the
In May 1962, Robes Corporation entered into a contract of sale with Millan for a parcel of land in the amount of 3,864.00 payable computation of the delivery would be too long a process to wait. They entered into an agreement to fix the price of the P0.782 a
in installments. Millan complied with her obligation and made her final payment on December 22, 1971 for a total payment of yard, regardless of the kind, quality or actual invoice value thereof. The parties arrived at that figure by dividing the total price of
P5,193.63 including interests and expenses for registration of title. On March 2, 1973 the deed of absolute sale was executed P265,550 by 339,440 yards, the aggregate quantity of the shipments.
but the transfer certificate of title could not be executed because the parcel of land conveyed to Millan was included among other
properties of the corporation mortgaged to GSIS to secure an obligation of P10 million, hence, the owner’s duplicate certificate After Pamintuan had delivered 224,150 yards of sheetings of inferior quality (P163,047.87), he refused to deliver the remainder
of title of the subdivision was in the possession of the GSIS. of the shipments with a total value of P102,502.13. Pamintuan justified his refusal on the company’s alleged failure to comply
with the change or novation in price.
Issue:
Is the 4% interest provision of the contract a penal clause? The company filed a case for recovery of compensatory damages for breach of a contract of sale in addition to liquidated
damages in the RTC on December 2, 1960. The court ruled for the company, including a grant of (a) P10,000 as stipulated
Held: liquidated damages, (b) P10,000 as moral damages, (c) P1,102.85 as premium paid by the company on the bond of P102,502.13
No. Said clause does not convey any penalty, for even without it, pursuant to Article 2209 of the Civil Code, the vendee would for the issuance of the writ of preliminary attachment and (d) P10,000 as attorney’s fees, or total damages of P110,559.28). In
be entitled to recover the amount paid by her with legal rate of interest which is even more than the 4% provided for in the clause. the computation for unrealized profits, the court based it on the selling price at the time of delivery amounting in total to

Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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 CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE
P67,174.17.
The overpayment of P12,282.26 made to Pamintuan by Yu Ping Kun Co., Inc. for the 224,150 yards, which the trial court
regarded as an item of damages suffered by the company, was computed as follows (p. 71, Record on Appeal):
. Liquidation value of 224.150 yards at P0.7822 a yard ..........................................................................................
P175,330.13
. Actual peso value of 224,150 yards as per firm offers
 or as per contract ...........................................................
163,047.87
. Overpayment................................................................. P 12,282.26
The Court of Appeals affirmed that judgment with the modification, disallowing moral damages. The Court found that the contract
of sale between Pamintuan and the company was partly consummated. The company fulfilled its obligation to obtain the
Japanese suppliers confirmation of their acceptance of firm offers totalling $47,000. Pamintuan reaped certain benefits from the
contract. Hence, he is estopped to repudiate it; otherwise, he would unjustly enrich himself at the expense of the company.
The Court also found that the writ of attachment was properly issued. It also found that Pamintuan was guilty of fraud because
(1) he was able to make the company agree to change the manner of paying the price by falsely alleging that there was a delay
in obtaining confirmation of the suppliers’ acceptance of the offer to buy; (2) he caused the plastic sheetings to be deposited in
the bonded warehouse of his brother and then required his brother to make him (Pamintuan), his attorney-in-fact so that he could
control the disposal of the goods; (3) Pamintuan, as attorney-in-fact of the warehouseman, endorsed to the customs broker the
warehouse receipts covering the plastic sheetings withheld by him and (4) he overpriced the plastic sheetings which he delivered
to the company.
On present appeal to the SC, Pamintuan alleged that the buyer, Yu Ping Kun Co., Inc., is entitled to recover only liquidated
damages. That contention is based on the stipulation that any violation of the provisions of this contract (of sale) shall entitle the
aggrieved party to collect from the offending party liquidated damages in the sum of P10,000. Pamintuan relies on the rule that
a penalty and liquidated damages are the same; that 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 (1st sentence of
Art. 1226, Civil Code) and, it is argued, there is no such stipulation to the contrary in this case and that liquidated damages are
those agreed upon by the parties to a contract, to be paid in case of breach thereof (Art. 2226, Civil Code).
ISSUE/S
Whether the buyer, Yu Ping Kun Co., Inc., is entitled to recover only liquidated damages.
HELD
NO. SC ruled that as Pamintuan was guilty of fraud in the performance of his obligation, he responsible for all damages which
may be reasonably attributed to the nonperformance of the obligation.
As a general rule, the penalty takes the place of the indemnity for damages and the payment of interest. This is subject to three
exceptions [Art. 1152 SCC; Art. 1226 NCC]: (1) when there is an express stipulation to that effect; (2) when the obligor having
failed to comply with the principal obligation also refuses to pay the penalty, in which case the creditor is entitled to interest in
the amount of the penalty, in accordance with Article 2209; and (3) when the obligor is guilty of fraud in the fulfillment of the
obligation.
The reason for the third exception is based on the principle that an action to enforce is based on the principle that an action to
enforce liability for future fraud cannot be renounced, as that would be against public policy and would contravene the express
provisions of Article 1171 of the Civil Code which states that any waiver of an action for future fraud is void.
The second sentence of article 1226 itself provides that nevertheless, damages shall be paid if the obligor x x x is guilty of fraud
in the fulfillment of the obligation. Responsibility arising from fraud is demandable in all obligations (Art. 1171, Civil Code), and
in case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all damages which may be reasonably
attributed to the nonperformance of the obligation (Ibid, art. 2201).
There is no justification for the Civil Code to make an apparent distinction between 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 (Arts. 1229,
2216 and 2227, Civil Code. See observations of Justice J.B.L. Reyes, cited in 4 Tolentino’s Civil Code, p. 251).
However, justice would be adequately done in this case by allowing Yu Ping Kun Co., Inc. to recover only the actual damages
proven and not to award to it the stipulated liquidated damages of ten thousand pesos for any breach of the contract. The proven
damages supersede the stipulated liquidated damages. This view finds support in the opinion of Manresa (whose comments
were the bases of the new matter found in article 1226, not found in article 1152 of the old Civil Code) that in case of fraud the
difference between the proven damages and the stipulated penalty may be recovered. Hence, the damages recoverable by the
firm would amount to (P90,559.28), with 6%/yr from the filing of the complaint.
Antonio, J., concurring:
A creditor, in case of fraud by the obligor is entitled only to the stipulated penalty plus the difference between the proven damages
and such stipulated penalty. It is evident from the foregoing that in case of fraud in the fulfillment of an obligation with a penal
clause, proof of such fraud is incumbent upon the creditor, and in case of demands indemnity in addition to the penalty stipulated,
proof of the existence and amount of the damages shall also correspond to him. However, the creditor may demand only the
difference of such amount over the amount of the penalty stipulated as the creditor cannot recover both the proven damages
and the stipulated penalty. In the case at bar, he is only entitled to the stipulated penalty plus the difference between the proven
damages and the stipulated penalty.
BALANE NOTE
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
Under the exception of 1226, the aggrieved party can demand the entire amount of the liquidated damages, with part of it
absorbed by the penalty.
COUNTRY BANKERS V. CA, 201 SCRA 458
DOCTRINE/S
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.—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 prestation (generally consisting in the payment of a sum of money)
in case the obligation is not fulfilled or is irregularly or inadequately fulfilled. (Eduardo P. Caguioa, Comments and Cases on Civil
Law, Vol. IV, First Edition, pp. 199–200) 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.
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.—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).
FACTS
Oscar Ventanilla Enterprises Corporation (OVEC), as lessor, and Enrique F. 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; including their air-
conditioning systems, projectors and accessories needed for showing the films or motion pictures. The term of the lease was for
six (6) years commencing from June 13, 1977 and ending June 12, 1983. After more than two (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 OVEC’s demand for repossession of the three (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.
Pursuant to the agreement, Sy’s arrears in rental was reduced to P71,028.91 as of December 31, 1979. However, the accrued
amusement tax liability of the three (3) theaters to the City Government of Cabanatuan City had accumulated to P84,000.00
despite the fact that Sy had been deducting the amount of P4,000.00 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 theaters on February 11,1980 in pursuance of the pertinent provisions of their lease contract of
June 11, 1977 and their supplemental letter-agreement of August 13, 1979.
Sy still failed to pay the liabilities, and 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 said movie houses and preventing the
lessee’s employees from entering the same.
Sy filed an action for reformation of the lease agreement, damages and injunction. He regained possession and operation of the
theaters.
Sy argued that
(1) the amount of deposit—P600,000.00 as agreed upon, P300,000.00 of which was to be paid o1n June 13,
1977 and the balance on December 13, 1977—was too big; and that OVEC had assured him that said
forfeiture will not come to pass.
(2) he sought reimbursement: of sums spent for “major repairs” (P1 00,000,00) on Broadway Theater;
electrical current used by OVEC through it’s “illegal connection” to Capitol Theater (P48,000.00) Broadway
Theater (P31,000.00) and for damages
(3) Damages suffered by Sy due to the padlocking of the theaters for lost income and inability to push through
with contracts entered into with movie and booking companies for the showing of movies at ABC.
(4) he prayed for the issuance of a restraining order/preliminary injunction to enjoin OVEC and all persons
employed by it from entering and taking possession of the three theaters, conditioned upon Sy’s filing of a
P500,000.00 bond supplied by Country Bankers Insurance Corporation (CBISCO).
OVEC alleged in its answer by way of counterclaims,
(1) that by reason of Sy’s violation of the terms of the subject lease agreement, OVEC became authorized to
enter and possess the three theaters in question and to terminate said agreement and the balance of the
deposits given by Sy to OVEC had thus become forfeited;
(2) that OVEC would be losing P50,000.00 for every month that the possession and operation of said three
theaters remain with Sy and that OVEC incurred P500,000.00 for attorney’s service.
The RTC held that Sy is not entitled to the reformation of the lease agreement; that the repossession of the leased premises by
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 CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE
OVEC after the cancellation and termination of the lease and forfeiture of the cash deposit was in accordance with the lease
agreement and the law applicable thereto.
The RTC further held that Sy was not entitled to the writ of preliminary injunction issued in his favor after the commencement
of the action and that the injunction bond filed by Sy is liable for whatever damages OVEC may have suffered by reason of the
injunction. The lessor was deprived of the possession and enjoyment of the leased premises and also suffered damages as a
result of the filing of the case by Sy and his violation of the terms and conditions of the lease agreement. Hence, it held that
OVEC is entitled to recover the said damages in addition to the arrears in rentals and amusement tax delinquency of Sy and the
accrued interest thereon:
OVEC finally regained the possession of the three (3) theaters under lease at the end of November, 1980, and
Sy’s unpaid rentals and amusement tax liability amounted to P289,534.78.,
To pay P10,000.00 every month from February to November, 1980 or the total amount of P100,000.00 with interest
on each amount of P1 0,000.00 from the time the same became due; This P10,000.00 portion of the monthly
lease rental was supposed to come from the remaining cash deposit of Sy but with the consequent
forfeiture of the remaining cash deposit of P290,000.00, there was no more cash deposit from which said
amount could be deducted.
Attorney’s fees equivalent to 10% of the amounts above-mentioned.
Through the injunction bond liable to pay the sum of P10,000.00 every month from February to November, 1980.
The amount represents the supposed increase in rental from P50,000.00 to P60,000.00 in view of the offer of one
RTG Productions, Inc. to lease the three theaters involved for P60,000.00 a month.
On appeal to the CA, the court affirmed and declared as lawful: the cancellation of the lease agreement, the forfeiture clause;
ordered the payment of unremitted amusement tax, with interest at 12%/year in line with the lease agreement; the unpaid monthly
lease rentals, increase in rentals plus interest; and attorney’s fees.
The court found no ambiguity in the provisions of the lease agreement. It held that the provisions are fair and reasonable and
therefore, should be respected and enforced as the law between the parties. It held that the cancellation or termination of the
agreement prior to its expiration period is justified as it was brought about by Sy’s own default in his compliance with the terms
of the agreement and not “motivated by fraud or greed.” It also affirmed the award to OVEC of the amount of P1 00,000.00
chargeable against the injunction bond posted by CBISCO, which was soundly and amply justified by the trial court.
The respondent Court likewise found no merit in OVEC’s appeal and held that the trial court did not err in not charging and
holding the injunction bond posted by Sy liable for all the awards as the undertaking of CBISCO under the bond referred only to
damages which OVEC may suffer as a result of the injunction.
ISSUE/S
(1) Whether the penalty clauses unjustly enriched OVEC at the expense of Sy.
(2) Whether there can be set-off arising from the damage caused by the injunction against the remaining cash deposit of
Sy.
HELD
(1) 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 prestation (generally consisting in the payment of a sum of money) in case the obligation is not
fulfilled or is irregularly or inadequately fulfilled. (Eduardo P. Caguioa, Comments and Cases on Civil Law, Vol. IV, First Edition,
pp. 199–200) 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.
In the case at bar, inasmuch as the forfeiture clause provides that the deposit shall be deemed forfeited, without prejudice to any
other obligation still owing by the lessee to the lessor. the penalty cannot substitute for the P100,000.00 supposed damage
resulting from the issuance of the injunction against the P290,000.00 remaining cash deposit. This supposed damage suffered
by OVEC was the alleged P10,000.00 a month increase in rental from P50,000.00 to P60,000.00), which OVEC failed to realize
for ten months from February to November, 1980 in the total sum of P1 00,000.00. This opportunity cost which was duly proven
before the trial court, was correctly made chargeable by the said court against the injunction bond posted by CBISCO.
(2) NO.
The undertaking assumed by CBISCO under subject injunction refers to “all such damages as such party may sustain by reason
of the injunction if the Court should finally decide that the Plaintiff was/were not entitled thereto,” (Rollo, p. 101) Thus, the
respondent Court correctly sustained the trial court in holding that the bond shall and may answer only for damages which OVEC
may suffer as a result of the injunction. The arrears in rental, the unmeritted amounts of the amusement tax delinquency, the
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
amount of P1 00,000.00 (P10,000.00 portions of each monthly rental which were not deducted from plaintiff s cash deposit from
February to November, 1980 after the forfeiture of said cash deposit on February 11, 1980) and attorney’s fees which were all
charged against Sy were correctly considered by the respondent Court as damages which OVEC sustained not as a result of
the injunction.
BALANE NOTE
In case of any of the exception, you pay both the penalty and the entire amount of damages, because this is more in line with
the nature of the “penalty clause”.
HEIRS OF MANUEL UY V. MEER CASTILLO, 697 SCRA 294 [2013]
DOCTRINE
In the absence of a showing that they expressly reserved the right to pay the penalty in lieu of the performance of their obligation
under the Kasunduan, respondents were correctly ordered by the RTC to execute and deliver a deed of conveyance over their
60% share in the subject parcels in favor of petitiOners. Considering that the Kasunduan stipulated that respondents would
retain a portion of their share consisting of 1,750 square meters, said disposition should, however, be modified to give full effect
to the intention of the contracting parties. Since the parties also fixed liquidated damages in the sum of P50,000.00 in case of
breach, we find that said amount should suffice as petitioners' indemnity, without further need of compensation for moral and
exemplary damages. In obligations with a penal clause, the penalty generally substitutes the indemnity for damages and the
payment of interests in case of non-compliance.68 Usually incorporated to create an effective deterrent against breach of the
obligation by making the consequences of such breach as onerous as it may be possible, the rule is settled that a penal clause
is not limited to actual and compensatory damages69
FACTS:
Respondent Mauricia Meer (together with her husband Felipe Castillo) owned four parcels of land located in Mayao, Lucena
City. Upon the death of Felipe, a deed of extrajudicial partition was made in favor of his heirs. Utilized as security for the payment
of a tractor purchased by Mauricia’s nephew, Santiago Rivera, from Bormaheco, Inc., it appears, however, that the subject
properties were subsequently sold at a public auction where Insurance Corporation of the Philippines (ICP) tendered the highest
bid. Having consolidated its title, ICP likewise sold said parcels in favor of Philippine Machinery Parts Manufacturing Co., Inc.
(PMPMCI) which, in turn, caused the same to be titled in its name.
Respondents filed an action in the CFI of Quezon for the annulment of the proceedings involving the parcels of land. Having
financial difficulties, respondents entered into an agreement with Manuel Uy Ek Liong to shoulder the litigation expenses. In the
event of a favorable decision, Uy would be granted “40% of the all the realties and/or monetary benefits, gratuities or damages”
which may be adjudicated in favor of respondents.”
On the same date, respondents and Buenaflor entered into another notarized agreement denominated as a Kasunduan whereby
they agreed to sell their remaining sixty (60%) percent share in the subject parcels in favor of Manuel for the sum of P180,000.00.
However, after securing a favorable judgment, the 60% share were divided equally among the respondents.
Having failed to reach an agreement as to the consideration for the supposed sale, petitioners (already the hiers of Uy Ek Liong)
filed an action for specific performance against the respondents for their unjustified refusal to comply with the Kasunduan. The
RTC ruled in favor of the petitioners, but the decision was set aside on appeal (CA ruled that the contract was null and void).
ISSUE:
Viewed in the light of the autonomous nature of contracts enunciated under Article 1306 of the Civil Code, on the other hand,
we find that the Kasunduan was correctly found by the RTC to be a valid and binding contract between the parties.
Obligations arising from contracts, after all, have the force of law between the contracting parties who are expected to abide in
good faith with their contractual commitments, not weasel out of them. Moreover, when the terms of the contract are clear and
leave no doubt as to the intention of the contracting parties, the rule is settled that the literal meaning of its stipulations should
govern. In such cases, courts have no authority to alter a contract by construction or to make a new contract for the parties.
Since their duty is confined to the interpretation of the one which the parties have made for themselves without regard to its
wisdom or folly, it has been ruled that courts cannot supply material stipulations or read into the contract words it does not
contain. Indeed, courts will not relieve a party from the adverse effects of an unwise or unfavorable contract freely entered into.
An accessory undertaking to assume greater liability on the part of the obligor in case of breach of an obligation, the foregoing
stipulation is a penal clause which serves to strengthen the coercive force of the obligation and provides for liquidated damages
for such breach. “The obligor would then be bound to pay the stipulated indemnity without the necessity of proof of the existence
and the measure of damages caused by the breach.”
In obligations with a penal clause, the penalty generally substitutes the indemnity for damages and the payment of interests in
case of non-compliance. Usually incorporated to create an effective deterrent against breach of the obligation by making the
consequences of such breach as onerous as it may be possible, the rule is settled that a penal clause is not limited to actual
and compensatory damages.
Article 1229
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. (1154a)
LO V. CA, 411 SCRA 523 [2003]
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 CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE
FACTS:
At the core of the present controversy are two parcels of land with an office building constructed thereon, located at Bo. Potrero,
Malabon, Metro Manila.
Petitioner acquired the subject parcels of land in an auction sale from the Land Bank of the Philippines (Land Bank).
Private respondent National Onion Growers Cooperative Marketing Association, Inc., an agricultural cooperative, was the
occupant of the disputed parcels of land under a subsisting contract of lease with Land Bank. The lease was valid until December
31, 1995.
Upon the expiration of the lease contract, petitioner demanded that private respondent vacate the leased premises and surrender
its possession to him. Private respondent refused on the ground that it was, at the time, contesting petitioner’s acquisition of the
parcels of land in question in an action for annulment of sale, redemption and damages.
On February 23, 1996, petitioner filed an action for ejectment before the Metropolitan Trial Court and asked, inter alia, for the
imposition of the contractually stipulated penalty of P5,000 per day of delay in surrendering the possession of the property to
him. On September 3, 1996, the trial court decided the case in favor of petitioner.
On appeal to the Regional Trial Court of Malabon, the MTC decision was affirmed in toto. The Court of Appeals rendered its
assailed decision affirming the decision of the trial court, with the modification that the penalty imposed upon private respondent
for the delay in turning over the leased property to petitioner was reduced from P 5,000 to P 1000 per day.
ISSUE:
W/N the CA erred in reducing the penalty awarded by the trial court, the same having been stipulated by the parties in their
Contract of Lease?
HELD:
NO. The petition has no merit.
Generally, courts are not at liberty to ignore the freedom of the parties to agree on such terms and conditions as they see fit as
long as they are not contrary to law, morals, good customs, public order or public policy. Nevertheless, courts may equitably
reduce a stipulated penalty in the contract if it is iniquitous or unconscionable, or if the principal obligation has been
partly or irregularly complied with.
This power of the courts is explicitly sanctioned by Article 1229 of the Civil Code which provides:
Article 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly
complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if
it is iniquitous or unconscionable.
The question of whether a penalty is reasonable or iniquitous is addressed to the sound discretion of the court and
depends on several factors, including, but not limited to, the following: the type, extent and purpose of the penalty, the nature
of the obligation, the mode of breach and its consequences, the supervening realities, the standing and relationship of
the parties.
In this case, the stipulated penalty was reduced by the appellate court for being unconscionable and iniquitous. As
provided in the Contract of Lease, private respondent was obligated to pay a monthly rent of P30,000. On the other hand, the
stipulated penalty was pegged at P5,000 for each day of delay or P150,000 per month, an amount five times the monthly
rent. This penalty was not only exorbitant but also unconscionable, taking into account that private respondent’s delay
in surrendering the leased premises was because of a well-founded belief that its right of preemption to purchase the
subject premises had been violated. Considering further that private respondent was an agricultural cooperative, collectively
owned by farmers with limited resources, ordering it to pay a penalty of P150,000 per month on top of the monthly rent of P30,000
would seriously deplete its income and drive it to bankruptcy. In Rizal Commercial Banking Corp. vs. Court of Appeals, the Court
tempered the penalty charges after taking into account the debtor’s pitiful financial condition.
Accordingly, we rule that the Court of Appeals did not commit any reversible error in the exercise of its discretion when
it reduced the award of penalty damages from P5,000 to P1,000 for each day of delay.
WHEREFORE, petition is hereby DENIED. The decision of the Court of Appeals reducing the amount of penalty damages
against private respondent is AFFIRMED.
Article 1231
Art. 1231. Obligations are extinguished:
(1) By payment or performance:
 the parties enter into another contract for the dissolution of the previous one, and they are bound by that contract.—When
(2) By the loss of the thing due:
 petitioner Floro, Inc. failed to deliver the Model 85 monitors, private respondent Phil. Rabbit would have been entitled to refuse
(3) By the condonation or remission of the debt;
 to pay the full amount stipulated in the Agreement. However, private respondent Phil. Rabbit opted to cancel the Agreement, to
(4) By the confusion or merger of the rights of creditor and debtor;
 which petitioner Floro, Inc. expressed its conformity. In legal effect, the parties entered into another contract for the dissolution
(5) By compensation;
 of the previous one, and they are bound by that contract.
(6) By novation.
Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory
condition, and prescription, are governed elsewhere in this Code. (1156a)
BALANE NOTE, OTHER CASES WHERE OBLIGATIONS ARE EXTINGUISHED
(7) annulment
(8) rescission
(9) fulfillment of a resolutory condition
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
(10) prescription
(11) death
(12) renunciation
(13) compromise
(14) arrival of resolutory term
(15) mutual dissent or mutual disistance (See saura v. DBP)
(16) unilateral withdrawal
(17) change of civil status
(18) rebus sic stantibus [Art 1267] – fortuitious event
(19) want of interest (see Tiu v. Platinum)
Non-involvent clause is invalid and no longer operable when the employer changes the nature of their business. A
chef previously subject of the clause, if during the period stated in the contract that he should not be involved the
employer changes his/her business, is no longer bound.
(20) judicial insolvency
SAURA V. DBP, 44 SCRA 445
Source: http://lextheorica.blogspot.com/2012/02/credit-transactions-digest.html
FACTS
Saura applied to the Rehabilitation Finance Corporation (RFC), before its conversion into DBP, for an industrial loan to be used
for construction of factory building, for payment of the balance of the purchase price of the jute machinery and equipment and
as additional working capital. In Resolution No.145, the loan application was approved to be secured first by mortgage on the
factory buildings, the land site, and machinery and equipment to be installed.
The mortgage was registered and documents for the promissory note were executed. The cancellation of the mortgage was
requested to make way for the registration of a mortgage contract over the same property in favor of Prudential Bank and Trust
Co., the latter having issued Saura letter of credit for the release of the jute machinery. As security, Saura execute a trust receipt
in favor of the Prudential. For failure of Saura to pay said obligation, Prudential sued Saura.
After 9 years after the mortgage was cancelled, Saura sued RFc alleging failure to comply with tits obligations to release the
loan proceeds, thereby prevented it from paying the obligation to Prudential Bank.
The trial court ruled in favor of Saura, ruling that there was a perfected contract between the parties ad that the RFC was guilty
of breach thereof.
ISSUE
Whether or not there was a perfected contract between the parties.
HELD
The Court held in the affirmative. Article 1934 provides: An accepted promise to deliver something by way of
commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itself shall not be perfected until
delivery of the object of the contract.
There was undoubtedly offer and acceptance in the case. When an application for a loan of money was approved by resolution
of the respondent corporation and the responding mortgage was executed and registered, there arises a perfected consensual
contract
FLORO V. CA, 249 SCRA 354
DOCTRINES
Contracts; Sales; Lease; Whether the contract is characterized as a sale or a lease, the consequences of the cancellation would
be the same-the parties are to be restored to their original positions inter se as far as practicable.—It would seem that the issue
to be resolved in this case is whether the contract entered into by petitioner Floro, Inc. and private respondent Phil. Rabbit was
one of sale on installment basis, as found by the CA, or one of lease, as found by the RTC. However, the Court does not see
any real need for resolving this issue in view of the fact that the parties had agreed to a mutual cancellation of their transaction.
As established by both respondent appellate court and the trial court, on 10 January 1983 private respondent Phil. Rabbit wrote
petitioner Floro, Inc. asking for the cancellation of the Agreement and the latter, through a letter dated 4 February 1983,
communicated to the former its conformity thereto. Whether the contract is characterized as a sale or a lease, the consequences
of the cancellation would be the same. The parties are to be restored to their original positions inter se as far as practicable.
Same; Where one party opts to cancel an existing agreement and the other party expresses its conformity thereto, in legal effect
Same; The dissolution or the cancellation of the original agreement necessarily involves restoration of the parties to the status
quo ante prevailing immediately prior to the execution of the agreement.—The dissolution or the cancellation of the original
Agreement necessarily involves restoration of the parties to the status quo ante prevailing immediately prior to the execution of
the Agreement i.e. the computer equipment reverts back to petitioner Floro, Inc. and private respondent Phil. Rabbit is
reimbursed the amounts it had paid to the former. However, in this case, Phil. Rabbit cannot reasonably demand reimbursement
for the full amount it had paid to petitioner Floro, Inc. because it cannot be gainsaid that Phil. Rabbit had utilized the computer
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equipment for its operations and benefitted from such use. Phil. Rabbit cannot be allowed to unjustly enrich itself at the expense
of Floro, Inc.
Same; Rescission; Equity; Article 1385 of the Civil Code refers to contracts that are rescissible for causes specified in Articles
1381 and 1382 of the Civil Code but it does not refer to contracts that are dissolved by mutual consent of the parties.—Hence,
respondent appellate court was correct in ordering the parties to restore to each other what each of them had received under
the contract but taking into account the use by private respondent Phil. Rabbit of the computer equipment. However, it was not
quite correct in invoking, in this connection, Article 1385 of the Civil Code. Article 1385 refers to contracts that are rescissible for
causes specified in Articles 1381 and 1382 of the Civil Code but it does not refer to contracts that are dissolved by mutual
consent of the parties. Rather, the mutual restoration is in consonance with the basic principle that when an obligation has been
extinguished or resolved, it is the duty of the court to require the parties to surrender whatever they may have received from the
other so that they may be restored, as far as practicable, to their original situation.
FACTS OF THE CASE:
On 25 February 1981, Floro, Inc. and Phil. Rabbit entered into an agreement denominated as "Agreement for Equipment Lease,
Service and Maintenance" whereby Floro, Inc. agreed to furnish Phil. Rabbit with certain computer equipment including four (4)
Model 85 Visual Display Units or monitors. Appearing on the bottom portion of the Agreement was a handwritten annotation
made by Mr. Ernesto P. Lagman, a sales representative of Floro, Inc., which read: "After (5) five years, the computer becomes
your property."
The Agreement provided for the payment by Phil. Rabbit to Floro, Inc. of a downpayment upon signing of the Agreement and
certain monthly payments, plus certain other amounts upon delivery of the computer equipment.The computer equipment
specified in the Agreement was delivered to Phil. Rabbit on September 1981 except for the four (4) Model 85 monitors. In lieu
thereof, Floro, Inc. delivered and installed Model 82 monitors. Phil. Rabbit made several verbal and written demands on Floro,
Inc. to deliver the Model 85 monitors. Upon assurances made by Floro, Inc. that the Model 85 monitors "will be forthcoming",
Phil. Rabbit made several payments in accordance with the terms of the Agreement. However, despite the assurances made
by Floro, Inc., the Model 85 monitors were never delivered to Phil. Rabbit.
Phil. Rabbit wrote Floro, Inc. asking for the cancellation of the Agreement alleging that the computers were not placed in full
operation due to the nondelivery of the Model 85 monitors. In a letter dated 4 February 1983, Floro, Inc. expressed its conformity
to the "mutual cancellation" of the Agreement and demanded the return of the computer equipment. Phil. Rabbit informed Floro,
Inc. that the computer equipment would be returned only upon the reimbursement of the amount of P295,169.00, which the
former had already paid the latter.
On 31 May 1983, Floro, Inc. wrote Phil. Rabbit reiterating its demand for the return of the equipment and payment of back rentals
in the amount of P265,291.50. Phil. Rabbit insisted on the return of the payments it had previously made.
ISSUE:
1. WHETHER THE CONTRACT BETWEEN THE PARTIES IS A CONTRACT OF LEASE OR A CONTRACT OF SALE ON
INSTALLMENT
2. WHETHER THE PARTIES SHOULD RESTORE TO EACH OTHER WHAT EACH OF THEM HAVE RECEIVED IN THE
CONTRACT
HELD:
1. The agreement between the parties is one of sale on an installment basis and not of lease. That the intention of Phil. Rabbit
and Floro, Inc. was to enter into a contract of sale on installment has been sufficiently established by the handwritten
annotation stating that after five years, the computer becomes the property of the respondents.
2. The mutual restoration is in consonance with the basic principle that when an obligation has been extinguished or resolved,
it is the duty of the court to require the parties to surrender whatever they may have received from the other so that they
may be restored, as far as practicable, to their original situation. Since the parties had agreed to a mutual cancellation of
the Agreement, the court ordered each to restore to the other what each had received under the Agreement in accordance
with Article 1385 of the Civil Code. The computer equipment had been previously returned to Floro, Inc. by virtue of the
writ of replevin issued by the trial court. The CA found that Phil. Rabbit had been able to make use of the computer
equipment for a period of six (6) months; hence, Phil. Rabbit was ordered to pay the sum of P120,564.00 to be deducted
from the sum of P295,169.00 which it had already paid to Floro, Inc. For its part, Floro, Inc. was ordered to return the
balance of P174,605.00.
Article 1234
Art. 1234. If the obligation has been substantially performed in good faith, the obligor may recover as
though there had been a strict and complete fulfillment, less damages suffered by the obligee. (n)
LEGARDA HERMANOS V. SALDANA, 55 SCRA 324
FACTS:
The Court, in affirming the decision under review of the Court of Appeals, which holds that the respondent buyer of two small
residential lots on installment contracts on a ten-year basis who has faithfully paid for eight continuous years on the principal
alone already more than the value of one lot, besides the larger stipulated interests on both lots, is entitled to the conveyance of
one fully paid lot of his choice, rules that the judgment is fair and just and in accordance with law and equity.
The action originated as a complaint for delivery of two parcels of land in Sampaloc, Manila and for execution of the
corresponding deed of conveyance after payment of the balance still due on their purchase price. Private respondent as plaintiff
had entered into two written contracts with petitioner Legarda Hermanos as defendant subdivision owner, whereby the latter
agreed to sell to him Lots Nos. 7 and 8 of block No. 5N of the subdivision with an area of 150 square meters each, for the sum
of P1,500.00 per lot, payable over the span of ten years divided into 120 equal monthly installments of P19.83 with 10% interest
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
per annum, to commence on May 26, 1948, date of execution of the contracts. Subsequently, Legarda Hermanos partitioned
the subdivision among the brothers and sisters, and the two lots were among those allotted to co-petitioner Jose Legarda who
was then included as co-defendant in the action.
It is undisputed that respondent faithfully paid for eight continuous years about 95 (of the stipulated 120) monthly installments
totalling P3,582.06 up to the month of February, 1956, which as per petitioners' own statement of account, Exhibit "1", was
applied to respondent's account (without distinguishing the two lots), as follows:
To interests P1,889.78
To principal 1,682.28
Total P3,582.06 1
It is equally undisputed that after February, 1956 up to the filing of respondent's complaint in the Manila court of first instance in
1961, respondent did not make further payments. The account thus shows that he owed petitioners the sum of P1,317.72 on
account of the balance of the purchase price (principal) of the two lots (in the total sum of P3,000.00), although he had paid more
than the stipulated purchase price of P1,500.00 for one lot.
Almost five years later, on February 2, 1961 just before the filing of the action, respondent wrote petitioners stating that his desire
to build a house on the lots was prevented by their failure to introduce improvements on the subdivision as "there is still no road
to these lots," and requesting information of the amount owing to update his account as "I intend to continue paying the balance
due on said lots."
Petitioners replied in their letter of February 11, 1961 that as respondent had failed to complete total payment of the 120
installments by May, 1958 as stipulated in the contracts to sell, "pursuant to the provisions of both contracts all the amounts paid
in accordance with the agreement together with the improvements on the premises have been considered as rents paid and as
payment for damages suffered by your failure," 2 and "Said cancellation being in order, is hereby confirmed."
From the adverse decision of July 17, 1963 of the trial court sustaining petitioners' cancellation of the contracts and dismissing
respondent's complaint, respondent appellate court on appeal rendered its judgment of July 27, 1966 reversing the lower court's
judgment and ordering petitioners "to deliver to the plaintiff possession of one of the two lots, at the choice of defendants, and
to execute the corresponding deed of conveyance to the plaintiff for the said lot," 3 ruling as follows: —
During the hearing, plaintiff testified that he suspended payments because the lots were not actually delivered to him, or could
not be, due to the fact that they were completely under water; and also because the defendants-owners failed to make
improvements on the premises, such as roads, filling of the submerged areas, etc., despite repeated promises of their
representative, the said Mr. Cenon. As regards the supposed cancellation of the contracts, plaintiff averred that no demand has
been made upon him regarding the unpaid installments, and for this reason he could not be declared in default so as to entitle
the defendants to cancel the said contracts.
The issue, therefore, is: Under the above facts, may defendants be compelled, or not, to allow plaintiff to complete payment of
the purchase price of the two lots in dispute and thereafter to execute the final deeds of conveyance thereof in his favor?
xxx xxx xxx
Whether or not plaintiffs explanation for his failure to pay the remaining installments is true, considering the circumstances
obtaining in this case, we elect to apply the broad principles of equity and justice. In the case at bar, we find that the plaintiff has
paid the total sum of P3,582.06 including interests, which is even more than the value of the two lots. And even if the sum applied
to the principal alone were to be considered, which was of the total of P1,682.28, the same was already more than the value of
one lot, which is P1,500.00. The only balance due on both lots was P1,317.72, which was even less than the value of one lot.
We will consider as fully paid by the plaintiff at least one of the two lots, at the choice of the defendants. This is more in line with
good conscience than a total denial to the plaintiff of a little token of what he has paid the defendant Legarda Hermanos. 4
Hence, the present petition for review, wherein petitioners insist on their right of cancellation under the "plainly valid written
agreements which constitute the law between the parties" as against "the broad principles of equity and justice" applied by the
appellate court. Respondent on the other hand while adhering to the validity of the doctrine of the Caridad Estates cases 5 which
recognizes the right of a vendor of land under a contract to sell to cancel the contract upon default, with forfeiture of the
installments paid as rentals, disputes its applicability herein contending that here petitioners-sellers were equally in default as
the lots were "completely under water" and "there is neither evidence nor a finding that the petitioners in fact cancelled the
contracts previous to receipt of respondent's letter." 6
The Court finds that the appellate court's judgment finding that of the total sum of P3,582.06 (including interests of P1,889.78)
already paid by respondent (which was more than the value of two lots), the sum applied by petitioners to the principal alone in
the amount of P1,682.28 was already more than the value of one lot of P1,500.00 and hence one of the two lots as chosen by
respondent would be considered as fully paid, is fair and just and in accordance with law and equity.
As already stated, the monthly payments for eight years made by respondent were applied to his account without specifying or
distinguishing between the two lots subject of the two agreements under petitioners' own statement of account, Exhibit "1". 7
Even considering respondent as having defaulted after February 1956, when he suspended payments after the 95th installment,
he had as of the already paid by way of principal (P1,682.28) more than the full value of one lot (P1,500.00). The judgment
recognizing this fact and ordering the conveyance to him of one lot of his choice while also recognizing petitioners' right to retain
the interests of P1,889.78 paid by him for eight years on both lots, besides the cancellation of the contract for one lot which thus
reverts to petitioners, cannot be deemed to deny substantial justice to petitioners nor to defeat their rights under the letter and
spirit of the contracts in question.
The Court's doctrine in the analogous case of J.M. Tuason & Co. Inc. vs. Javier 8 is fully applicable to the present case, with the
respondent at bar being granted lesser benefits, since no rescission of contract was therein permitted. There, where the therein
buyer-appellee identically situated as herein respondent buyer had likewise defaulted in completing the payments after having
religiously paid the stipulated monthly installments for almost eight years and notwithstanding that the seller-appellant had duly
notified the buyer of the rescission of the contract to sell, the Court upheld the lower court's judgment denying judicial confirmation
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of the rescission and instead granting the buyer an additional grace period of sixty days from notice of judgment to pay all the
installment payments in arrears together with the stipulated 10% interest per annum from the date of default, apart from
reasonable attorney's fees and costs, which payments, the Court observed, would have the plaintiff-seller "recover everything
due thereto, pursuant to its contract with the defendant, including such damages as the former may have suffered in
consequence of the latter's default."
In affirming, the Court held that "Regardless, however, of the propriety of applying said Art. 1592 thereto, We find that plaintiff
herein has not been denied substantial justice, for, according to Art. 1234 of said Code: 'If the obligation has been substantially
performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less damages
suffered by the obligee,'" and "that in the interest of justice and equity, the decision appealed from may be upheld upon the
authority of Article 1234 of the Civil Code." 9
ACCORDINGLY, the appealed judgment of the appellate court is hereby affirmed. Without pronouncement as to costs.
J.M. TUASON V. JAVIER, 31 SCRA 829
FACTS:
On September 7, 1954, petitioner J.M. Tuason & Co., Inc. entered a contract to sell with respondent Ligaya Javier a parcel of
land known as Lot No. 28, Block No. 356, PSD 30328, of the Sta. Mesa Heights Subdivision for the sum of Php3,691.20 with
10% interest per annum; Php396.12 will be payable upon execution of the contract, and an installment of Php43.92 monthly for
a period of ten (10) years. It was further stipulated in the contract, particularly the sixth paragraph, that upon failure of respondent
to pay the monthly installment, she is given a one month grace period to pay such installment together with the monthly
installment falling on the said grace period. Furthermore, failure to pay both monthly installments, respondent will pay an
additional 10% interest. And after 90 days from the end of the grace period, petitioner can rescind the contract, the payments
made by respondent will be considered as rentals. Upon the execution of the contract, respondent religiously paid the monthly
installment until January 5, 1962. Respondent, however, was unable to the pay the monthly installments within the grace period
which petitioner, subsequently, sent a letter to respondent on May 22, 1964 that the contract has been rescinded and asked the
respondent to vacate the said land. So, upon failure of respondent to vacate the said land, petitioner filed an action to the Court
of First Instance of Rizal for the rescission of the contract. The CFI rendered a decision in favor of respondent in applying Article
1592 of the New Civil Code. Hence, petitioner made an appeal to the Supreme Court alleging that since Article 1592 of the New
Civil applies only to contracts of sale and not in contracts to sell.
ISSUE:
Did the CFI erroneously apply Article 1592 of the New Civil Code?
RULING:
Yes. Regardless, however, of the propriety of applying Article 1592, petitioner has not been denied substantial justice under
Article 1234 of the New Civil Code. In this connection, respondent religiously satisfied the monthly installments for almost eight
(8) years or up to January 5, 1962. It has been shown that respondent had already paid Php4,134.08 as of January 5, 1962
which is beyond the stipulated amount of Php3,691.20. Also, respondent has offered to pay all installments overdue including
the stipulated interest, attorney’s fees and the costs which the CFI accordingly sentenced respondent to pay such installment,
interest, fees and costs. Thus, petitioner will be able recover everything that was due
thereto. Under these circumstances, the SC feel that, in the interest of justice and equity, the decision appealed from may be
upheld upon the authority of Article 1234 of the New Civil Code.
PRESBITERO V. CA, 217 SCRA 372
FACTS:
Ricardo Presbitero, Sr. entered into a Conformity Contract with Leonardo Cañoso, to engage the services of the latter to negotiate
with the Land Bank of the Philippines and the Ministry of Agrarian Reform for the sale of his 270-hectare land under a voluntary
offer agreement. Presbitero bound himself to compensate Cañoso "for his efforts, services and other related expenses in making
the necessary follow up (sic) of the preparation, production of pertinent documents required," and "to effect the recovery of the
proceed (sic) of the land transfer payment from the Land Bank of the Philippines," in an amount equivalent to "Twenty Five per
cent (25%) of the gross total sales of my properties described above which is (sic) subject of Operation Land Transfer." However,
when a part of the proceeds was released, the private respondent was not given his share as agreed upon. Hence, the latter
filed a complaint against Presbitero before the RTC of Cotabato City which was docketed as Civil Case No. 68 and assigned to
Branch 15 of the said court. The trial court ruled in favor of Cañoso.
ISSUE:
Whether Presbitero is entitled to rescind the contract.
HELD:
No. (But since this is under Art. 1234, read further down the held!) [Even assuming that the private respondent breached the
agreement by not fully accomplishing his obligation within the stipulated period, said breach was not of a nature which would
justify a rescission of the contract. In the case of Bacolod-Murcia Milling Co., Inc. vs. Court of Appeals that rescission of a contract
will not be permitted for a slight or casual breach, but only for such substantial and fundamental breach as would defeat the very
object of the parties in making the agreement; the question of whether a breach of contract is substantial depends upon the
attending circumstances.
In the case at bar, no substantial breach was committed by the private respondent sufficient enough to warrant a rescission.
From all indications, private respondent was able to perform his obligation; this conclusion follows in the wake of the approval of
the claim.]
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
Under Article 1234 of the New Civil Code, if the obligation has been substantially performed in good faith, the obligor (private
respondent) may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee
(Presbitero). Moreover, when the obligee accepts the performance, as what happened in this case, knowing its incompleteness
or irregularity, and without expressing a protest or objection, the obligation is deemed fully complied with. Finally, to allow
Presbitero to rescind the contract would not only violate the well-settled rule on mutuality of contracts — which provides that the
validity or compliance of a contract cannot be left to the will of one of the contracting parties 41 — but would also work an injustice
to the rights of the private respondent who has already performed his obligation pursuant to their agreement. Presbitero's
correlative obligation must perforce be also fulfilled. There is no evidence to indicate that the private respondent was remise or
negligent in the performance of his obligation. Neither was there any evidence presented to show that it was through Presbitero's
own efforts that this claim with the LBP was approved.
TAYAG V. CA, 219 SCRA 480
Facts:
Siblings Juan Galicia Sr. and Celerina Labuguin entered into a contract to sell a parcel of land in Nueva Ecija to a certain Albrigido
Leyva:
 o 3K upon agreement
 o 10K ten days after the agreement
 o 10K representing vendor’s indebtedness to Phil Veterans
Bank
 o 27K payable within one year from execution of contract.
Leyva only paid parts of the obligation.
But even after the grace period for payment made in the contract and while litigation of such case, the petitioners still allowed
Leyva to make payments.
With regards to the obligation payable to the Phil Veterans bank by the vendee, as they deemed that it was not paid in full, such
obligation they completed by adding extra amount to fulfill such obligation. This was fatal in their case as this is Leyva’s argument
that they constructively fulfilled the obligation which is rightfully due to him. (Trivia: It was Celerina, Juan’s sister, that paid the
bank to complete such obligation).
Petitioners claim that they are only “OBLIGEES” with regards to the contract, so the principle of constructive fulfillment cannot
be invoked against them.
Petitioners, being both creditor and debtor to private respondent, in accepting piecemeal payment even after the grace period,
are barred to take action through estoppel.
Issue:
1. WON there was constructive fulfillment in the part of the petitioners that shall make rise the obligation to deliver to Leyva the
deed of sale? YES

2. WON they are still entitled to rescind the contract? NO, barred by estoppel.
Held:
1. In a contract of purchase, both parties are mutually obligors and also obligees, and any of the contracting parties may, upon
non-fulfillment by the other privy of his part of the prestation, rescind the contract or seek fulfillment (Article 1191, Civil Code).
In short, it is puerile for petitioners to say that they are the only obligees under the contract since they are also bound as obligors
to respect the stipulation in permitting private respondent to assume the loan with the Philippine Veterans Bank which petitioners
impeded when they paid the balance of said loan. As vendors, they are supposed to execute the final deed of sale upon full
payment of the balance as determined hereafter.
2. Petitioners accepted Leyva’s delayed payments not only beyond the grace periods but also during the pendency of the case
for specific performance. Indeed, the right to rescind is not absolute and will not be granted where there has been substantial
compliance by partial payments. By and large, petitioners’ actuation is susceptible of but one construction — that they are now
estopped from reneging from their commitment on account of acceptance of benefits arising from overdue accounts of private
respondent.
Article 1235
Art. 1235. 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. (n)
AZCONA V. JAMANDRE, 151 SCRA 317
Same; Same; Where landlord signs a receipt for P7,000.00 as rental payment “as per contract” he cannot ask for cancellation
of the lease on the ground that the lessee did not pay the full rent of P 7,200.00 fixed in the contract. The landlord should have
made an express reservation for the deficiency. Rent deemed reduced to P 7,000.00.—After a study of the receipt as signed by
the petitioner and witnessed for the respondent, this Court has come to the conclusion, and so holds, that the amount of
P7,000.00 paid to by the respondent and received by the petitioner represented payment in full of the rental for the agricultural
year 1961–62. The language is clear enough: “The amount of SEVEN THOUSAND PESOS (P7,000.00), Philippine Currency,
as payment for the rental corresponding to crop year 1961–62 . . . to the rental due on or before January 30, 1961, as per
contract.” The conclusion should be equally clear. The words “as per contract” are especially significant as they suggest that the
parties were aware of the provisions of the agreement, which was described in detail elsewhere in the receipt. The rental
stipulated therein was P7,200.00. The payment being acknowledged in the receipt was P7,000.00 only. Yet no mention was
made in the receipt of the discrepancy and, on the contrary, the payment was acknowledged “as per contract.” We read this as
meaning that the provisions of the contract were being maintained and respected except only for the reduction of the agreed
rental.
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Same; Same; Same.—It seems to us that this meaning was adequately conveyed in the acknowledgment made by the petitioner
that this was “payment for the rental corresponding to crop year 1961–62“and “corresponds to the rentals due on or before
January 30, 1961, as per contract.” On the other hand, if this was not the intention, the petitioner does not explain why he did
not specify in the receipt that there was still a balance of P200.00 and, to be complete, the date when it was to be paid by the
respondent.
PAGSIBIGAN V. CA, 221 SCRA 202
Contracts; Loan agreement with real estate mortgage; Acceleration clause; Effect of acceptance of delayed payments.—There
is no question that the respondent bank has the right to foreclose the mortgage upon the first default of petitioner on May 3,
1977, but the records show that it did not. When it received payment of petitioner on July 6, 1977, which had been 2 months and
3 days delayed, it applied P154.80 to the principal, P210.00 to interest, and only P25.20 to penalty. From this act of receiving
delayed payment, it is clear that the respondent bank had waived its right under the acceleration clause so that instead of
claiming penalty charges on the entire amount of P4,500.00, it only computed the penalty based on the defaulted amortization
payment which is P1,018.14. If it computed the penalty charge at 19% of the entire amount of P4,500.00 which would have been
due and demandable by virtue of the acceleration clause, the penalty charges would be much more than P25.20.
Same; Same; Application of payments; Waiver.—We also noticed that in Exhibit “D-3”, the receipt which the respondent bank
issued to petitioner for the August 26, 1978 partial payment, it waived its right under Article 1253 of the Civil Code on Application
of Payments when it applied the payment to the principal instead of the interest. Thus, on that date the outstanding obligation of
petitioner was already reduced to P3,558.21 after she had paid a total of P2,200.00 over a period of nine months from the time
the loan was obtained.
Same; Same; Substantial performance under Art. 1234 of the New Civil Code.—We hold that the payment amounting to
P8,650.00 for the balance of P3,558.20 as of August 26, 1978 plus the P1,000.00 it was asked to pay on April 24, 1984 would
at the very least constitute substantial performance. Article 1234 of the Civil Code, provides: “Article 1234. If the obligation has
been substantially performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment,
less damages suffered by the obligee.” Petitioner in this case has the right to move for the cancellation of the mortgage and the
release of the mortgaged property, upon payment of the balance of the loan. Definitely, it would not be in the amount demanded
by the respondent bank, which the trial court held to be P29,554.81.
Article 1240
Art. 1240. 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. (1162a)
ARANAS V. TUTAAN, 127 SCRA 828
Facts:
The stocks of Universal Textile Mills (UTEX) were issued to co-defendants Manuel and Castaneda. Subsequently, in 1971, the
lower court declared that Luisa Aranas is the rightful owner of the 400 shares of stocks at Universal Textile Mills (UTEX. Further,
it ordered that dividends in cash or stocks pertaining to the same be delivered to Aranas. UTEX then filed a motion to clarify the
phrase in said decision which states “to deliver to her all dividends appertaining to the same, whether in cash or in stocks” meant
dividends properly pertaining to the plaintiffs after the court’s declaration of her ownership. The said motion was granted, where
the court ordered UTEX to pay the plaintiff the cash dividends which accrued to the stocks in question after the current decision
was rendered but the cash dividends already paid to the co-defendants before the court decision may not be claimed by the
plaintiffs.
The co-defendants filed for a new trial and the decision was the same as the the 1971 ruling. Upon appeal to the CA, the said
ruling was affirmed. The lower court issued a writ of execution in 1979 directed to UTEX to 1) cancel the certificate of stocks of
the co-defendants and issue new ones in the name of the petitioners, and 2) Pay the cash dividends accrued from 1972 to 1979
(period from the new trial to the issuance of writ of execution). UTEX alleged that the cash dividends had already been paid.
ISSUE:
Whether or not there was valid payment
RULING:
No. It is elementary that payment made by a judgment debtor to a wrong party cannot extinguish the obligation of such debtor
to its creditor. It was clear in the motion for clarification that all dividends accruing to the said shares after the rendition of
judgement belonged to the Aranas. When UTEX paid the wrong parties, despite its knowledge and understanding of the final
judgment, it is still liable to pay Aranas as the lawful declared owners of the said shares. The burden to recover the wrong
payment is on UTEX and cannot be passed on to the Aranas as the innocent parties.
PAL V. CA, 181 SCRA 557
Facts:
Amelia Tan under the company Able Printing Press filed a complaint for damages versus PAL. The trial court rendered judgment
in favor of Tan and ordered PAL to pay damages. PAL appealed the judgment which the CA granted by reducing the amount of
damages.
Judgment became final and executory and was correspondingly entered in the case, which was remanded to the trial court for
execution. The trial court upon the motion of Amelia Tan issued an order of execution with the corresponding writ in favor of the
respondent. Said writ was duly referred to Deputy Sheriff Reyes for enforcement.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
Four months later, Amelia Tan moved for the issuance of an alias writ of execution, stating that the judgment rendered by the
lower court, and affirmed with modification by the CA, remained unsatisfied. PAL opposed the motion, stating that it had already
fully paid its obligation to plaintiff through the issuance of checks payable to the deputy sheriff who later did not appear with his
return and instead absconded.
The CA denied the issuance of the alias writ for being premature. After two months the CA granted her an alias writ of execution
for the full satisfaction of the judgment rendered, when she filed another motion. Deputy Sheriff del Rosario is appointed special
sheriff for enforcement thereof.
PAL filed an urgent motion to quash the alias writ of execution stating that no return of the writ had as yet been made by Deputy
Sheriff Reyes and that judgment debt had already been fully satisfied by the former as evidenced by the cash vouchers signed
and received by the executing sheriff.
Deputy Sheriff del Rosario served a notice of garnishment on the depository bank of PAL, through its manager and garnished
the latter’s deposit. Hence, PAL brought the case to the Supreme Court and filed a petition for certiorari.
Issue:
WON the payment of judgment to the implementing officer as directed in the writ of execution constitutes satisfaction of
judgment? Or did the payment made to the absconding sheriff by check in his name operate to satisfy the judgment debt? NO.
Ratio:
In general, a payment, in order to be effective to discharge an obligation, must be made to the proper person. Article 1240 of the
Civil Code provides:
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. (Emphasis supplied)
Thus, payment must be made to the obligee himself or to an agent having authority, express or implied, to receive the particular
payment. Payment made to one having apparent authority to receive the money will, as a rule, be treated as though actual
authority had been given for its receipt. Likewise, if payment is made to one who by law is authorized to act for the creditor, it
will work a discharge. The receipt of money due on a judgment by an officer authorized by law to accept it will, therefore, satisfy
the debt.
The theory is where payment is made to a person authorized and recognized by the creditor, the payment to such a person so
authorized is deemed payment to the creditor. Under ordinary circumstances, payment by the judgment debtor in the case at
bar, to the sheriff should be valid payment to extinguish the judgment debt.
There are circumstances in this case, however, which compel a different conclusion.
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 Able Printing Press but to the absconding sheriff.
Did such payments extinguish the judgment debt?
Article 1249 of the Civil Code provides:
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.
In the absence of an agreement, either express or implied, payment means the discharge of a debt or obligation in money and
unless the parties so agree, a debtor has no rights, except at his own peril, to substitute something in lieu of cash as medium of
payment of his debt. Consequently, unless authorized to do so by law or by consent of the obligee a public officer has no authority
to accept anything other than money in payment of an obligation under a judgment being executed. Strictly speaking, the
acceptance by the sheriff of the petitioner's checks, in the case at bar, does not, per se, operate as a discharge of the judgment
debt.
Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does not, by
itself, operate as payment. A check, whether a manager's check or ordinary cheek, 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. Mere delivery of
checks does not discharge the obligation under a judgment. The obligation is not extinguished and remains suspended until the
payment by commercial document is actually realized (Art. 1249, Civil Code, par. 3).
If bouncing checks had been issued in the name of Amelia Tan and not the Sheriff's, there would have been no payment. After
dishonor of the checks, Ms. Tan could have run after other properties of PAL. The theory is that she has received no value for
what had been awarded her. Because the checks were drawn in the name of Emilio Z. Reyes, neither has she received anything.
The same rule should apply.
It is argued that if PAL had paid in cash to Sheriff Reyes, there would have been payment in full legal contemplation. The
reasoning is logical but is it valid and proper? Logic has its limits in decision making. We should not follow rulings to their logical
extremes if in doing so we arrive at unjust or absurd results.
In the first place, PAL did not pay in cash. It paid in cheeks.
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 CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE
And second, payment in cash always carries with it certain cautions. Nobody hands over big amounts of cash in a careless and
inane manner. Mature thought is given to the possibility of the cash being lost, of the bearer being waylaid or running off with
what he is carrying for another. Payment in checks is precisely intended to avoid the possibility of the money going to the wrong
party. The situation is entirely different where a Sheriff seizes a car, a tractor, or a piece of land. Logic often has to give way to
experience and to reality. Having paid with checks, PAL should have done so properly.
Payment in money or cash to the implementing officer may be deemed absolute payment of the judgment debt but the Court
has never, in the least bit, suggested that judgment debtors should settle their obligations by turning over huge amounts of cash
or legal tender to sheriffs and other executing officers. Payment in cash would result in damage or interminable litigations each
time a sheriff with huge amounts of cash in his hands decides to abscond.
As a protective measure, therefore, the courts encourage the practice of payments by cheek 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. Actual transfer of funds
takes place within the safety of bank premises. These practices are perfectly legal. The object is always the safe and incorrupt
execution of the judgment.
It is, indeed, out of the ordinary that checks intended for a particular payee are made out in the name of another. Making the
checks payable to the judgment creditor would have prevented the encashment or the taking of undue advantage by the sheriff,
or any person into whose hands the checks may have fallen, whether wrongfully or in behalf of the creditor. The issuance of the
checks in the name of the sheriff clearly made possible the misappropriation of the funds that were withdrawn.
As explained and held by the respondent court:
... [K]nowing as it does that the intended payment was for the private party respondent Amelia Tan,
the petitioner corporation, utilizing the services of its personnel who are or should be knowledgeable
about the accepted procedures and resulting consequences of the checks drawn, nevertheless, in
this instance, without prudence, departed from what is generally observed and done, and placed as
payee in the checks the name of the errant Sheriff and not the name of the rightful payee. Petitioner
thereby created a situation which permitted the said Sheriff to personally encash said checks and
misappropriate the proceeds thereof to his exclusive personal benefit. For the prejudice that resulted,
the petitioner himself must bear the fault. The judicial guideline which we take note of states as
follows:
As between two innocent persons, one of whom must suffer the consequence of a breach of trust,
the one who made it possible by his act of confidence must bear the loss.
Having failed to employ the proper safeguards to protect itself, the judgment debtor whose act made possible the loss had but
itself to blame.
Article 1244
Art. 1244. The debtor of a thing cannot compel the creditor to receive a different one, although the latter
may be of the same value as, or more valuable than that which is due.
In obligations to do or not to do, an act or forbearance cannot be substituted by another act or forbearance
against the obligee's will. (1166a)
CATHAY PACIFIC V. VAZQUEZ, 399 SCRA 207 [2003]
DOCTRINE:
Same; Same; Same; Upgrading; Airline passengers have every right to decline an upgrade and insist on the accommodation
they had booked, and if an airline insists on the upgrade, it breaches its contract of carriage with the passengers.—We note that
in all their pleadings, the Vazquezes never denied that they were members of Cathay’s Marco Polo Club. They knew that as
members of the Club, they had priority for upgrading of their seat accommodation at no extra cost when an opportunity arises.
But, just like other privileges, such priority could be waived. The Vazquezes should have been consulted first whether they
wanted to avail themselves of the privilege or would consent to a change of seat accommodation before their seat assignments
were given to other passengers. Normally, one would appreciate and accept an upgrading, for it would mean a better
accommodation. But, whatever their reason was and however odd it might be, the Vazquezes had every right to decline the
upgrade and insist on the Business Class accommodation they had booked for and which was designated in their boarding
passes. They clearly waived their priority or preference when they asked that other passengers be given the upgrade. It should
not have been imposed on them over their vehement objection. By insisting on the upgrade, Cathay breached its contract of
carriage with the Vazquezes.
FACTS:
In respondents’ return flight to Manila from Hongkong, they were deprived of their original seats in Business Class with thei r
companions because of overbooking. Since respondents were privileged members, their seats were upgraded to First Class.
Respondents refused but eventually persuaded to accept it. Upon return to Manila, they demanded that they be indemnified in
the amount of P1million for the “humiliation and embarrassment” caused by its employees. Petitioner’s Country Manager failed
to respond. Respondents instituted action for damages. The RTC ruled in favor of respondents. The Court of Appeals affirmed
the RTC decision with modification in the award of damages.
ISSUE:
Whether or not the petitioners (1) breached the contract of carriage, (2) acted with fraud and (3) were liable for damages.
RULING:
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
(1) YES. Although respondents have the priority of upgrading their seats, such priority may be waived, as what respondents did.
It should have not been imposed on them over their vehement objection.
(2) NO. There was no evident bad faith or fraud in upgrade of seat neither on overbooking of flight as it is within 10% tolerance.
(3) YES. Nominal damages (Art. 2221, NCC) were awarded in the amount of P5,000.00. Moral damages (Art.2220, NCC) and
attorney’s fees were set aside and deleted from the Court of Appeals’ ruling.
Article 1245
Art. 1245. Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in
money, shall be governed by the law of sales. (n)
FILINVEST V. PHIL. ACETYLENE, 111 SCRA 421
FACTS:
Phil. Acetylene (Defendant) purchased a vehicle through a Deed of Sale from Alexander Lim payable on installment. The balance
is to be paid under a promissory note with the said vehicle as the subject of a chattel mortgage to secure the obligation.
Subsequently, Lim assigned his rights to the vehicle to appellee corporation (Filinvest). Phil. Acetylene defaulted after it failed to
pay nine (9) successive installments. The petitioner through a demand letter informed the defendant to make the full payment
plus interests and charges or return the mortgaged property. As a result, the defendant returned the vehicle together with the
document "Voluntary Surrender with Special Power of Attorney To Sell" by appellant on March 12, 1973 and confirmed to by
Filinvest’s vice-president.
Filinvest then informed appellant thru a letter that it cannot sell the vehicle due to its unpaid taxes in the amount of P70,122. On
the last portion of the said letter, appellee requested the appellant to update its account by paying the instalments in arrears and
accruing interest in the amount of P4,232.21 on or before April 9, 1973. On May 8, 1973, appellee, in a letter, offered to deliver
back the motor vehicle to the appellant but the latter refused to accept it, so the appellee instituted an action for collection of a
sum of money with damages in the CFI of Manila.
Phil. Acetylene argued that appellee has no cause of action against it since its obligation towards the appellee was extinguished
when it returned the mortgaged property, and that assuming that the return of the property did not extinguish its obligation, it
was nonetheless justified in refusing payment since the appellee is not entitled to recover the same due to the breach of warranty
committed by the original vendor-assignor Alexander Lim.
ISSUE:
Whether or not the return of the mortgaged motor vehicle to the appellee by virtue of a voluntary surrender by the appellant
totally extinguished and/or cancelled the obligation
RULING:
No. No dacion en pago here since there’s nothing in the evidence to show that Filinvest consented or intended that the mere
delivery to and acceptance by him of the vehicle be construed as actual payment or more specifically, dacion en pago. The mere
return of the mortgaged motor vehicle by the mortgagor (herein appellant) to the mortgagee, (appellee), does not constitute
dation in payment or dacion en pago in the absence, express or implied of the true intention of the parties. Dacion en pago,
(according to Manresa) is the transmission of the ownership of a thing by the debtor to the creditor as an accepted equivalent of
the performance of obligation. 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. The undertaking really partakes in one sense of the nature of
sale, that is, the creditor is really buying the thing or property of the debtor, payment for which is to be charged against the
debtor's debt. As such, the essential elements of a contract of sale, namely, consent, object certain, and cause or consideration
must be present. In its modern concept, what actually takes place in dacion en pago is an objective novation of the obligation
where the thing offered as an accepted equivalent of the performance of an obligation is considered as the object of the contract
of sale, while the debt is considered as the purchase price. In any case, common consent is an essential prerequisite, be it sale
or innovation to have the effect of totally extinguishing the debt or obligation.
The evidence fails to show that Filinvest consented, or at least intended, that the mere delivery to, and acceptance by him, of
the mortgaged motor vehicle be construed as actual payment, more specifically dation in payment or dacion en pago. The fact
that the mortgaged motor vehicle was delivered to him does not necessarily mean that ownership thereof, as juridically
contemplated by dacion en pago, was transferred from appellant to appellee. In the absence of clear consent of appellee to the
proferred special mode of payment, there can be no transfer of ownership of the mortgaged motor vehicle from appellant to
appellee. If at all, only transfer of possession of the mortgaged motor vehicle took place, for it is quite possible that appellee, as
mortgagee, merely wanted to secure possession to forestall the loss, destruction, fraudulent transfer of the vehicle to third
persons, or its being rendered valueless if left in the hands of the appellant.
Finally the Voluntary Surrender with SPA to Sell executed reveals that the possession of the mortgaged motor vehicle was
voluntarily surrendered by the appellant to the appellee authorizing the latter to look for a buyer and sell the vehicle in behalf of
the former who retains ownership thereof, and to apply the proceeds of the sale to the mortgage indebtedness, with the
undertaking of the appellant to pay the difference, if any, between the selling price and the mortgage obligation. With the
stipulated conditions as stated, the appellee, in essence was constituted as a mere agent to sell the motor vehicle which was
delivered to the appellee, not as its property. There is no estoppel on part of Filinvest to demand payment from the unpaid
obligation since it never accepted the mortgaged motor vehicle in cull satisfaction of the mortgaged debt.
CITIZENS SURETY V. CA, 162 SCRA 738
There is no dation in payment when there is no obligation to be extinguished.—The transaction could not be dation in payment.
As pointed out in the concurring and dissenting opinion of Justice Edgardo L. Paras and the dissenting opinion of Justice Mariano
Serrano when the deed of assignment was executed on December 4, 1959, the obligation of the assignor to refund the assignee
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 CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE
had not yet arisen. In other words, there was no obligation yet on the part of the petitioner, Citizens’ Surety and Insurance Co.,
to pay Singer Sewing Machine Co. There was nothing to be extinguished on that date, hence, there could not have been a dation
in payment.
In order to judge the intention of the parties, their contemporaneous and subsequent acts shall be principally considered.—It is
the general rule that when the words of a contract are plain and readily understandable, there is no room for construction thereof
(San Mauricio Milling Co. v. Ancheta, 105 SCRA 371). However, this is only a general rule and it admits exceptions. On its face,
the document speaks of an assignment where there seems to be a complete conveyance of the stocks of lumber to the petitioner,
as assigned. However, in the light of the circumstances obtaining at the time of the execution of said deed of assignment, we
can not regard the transaction as an absolute conveyance. As held in the case of Sy v. Court of Appeals, (131 SCRA 116, 124).
LO V. KJS, 413 SCRA 182
FACTS:
Respondent KJS Eco-Framework System is a corporation engaged in the sale of steel scaffoldings, while petitioner Sonny Lo,
doing business under the name of San’s Enterprises, is a building contractor.
1. In February 1990, petitioner ordered scaffolding equipments from the respondent amounting to P540, 425.80. He paid a
down payment of P150,000 and the balance was to be paid in 10 monthly installments
2. However, Lo was only able to pay the first 2 monthly installments due to financial difficulties despite demands from the
respondent
3. In October 1990, petitioner and respondent executed a deed of assignment whereby petitioner assigned to respondent his
receivables of P335,462.14 from Jomero Realty Corp
4. But when respondent tried to collect the said credit from Jomero Realty Corp, the latter refused to honor the deed of
assignment because it claimed that the petitioner was also indebted to it. As such, KJS sent Lo a demand letter but the latter
refused to pay, claiming that his obligation had been extinguished when they executed the deed of assignment
5. Subsequently, respondent filed an action for recovery of sum of money against petitioner.
6. Petitioner argued that his obligation was extinguished with the execution of the deed of assignment of credit. Respondent
alleged that Jomero Realty Corp refused to honor the deed of assignment because it claimed that the petitioner had outstanding
indebtedness to it
7. The trial court dismissed the complaint on the ground that the assignment of credit extinguished the bligation
8. Upon appeal, CA reversed the trial court decision and held in favor of KJS. CA held that
a. Petitioner failed to comply with his warranty under the deed
b. The object of the deed did not exist at the time of the transaction, rendering it void under Art 1409 NCC
c. Petitioner violated the terms of the deed of assignment when he failed to execute and do all acts necessary to effectually
enable the respondent to recover the collectibles
ISSUE:
WON the deed of assignment extinguished the petitioner’s obligation
HELD:
No, the petitioner’s obligation was not extinguished with the execution of the deed of assignment.
An assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal cause, such
as sale, dacion en pago, exchange or donation, and without the consent of the debtor, transfers his credit and accessory rights
to another, known as the assignee, who acquires the power to enforce it to the same extent as the assignor could enforce it
against the debtor.
In dacion en pago, as a special mode of payment, the debtor offers another thing to the creditor who accepts it as equivalent of
payment of an outstanding debt. In order that there be a valid dation in payment, the following are the requisites: (1) There must
be the performance of the prestation in lieu of payment (animo solvendi) which may consist in the delivery of a corporeal thing
or a real right or a credit against the third person; (2) There must be some difference between the prestation due and that which
is given in substitution (aliud pro alio); (3) There must be an agreement between the creditor and debtor that the obligation is
immediately extinguished by reason of the performance of a prestation different from that due. The undertaking really partakes
in one sense of the nature of sale, that is, the creditor is really buying the thing or property of the debtor, payment for which is to
be charged against the debtor’s debt. As such, the vendor in good faith shall be responsible, for the existence and legality of
the credit at the time of the sale but not for the solvency of the debtor, in specified circumstances.
Hence, it may well be that the assignment of credit, which is in the nature of a sale of personal property, produced the
effects of a dation in payment which may extinguish the obligation. However, as in any other contract of sale, the vendor
or assignor is bound by certain warranties. More specifically, the first paragraph of Article 1628 of the Civil Code provides:
The vendor in good faith shall be responsible for the existence and legality of the credit at the time of the sale,
unless it should have been sold as doubtful; but not for the solvency of the debtor, unless it has been so expressly
stipulated or unless the insolvency was prior to the sale and of common knowledge.
From the above provision, petitioner, as vendor or assignor, is bound to warrant the existence and legality of the credit at the
time of the sale or assignment. When Jomero claimed that it was no longer indebted to petitioner since the latter also had an
unpaid obligation to it, it essentially meant that its obligation to petitioner has been extinguished by compensation. In other words,
respondent alleged the non-existence of the credit and asserted its claim to petitioner’s warranty under the
assignment. Therefore, it necessary for the petitioner to make good its warranty and pay the obligation.
Furthermore, the petitioner breached his obligation under the Deed of Assignment, to execute and do all such further acts and
deeds as shall be reasonably necessary to effectually enable said ASSIGNEE to recover whatever collectibles said ASSIGNOR
has in accordance with the true intent and meaning of these presents.
Indeed, by warranting the existence of the credit, petitioner should be deemed to have ensured the performance thereof in case
the same is later found to be inexistent. He should be held liable to pay to respondent the amount of his indebtedness.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
Article 1248
Art. 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled partially
to receive the prestations in which the obligation consists. Neither may the debtor be required to make
partial payments.
However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the
debtor may effect the payment of the former without waiting for the liquidation of the latter. (1169a)
NASSER V. CUEVAS, 188 SCRA 812
Facts:
A probate settlement was instituted for the estate of Amadeo Molave. A document embodying a supplemental compromise
agreement and project of partition was executed among the heirs and other interested parties. It was approved by the Probate
Court some eight months later . 3 It rendered moot related cases then pending in this Court 4 Which on that account were
consequently dismissed.
The agreement provided inter alia for the payment of the attorney's fees of respondent Atty. Paterno Canlas in the aggregate
amount of P600,000.00, in property (Hacienda Cadiatan, valued at P128,000.00) and cash (P412,000.00). Relative to said fees,
the agreement also contained a provision creating a charging lien in Canlas' favor. The provision stated that until there has been
full payment, all the properties of the estate are charged with a lien for attorney’s fees. The agreement was approved by the
court.
Canlas then moved for the execution of the agreement which was opposed by the heirs (Nassers and Matutes) on the ground
that execution was improper in the absence of a written agreement on the precise terms of payment of Canlas attorney's fees.
Issue:
WON the stipulation provided for payment in instalments? NO
Ratio:
The proviso that "upon full payment of the corresponding liability of a party the lien on his/ her share is extinguished," evidently
contemplates the probability that the heirs obliged to pay Canlas' fees would pay at different times, and denotes nothing more
than that if one of the obligors separately pays his share in Canlas' fees, the lien on his share of the estate is thereby extinguished
a quite obvious proposition, to be sure. The clause cannot be construed as granting to any of the obligors, by implication, the
option to pay in installments, or as impliedly binding the obligee to accept payment by parts.
The legal principle, in any event, is that "the creditor cannot be compelled partially to receive the presentations in which the
obligation consists" unless "there is an express stipulation to that effect," in much the same way that the debtor may not "be
required to make partial payments.
Article 1249
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 the abeyance. (1170)
DBP V. SIMA WEI, 219 SCRA 736
Facts:
Sima Wei acquired a loan from Development Bank of Rizal. He executed and delivered to the former a promissory note, engaging
to pay the petitioner Bank or order the amount of P1,820,000.00 on or before June 24, 1983 with interest at 32% per annum.
Sima Wei made partial payments on the note, leaving a balance of P1,032,450.02. On November 18, 1983, Sima Wei issued
two crossed checks payable to petitioner Bank drawn against China Banking Corporation, bearing respectively the serial
numbers 384934, for the amount of P550,000.00 and 384935, for the amount of P500K. The said checks were allegedly issued
in full settlement of the drawer’s account evidenced by the promissory note.
These two checks were not delivered to the Development Bank. For reasons not shown, these checks came into the possession
of respondent Lee Kian Huat, who deposited the checks without the Development’s indorsement (forged or otherwise) to the
account of respondent Plastic Corporation, at the Balintawak branch, Caloocan City, of the Producers Bank. The Branch
Manager of the Balintawak branch of Producers Bank, relying on the assurance of respondent Samson Tung, President of Plastic
Corporation, that the transaction was legal and regular, instructed the cashier of Producers Bank to accept the checks for deposit
and to credit them to the account of said Plastic Corporation, inspite of the fact that the checks were crossed and payable to
petitioner Bank and bore no indorsement of the latter. Hence, Development filed the complaint for sum of money against Wei
and/or Kian Huat, Uy, Tung, Plastic Corporation and the Producers Bank.
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Bank alleged that its cause of action was not based on collecting the sum of money evidenced by the negotiable instruments
stated but on quasi-delict — a claim for damages on the ground of fraudulent acts and evident bad faith of the alternative
respondents.
Issue:
WON Development Bank has a cause of action against the respondents?
Held:
No. Unless respondent Sima Wei proves that she has been relieved from liability on the promissory note by some other cause,
petitioner Bank has a right of action against her for the balance due thereon.
The normal parties to a check are the drawer, the payee and the drawee bank. Courts have long recognized the business custom
of using printed checks where blanks are provided for the date of issuance, the name of the payee, the amount payable and the
drawer’s signature. All the drawer has to do when he wishes to issue a check is to properly fill up the blanks and sign it. However,
the mere fact that he has done these does not give rise to any liability on his part, until and unless the check is delivered to the
payee or his representative.
A negotiable instrument, of which a check is, is not only a written evidence of a contract right but is also a species of property.
Just as a deed to a piece of land must be delivered in order to convey title to the grantee, so must a negotiable instrument be
delivered to the payee in order to evidence its existence as a binding contract.
Thus, the payee of a negotiable instrument acquires no interest with respect thereto until its delivery to him. Delivery of an
instrument means transfer of possession, actual or constructive, from one person to another. Without the initial delivery of the
instrument from the drawer to the payee, there can be no liability on the instrument. Moreover, such delivery must be intended
to give effect to the instrument. Without the delivery of said checks to petitioner-payee, the former did not acquire any right or
interest therein and cannot therefore assert any cause of action, founded on said checks, whether against the drawer Sima Wei
or against the Producers Bank or any of the other respondents.
However, insofar as the other respondents are concerned, petitioner Bank has no privity with them. Since petitioner Bank never
received the checks on which it based its action against said respondents, it never owned them (the checks) nor did it acquire
any interest therein
Velasco vs. Manila Electric Co., 42 SCRA 556 , No. L-18390, December 20, 1971
TIBAJIA V. CA, 223 SCRA 163
Facts:
A suit for collection of sum of money was ruled in favor of Eden Tan and against the spouses Norberto Jr. and Carmen Tibajia.
After the decision was made final, Tan filed a motion for execution and levied upon the garnished funds which were deposited
by the spouses with the cashier of the Regional Trial Court of Pasig. The spouses, however, delivered to the deputy sheriff the
total money judgment in the form of Cashier’s Check (P262,750) and Cash (P135,733.70). Tan refused the payment and insisted
upon the garnished funds to satisfy the judgment obligation. The spouses filed a motion to lift the writ of execution on the ground
that the judgment debt had already been paid. The motion was denied.
Issue:
WON payment by means of check is considered payment in legal tender as
required by Civil Code
Held:
No, it is not considered legal tender. 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.
b. Section 1 of Republic Act No. 529, as amended
c. Section 63 of Republic Act No. 265, as amended (Central Bank Act)
From the aforequoted provisions of law, it is clear that this petition must fail.
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.
The ruling in these two (2) cases merely applies the statutory provisions which lay down the rule that a
check is not legal tender and that a creditor may validly refuse payment by check, whether it be a
manager's, cashier's or personal check.
Petitioners erroneously rely on one of the dissenting opinions in the Philippine Airlines case to support their cause. The dissenting
opinion however does not in any way support the contention that a check is legal tender but, on the contrary, states that "If the
PAL checks in question had not been encashed by Sheriff Reyes, there would be no payment by PAL and, consequently, no
discharge or satisfaction of its judgment obligation." Moreover, the circumstances in the Philippine Airlines case are quite different
from those in the case at bar for in that case the checks issued by the judgment debtor were made payable to the sheriff, Emilio
Z. Reyes, who encashed the checks but failed to deliver the proceeds of said encashment to the judgment creditor.
In the more recent case of Fortunado vs. Court of Appeals, 8 this Court stressed that, "We are not, by this decision, sanctioning
the use of a check for the payment of obligations over the objection of the creditor."
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
CITIBANK V. SABENIANO, 504 SCRA 378 [2006]
FACTS:
Petitioner Citibank is a banking corporation duly authorized under the laws of the USA to do commercial banking activities n the
Philippines. Sabeniano was a client of both Petitioners Citibank and FNCB Finance. Respondent filed a complaint against
petitioners claiming to have substantial deposits, the proceeds of which were supposedly deposited automatically and directly
to respondent’s account with the petitioner Citibank and that allegedly petitioner refused to despite repeated demands. Petitioner
alleged that respondent obtained several loans from the former and in default, Citibank exercised its right to set-off respondent’s
outstanding loans with her deposits and money. RTC declared the act illegal, null and void and ordered the petitioner to refund
the amount plus interest, ordering Sabeniano, on the other hand to pay Citibank her indebtedness. CA affirmed the decision
entirely in favor of the respondent.
ISSUE:
Whether petitioner may exercise its right to set-off respondent’s loans with her deposits and money in Citibank-Geneva
RULING:
Petition is partly granted with modification.
1. Citibank is ordered to return to respondent the principal amount of P318,897.34 and P203,150.00 plus 14.5% per annum
2. The remittance of US $149,632.99 from respondent’s Citibank-Geneva account is declared illegal, null and void, thus Citibank
is ordered to refund said amount in Philippine currency or its equivalent using exchange rate at the time of payment.
3. Citibank to pay respondent moral damages of P300,000, exemplary damages for P250,000, attorney’s fees of P200,000.
4. Respondent to pay petitioner the balance of her outstanding loans of P1,069,847.40 inclusive off interest.
BPI V. ROXAS, 536 SCRA 169 [2007]
Facts:
Gregorio C. Roxas, respondent, is a trader. Sometime in March 1993, he delivered stocks of vegetable oil to spouses Rodrigo
and Marissa Cawili. As payment therefor, spouses Cawili issued a personal check in the amount of P348,805.50. However,
when respondent tried to encash the check, it was dishonored by the drawee bank. Spouses Cawili then assured him that they
would replace the bounced check with a cashier’s check from BPI. On March 31, 1993, respondent and Rodrigo Cawili went to
petitioner’s branch at Shaw Boulevard where Elma Capistrano, the branch manager, personally attended to them. Upon Elma’s
instructions, Lita Sagun, the bank teller, prepared BPI Cashier’s Check No. 14428 in the amount of P348,805.50, drawn against
the account of Marissa Cawili, payable to respondent. Rodrigo then handed the check to respondent in the presence of Elma.
The following day, April 1, 1993, respondent returned to petitioner’s branch at Shaw Boulevard to encash the cashier’s check
but it was dishonored. Elma informed him that Marissa’s account was closed on that date. Despite the insistence of the
respondent, BPI refused to encash the check.
A complaint for sum of money was then filed against BPI. The lower courts eventually decided in favor of respondent and ordered
BPI to pay the value of the check and damages.
Issue:
WON Roxas (respondent) is a holder in due course? YES
Ratio:
As a general rule, under the above provision, every holder is presumed prima facie to be a holder in due course. One who claims
otherwise has the onus probandi to prove that one or more of the conditions required to constitute a holder in due course are
lacking. In this case, petitioner contends that the element of "value" is not present, therefore, respondent could not be a holder
in due course.
Furthermore, it bears emphasis that the disputed check is a cashier’s check. In International Corporate Bank v. Spouses
Gueco, this Court held that a cashier’s check is really the bank’s own check and may be treated as a promissory note with the
bank as the maker. The check becomes the primary obligation of the bank which issues it and constitutes a written
promise to pay upon demand. In New Pacific Timber & Supply Co. Inc. v. Señeris, this Court took judicial notice of the "well-
known and accepted practice in the business sector that a cashier’s check is deemed as cash." This is because the mere
issuance of a cashier’s check is considered acceptance thereof.
In view of the above pronouncements, petitioner bank became liable to respondent from the moment it issued the cashier’s
check. Having been accepted by respondent, subject to no condition whatsoever, petitioner should have paid the same upon
presentment by the former
Article 1250
Art. 1250. In case an extraordinary inflation or deflation of the currency stipulated should supervene, the
value of the currency at the time of the establishment of the obligation shall be the basis of payment,
unless there is an agreement to the contrary. (n)
VELASCO V. MERALCO, 42 SCRA 556
FACTS:
This is a Motion for Reconsideration sought by both parties emanating from a decision of the Supreme Court regarding an
abatement complaint filed by Velasco against MERALCO. In the main case, Velasco bought three lots, two of which he sold to
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MERALCO for the latter’s construction of a substation. A sound was emanating from said substation which Velasco made as a
basis for abatement.
In this MR, Velasco alleges that that the damages awarded him are inadequate considering the present high cost of living, and
calls attention to Article 1250 of the present Civil Code.
Issue:
WON Article 1250 is applicable.
Held:
No. It can be seen from the employment of the words "extraordinary inflation or deflation of the currency stipulated" that the legal
rule envisages contractual obligations where a specific currency is selected by the parties as the medium of payment; hence it
is inapplicable to obligations arising from tort and not from contract, as in the case at bar, besides there being no showing that
the factual assumption of the article has come into existence. As to the Pantoja ruling, the regard paid to the decreasing purchase
of the peso was considered a factor in estimating the indemnity due for loss of life, which in itself is not susceptible of accurate
estimation. It should not be forgotten that the damages awarded to herein appellant were by no means full compensatory
damages, since the decision makes clear that appellant, by his failure to minimize his damages by means easily within his reach,
was declared entitled only to a reduced award for the nuisance sued upon; and the amount granted him had already taken into
account the changed economic circumstances.
COMMISSIONER V. BURGOS, 96 SCRA 831
DOCTRINES
Obligations and Contracts; Constitutional Law; Expropriation; Article 1250 of the New Civil Code applies only to payments
stipulated in contracts, not to taking, by way of expropriation, of property by the Government.—It is clear that the foregoing
provision applies only to cases where a contract or agreement is involved. It does not apply where the obligation to pay arises
from law, independent of contracts. The taking of private property by the Government in the exercise of its power of eminent
domain does not give rise to a contractual obligation. We have expressed this view in the case of Velasco vs. Manila Electric
Co., et al., L-19390, December 29, 1971.
Same; Same; Same.—Moreover, the law as quoted, clearly provides that the value of the currency at the time of the
establishment of the obligation shall be the basis of payment which, in cases of expropriation, would be the value of the peso at
the time of the taking of the property when the obligation of the Government to pay arises. It is only when there is an “agreement
to the contrary” that the extraordinary inflation will make the value of the currency at the time of payment, not at the time of the
establishment of the obligation, the basis for payment. In other words, an agreement is needed for the effects of an extraordinary
inflation to be taken into account to alter the value of the currency at the time of the establishment of the obligation which, as a
rule, is always the determinative element, to be varied by agreement that would find reason only in the supervention of
extraordinary inflation or deflation.
Same; Same; Civil Law; Actions; The long delay of respondent in filing the recovery case justifies non-payment of a bigger
amount for the expropriated property.—In the present case, the unusually long delay of private respondent in bringing the present
action—a period of almost 25 years—which a stricter application of the law on estoppel and the statute of limitations and
prescription may have divested her of the rights she seeks in this action over property in question, is an added circumstance
militating against payment to her of an amount bigger—nay three-fold more—than the value of the property should have been
paid at the time of the taking. For conformably to the rule that one should take good care of his own concern, private respondent
should have commenced proper action soon after she bad been deprive of her right of ownership and possession over the land,
a deprivation she knew was permanent in character, for the land was intended for, and had become, avenues in the City of
Cebu. A penalty is always visited upon one for his allegedly withheld from him, or otherwise transgressed upon by another.
Same; Same; Judgments; Loans; Interest; The ruling in this case that legal interest shall accrue from the date of taking is now
the law of the case and, therefore, what the case law is in other cases that legal interest shall be computed from the filing of the
complaint is not applicable.—In our decision in G.R. No. No. L-26400, February 29, 1972, We have said that Victoria Amigable
is entitled to the legal interest on the price of the land from the time of the taking.
De Castro, J:
Facts:
 On 1924, the government took private respondent Victor Amigable's land for road-right-of-way purpose.
 On 1959, Amigable filed in the Court of First Instance a complaint to recover the ownership and possession of the
land and for damages for the alleged illegal occupation of the land by the government (entitled Victor Amigable vs.
Nicolas Cuenco, in his capacity as Commissioner of Public Highways and Republic of the Philippines).
 Amigable's complaint was dismissed on the grounds that the land was either donated or sold by its owners to
enhance its value, and that in any case, the right of the owner to recover the value of said property was already
barred by estoppel and the statute of limitations. Also, the non-suability of the government was invoked.
 In the hearing, the government proved that the price of the property at the time of taking was P2.37 per square
meter. Amigable, on the other hand, presented a newspaper showing that the price was P6.775.
 The public respondent Judge ruled in favor of Amigable and directed the Republic of the Philippines to pay
Amigable the value of the property taken with interest at 6% and the attorney's fees.
Issue:
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
 Whether or not the provision of Article 1250 of the New Civil Code is applicable in determining the amount of
compensation to be paid to private respondent Amigable for the property taken.
Held:
 Not applicable.
Ratio:
 Article 1250 of the NCC provides that the value of currency at the time of the establishment of the obligation shall
be the basis of payment which would be the value of peso at the time of taking of the property when the obligation
of the government to pay arises. It is only when there is an agreement that the inflation will make the value of
currency at the time of payment, not at the time of the establishment, the basis for payment.
 The correct amount of compensation would be P14,615.79 at P2.37 per square meter, not P49,459.34, and the
interest in the sum of P145,410.44 at the rate of 6% from 1924 up to the time respondent court rendered its decision
as was awarded by the said court should accordingly be reduced.
FILIPINO PIPE & FOUNDRY CORP V. NAWASA, 161 SCRA 32
FACTS
 NAWASA entered into a contract with the plaintiff FPFC for the latter to supply iron pressure pipes worth
P270,187.50 to be used in the construction of the Anonoy Waterworks in Masbate and the Barrio San Andres-
Villareal Waterworks in Samar.
 NAWASA paid in installments on various dates, a total of P134,680.00 leaving a balance of P135,507.50 excluding
interest.
 FPFC demanded payment from NAWASA of the unpaid balance of the price with interest in accordance with the
terms of their contract
 NAWASA failed to pay, plaintiff filed a collection suit

RTC rendered judgment orderedNAWASA to pay the unpaid balance in NAWASA negotiable bonds
 NAWASA did not deliver the bonds to the judgment creditor
 FPFC filed another complaint seeking an adjustment of the unpaid balance in accordance with the value of the
Philippine peso
 FPFC presented voluminous records and statistics showing that a spiralling inflation has marked the progress of
the country from 1962 up to the present. There is no denying that the price index of commodities, which is the
usual evidence of the value of the currency has been rising.
ISSUE
W/N there exists an extraordinary inflation of the currency justifying an adjustment of NAWASA's unpaid judgment obligation to
FPFC.
RULING
Article 1250 of the Civil Code provides:
In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time
of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary..
 Extraordinary inflation exists "when there is a decrease or increase in the purchasing power of the Philippine
currency which is unusual or beyond the common fluctuation in the value said currency, and such decrease or
increase could not have reasonably foreseen or was manifestly beyond contemplation the the parties at the time
of the establishment of the obligation. (Tolentino Commentaries and Jurisprudence on the Civil Code Vol. IV, p.
284.)
 While appellant's voluminous records and statistics proved that there has been a decline in the purchasing power
of the Philippine peso, this downward fall of the currency cannot be considered "extraordinary." It is simply a
universal trend that has not spared our country.
DEL ROSARIO V. SHELL, 164 SCRA 556
Facts:
On September 20, 1960 the parties entered into a Lease Agreement whereby the plaintiff- appellant leased a parcel of land
known as Lot No. 2191 of the cadastral Survey of Ligao, Albay to the defendant-appellee Shell at a monthly rental of Two
Hundred Fifty Pesos (P250.00).
Paragraph 14 of said contract of lease provides:
“14. In the event of an official devaluation or appreciation of the Philippine Peso the rental specified herein shall be
adjusted in accordance with the provisions of any law or decree declaring such devaluation or appreciation as may
specifically apply to rentals."
On November 6, 1965, President Diosdado Macapagal promulgated Executive Order No. 195 changing the par value (official
quoted exchange rate) of the Peso.
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By reason of this Executive Order No. 195, plaintiff-appellant demanded from the defendant-appellee ailieged increase in the
monthly rentals from P250.00 a month to P487.50 a month.
On January 16, 1967, plaintiff-appellant filed a complaint (Civil Case No. 68154) with the CFI of Manila, Branch XVII praying that
defendant-appellee be ordered to pay the monthly rentals as increased by reason of Executive Order 195 and further prayed
that plaintiff-appellant be paid the following amounts: The difference between P487.50 and P250.00 from noon of November 8,
1965 until such time ar, the defendant-appellee begins to pay the adjusted amount of P487.50 a month.
The court ruled against Del Rosario, reasoning that the Peso did not devalue but its par value merely changed.
Issue:
W/N petitioner Del Rosario is entitled to the increased rentals based on the contract.
Held:
Yes. In the case at bar, while no express reference has been made to metallic content, there nonetheless is a reduction in par
value or in the purchasing power of Philippine currency.
(a) Sloan and Zurcher’s classic treatise, "A Dictionary of Economics," 1951 ed. pp. 80-81, defines devaluation (as applied to
a monetary unit) as.
"a reduction in its metallic content as determined by law 2 resulting in "the lowering of the value of one nation’s
currency in terms of the currencies of other nations" (Emphasis supplied)
Samuelson and Nordhaus, writing in their book, "Economics" (Singapore, Mc-Graw Hill Book Co., 1985, p. 875)
"when a country’s of official exchange rate 3 relative to gold or another currency is lowered, as from $35 an ounce
of gold to $38, we say the currency has been devalued."
(b) Upon the other hand, "depreciation" (opposite of "appreciation" the term used in the contract), according to Gerardo P.
Sicat in his "Economics" (Manila: National Book Store, 1983, p. 636).
"occurs when a currency’s value falls in relation to foreign currencies."
(c) It will be noted that devaluation is an official act of the government (as when a law is enacted thereon) and refers to a
reduction in metallic content; depreciation can take place with or without an official act, and does not depend on metallic
content (although depreciation may be caused by devaluation).
Even assuming there has been no official devaluation as the term is technically understood, the fact is that there has been a
diminution or lessening in the purchasing power of the peso, thus, there has been a "depreciation" (opposite of
"appreciation"). Moreover, when laymen unskilled in the semantics of economics use the terms "devaluation" or
"depreciation" they certainly mean them in their ordinary signification decrease in value. Hence as contemplated by
the parties herein in their lease agreement, the term "devaluation" may be regarded as synonymous with
"depreciation," for certainly both refer to a decrease in the value of the currency. The rentals should therefore by their
agreement be proportionately increased.
SANGRADOR V. VALDERAMA, 168 SCRA 215
Facts:
Sps Valderrama obtained a loan from Manuel Asencio in the amount of 500k. It was secured by a real estate mortgage on the
spouses’ house and lot. Foreseeing that they would not be able to pay the loan and redeem their property upon maturity of the
loan, the defendants scouted around for money-lenders who would be willing to lend them money with which to pay off their
mortgage to Asencio. Through the help of a loan broker, Wilson Jesena, they were able to obtain on April 6, 1984 a P1,000,000
loan from the plaintiff Teresita Sangrador, who is an aunt of Jesena, on the security of the same property which they redeemed
from Asencio. The loan is evidenced by promissory note (Exh. B) dated April 6, 1 984 providing for the payment of P1,400,000
to the creditor eight months after date wherein they promise to jointly and severally pay Sangrador. There was also a stipulation
that if there is a default, 20 percentum of the amount due will be paid.
Another stipulation said that “in the event that an extraordinary inflation of the Philippine Peso should supervene between now
and eight (8) months after date, then the value of the Philippine Peso at the time of the establishment of this obligation, shall be
the basis of payment pursuant to Art. 1250, and for this purpose, we hereby acknowledge the official exchange rate of the
Philippine Peso to the US Dollar at P14.002 to $1. The corresponding adjustment in the value of the Philippine Peso shall be
made in the event that at the time of the maturity of this obligation, the rate of exchange will have changed as a result of the
supervening inflation. We further agree that the official rate of exchange as set by the Central Bank of the Philippines for private
transactions, shall be the basis of this adjustment.”
When the defendants failed to pay the sum stated in the promissory note, a complaint for foreclosure was instituted. The
defendants in their answer denied that the loan was P1,400,000. They alleged that it was only P1,000,000.00 and that the
additional P400,000 represented usurious interest. The trial court rendered judgment directing the foreclosure, and ordering
defendants to pay the amount stated in the obligation plus sum pursuant to the escalation clause. In default of the payment, the
mortgaged properties would be sold at public auction.
Issue:
WON the escalation clause is valid? NO / WON there is a cause for extraordinary inflation? NO
Ratio:
The disputed amount of P400,000.00 was a hidden interest that the petitioners had required the respondents to pay at the
maturity of the loan, but said amount of P400,000.00 was not received by or delivered to the respondents. This conclusion is
strengthened by the fact that the promissory note and the deed of real estate mortgage, strangely enough, do not contain any
express stipulation on interest, or rate of interest, when the loan involved therein is in the substantial amount of allegedl y
P1,400,000.00.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
Despite having no interest ceiling on loans, if no interest rate is expressly stipulated in the agreement, Circular 905 of the BSP
is controlling which provides:
Section 1. The rate of interest, including commissions, premiums, fees and other charges on a loan
or forbearance of any money, goods, or credits, regardless of maturity and whether secured or
unsecured, that may be charged or collected by any person, whether natural or juridical, shall not be
subject to any ceiling prescribed under or pursuant to the Usury law, as amended.
Section 2. The rate of interest for the loan or forbearance of any money, goods or credits and the rate
allowed in judgments, in the absence of express contract as to such rate of interest, shall continue to
be twelve per cent (1 2%) per annum.
The rate of interest for loans or forbearance of money, in the absence of express contract as to such rate of interest, shall
continue therefore to be twelve per cent (12%) per annum.
In Filipino Pipe and Foundry Corporation vs. National Waterworks and Sewerage Authority, this Court held:
Extraordinary inflation exists when 'there is a decrease or increase in the purchasing power of the
Philippine currency which is unusual or beyond the common fluctuation in the value of said currency,
and such decrease or increase could not have been reasonably foreseen or was manifestly beyond
the contemplation of the parties at the time of the establishment of the obligation.
While appellant's voluminous records and statistics proved that there has been a decline in the
purchasing power of the Philippine peso, this downward fall of the currency cannot be considered
"extraordinary." It is simply a universal trend that has not spared our country.
Since petitioners failed to prove the supervening of extraordinary inflation between 6 April 1984 and 7 December 1984—no
proofs were presented on how much, for instance, the price index of goods and services had risen during the intervening period—
an extraordinary inflation cannot be assumed; consequently, there is no reason or basis, legal or factual, for adjusting the value
of the Philippine Peso in the settlement of respondents' obligation.
TELANGTAN V. US LINES, 483 SCRA 458 [2006]
FACTS:
Telengtan which is a domestic corporation in the Philippines hired U.S. Lines for to ship cargo from overseas. During the period
material to this case the provisions of Far East Conference Tariff No. 12 were made applicable to Philippine containerized cargo,
which required the payment of demurrage charges if the consignee fails to take delivery of the containerized cargo within the
10-day free period. US Lines filed a case against Telengtan seeking payment of demurrage charges plus interest and damages
because petitioner failed to withdraw its goods from the containers wherein the goods had been shipped. Telengtan on the other
hand disclaims liability saying they never entered into any agreement on demurrage. Aside from this respondent claims that
there should be a re-computation of the award based on the currency at the time of the obligation to account for devaluation of
the peso.
ISSUE:
1. WON Telengtan was liable for demurrage charges – yes
2. WON there should be devaluation of the peso – No.
HELD:
1. The court held that petitioner is in fact liable for demurrage charges for failing to remove its goods during the ten day free
period. Furthermore, as shown by evidence, the appellant is used to paying demurrage charges because it is its practice not to
get its cargo from the carrier immediately upon notification of its arrival.
2. Art. 1250 of the CC states that in case there is extraordinary inflation or deflation of the currency stipulated, the value at the
time of the establishment of the obligation shall be basis of payment unless there is an agreement to the contrary. Extraordinary
inflation or deflation, as the case may be, exists when there is an unusual increase or decrease in the purchasing power of the
Philippine peso which is beyond the common fluctuation in the value of said currency, and such increase or decrease could not
have been reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the establishment of
the obligation. Extraordinary inflation can never be assumed; he who alleges the existence of such phenomenon must prove the
same. In this case the SC said there was no extraordinary inflation, even if the price of goods rose during the intervening period
the increase cannot be said to be extraordinary. Furthermore, absent an official pronouncement by competent authorities of the
existence of extraordinary inflation during a given period as here, the effects of extraordinary inflation cant apply.
Art. 1250 is clear when it states that the value of the peso at the time of establishing the obligation shall control and be the basis
of payment unless there is an agreement to the contrary. In other word as said in the Mobil Oil case, an agreement is needed
for the effects of extraordinary inflation to be taken into account to alter the value of the currency at the time of the establishment
of the obligation for payment. Neither the CA nor the trial court pointed to any provision of the bill of ladings to this effect.
Article 1253
Art. 1253. If the debt produces interest, payment of the principal shall not be deemed to have been
made until the interests have been covered. (1173)
RAPANUT V. CA, 246 SCRA 323
FACTS
On November 29, 1985, petitioner and private respondent executed a Deed of Conditional Sale with Mortgage. Under the
contract, private respondent agreed to sell to petitioner a parcel of land in San Rafael, Pasay City, payable in monthly installments
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of P500.00 to be paid not later than the fifth day of every month and in semi-annual installments of P1,000.00 to be paid on June
30 and December 31 of every year, "with an interest of 10% per annum on the remaining balance until the full amount is paid"
In April 1986, petitioner and private respondent entered into a Supplemental Agreement with the following stipulations:
WHEREAS, the VENDOR/MORTGAGEE is willing to sell said portion of her lots to the VENDEE/MORTGAGOR for a
total price of P37,485.00 payable in monthly installments of P500.00 with an interest of 10% per annum on the
remaining balance until the full amount is paid.
Payments of the monthly installments of P500.00 shall be made not later than the fifth day of every month without need
of demand starting January, 1986. Failure to pay any of the monthly installments when due for three months, shall be
sufficient cause for rescission of this contract and all payments made shall be applied as corresponding rentals.
Petitioner, thus, had been making the P500.00 monthly installment payments until he received a letter dated February 13, 1990
from private respondent' s counsel informing him that for his failure to pay the monthly installments plus 10% per annum interest
on the balance, the Deed of Conditional Sale with Mortgage and the Supplemental Agreement were rescinded "as of receipt
hereof," and that payments made were considered rentals. The letter further demanded that petitioner vacate the premises within
15 days from receipt thereof.
Respondent filed a complaint against petitioner in the Regional Trial Court of Pasay City for rescission of the Deed of Conditional
Sale with Mortgage and Supplemental Agreement which the court granted.
The controversial provision in the Supplemental Agreement reads: ". . . the VENDOR/MORTGAGEE is willing to sell said portion
of her lot to the VENDEE/MORTGAGOR for a total price of P37,485.00 payable in monthly installments of P500.00 with an
interest of 10% per annum on the remaining balance until the full amount is paid"
Private respondent's view is that the 10% interest must be paid every year and posits that the P500.00 monthly installments
include the 10% interest.
Issue:
W/N the 10% interest must be paid every year and the P500.00 paid by petitioner monthly inludes the 10% interest.
Held:
After pondering on the meaning of Article 1253, we reach the conclusion that in a contract involving installment payments with
interest chargeable against the remaining balance of the obligation, it is the duty of the creditor to inform of the amount of interest
that falls due and that he is applying the installment payments to cover said interest. Otherwise, the creditor cannot apply the
payments to the interest and then hold the debtor in default for non-payment of installments on the principal.
A liberal interpretation of the contracts in question is that at the end of each year, all payments made shall be deducted from the
principal obligation. The 10% interest on the balance is then added to whatever remains of the principal. Thereafter,
petitioner shall pay the monthly installments on the stipulated dates. In other words, the interest due are added to and paid
like the remaining balance of the principal. Thus, we must rule that the parties intended that petitioner pay the monthly
installments at predetermined dates, until the full amount, consisting of the purchase price and the interests on the balance, is
paid.
Significant is the fact that private respondent accepted the payments petitioner religiously made for four years. Private
respondent cannot rely on the clause in the contract stating that no demand is necessary to explain her silence for four years as
to the 10% interest, as such clause refers to the P500.00 monthly installments.
Even granting as acceptable private respondent's theory that the monthly amortizations shall first be applied to the payment of
the interests, we must still rule for petitioner.
The contracts provided for private respondent's right of rescission which may be exercised upon petitioner's failure to pay
installments for three months. Private respondent's failure to exercise her right of rescission after petitioner's alleged default
constitutes a waiver of such right. Her continued acceptance of the installment payments places her in estoppel.
GOBONSENG V. CA, 246 SCRA 472
If the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been
covered.—As a matter of fact, an amount of P7,417.86 was credited to the principal in the promissory note with the code IF-84-
CB022-GG per Official Receipt No. 14173 dated 2 May 1984. This partial payment for the principal clearly proves that the interest
due had been paid. Article 1253 of the Civil Code provides that if the debt produces interest, payment of the principal shall not
be deemed to have been made until the interests have been covered. Consequently, automatic renewal of the loans by way of
promissory notes for the succeeding interest period was unavoidable.
Article 1256
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.
Consignation alone shall produce the same effect in the following cases:
(1) When the creditor is absent or unknown, or does not appear at the place of payment;

(2) When he is incapacitated to receive the payment at the time it is due;

 (3) When, without just cause, he refuses to give a receipt; 
 prayed that the rentals be ordered deposited in court. The spouses, on the other hand, contended that the deposit of the rentals
(4) When two or more persons claim the same right to collect; 
 cannot render ineffective the provision of BP25 which allows the ejectment of a lessee in case of arrears in payment of rent for
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
(5) When the title of the obligation has been lost. (1176a)
SOCO V. MILITANTE, 123 SCRA 160
Facts:
Soco leased her commercial building and lot situated at Manalili Street, Cebu City, to Francisco for a monthly rental of P 800.00
for a period of 10 years renewable for another 10 years at the option of the lessee. The terms of the contract were in a Contract
of Lease (Exhibit "A" for Soco and Exhibit "2" for Francisco). It can readily be discerned from Exhibit "A" that par. 10 and 11
appear to have been cancelled while in Exhibit "2" only par. 10 has been cancelled. Claiming that par. 11 of the Contract of
Lease was in fact not part of the contract because it was cancelled, Soco filed for annulment and/or reformation of the contract.
Before this case, Soco also learned that Francisco sub-leased a portion of the building to NACIDA, at a monthly rental of more
than P3,000.00 which is definitely very much higher than what Francisco was paying to Soco under the Contract of Lease. Since
Soco felt he was on the losing end of the contract, he looked for ways to terminate the contract. Soco through her lawyer served
notice to the Francisco 'to vacate the premises leased.' Soco stopped sending his collector to Francisco and has not accepted
payment. As a response, Francisco through his lawyer informed Soco that all payments of rental due were in fact paid by
Commercial Bank and Trust Company through the Clerk of Court of the City Court of Cebu since Soco was not collecting
anymore directly from Francisco.
Taking into account the factual background setting of this case, the Court holds that there was in fact a tender of payment of the
rentals made by Francisco to Soco through Comtrust and since these payments were not accepted by Soco evidently because
of her intention to evict Francisco, by all means, culminating in the filing of Civil Case R-16261, Francisco was impelled to deposit
the rentals with the Clerk of Court of the City Court of Cebu. There was therefore substantial compliance of the requisites of
consignation, hence his payments were valid and effective. Consequently, Francisco cannot be ejected from the leased premises
for non-payment of rentals. Thus, this appeal.
Issue:
W/N there was valid cosignation by Francisco? No. Substantial compliance is not allowed. The rules on consignation must be
followed strictly.
Ratio:
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 first comply with certain requirements prescribed by law. The debtor must show (1) that there was a debt due; (2)
that the consignation of the obligation had been made because the creditor to whom tender of payment was made refused to
accept it, or because he was absent or incapacitated, or because several persons claimed to be entitled to receive the amount
due (Art. 1176, Civil Code); (3) that previous notice of the consignation had been given to the person interested in the
performance of the obligation (Art. 1177, Civil Code); (4) that the amount due was placed at the disposal of the court (Art. 1178,
Civil Code); and (5) that after the consignation had been made the person interested was notified thereof (Art. 1178, Civil Code).
Failure in any of these requirements is enough ground to render a consignation ineffective.
Recapitulating the above testimony of the Bank Comptroller, it is clear that the bank did not send notice to Soco that the checks
will be deposited in consignation with the Clerk of Court (the first notice) and also, the bank did not send notice to Soco that the
checks were in fact deposited (the second notice) because no instructions were given by its depositor, the lessee, to this effect,
and this lack of notices started from September, 1977 to the time of the trial, that is June 3, 1980
The reason for the notification to the persons interested in the fulfillment of the obligation after consignation had been made,
which is separate and distinct from the notification which is made prior to the consignation, is stated in Cabanos vs. Calo, G.R.
No. L-10927, October 30, 1958, 104 Phil. 1058. thus: "There should be notice to the creditor prior and after consignation as
required by the Civil Code. The reason for this is obvious, namely, to enable the creditor to withdraw the goods or money
deposited. Indeed, it would be unjust to make him suffer the risk for any deterioration, depreciation or loss of such goods or
money by reason of lack of knowledge of the consignation."
Also the fourth requisite that Francisco failed to prove is the actual deposit or consignation of the monthly rentals except the two
cashier's checks referred to in Exhibit 12. As indicated earlier, not a single copy of the official receipts issued by the Clerk of
Court was presented at the trial of the case to prove the actual deposit or consignation. The copy of the receipts were only
presented in the MR, and the date of payment on the receipt was 2 years late than the actual demand.
ALFONSO V. CA, 168 SCRA 545
Facts:
Danilo and Luzviminda C. Basco are the owners of an apartment building located in Grace Park, Caloocan City, having acquired
it by purchase from Pacifico Vibar and Antonia Mapay Vibar. A unit (fourth door) of the aforesaid apartment bearing the number
275 was being rented out by the former owners to Roland Alfonso at a monthly rental of P 185.00, while the other suits were
being rented out to different lessees. The new owners were also the former lessees of a ground floor unit located at the back of
the apartment building. After the new owners had purchased the property from the former owners, or on March 19, 1984, spouses
Basco sent to Alfonso a letter demanding him and other lessees to vacate the premises. Alfonso refused and sent by registered
mail his rental payment which was rejected by the spouses who proposed to give the Alfonso a period of one (1) year from April
1, 1984 or up to March 31, 1985 within which to stay at the premises free from rental in exchange for the voluntary surrender of
the premises.
Despite the offer, Alfonso refused to vacate the premises; spouses then filed a complaint for ejectment. Alfonso, through counsel,
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three (3) months at one time, provided, that in case of refusal by the lessor to accept payment of the rental agreed upon, the
lessee shall either deposit by way of consignation, the amount in Court or in a bank in the name of and with notice to the lessor.
Issue:
WON Alfonso incurred default? YES
WON the METC had jurisdiction to determine the ejectment case since there was no demand to vacate on the part of the
spouses? YES
Ratio:
The tenor of the two letters dated March 19, 1984 and May, 1984, respectively, shows that the free rent offer was merely a
proposal of plaintiffs to defendant who rejected it by tendering his payment corresponding to the April, 1984 rental and by
consistently refusing to vacate the premises.
Such rejection rendered the proposal of free rental without force and effect. Defendant therefore was duty bound to pay the
rentals as they fall due in order to abort any ejectment proceedings against him. If the lessor refuses to accept the payment, as
in the case at bar, defendant had a remedy provided for by law, namely consignation in court or deposit in a bank in the lessor's
name with due notice to the lessor. Unfortunately, it is of record that defendant did not avail of such remedy so that when plaintiffs
filed the ejectment proceedings against him on July 30, 1984, the rentals corresponding to the month of April to July 1984 had
not yet been paid by defendant. Tender of payment is not enough — consignation must follow in order to extinguish the debt.
Otherwise failure to comply with the requirements provided for under Sec. 5, paragraph (b) Batas Pambansa Blg. 25 is a ground
for ejectment. Delayed consignation or deposit will not do.
TAYAG V. CA, 219 SCRA 480
Facts:
Siblings Juan Galicia Sr. and Celerina Labuguin entered into a contract to sell a parcel of land in Nueva Ecija to a certain Albrigido
Leyva: 3K upon agreement, 10K ten days after the agreement, 10K representing vendor’s indebtedness to Phil Veterans Banko
and 27K payable within one year from execution of contract.
Leyva only paid parts of the obligation.
But even after the grace period for payment made in the contract and while litigation of such case, the petitioners still allowed
Leyva to make payments.
With regards to the obligation payable to the Phil Veterans bank by the vendee, as they deemed that it was not paid in full, such
obligation they completed by adding extra amount to fulfill such obligation. This was fatal in their case as this is Leyva’s argument
that they constructively fulfilled the obligation which is rightfully due to him. (Trivia: It was Celerina, Juan’s sister, that paid the
bank to complete such obligation).
Petitioners claim that they are only “OBLIGEES” with regards to the contract, so the principle of constructive fulfillment cannot
be invoked against them.
Petitioners, being both creditor and debtor to private respondent, in accepting piecemeal payment even after the grace period,
are barred to take action through estoppel.
Lastly, petitioners argue that there was no valid tender of payment nor consignation of the sum of P18,520.00 which they
acknowledge to have been deposited in court on January 22, 1981 five years after the amount of P27,000.00 had to be paid.
Issue:
1. WON there was constructive fulfillment in the part of the petitioners that shall make rise the obligation to deliver to Leyva the
deed of sale? YES
2. WON they are still entitled to rescind the contract? NO, barred by estoppel.
Ratio:
1.In a contract of purchase, both parties are mutually obligors and also obligees, and any of the contracting parties may, upon
non-fulfillment by the other privy of his part of the prestation, rescind the contract or seek fulfillment (Article 1191, Civil Code).
In short, it is puerile for petitioners to say that they are the only obligees under the contract since they are also bound as obligors
to respect the stipulation in permitting private respondent to assume the loan with the Philippine Veterans Bank which petitioners
impeded when they paid the balance of said loan. As vendors, they are supposed to execute the final deed of sale upon full
payment of the balance as determined hereafter.
2.Petitioners accepted Leyva’s delayed payments not only beyond the grace periods but also during the pendency of the case
for specific performance. Indeed, the right to rescind is not absolute and will not be granted where there has been substanti al
compliance by partial payments. By and large, petitioners’ actuation is susceptible of but one construction — that they are now
estopped from reneging from their commitment on account of acceptance of benefits arising from overdue accounts of private
respondent
Consignation alone produced the effect of payment in the case at bar because it was established below that two or more heirs
of Juan Galicia, Sr. claimed the same right to collect (Article 1256, (4), Civil Code; pp. 4-5, Decision in Civil Case No. 681-G; pp.
67-68, Rollo). Moreover, petitioners did not bother to refute the evidence on hand that, aside from the P18,520. which was
consigned, private respondent also paid the sum of P13,908.25. These two figures representing private respondent's payment
of the fourth condition amount to P32,428.25, less the P3,778.77 paid by petitioners to the bank, will lead us to the sum of
P28,649.48 or a refund of P1,649.48 to private respondent as overpayment of the P27,000.00 balance.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
PASRICHA V. LUIS DISON REALTY, 548 SCRA 273 [2008]
FACTS:
Respondent and petitioners executed two Contracts of Lease over a building in Ermita as lessor and lessees respectively.
Lessees agreed to pay monthly rentals. While the contracts were in effect, Pacheco, then General Manager was replaced by
Bautista. They paid monthly rentals until May 1992. Despite final demand by respondents, lessees did not comply still. Hence,
a complaint for ejectment was filed. Petitioners admitted their failure to provide for the stipulated rent but claimed it is justified
because of the confusion as to the person authorized to receive the payment because of the change in management.
ISSUE:
W/n lessee is justified in not paying the rentals because of lessor’s fault
HELD:
Not knowing to whom payment should be made does not justify the failure of lessees to pay because they were not without
remedy. They should have availed provisions of the Civil Code on consignation of payment by depositing things due at the
disposal of judicial authority.
GO CINCO V. CA, 603 SCRA 108 [2009]
Facts:
Manuel Cinco obtained a commercial loan for P700,000.00 from Maasin Traders Lending Corp. (MTLC) evidenced by a
promissory note dated Dec. 11, 1987 and secured it by way of a real estate mortgage over his conjugal land and four storey
building in Maasin, Southern Leyte. The terms for payment imposed a 3%-36% per annum interest rate on the principal and was
payable within a term of 180 days or 6 months, renewable for another 180 days. As of July 16, 1989, Manuel’s outstanding
obligation ammounted to P1,071, 256.66.
To be able to pay the loan, the spouses applied for a loan from Philippine National Bank and was granted on July 8, 1989, on
the condition that the existing mortgage would be cancelled so the land could be used as security for the new loan under a new
mortgage contract.
On July 16, 1989, Manuel went to the house of MTLC’s President (Ester Servacio) and informed her that payment for the loan
was ready at PNB. Ester then proceeded to the bank but was informed by them that Manuel had no pending loan application
with them.
On July 20, 1989, Manuel executed a Special Power of Attorney authorizing Ester to collect the proceeds of his PNB loan. This
time when Ester returned to the bank the officers told her that there was indeed a loan for P1.3 million and that the proceeds
were hers as long as she signed a deed of release/cancellation of mortgage. Outraged that the spouses Go Cinco used the
same properties mortgaged to MTLC as collateral for the PNB loan, Ester refused to sign the deed and did not collect the P1.3
Million loan proceeds.
On July 24, 1989 Ester instituted foreclosure proceedings against the spouses Go Cinco while the latter filed an action for specific
performance, damages, and preliminary injuction in the RTC of Maasin.
RTC ruled in favor of spouses Go Cinco finding that Ester unjusty refused to collect the amount. On appeal the CA reversed the
RTC. Hence, the instant petition for review on certiorari.
Issue:
(1) W/N the loan to MTLC was extinguished through payment or performance.
Held:
YES. PETITION Granted.
Rationale:
While Ester’s refusal was unjustified and unreasonable, Manuel’s position that this refusal had the effect of payment that
extinguished his obligation to MTLC is wrong because a refusal without just cause is not equivalent to payment; to have the
effect of payment and the consequent extinguishment of the obligation to pay, the law requires the companion acts of tender of
payment and consignation. Article 1256 is clear and unequivocal on this point.
Nevertheless, the spouses Go Cinco duly established that they have legitimately secured a means of paying off their loan with
MTLC; they were only prevented from doing so by the unjust refusal of Ester to accept the proceeds of the PNB loan through
her refusal to execute the release of the mortgage on the properties mortgaged to MTLC.
In the present case, Manuel sought to pay Ester by authorizing her, through an SPA, to collect the proceeds of the PNB loan –
an act that would have led to payment if Ester had collected the loan proceeds as authorized. Admittedly, the delivery of the
SPA was not, strictly speaking, a delivery of the sum of money due to MTLC, and Ester could not be compelled to accept it as
payment based on Article 1233. Nonetheless, the SPA stood as an authority to collect the proceeds of the already-approved
PNB loan that, upon receipt by Ester, would have constituted as payment of the MTLC loan. Had Ester presented the SPA to
the bank and signed the deed of release/cancellation of mortgage, the delivery of the sum of money would have been effected
and the obligation extinguished. Since payment was available and was unjustifiably refused, justice and equity demand that the
spouses Go Cinco be freed from the obligation to pay interest on the outstanding amount from the time the unjust refusal took
place.
BONROSTRO V. LUNA, GR 172346, 24 JULY 2013
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FACTS:
Respondent Constancia Luna, as buyer, entered into a Contract to Sell with Bliss Development Corporation (Bliss) involving a
house and lot of New Capitol Estates in Diliman, Quezon City. Barely a year after, Constancia, this time as the seller, entered
into another Contract to Sell with petitioner Lourdes Bonrostro concerning the same property.
Immediately after the execution of the said second contract, the spouses Bonrostro took possession of the property. However,
except for the P200,000.00 down payment, Lourdes failed to pay any of the stipulated subsequent amortization payments.
Constancia and her husband, respondent Juan Luna filed before the RTC a Complaint for Rescission of Contract and Damages
against the spouses Bonrostro praying for the rescission of the contract, delivery of possession of the subject property, payment
by the latter of their unpaid obligation, and awards of actual, moral and exemplary damages, litigation expenses and attorney’s
fees.
In their Answer the spouses Bonrostro averred that they were willing to pay their total balance to the spouses Luna after they
sought from them a 60-day extension to pay the same. However, during the time that they were ready to pay the said amount,
Constancia and her lawyer, Atty. Arlene Carbon (Atty. Carbon), did not show up at their rendezvous. Claiming that they are still
willing to settle their obligation, the spouses Bonrostro prayed that the court fix the period within which they can pay the spouses
Luna. The spouses Bonrostro likewise asserted that they paid Bliss, the developer of New Capitol Estates, the amount of
P46,303.44. Later during trial, Lourdes testified that Constancia instructed Bliss not to accept amortization payments from
anyone.
The RTC rendered its Decision focusing on the sole issue of whether the spouses Bonrostro’s delay in their payment of the
installments constitutes a substantial breach of their obligation under the contract warranting rescission. The RTC ruled that the
delay could not be considered a substantial breach considering that Lourdes (1) requested for an extension within which to pay;
(2) was willing and ready to pay and even wrote Atty. Carbon about this; (3) gave Constancia a down payment of P200,000.00;
and, (4) made payment to Bliss.
The CA concluded that there being no cancellation effected in accordance with the procedure prescribed by law, the contract
therefore remains valid and subsisting. However, the CA modified the RTC Decision with respect to interest, viz:
Nevertheless, there is a need to modify the appealed decision insofar as (i) the interest imposed on the sum of P300,000.00 is
only for the period April 1993 to November 1993; (ii) the interest imposed on the sum of P330,000.00 is 2% per month and is
only for the period July 1993 to November 1993; (iii) it does not impose interest on the amount of P214,492.62 which was paid
by Constancia to BLISS in behalf of Lourdes x x x
The rule is that ‘no interest shall be due unless it has been expressly stipulated in writing’ (Art. 1956, Civil Code). However, the
contract does not provide for interest in case of default in payment of the sum of P330,000.00 to Constancia and the monthly
amortizations to BLISS.
Issue:
W/N tender of payment has been made in this case so as to amount to consignation?
Held: NO!
The spouses Bonrostro assert that Lourdes’ letter of November 24, 1993 amounts to tender of payment of the remaining balance
amounting to P630,000.00. Accordingly, thenceforth, accrual of interest should be suspended.
Tender of payment “is the manifestation by the debtor of a desire to comply with or pay an obligation. If refused without
just cause, the tender of payment will discharge the debtor of the obligation to pay but only after a valid consignation
of the sum due shall have been made with the proper court.” “Consignation is the deposit of the [proper amount with
a judicial authority] in accordance with rules prescribed by law, after the tender of payment has been refused or because
of circumstances which render direct payment to the creditor impossible or inadvisable.”
“Tender of payment, without more, produces no effect.” “[T]o have the effect of payment and the consequent
extinguishment of the obligation to pay, the law requires the companion acts of tender of payment and consignation.”
As to the effect of tender of payment on interest, noted civilist Arturo M. Tolentino explained as follows:
When a tender of payment is made in such a form that the creditor could have immediately realized payment if he had accepted
the tender, followed by a prompt attempt of the debtor to deposit the means of payment in court by way of consignation, the
accrual of interest on the obligation will be suspended from the date of such tender. But when the tender of payment is not
accompanied by the means of payment, and the debtor did not take any immediate step to make a consignation, then
interest is not suspended from the time of such tender. x x x x36 (Emphasis supplied)
Here, the subject letter merely states Lourdes’ willingness and readiness to pay but it was not accompanied by
payment. She claimed that she made numerous telephone calls to Atty. Carbon reminding the latter to collect her payment,
but, neither said lawyer nor Constancia came to collect the payment. After that, the spouses Bonrostro took no further steps
to effect payment. They did not resort to consignation of the payment with the proper court despite knowledge that
under the contract, non-payment of the installments on the agreed date would make them liable for interest
thereon. The spouses Bonrostro erroneously assumed that their notice to pay would excuse them from paying interest. Their
claimed tender of payment did not produce any effect whatsoever because it was not accompanied by actual payment
or followed by consignation. Hence, it did not suspend the running of interest. The spouses Bonrostro are therefore liable for
interest on the subject installments from the date of default until full payment of the sums of P300,000.00 and P330,000.00.
SPS. CACAYORIN V. AFPMBAI, 696 SCRA 311 [2013]
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
Civil Law; Consignation; Under Article 1256 of the Civil Code, the debtor shall be released from responsibility by the consignation
of the thing or sum due, without need of prior tender of payment, when the creditor is absent or unknown, or when he is
incapacitated to receive the payment at the time it is due, or when two or more persons claim the same right to collect, or when
the title to the obligation has been lost.―Under Article 1256 of the Civil Code, the debtor shall be released from responsibility
by the consignation of the thing or sum due, without need of prior tender of payment, when the creditor is absent or unknown,
or when he is incapacitated to receive the payment at the time it is due, or when two or more persons claim the same right to
collect, or when the title to the obligation has been lost. Applying Article 1256 to the petitioners’ case as shaped by the allegations
in their Complaint, the Court finds that a case for consignation has been made out, as it now appears that there are two entities
which petitioners must deal with in order to fully secure their title to the property: 1) the Rural Bank (through PDIC), which is the
apparent creditor under the July 4, 1994 Loan and Mortgage Agreement; and 2) AFPMBAI, which is currently in possession of
the loan documents and the certificate of title, and the one making demands upon petitioners to pay. Clearly, the allegations in
the Complaint present a situation where the creditor is unknown, or that two or more entities appear to possess the same right
to collect from petitioners. Whatever transpired between the Rural Bank or PDIC and AFPMBAI in respect of petitioners’ loan
account, if any, such that AFPMBAI came into possession of the loan documents and TCT No. 37017, it appears that petitioners
were not informed thereof, nor made privy thereto.
Same; Same; Article 1256 authorizes consignation alone, without need of prior tender of payment, where the ground for
consignation is that the creditor is unknown, or does not appear at the place of payment; or is incapacitated to receive the
payment at the time it is due; or when, without just cause, he refuses to give a receipt; or when two or more persons claim the
same right to collect; or when the title of the obligation has been lost.―The lack of prior tender of payment by the petitioners is
not fatal to their consignation case. They filed the case for the exact reason that they were at a loss as to which between the
two―the Rural Bank or AFPMBAI―was entitled to such a tender of payment. Besides, as earlier stated, Article 1256 authorizes
consignation alone, without need of prior tender of payment, where the ground for consignation is that the creditor is unknown,
or does not appear at the place of payment; or is incapacitated to receive the payment at the time it is due; or when, without just
cause, he refuses to give a receipt; or when two or more persons claim the same right to collect; or when the title of the obligation
has been lost.
Article 1266
Art. 1266. The debtor in obligations to do shall also be released when the prestation becomes legally or
physically impossible without the fault of the obligor. (1184a)
PEOPLE V. FRANKLIN, 39 SCRA 363
Bail bond; Article 1266, New Civil Code, does not apply to a, surety upon a, bail bond.—Art. 1266, New Civil Code, does not
apply to a surety upon a bail bond, as said Article speaks of a relation between a debtor and creditor, which does not exist in the
case of a surety upon a bail bond, on one hand, and the State, on the other. For while sureties upon a bail bond (or recognizance)
can discharge themselves from liability by surrendering their principal, sureties on ordinary bonds or commercial contracts, as a
general rule, can only be released by payment of the debt or performance of the act stipulated.
Same; Obligations of surety.—In the eyes of the law a surety becomes the legal custodian and jailer of the accused, thereby
assuming the obligation to keep the latter at all times under surveillance, and to produce and surrender him to the court the
latter's demand.
Same; Where negligent so as to justify forfeiture of its bond.—A forfeiture of a bail bond is justified by failure to produce the
accused in court by reason of her obtaining a Philippine Passport and leaving for the United States. For it was the surety
company's duty to do every thing and take all steps necessary to prevent that departure , which could have been accomplished
by seasonably informing the Department of Foreign Affairs and other agencies of the Government of the fact that the accused
whose provisional liberty it had posted a bail bond, was facing a criminal charge in a particular court of the country.
IMMACULATA V. NAVARRO, 160 SCRA 211
Facts
This case is a Motion for Reconsideration on a decision rendered by the court denying Immaculata’s petition to set aside a
decision in another civil case. In the latter case, Victoria filed for specific performance in order to compel Immaculata to execute
a document registrable with the Register of Deeds. This case was regarding the sale of a 5000 sqm parcel of land allegedly sold
by Immaculata in favor of Victoria. In that case, a judgment in default was entered against Immaculata. Thus, Immaculata sought
to annul said judgment on the ground that the court did not acquire jurisdiction over the person of Immaculata because he was
mentally ill and did not receive the summons. On certiorari, the court ruled that Immaculata was barred by res judicata and that
his wife, his then guardian ad litem, received the alias summons and that, assuming there was no proper service of summons,
he voluntarily submitted himself when he filed a petition to set aside judgment.
In this MR, Immaculata is seeking the court to consider a point inadvertently missed by the court in its 1986 this decision. (The
resolution of this MR was in 1988) Immaculata alternatively prayed therein that, in case the validity of the sale is upheld, he be
allowed to legally redeem the parcel of land previously obtained through a free patent.
Held:
The MR should be GRANTED. While res judicata may bar questions on the validity of the sale in view of alleged insanity and
intimidation (and this point is no longer pressed by counsel for the petitioner) still the question of the right of legal redemption
has remained unresolved.. While the sale was originally executed sometime in December, 1969, it was only on February 3, 1974
when a "deed of conveyance" was formally executed. Since offer to redeem was made on March 24, 1975, this was clearly
within the five-year period of legal redemption allowed by the Public Land Act.
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The allegation that the offer to redeem was not sincere, because there was no consignation of the amount in Court is devoid of
merit. The right to redeem is a RIGHT, not an obligation, therefore, there is no consignation required to preserve the right to
redeem.
PNCC V. NLRC, 193 SCRA 401
Civil Law; Contracts; The non-renewal of private respondent’s permit had the effect of resolving or rendering cancellable the
employment contract.—Appraising the second employment contract between petitioner and private respondent in terms of
Philippine law, there are three (3) reasons why petitioner cannot be held liable under that contract for breach thereof under the
circumstances of this case. The first reason relates to paragraph 13 of the second contract, quoted earlier. It will be seen that
the renewal of private respondent’s Residence and Work permit constituted a condition to his continued employment in Saudi
Arabia. That condition was resolutory in nature, that is, the non-renewal of private respondent’s permit had the effect of resolving,
or rendering cancellable, that contract.
Same; Same; Same; An obligor shall be released from his obligation when the prestation has become legally or physically
impossible without fault on his part.—The second reason is found in the rule that an obligor shall be released from his obligation
when the prestation has become legally or physically impossible without fault on his part. The supervening impossibility of
performance, based upon some factor independent of the will of the obligor, releases the obligor from his obligation after
restitution of what he may have received, if any, in advance from the other contracting party; the obligor incurs no liability for
damages for his inability to perform.
Same; Same; Same; Paragraph 13 of the second contract expressly envisaged the possibility that renewal of the residence and
work permit of private respondent could be denied by the concerned authorities for any reason in which case the contract would
be cancelled.—There is a third and final reason why private respondent cannot hold petitioner liable for breach of the second
contract of employment. Paragraph 13 of the second contract expressly envisaged the possibility that renewal of the Residence
and Work permit of private respondent could “be denied by the concerned authorities for any reason,” in which case, the contract
would be “cancelled.” Private respondent was, of course, aware that his original permit was about to expire when he left for
Saudi Arabia the second time. He must or should have been also alerted by the second contract of employment to the possibility
of non-renewal of his Residence and Work permit and the ensuing cancellability of the contract. Petitioner did not, in other words,
conceal the legal and practical situation from private respondent. We find no bad faith on the part of petitioner.
PNCC V. CA, 272 SCRA 183
Civil Law; Contracts; Article 1266 of the Civil Code is an exception to the principle of the obligatory force of contracts.—It is a
fundamental rule that contracts, once perfected, bind both contracting parties, and obligations arising therefrom have the force
of law between the parties and should be complied with in good faith. But the law recognizes exceptions to the principle of the
obligatory force of contracts. One exception is laid down in Article 1266 of the Civil Code, which reads: “The debtor in obligations
to do shall also be released when the prestation becomes legally or physically impossible without the fault of the obligor.”
Same; Same; Said article is applicable only to obligations “to do” and not to obligations “to give.”—Petitioner cannot, however,
successfully take refuge in the said article, since it is applicable only to obligations “to do,” and not obligations “to give.” An
obligation “to do” includes all kinds of work or service; while an obligation “to give” is a prestation which consists in the delivery
of a movable or an immovable thing in order to create a real right, or for the use of the recipient, or for its s imple poss ession,
or in order to return it to its owner.
Same; Same; The obligation to pay rentals or deliver the thing in a contract of lease falls within the prestation “to give”; hence,
it is not covered within the scope of Article 1266.—The obligation to pay rentals or deliver the thing in a contract of lease falls
within the prestation “to give”; hence, it is not covered within the s cope of Article 1266. At any rate, the unforeseen event and
causes mentioned by petitioner are not the legal or physical impossibilities contemplated in the said article. Besides, petitioner
failed to state specifically the circumstances brought about by “the abrupt change in the political climate in the country” except
the alleged prevailing uncertainties in government policies on infrastructure projects.
Same; Same; Under the theory of rebus sic stantibus, the parties stipulate in the light of certain prevailing conditions and once
these conditions cease to exist, the contract also ceases to exist.—The principle of rebus sic stantibus neither fits in with the
facts of the case. Under this theory, the parties stipulate in the light of certain prevailing conditions, and once these conditions
cease to exist, the contract also ceases to exist. This theory is said to be the basis of Article 1267 of the Civil Code, which
provides: ART. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the
obligor may also be released therefrom, in whole or in part.
Same; Same; Mere pecuniary inability to fulfill an engagement does not discharge a contractual obligation, nor does it constitute
a defense to an action for specific performance.—Anent petitioner’s alleged poor financial condition, the same will neither release
petitioner from the binding effect of the contract of lease. As held in Central Bank v. Court of Appeals, cited by private respondents,
mere pecuniary inability to fulfill an engagement does not discharge a contractual obligation, nor does it constitute a defense to
an action for specific performance.
Same; Same; The motive or particular purpose of a party in entering into a contract does not affect the validity nor existence of
the contract, except when the realization of such motive or particular purpose has been m ade a condition upon which the
contract is made to depend.—With regard to the non-materialization of petitioner’s particular purpose in entering into the contract
of lease, i.e., to use the leased premises as a site of a rock crushing plant, the same will not invalidate the contract. The cause
or essential purpose in a contract of lease is the use or enjoyment of a thing. As a general principle, the motive or particular
purpose of a party in entering into a contract does not affect the validity nor existence of the contract; an exception is when the
realization of such motive or particular purpose has been made a condition upon which the contract is made to depend. The
exception does not apply here.
Article 1267
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
Art. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the
parties, the obligor may also be released therefrom, in whole or in part. (n)
LAGUNA V. MANABAT , 58 SCRA 650
Facts:
A contract was executed whereby the Biñan Transpo. Co. leased to the Laguna-Tayabas Bus Company at a monthly rental of
P2,500.00 its certificates of public convenience over the lines known as Manila-Biñan, Manila-Canlubang and Sta. Rosa-Manila,
and to the Batangas Transportation Company its certificate of public convenience over the line known as Manila-Batangas
Wharf, together with one "International" truck, for a period of five years, renewable for another similar period, to commence from
the approval of the lease contract by the Public Service Commission (PSC). The PSC provisionally approved the lease contract
on condition that the lessees should operate on the leased lines in accordance with the prescribed time schedule and that such
approval was subject to modification or cancellation.
Sometime after the execution of the lease contract, the plaintiff Biñan was declared insolvent, and Manabat was appointed as
its assignee. From time to time, the defendants paid the lease rentals. However, while case was pending rentals accrued.
Batangas Transpo and Laguna-Tayabas Bus Co. separately filed with the PSC a petition for authority to suspend the operation
on the lines covered by the certificates of public convenience leased to each of them by Biñan. They alleged as reasons the
reduction in the amount of dollars allowed by the Monetary Board of the Central Bank of the Philippines for the purchase of spare
parts needed in the operation of their trucks, the alleged difficulty encountered in securing said parts, and their procurement at
exorbitant costs, thus rendering the operation of the leased lines prohibitive. Further, that the high cost of operation, coupled
with the lack of passenger traffic on the leased lines resulted in financial losses. For these reasons they asked permission to
suspend the operation of the leased lines.
Lessees Batangas and Laguna, then pleaded for a reduction of the rentals on the ground that the subject matter of the lease
was allegedly not used by them as a result of the suspension of operations on the lines authorized by PSC.
Issue:
W/N lessee can be allowed equitable reduction of the stipulated rentals? NO.
Rationale:
Performance is not excused by subsequent inability to perform, by unforeseen difficulties, by unusual or unexpected expenses,
by danger, by inevitable accident, by breaking of machinery, by strikes, by sickness, by failure of a party to avail himself of the
benefits to be had under the contract, by weather conditions, by financial stringency or bystagnation of business. Neither is
performance excused by the fact that the contract turns out to be hard and improvident, unprofitable, or impracticable, ill-advised,
or even foolish, or less profitable, unexpectedly burdensome.
Article 1680 is a special provision for leases of rural lands. No other legal provision makes it applicable to ordinary leases. Even
if the cited article were a general rule on lease, its provisions nevertheless do not extend to petitioners. One of its requi sites is
that the cause of loss of the fruits of the leased property must be an "extraordinary and unforeseen fortuitous event." The
circumstances of the instant case fail to satisfy such requisite. As correctly ruled by the CA, the alleged causes for the suspension
of operations on the lines leased, namely, the high prices of spare parts and gasoline and the reduction of the dollar allocations,
"already existed when the contract of lease was executed". The cause of petitioners' inability to operate on the lines cannot be
ascribed to fortuitous events or circumstances beyond their control, but to their own voluntary desistance
Obviously, no reduction can be sustained on the ground that the operation of the leased lines was suspended upon the mere
speculation that it would yield no substantial profit for the lessee bus company. Petitioners' profits may be reduced due to
increase operating costs; but the volume of passenger traffic along the leased lines not only remains same but may even increase
as the tempo of the movement of population is intensified by the industrial development of the areas covered or connected by
the leased routes. Moreover, upon proper showing, the PSC might have granted petitioners an increase in rates, as it has done
so in several instances, so that public interest will always be promoted by a continuous flow of transportation facilities to service
the population and the economy. The citizenry and the economy will suffer by reason of any disruption in the transportation
facilities.
Furthermore, we are not at all convinced that the lease contract brought no material advantage to the lessor for the period of
suspension. It must be recalled that the lease contract not only stipulated for the transfer of the lessor's right to operate the lines
covered by the contract, but also for a forbearance on the part of the lessor to operate transportation business along the same
lines - and to hold a certificate for that purpose. Thus, even if the lessee would not actually make use of the lessor's certificates
over the leased lines, the contractual commitment of the lessor not to operate on the lines would sufficiently insure added profit
to the lessees on account of the lease contract. In other words, the commitment alone of the lessor under the contract would
enable the lessees to reap full benefits therefrom since the commuting public would, after all, be forced - at their inconvenience
and prejudice
"(S)ince, by the lease, the lessee was to have the advantage of casual profits of the leased premises, he should run the hazard
of casual losses during the term and not lay the whole burden upon the lessor." (Reyes v. Caltex)
Militating further against a grant of reduction of the rentals to the petitioners is the petitioners' conduct which is not in accord with
the rules of fair play and justice. Petitioners, it must be recalled, promised to pay the accrued rentals in due time. Later, however,
when they believed they found a convenient excuse for escaping their obligation, they reneged on their earlier promise.
Moreover, petitioners' option to suspend operation on the leased lines appears malicious. Thus, Justice Esguerra, speaking for
the Court of Appeals, propounded the following questions: "If it were true that the cause of the suspension was the high prices
of spare parts, gasoline and needed materials and the reduction of the dollar allocation, why was it that only plaintiff-appellee's
certificate of public convenience was sought to be suspended? Why did not the defendants-appellants ask for a corresponding
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reduction or suspension under their own certificate along the same route? Suppose the prices of the spare parts and needed
materials were cheap, would the defendants-appellants have paid more than what is stipulated in the lease contract? We believe
not. Hence, the suspension of operation on the leased lines was conceived as a scheme to lessen operation costs with the
expectation of greater profit."
Indeed, petitioners came to court with unclean hands, which fact militates against their plea for equity.
OCCENA V. JABSON, 73 SCRA 637
Facts:
Private respondent Tropical Homes, Inc. entered into a subdivision contract with petitioners wherein respondent guaranteed
petitioners (as landowners of a 55,330 square meter parcel of land in Davao City) an amount equivalent to 40% of all cash
receipts from the sale of the subdivision lots. Respondent filed a complaint for modification of the terms and conditions of the
contract with petitioners, alleging that:
• “due to the increase in price of oil and its derivatives and the concomitant worldwide spiralling of prices, which
are not within the control of plaintiff, of all commodities including basis raw materials required for such
development work, the cost of development has risen to levels which are unanticipated, unimagined and not
within the remotest contemplation of the parties at the time said agreement was entered into and to such a
degree that the conditions and factors which formed the original basis of said contract, have been totally
changed;”
• “further performance by the plaintiff under the contract will result in situation where defendants would be
unustly enriched at the expense of the plaintiff; will cause an inequitous distribution of proceeds from the sales
of subdivided lots in manifest actually result in the unjust and intolerable exposure of plaintiff to implacable
losses, all such situations resulting in an unconscionable, unjust and immoral situation contrary to and in
violation of the primordial concepts of good faith, fairness and equity which should pervade all human
relations.”
Petitioners insist that the worldwide increase in prices cited by respondent does not constitute a sufficient cause of action for
modification of the subdivision contract.
Issue/Held:
Does the increase in prices constitute a sufficient cause of action of for modification of the subdivision contract? No.
Rationale:
ART. 1267 of the Civil Code:
“When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor
may also be released therefrom, in whole or in part.
Respondent's complaint for modification of contract manifestly has no basis in law and therefore states no cause of action. Under
the particular allegations of respondent's complaint and the circumstances therein averred, the courts cannot even in equity
grant the relief sought.
While respondent court correctly cited in its decision the Code Commission's report giving the rationale for Article 1267 of the
Civil Code, to wit: “[t]he general rule is that impossibility of performance releases the obligor. However, it is submitted that when
the service has become so difficult as to be manifestly beyond the contemplation of the parties, the court should be authorized
to release the obligor in whole or in part. The intention of the parties should govern and if it appears that the service turns out to
be so difficult as have been beyond their contemplation, it would be doing violence to that intention to hold the obligor still
responsible,” the respondent court misapplied the same to respondent's complaint.
If respondent's complaint were to be released from having to comply with the subdivision contract, assuming it could show at
the trial that the service undertaken contractually by it had "become so difficult as to be manifestly beyond the contemplation of
the parties", then respondent court's upholding of respondent's complaint and dismissal of the petition would be justifiable under
the cited codal article. Without said article, respondent would remain bound by its contract under the prevailing doctrine that
performance therewith is not excused "by the fact that the contract turns out to be hard and improvident, unprofitable, or
unexpectedly burdensome", since in case a party desires to be excused from performance in the event of such contingencies
arising, it is his duty to provide it in the contract.
However, respondent's complaint seeks not release from the subdivision contract but that the court render judgment in modifying
the terms and conditions of the contract by fixing the proper shares that should pertain to the herein parties out of the gross
proceeds from the sales of subdivided lots of subject subdivision.
The cited article does not grant the courts this authority to remake, modify or revise the contract or to fix the division of shares
between the parties as contractually stipulated with the force of law between the parties, so as to substitute its own terms for
those covenanted by the parties themselves.
NAGA TELEPHONE V. CA, 230 SCRA 351
Facts:
In 1977, the parties entered into a contract for the use by petitioners in the operation of its telephone service the electri c light
posts of private respondent in Naga City. In consideration therefor, petitioners agreed to install, free of charge, 10 telephone
connections for the use by private respondent. Said contract also provided that the term or period of the contract shall be as
long as the petitioner has need for the electric light posts. In 1989, private respondent filed with the RTC against petitioners for
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
reformation of the contract with damages, on the grounds that: 1) petitioners' use of the posts have become much heavier with
the increase in the volume of their subscribers; 2) petitioners have used 319 posts without any contract with it and that petitioners
had refused to pay private respondent rent despite demands; and 3) the poor servicing by petitioners of the 10 telephone units
which had caused it great inconvenience and damages. The RTC ruled in favor of private respondents, ordering the reformation
of the contract, ruling that while in an action for reformation of contract, it cannot make another contract for the parties, it can,
however, for reasons of justice and equity, order that the contract be reformed to abolish the inequities therein. The CA affirmed
the RTC decision but said that: (1) Article 1267 of the New Civil Code is applicable and (2) that the contract was subject to a
potestative condition which rendered said condition void. Petitioners filed an MR but was denied. Hence, the present petition.
Petitioners assert that Article 1267 is not applicable 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.
Issue/Held:
W/N Art. 1276 is applicable. – YES.
Rationale:
Article 1267 speaks of "service" which 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, it is not a requirement thereunder that the contract be for future service with future
unusual change. According to 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
favor of the party prejudiced. We, therefore, release the parties from their correlative obligations under the contract. However,
we have to take into account the possible consequences of merely releasing the parties therefrom: petitioners will remove the
telephone wires/cables in the posts of private respondent, resulting in disruption of their service to the public; while private
respondent, in consonance with the contract will return all the telephone units to petitioners, causing prejudice to its business.
We shall not allow such eventuality. Rather, we require, as ordered by the trial court: 1) petitioners to pay private respondent for
the use of its posts in Naga City and in the other places where petitioners use private respondent's posts, P10 per post, per
month; and 2) private respondent to pay petitioner the monthly dues of all its telephones at the same rate being paid by the
public. The peculiar circumstances of the present case necessitates exercise of our equity jurisdiction. We are not making a new
contract for the parties, but we find it necessary to do so in order not to disrupt the basic and essential services being rendered
by both parties to the public and to avoid unjust enrichment by appellant at the expense of plaintiff.
OTHER ISSUES:
On the issue of prescription, petitioners allege that private respondent’s cause of action already prescribed as the action was
filed more than 10 years from the execution of the contract. However, the 10-year period when the right of action accrues is not
necessarily the date of execution of the contract. Private the right of action arose only after said contract had already become
disadvantageous due to subsequent events and conditions, which must be sometime during the latter part of 1982 or in 1983
when Atty. General was asked by private respondent's Board of Directors to study said contract as it already appeared
disadvantageous is erroneous.
Regarding the last issue, petitioners allege that there is nothing purely potestative about the prestations of either party because
petitioner's permission for free use of telephones is not made to depend purely on their will, neither is private respondent's
permission for free use of its posts dependent purely on its will. Petitioners' allegations must be upheld in this regard. A
potestative condition is a condition, the fulfillment of which depends upon the sole will of the debtor, in which case, the conditional
obligation is void. Based on this definition, the provision in the contract, to wit: “(a) That the term or period of this contract shall
be as long as the party of the first part (petitioner) has need for the electric light posts of the party of the second part (private
respondent)…” is a potestative condition. However, the other conditions in the same provision, to wit: “…it being understood that
this contract shall terminate when for any reason whatsoever, the party of the second part (private respondent) is forced to stop,
abandoned (sic) its operation as a public service and it becomes necessary to remove the electric light post (sic)” which are
casual conditions since they depend on chance, hazard, or the will of a third person. In sum, the contract is subject to mixed
conditions, that is, they depend partly on the will of the debtor and partly on chance, hazard or the will of a third person, which
do not invalidate the aforementioned provision.
MAGAT V. CA, 337 SCRA 298
Facts:
Guerrero, President of Guerrero Transport Services [GTS], won a bid to "provide radio-controlled taxi service within the U.S.
Naval Base for not more than one year. At the birth of Martial Law, Marcos issued LOI No. 1 seizing and controlling all privately
owned newspapers, magazines… and other media of communication. Thus, the Radio Control Office issued an Administrative
Circular suspending the acceptance and processing of applications for radio station permits and to own or possess radio
transmitters or transceivers, Except: 1. Aeronautical Stations; 2. Aeronautical Fixed Stations; 3. Aircraft Stations; 4. Coastal
Stations; and 5. Ship Stations.
Guerrero and Magat, the General Manager of Spectrum Electronic Laboratories, executed a letter-contract for the purchase of
transceivers. It appears though that Magat is also ordering the transceivers from a Japanese supplier. Thus, Magat told Guerrero
that should the contract be cancelled, the Japanese firm would forfeit 30% of the deposit and charge a cancellation fee in an
amount not yet known and that Guerrero shall bear the loss. Further, should the contract be canceled, Magat would demand an
additional amount equivalent to 10% of the contract price.
Unable to get a letter of credit from the Central Bank due to the refusal of the Philippine government to issue a permit to import
the transceivers, Guerrero commenced operation of the taxi cabs within Subic Naval Base, using radio units borrowed from the
U.S. government. Magat thus canceled his order with his Japanese supplier and sued Guerrero. Latter claims the contract is
void because it was a contraband.
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The RTC and CA decided in favor of the heirs of Magat and ordered Guerrero to pay temperate, moral and exemplary damages,
and attorney's fees. Hence, this appeal.
Issue:
1. Was the contract for the purchase of radio transceivers void? No, valid.
2. Were the transceivers subject of the contract banned contraband items prohibited by the LOI and the Administrative Circular
to import? No. Not contraband.
Held:
While contract is valid, no exemplary moral and actual damages should be awarded.
Ratio:
1. As to the validity of the contract: "Contraband" generally refers to "any property which is unlawful to produce or possess." It
refers to goods which are exported and imported into a country against its laws.
The contract was not void ab initio. Nowhere in the LOI and Admin. Circular is there an express ban on the importation of
transceivers. The LOI and Administrative Circular did not render "radios and transceivers" illegal per se. The Administrative
Circular merely ordered the Radio Control Office to suspend the "acceptance and processing . . . . of applications . . . for permits
to possess, own, transfer, purchase and sell radio transmitters and transceivers . . . " Therefore, possession and importation of
the radio transmitters and transceivers was legal provided one had the necessary license for it. Transceivers were not prohibited
but merely regulated goods. The LOI and Administrative Circular did not render the transceivers outside the commerce of man.
They were valid objects of the contract. Thus, the contract was valid.
The law provides that "[w]hen the service (required by the contract) has become so manifestly beyond the contemplation of the
parties, the obligor may also be released therefrom, in whole or in part." Here, Guerrero's inability to secure a letter of credit and
to comply with his obligation was a direct consequence of the denial of the permit to import. For this, he cannot be faulted.
2. As to the damages: No Moral and exemplary damages:
Even if we assume that there was a breach of contract, damages cannot be awarded. Damnum absque injuria.
There was no bad faith. Bad faith does not simply connote bad judgment or negligence. It imports a dishonest purpose or some
moral obliquity and conscious doing of wrong. True, Guerrero borrowed equipment from the Subic Naval Base authorities at
zero cost. This does not automatically translate to bad faith. Guerrero was faced with the danger of the cancellation of his contract
with Subic Naval Base. He borrowed equipment as a prudent and swift alternative. There was no proof that he resorted to this
option with a deliberate and malicious intent to dishonor his contract with Victorino.
Neither can actual damages be awarded. To recover actual damages, the amount of loss must not only be capable of proof, but
must be proven with a reasonable degree of certainty. The claim must be premised upon competent proof or upon the best
evidence obtainable, such as receipts or other documentary proof.
Only the testimony of the broker was presented to substantiate petitioners' claim for unrealized profits. Not only is his testimony
self-serving, it is also hearsay.
Article 1270
Art. 1270. Condonation or remission is essentially gratuitous, and requires the acceptance by the obligor.
It may be made expressly or impliedly.
One and the other kind shall be subject to the rules which govern inofficious donations. Express
condonation shall, furthermore, comply with the forms of donation. (1187)
YAM V. CA, 303 SCRA 1
Facts:
On May 10,1979, the parties in this case entered into a Loan Agreement with Assumption of Solidary Liability whereby petitioners
were given a loan of P500,000.00 by private respondent. The contract provided for the payment of 12% annual interest, 2%
monthly penalty, 1 1/2% monthly service charge, and 10% attorney's fees. Denominated the first Industrial Guarantee and Loan
Fund (IGLF), the loan was secured by a chattel mortgage on the printing machinery in petitioners' establishment.
Petitioners subsequently obtained a second IGLF loan evidenced by two promissory notes. For this purpose, a new loan
agreement was entered into by the parties containing identical provisions as the first one, except as to certain provisions.
Yam paid the first loan. After a few months, Manphil was placed under receivership. A partial payment was then made on the
second loan. Yam later wrote a letter to Manphil proposing to settle their obligation. However, Manphil replied with a counter-
offer of reducing the penalty charges if the obligation is paid on or before a certain date.
Manphil sent 2 demand letters seeking the payment of the balance. As petitioners did not pay, a case was filed in court for the
collection or the foreclosure of the mortgages. Yam, on the other hand, contended that they fully paid their obligation when the
president of Manphil agreed to waive the penalties. This is the reason why according to them they only paid P410,854.47.
Petitioners added that this fact of full payment is reflected in the voucher accompanying the Pilipinas Bank check they issued,
which bore the notation "full payment of IGLF loan."
Issue:
WON Yam is liable for the payment of the penalties and service charges on their loan? YES
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
Ratio:
Art. 1270, par. 2 of the Civil Code provides that express condonation must comply with the forms of donation. Art. 748, par. 3
provides that the donation and acceptance of a movable, the value of which exceeds P5,000,00, must be made in writing,
otherwise the same shall be void. In this connection, under Art. 417, par. 1, obligations, actually referring to credits,l3 are
considered movable property. In the case at bar, it is undisputed than the alleged agreement to condone P266,196.88 of the
second IGLF loan was not reduced in writing.
Nonetheless, petitioners insist that the voucher covering the Pilipinas Bank check for P410,854.47, containing the notation that
the amount is in "full payment of IGLF loan," constitutes documentary evidence of such oral agreement. This contention is without
merit. The notation in "full payment of IGLF loan" merely states petitioners' intention in making the payment, but in no way does
it bind private respondent. It would have been a different matter if the notation appeared in a receipt issued by respondent
corporation, through its receiver, because then it would be an admission against interest. Indeed, if private respondent really
condoned the amount in question, petitioners should have asked for a certificate of full payment from respondent corporation,
as they did in the case of their first IGLF loan of P500,000.00.
Petitioners, however, contend that the Central Bank examiner assigned to respondent corporation, Cristina Destajo, signed the
voucher in question. Destajo claimed that, when she signed the voucher, she failed to notice the statement that the amount of
P410,854.47 was being given in "full payment of IGLF Loan." She said she merely took note of the amount and the check number
indicated therein. In any event, Destajo, by countersigning the voucher, did no more than acknowledge receipt of the payment.
She cannot be held to have ascented thereby to the payment in full of petitioners' indebtedness to private respondent. It was
obvious she had no authority to condone any indebtedness, her "issuing official receipts, preparing check vouchers and
documentation."
Article 1271
Art. 1271. The delivery of a private document evidencing a credit, made voluntarily by the creditor to the
debtor, implies the renunciation of the action which the former had against the latter.
If in order to nullify this waiver it should be claimed to be inofficious, the debtor and his heirs may uphold
it by proving that the delivery of the document was made in virtue of payment of the debt. (1188)
TRANS-PACIFIC V. CA, 235 SCRA 494
Contracts; Obligations; Evidence; Presumptions of Payment; Original Copies of Documents; Duplicate originals are admissible
as evidence.—Applying the legal presumption provided by Art. 1271 of the Civil Code, the trial court ruled that petitioner has
fully discharged its obligation by virtue of its possession of the documents (stamped “PAID”) evidencing its indebtedness.
Respondent court disagreed and held, among others, that the documents found in possession of Trans-Pacific are mere
duplicates and cannot be the basis of petitioner’s claim that its obligation has been fully paid. Accordingly, since the promissory
notes submitted by petitioner were duplicates and not the originals, the delivery thereof by respondent bank to the petitioner
does not merit the application of Article 1271 (1st par.) of the Civil Code. Respondent court is of the view that the provision must
be construed to mean the original copy of the document evidencing the credit and not its duplicate. The pronouncement of
respondent court is manifestly groundless. It is undisputed that the documents presented were duplicate originals and are
therefore admissible as evidence. Further, it must be noted that respondent bank itself did not bother to challenge the authenticity
of the duplicate copies submitted by petitioner. A duplicate copy of the original may be admitted in evidence when the original is
in the possession of the party against whom the evidence is offered, and the latter fails to produce it after reasonable notice, as
in the case of respondent bank.
Same; Same; Same; Same; The presumption created by Art. 1271 of the Civil Code is not conclusive but merely prima facie.—
The presumption created by the Art. 1271 of the Civil Code is not conclusive but merely prima facie. If there be no evidence to
the contrary, the presumption stands. Conversely, the presumption loses its legal efficacy in the face of proof or evidence to the
contrary. In the case before us, we find sufficient justification to overthrow the presumption of payment generated by the delivery
of the documents evidencing petitioners indebtedness.
Same; Same; Same; Same; Private documents; Where several originals are made out of a private document, the intendment of
the law would thus be to refer to the delivery only of the original original rather than to the original duplicate of which the debtor
would normally retain a copy.—It may not be amiss to add that Article 1271 of the Civil Code raises a presumption, not of
payment, but of the renunciation of the credit where more convincing evidence would be required than what normally would be
called for to prove payment. The rationale for allowing the presumption of renunciation in the delivery of a private instrument is
that, unlike that of a public instrument, there could be just one copy of the evidence of credit. Where several originals are made
out of a private document, the intendment of the law would thus be to refer to the delivery only of the original original rather than
to the original duplicate of which the debtor would normally retain a copy. It would thus be absurd if Article 1271 were to be
applied differently.
Article 1278
Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and
debtors of each other. (1195)
GAN TION V. CA, 28 SCRA 235
DOCTRINE
An award for attorney's fees is a proper subject of legal compensation, it being an award of damages to the client and not the
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counsel.
The litigant, not his counsel, is the judgment creditor who may enforce the judgment for attorney's fees for execution.
FACTS
Ong Wan Sieng leased was a tenant in certain premises owned by Gan Tion. In 1961 the latter filed an ejectment case against
the former, alleging non-payment of rents for August and September of that year, at P180 a month, or P360 altogether. The
defendant denied the allegation and said that the agreed monthly rental was only P160, which he had offered to but was refused
by the plaintiff. The plaintiff obtained a favorable judgment in the municipal court (of Manila), but upon appeal the Court of First
Instance, on July 2, 1962, reversed the judgment and dismissed the complaint, and ordered the plaintiff to pay the defendant
the sum of P500 as attorney's fees. That judgment became final.
On October 10, 1963 Gan Tion served notice on Ong Wan Sieng that he was increasing the rent to P180 a month, effective
November 1st, and at the same time demanded the rents in arrears at the old rate in the aggregate amount of P4,320.00,
corresponding to a period from August 1961 to October 1963.
In the meantime, over Gan Tion's opposition, Ong Wan Sieng was able to obtain a writ of execution of the judgment for attorney's
fees in his favor. Gan Tion went on certiorari to the Court of Appeals, where he pleaded legal compensation, claiming that Ong
Wan Sieng was indebted to him in the sum of P4,320 f or unpaid rents, The appellate court accepted the petition but eventually
decided for the respondent, holding that although "respondent Ong is indebted to the petitioner for unpaid rentals in an amount
of more than P4,000.00," the sum of P500 could not be the subject of legal compensation, it being a "trust fund for the benefit of
the lawyer, which would have to be turned over by the client to his counsel." In the opinion of said Court, the requisites of legal
compensation, namely, that the parties must be creditors and debtors of each other in their own right (Art. 1278, Civil Code) and
that each one of them must be bound principally and at the same time be a principal creditor of the other (Art. 1279), are not
present in the instant case, since the real creditor with respect to the sum of P500 was the defendant's counsel.
ISSUE/S
Whether or not there has been legal compensation.
HELD
YES. It is the litigant, not his counsel, who is the judgment creditor and who may enforce the judgment by execution. Such credit,
therefore, may properly be the subject of legal compensation. Quite obviously it would be unjust to compel petitioner to pay his
debt for P500 when admittedly his creditor is indebted to him for more than P4,000.
The nature of the award of damages – attorney’s fees – is that it is made in favor of the litigant, not of his counsel, and is justified
by way of indemnity for damages recoverable by the former in the cases enumerated in Article 2208 of the Civil Code.
2014A
Article 1278 of the Civil Code does indeed provide that "Compensation shall take when two persons, in their own right, are
creditors and debtors of each other. " Also true is that compensation may transpire by operation of law, as when all the requisites
therefor, set out in Article 1279, are present. Nonetheless, these legal provisions cannot apply to PNB's advantage under the
circumstances of the case at bar.
The insuperable obstacle to the success of PNB's cause is the factual finding of the IAC, by which upon firmly established rules
even this Court is bound, that it has not proven by competent evidence that it is a creditor of ISABELA. The only evidence present
by PNB towards this end consists of two (2) documents marked in its behalf as Exhibits 1 and 2, But as the IAC has cogently
observed, these documents do not prove any indebtedness of ISABELA to PNB. All they do prove is that a letter of credit might
have been opened for ISABELA by PNB, but not that the credit was ever availed of (by ISABELA's foreign correspondent MAN,
or that the goods thereby covered were in fact shipped, and received by ISABELA.
PNB has however deposited an alternative theory, which is that the P2M deposit had been assigned to it by ISABELA as
"collateral," although not by way of pledge; that ISABELA had explicitly authorized it to apply the P2M deposit in payment of its
indebtedness; and that PNB had in fact applied the deposit to the payment of ISABELA's debt on February 26, 1980, in concept
of voluntary compensation. This second, alternative theory, is as untenable as the first.
In the first place, there being no indebtedness to PNB on ISABELA's part, there is in consequence no occasion to speak of any
mutual set-off, or compensation, whether it be legal, i.e., which automatically occurs by operation of law, or voluntary, i.e., which
can only take place by agreement of the parties.
In the second place, the documents indicated by PNB as constitutive of the claimed assignment do not in truth make out any
such transaction.
Even if it be assumed that such an assignment had indeed been made, and PNB had been really authorized to apply the P2M
deposit to the satisfaction of ISABELA's indebtedness to it, nevertheless, since the record reveals that the application was
attempted to be made by PNB only on February 26, 1980, that essayed application was ineffectual and futile because at that
time, the deposit was already in custodia legis, notice of garnishment thereof having been served on PNB on January 9, 1980
(pursuant to the writ of execution issued by the Court of First Instance on December 23, 1979 for the enforcement of the partial
judgment in the ACEROS' favor rendered on November 18,1979).
One final factor precludes according validity to PNB's arguments. On the assumption that the P 2M deposit was in truth assigned
as some sort of "collateral" to PNB — although as PNB insists, it was not in the form of a pledge — the agreement postulated
by PNB that it had been authorized to assume ownership of the fund upon the coming into being of ISABELA s indebtedness is
void ab initio, it being in the nature of a pactum commisoruim proscribed as contrary to public policy.

PNB V. ONG ACERO, 148 SCRA 166 FRANCIA V. IAC, 162 SCRA 753

FACTS: Facts:
A savings account of Isabela is being claimed by ACEROS and PNB. The ACEROS are judgment creditors of Isabela who seek On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by the Republic of the Philippines for
to enforce against said savings account the final and executory judgment rendered in their favor. PNB on the other hand claims the sum of P4,116.00 representing the estimated amount equivalent to the assessed value of the aforesaid portion.
that since ISABELA was at some point in time both its debtor and creditor-ISABELA's deposit being deemed a loan to it (PNB)- Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5, 1977, his property was sold
there had occurred a mutual set-off between them, which effectively precluded the ACEROS' recourse to that deposit. at public auction by the City Treasurer of Pasay City pursuant to Section 73 of Presidential Decree No. 464 known as the Real
Property Tax Code in order to satisfy a tax delinquency of P2,400.00.
The controversy was decided by the Intermediate Appellate Court adversely to the PNB. It is this decision that the PNB would
have this Court reverse. Issue:
May compensation take place?
The ACEROS' claim to the bank deposit is more specifically founded upon the garnishment thereof by the sheriff, effected in
execution of the partial judgment rendered by the CFI at Quezon City in their favor on November 18, 1979. Ruling:
There can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot
On the other hand, PNB's claim to the two-million-peso deposit in question is made to rest on an agreement between it and refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The
ISABELA in virtue of which, according to PNB: (1) the deposit was made by ISABELA as "collateral" in connection with its collection of a tax cannot await the results of a lawsuit against the government.
indebtedness to PNB as to which it (ISABELA) had assumed certain contractual undertakings; and (2) in the event of ISABELA's
failure to fulfill those undertakings, PNB was empowered to apply the deposit to the payment of that indebtedness. Isabela A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the statutes of set-off, which
subsequently failed to fulfill the undetakings hence PNB’s claims are construed uniformly, in the light of public policy, to exclude the remedy in an action or any indebtedness of the state or
municipality to one who is liable to the state or municipality for taxes.
Its theory thereon based on a mutual set-off, or compensation, between it and ISABELA — in accordance with Articles 1278 et
al. of the Civil Code — that PNB intervened in the action between the ACEROS and ISABELA on or about February 28, 1980 Government and taxpayer are not mutually creditors and debtors of each other under Article 1278 of the Civil Code and a claim
and moved for reconsideration of the Order of February 15, 1980. for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off.

ISSUE:
WON PNB was correct in asserting that compensation automatically took place between them hence the P2M cannot be subject
to garnishment. NO
RATIO:
PNB's main thesis is that when it opened a savings account for ISABELA on March 9, 1979 in the amount of P 2M, it (PNB)
became indebted to ISABELA in that amount. So that when ISABELA itself subsequently came to be indebted to it on account
of ISABELA's breach of the terms of the Credit Agreement of October 13, 1977, and therefore ISABELA and PNB became at
the same time creditors and debtors of each other, compensation automatically took place between them, in accordance with
Article 1278 of the Civil Code. The amounts due from each other were, in its view, applied by operation of law to satisfy and
extinguish their respective credits. More specifically, the P2M owed by PNB to ISABELA was automatically applied in payment
and extinguishment of PNB's own credit against ISABELA. This having taken place, that amount of P2M could no longer be
levied on by any other creditor of ISABELA, as the ACEROS attempted to do in the case at bar, in order to satisfy their judgment
against ISABELA.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
MONDRAGON V. SOLA, 689 SCRA 18 [2013]
Civil Law; Obligations; Compensation; Legal Compensation; Compensation is a mode of extinguishing to the concurrent amount
the obligations of persons who in their own right and as principals are reciprocally debtors and creditors of each other. Legal
compensation takes place by operation of law when all the requisites are present, as opposed to conventional compensation
which takes place when the parties agree to compensate their mutual obligations even in the absence of some requisites.—We
find that petitioner’s act of withholding respondent’s service fees/commissions and applying them to the latter’s outstanding
obligation with the former is merely an acknowledgment of the legal compensation that occurred by operation of law between
the parties. Compensation is a mode of extinguishing to the concurrent amount the obligations of persons who in their own right
and as principals are reciprocally debtors and creditors of each other. Legal compensation takes place by operation of law when
all the requisites are present, as opposed to conventional compensation which takes place when the parties agree to compensate
their mutual obligations even in the absence of some requisites. Legal compensation requires the concurrence of the following
conditions: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the
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other; (2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of
the same quality if the latter has been stated; (3) That the two debts be due; (4) That they be liquidated and demandable; (5)
That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to
the debtor.
Article 1279
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal
creditor of the other;
 expenses incurred by PAN-ORIENTAL, is also still unliquidated since interest does not stop accruing “until the expenses are
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same
kind, and also of the same quality if the latter has been stated;
 only P40,797.54. Deducting the latter amount from the former, REPUBLIC claims that P 18, 702.46 would still be owing by PAN-
(3) That the two debts be due;
(4) That they be liquidated and demandable; 

(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor. (1196)
REPUBLIC V. DE LOS ANGELES, 98 SCRA 103
Constitutional Law; Due Process; Lessees of a commercial building, not parties to the case and not afforded an opportunity to
be heard, cannot be ordered to pay rentals to a mortgagee of the building; Reasons.—But, the respondent Judge exceeded his
jurisdiction in ordering or compelling the lessees of the said building, the RCA among others, to pay the rentals to the respondent
Corporation, without giving the lessees an opportunity to be heard. The said lessees are not parties to the case between the
lessor and the Marcelo Steel Corporation. The RCA, in particular, was not furnished with a copy of the motion of the respondent
Corporation, dated December 9, 1967, praying that an order be issued directing and/or authorizing the RCA and other lessees
to channel or pay directly to the said corporation the rents for the use of the Doña Petra Building, so that the RCA was deprived
of its day in court and precluded it from presenting the defenses that it has against the lessor. x x x The said order clearly violated
the constitutional provision against depriving a person of his property without due process of law.
Civil Law; Compensation; Compensation of debts arise even without proof of liquidation of claim, where the claim is
undisputed.—Proof of the liquidation of a claim, in order that there be compensation of debts, is proper if such claim is disputed.
But, if the claim is undisputed, as in the case at bar, the statement is sufficient and no other proof may be required. In the instant
case, the claim of the RCA that Petra R. Farin has an outstanding obligation to the RCA in the amount of P263,062.40 which
should be compensated against the rents already due or may be due, was raised by the RCA in its motion for the reconsideration
of the order of December 23, 1967. A copy of said motion was duly furnished counsel for Petra R. Farin and although the said
Petra R. Farin subsequently filed a similar motion for the reconsideration of the order of December 23, 1967, she did not dispute
nor deny such claim. Neither did the Marcelo Steel Corporation dispute such claim of compensation in its opposition to the
motion for the reconsideration of the order of December 23, 1967. The silence of Petra R. Farin, although the declaration is such
as naturally one to call for action or comment if not true, could be taken as an admission of the existence and validity of such a
claim. Therefore, since the claim of the RCA is undisputed, proof of its liquidation is not necessary. At any rate, if the record is
bereft of the proof mentioned by the respondent Judge of first instance, it is because the respondent Judge did not call for the
submission of such proof. Had the respondent Judge issued an order calling for proof, the RCA would have presented sufficient
evidence to the satisfaction of the court.
SOLINAP V. DEL ROSARIO, 123 SCRA 640
Civil Law; Obligations; Compensation, not a case of; For compensation to take place, both obligations must be certain and
liquidated; Mutual obligations of parties, not extinguished.—Petitioner contends that respondent judge gravely abused her
discretion in not declaring the mutual obligations of the parties extinguished to the extent of their respective amounts. He relies
on Article 1278 of the Civil Code to the effect that compensation shall take place when two persons, in their own right, are
creditors and debtors of each other. The argument fails to consider Article 1279 of the Civil Code which provides that
compensation can take place only if both obligations are liquidated. In the case at bar, the petitioner’s claim against the
respondent Luteros in Civil Case No. 12379 is still pending determination by the court. While it is not for Us to pass upon the
merits of the plaintiffs’ cause of action in that case, it appears that the claim asserted therein is disputed by the Luteros on both
factual and legal grounds. More, the counterclaim interposed by them, if ultimately found to be meritorious, can defeat petitioner’s
demand. Upon this premise, his claim in that case cannot be categorized as liquidated credit which may properly be set-off
against his obligation. As this Court ruled in Mialhe vs. Halili, “compensation cannot take place where one’s claim against the
other is still the subject of court litigation. It is a requirement, for compensation to take place, that the amount involved be certain
and liquidated.”
SYCIP V. CA, 134 SCRA 317
Obligations and Contracts; Criminal Law; Compensation cannot take place where, with respect to the money involved in the
estafa case, the complainant was merely acting as agent of another. In set-off the two persons must in their own right be creditor
and debtor of each other.—In this third and fourth assigned errors, petitioner contends that respondent Court of Appeals erred
in not applying the provisions on compensation or setting-off debts under Articles 1278 and 1279 of the New Civil Code, despite
evidence showing that Jose K. Lapuz still owed him an amount of more than P5,000.00 and in not dismissing the appeal
considering that the latter is not legally the aggrieved party. This contention is untenable. Compensation cannot take place in
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
this case since the evidence shows that Jose K. Lapuz is only an agent of Albert Smith and/or Dr. Dwight Dill. Compensation
takes place only when two persons in their own right are creditors and debtors of each other, and that each one of the obligors
is bound principally and is at the same time a principal creditor of the other. Moreover, as correctly pointed out by the trial court,
Lapuz did not consent to the off-setting of his obligation with petitioner’s obligation to pay for the 500 shares.
CIA. MARITIMA V. CA, 135 SCRA 593
Obligations; Compensation cannot take place where one of the debts is not liquidated as when there is a running interest still to
be paid thereon.—More, the legal interest payable from February 3, 1951 on the sum of P40,797.54, representing useful
fully paid.” Thus, we find without basis REPUBLlC’s allegation that PAN-ORIENTAL’s claim in the amount of P40,797.54 was
extinguished by compensation since the rentals payable by PAN-ORIENTAL amount to P59,500.00 while the expenses reach
ORIENTAL to REPUBLIC. That argument loses sight of the fact that to the sum of P40,797.54 will still have to be added the
legal rate of interest “from February 3, 1951 until fully paid.”
INTERNATIONAL CORPORATE BANK V. IAC, 163 SCRA 296
Obligations and Contracts; Foreclosure of Mortgage; Requisites of Legal Compensation under Art. 1279 of Ciuil Code.—
Petitioner contends that after foreclosing the mortgage, there is still due from private respondent as deficiency the amount of
P6.81 million against which it has the right to apply or set off private respondent's money market claim ofPl,062,063.83. The
argument is without merit. As correctly pointed out by the respondent Court of Appeals—"Compensation shall take place when
two persons, in their own right, are creditors and debtors of each other. (Art. 1278, Civil Code). 'When all the requisites mentioned
in Art. 1279 of the Civil Code are present, compensation takes effect by operation of law, even without the consent or knowledge
of the debtors.' (Art. 1290, Civil Code). Article 1279 of the Civil Code requires among others, that in order that legal compensation
shall take place, 'the two debts be due' and 'they be liquidated and demandable.' Compensation is not proper where the claim
of the person asserting the set-off against the other is not clear nor liquidated; compensation cannot extend to unliquidated,
disputed claim arising from breach of contract. (Compania General de Tabacos vs. French and Unson, 39 Phil. 34; Lorenzo &
Martinez vs. Herrero, 17 Phil. 29). "There can be no doubt that petitioner is indebted to private respondent in the amount
ofPl,062,063.83 representing the proceeds of her money market investment. This is admitted. But whether private respondent
is indebted to petitioner in the amount of P6.81 million representing th$ deficiency balance after the foreclosure of the mortgage
executed to secure the loan extended to her, is vigorously disputed. This circumstance prevents legal compensation from taking
place." (CA Decision, Rollo, pp. 112-113).
Same; Same; Same; Requirement that debts ?nust be liquidated and demandable not yet been met since the validity ofthe
extrajudicial foreclosure and petitioners claim for deficiency still in question.—It must be noted that Civil Case No. 83-19717 is
still pending consideration at the RTC Manila, for annulment of Sheriff s sale on extrajudicial foreclosure of private respondent's
property from which the alleged deficiency arose. (Annex"AA", Rollo, pp. 181-189). Therefore, the validity of the extrajudicial
foreclosure sale and petitioner's claim for deficiency are still in question, so much so that it is evident, that the requirement of
Article 1279 that the debts must be liquidated and demandable has not yet been met. For this reason, legal compensation cannot
take place under Article 1290 of the Civil Code.
ONG V. CA, 177 SCRA 402
Facts:
Ong entered into an “Agreement of Purchase and Sale” with the Robles spouses concerning two parcels of land in San Antonio,
Quezon. The contract price was for P2M, where Ong, as buyer, will make an initial payment of 600,000 and the remaining
balance to be paid in four quarterly installments. The initial payment was to be made by Ong to BPI to settle the loan of the
spouses (about almost 500,000) and the remaining amount (100,000) was paid to the spouses. Ong took possession of the said
parcels of land together with their improvements, including a rice mill and a piggery. The spouses undertook to deliver the titles
upon full payment.
However, the post-dated checks issued by Ong for the installment payments were dishonored due to insufficiency of funds. To
make the matters worse, Ong was not able to fully pay the loan of the spouses with BPI so the latter threatened to foreclose the
mortgage. Thus, the spouses were compelled to sell three transformers of the rice mill with Ong’s consent. Ong voluntarily
permitted the spouses to operate the rice mill.
The spouses then demanded from Ong the return of the properties, after which they filed for rescission and recovery of properties
with damages. During the pending of the suit, petitioner Ong introduced improvements on the property which prompted the
spouses to file for an injunction. The trial court ruled in favor of the spouses, which was affirmed on appeal.
ISSUES:
WON the contract entered into by the parties may be validly rescinded under Article 1191 of the New Civil Code; and
HELD:
A careful reading of the parties' "Agreement of Purchase and Sale" shows that it is in the nature of a contract to sell, as
distinguished from a contract of sale. In a contract of sale, the title to the property passes to the vendee upon the delivery of
the thing sold; while in a contract to sell, ownership is, by agreement, reserved in the vendor and is not to pass to the vendee
until full payment of the purchase price. In a contract to sell, the payment of the purchase price is a positive suspensive
condition, the failure of which is not a breach, casual or serious, but a situation that prevents the obligation of the
vendor to convey title from acquiring an obligatory force.
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The promise of the spouses to sell was subject to the fulfillment of the suspensive condition of full payment of the purchase price
by the petitioner. Petitioner, however, failed to complete payment of the purchase price. The non-fulfillment of the condition of
full payment rendered the contract to sell ineffective and without force and effect. It must be stressed that the breach
contemplated in Article 1191 of the New Civil Code is the obligor's failure to comply with an obligation. Failure to pay, in this
instance, is not even a breach but merely an event which prevents the vendor's obligation to convey title from acquiring
binding force. Hence, the agreement of the parties in the case at bench may be set aside, but not because of a breach
on the part of petitioner for failure to complete payment of the purchase price. Rather, his failure to do so brought about
a situation which prevented the obligation of respondent spouses to convey title from acquiring an obligatory force.
PIONEER INSURANCE V. CA, 180 SCRA 126
COULDN’T FIND CASE.
SILAHIS MARKETING V. IAC, 180 SCRA 21
FACTS:
On various dates in October, November and December, 1975, Gregorio de Leon doing business under the name and style of
Mark Industrial Sales sold and delivered to Silahis Marketing Corporation various items of merchandise covered by several
invoices in the aggregate amount of P22,213.75 payable within thirty (30) days from date of the covering invoices.
Allegedly due to Silahis' failure to pay its account upon maturity despite repeated demands, de Leon filed a complaint for the
collection of the said accounts including accrued interest thereon in the amount of P661.03 and attorney's fees of P5,000.00
plus costs of litigation.
The answer admitted the allegations of the complaint insofar as the invoices were concerned but presented as affirmative
defenses; [a] a debit memo for P22,200.00 as unrealized profit for a supposed commission that Silahis should have received
from de Leon for the sale of sprockets in the amount of P111,000.00 made directly to Dole Philippines, Incorporated by the latter
sometime in August 1975; and [b] Silahis' claim that it is entitled to return the stainless steel screen which was found defective
by its client, Borden International, Davao City, and to have the corresponding amount cancelled from its account with de Leon.
ISSUE:
Whether or not private respondent is liable to the petitioner for the commission or margin for the direct sale which the former
concluded and consummated with Dole Philippines, Incorporated without coursing the same through herein petitioner.
RULING:
It must be remembered that compensation takes place when two persons, in their own right, are creditors and debtors to each
other. Article 1279 of the Civil Code provides that: "In order that compensation may be proper, it is necessary: [1] that each one
of the obligors be bound principally, and that he be at the same time a principal creditor of the other; [2] that both debts consist
in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has
been stated; [3] that the two debts be due; [4] that they be liquidated and demandable; [5] that over neither of them there be any
retention or controversy, commenced by third persons and communicated in due time to the debtor."
Undoubtedly, petitioner admits the validity of its outstanding accounts with private respondent in the amount of P22,213.75 as
contained in its answer. But whether private respondent is liable to pay the petitioner a 20% margin or commission on the subject
sale to Dole Philippines, Inc. is vigorously disputed. This circumstance prevents legal compensation from taking place.
The Court agrees with respondent appellate court that there is no evidence on record from which it can be inferred that there
was any agreement between the petitioner and private respondent prohibiting the latter from selling directly to Dole Philippines,
Incorporated. Definitely, it cannot be asserted that the debit memo was a contract binding between the parties considering that
the same, as correctly found by the appellate court, was not signed by private respondent nor was there any mention therein of
any commitment by the latter to pay any commission to the former involving the sale of sprockets to Dole Philippines, Inc. in the
amount of P111,000.00.
Indeed, such document can be taken as self-serving with no probative value absent a showing or at the very least an inference,
that the party sought to be bound assented to its contents or showed conformity thereto. Thus the questioned decision of
respondent appellate court is hereby affirmed.
Article 1285
Art. 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a
third person, cannot set up against the assignee the compensation which would pertain to him against
the assignor, unless the assignor was notified by the debtor at the time he gave his consent, that he
reserved his right to the compensation.
If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may
set up the compensation of debts previous to the cession, but not of subsequent ones.
If the assignment is made without the knowledge of the debtor, he may set up the compensation of all
credits prior to the same and also later ones until he had knowledge of the assignment. (1198a)
SESBRENO V. CA, 222 SCRA 466
Extinguishment of Obligation; Compensation may defeat assignee’s rights before notice of the assignment is given to the
debtor.—In other words, petitioner notified Delta of his rights as assignee after compensation had taken place by operation of
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
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—i.e., the defenses—which the debtor could have set up against the original
assignor before notice of the assignment was given to the debtor. At the time that Delta was first put to notice of the assignment
in petitioner’s favor on 14 July 1981, DMC PN No. 2731 had already been discharged by compensation. Since the assignor
Philfinance could not have then compelled payment anew by Delta of DMC PN No. 2731, petitioner, as assignee of Philfmance,
is similarly disabled from collecting from Delta the portion of the Note assigned to him.
Article 1290
Art. 1290. When all the requisites mentioned in Article 1279 are present, compensation takes effect by
operation of law, and extinguishes both debts to the concurrent amount, even though the creditors and
debtors are not aware of the compensation. (1202a)

MINDANAO PORTLAND CEMENT V. CA, 120 SCRA 930
Civil Law; Obligations; Compensation; Automatic compensation, requisites of, present; Extinguishment of two debts arising from
final and executory judgments due to compensation by operation of law; Case at bar.—It is clear from the record that both
corporations, petitioner Mindanao Portland Cement Corporation (appellant) and respondent Pacweld Steel Corporation
(appellee), were creditors and debtors of each other, their debts to each other consisting in final and executory judgments of the
Court of First Instance in two (2) separate cases, ordering the payment to each other of the sum of P10,000.00 by way of
attorney’s fees. The two (2) obligations, therefore, respectively offset each other, compensation having taken effect by operation
of law and extinguished both debts to the concurrent amount of P10,000.00, pursuant to the provisions of Arts. 1278, 1279 and
1290 of the Civil Code, since all the requisites provided in Art. 1279 of the said Code for automatic compensation “even though
the creditors and debtors are not aware of the compensation” were duly present.
Article 1291
Art. 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. (1203)
LAND BANK V. CA, 181 SCRA 610
DOCTRINE
A party cannot unilaterally novate the printed terms of a bond agreement by placing a notation on the application form for its
issuance, without showing proof that there has been either novation in the subject matter of the bond agreement or (partial)
subrogation of the creditor (obligee).
FACTS
Spouses Suarez were former owners of agricultural lands that was subjected to the Operation Land Transfer (OLT) under
Presidential Decrees Nos. 2 and 127. As part of the financing support for OLT, Land Bank of the Philippines (”Bank”) issued 3
Land Bank Interim Bond Certificates registered in the name of Sps. Suarez as partial payment for their agricultural lands (Serial
Nos. A-02918-F for the amount of P241,160.00; A-02915-F for P309,440.00; and A- 03058-F for P72,740.00) with a maturity of
25 years from date of issue and bear interest at the rate of 6% per annum, tax-free and payable semi- annually on May 20 and
November 20 of each year.
On 17 March 1975, Sps. Suarez requested the Bank to convert their bonds from registered bonds to bearer bonds, in preparation
for their intended delivery or transfer to third parties. For this purpose, respondents were required to fill up three (3) sets of LBP
Form No. 64· Request for Transfer/ Redenomination of Bonds. In each of said LBP forms, respondents themselves inserted the
following notation·
NOTE: It is understood that the interest from November 21, 1974 to March 17, 1975 shall accrue to the transferor.
This notation was typed in by a clerk of the Bank at the exclusive request of Sps. Suarez, and was done not in response to any
question posed by the LBP Form 64 nor to fill in any blank line required by LBP Form 64 to be filled up. The LBP Forms 64 were
processed and signed by the manager of Bank’s Cash Department, Mr. Bajada. Thereafter and upon the surrender by
respondents of their registered bonds, 8 new bearer bonds with different denominations but of equivalent aggregate face value
were issued by the Bank to the Spouses Suarez. The new bonds were covered by the same terms and conditions as the prior
registered bonds.
On 20 May 1975, the first interest payment date after the conversion, Sps. Suarez demanded from the Bank the payment of
P11,877.24 representing that part of the accrued interest on the three (3) registered bonds formerly held by them which
corresponded to the period from 21 November 1974 to 17 March 1975. The Bank declined to honor the demand when Sps
Suarez refused or failed to present the Bearer Bond Certificates as required by Land Bank Implementing Guidelines and
Procedures on The Processing Payment of Interest on LBP Bonds.
On 10 November 1975, Sps Suarez filed a complaint with the then Manila CFI to compel payment by the Bank of the claimed
amount of
interest on the registered bonds previously held by them.
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The RTC ruled for the spouses and ordered the Land Bank to pay the sum of P11,877.24 as accrued interest on the bonds from
21 November 1974 to 17 March 1975 at six percent (6%) until fully paid plus P4,000.00 as attorney’s fees and to pay costs of
suit.
On appeal, the Court of Appeals affirmed the decision of the trial court. The appellate court held that the Bank was bound by the
notation inserted by the respondents Suarez in the LBP Forms 64 because the Bank knew and in fact had approved the transfer
of the bonds to third persons. MR was denied.
Present Petition for Review was filed by the Bank to the SC.
The Bank argues that the unilateral notation made by the spouses on the LBP Form 64 does not bind it.
Respondent spouses Suarez contend that the Implementing Guidelines or Procedures of the Land Bank cannot prevail over
the notation they caused to be written into the LBP Forms 64; and that petitioner is estopped from disclaiming any liability for the
payment of the claimed interest, which liability it had implicitly accepted when it signed the LBP Forms 64 with knowledge of the
existence of the notation and without any objection on its part.
Spouses Suarez argue that novation had taken place in respect of their bonds when they had their registered bonds converted
into bearer bonds: their notation in the LBP Forms 64 novated the printed terms of the new bearer bonds and obligated Land
Bank to pay a portion of the November 21, 1974·May 20, 1975 interest not to the holder or bearer of such bonds (as required
by the terms thereof) but rather to the spouses Suarez.
ISSUE/S
Whether or not novation had taken place.
HELD
NO. Petition for Review is hereby GRANTED and Land Bank is not liable to pay interest to the Spouses Suarez.
The printed terms of the new bearer bonds were not novated by the notation the spouses inserted in LBP Forms 64 and Land
Bank was not thereby bound or obligated to pay a portion of the November 21, 1974-May 20, 1975 interest to the spouses. None
of the requirements of novation either of the subject matter of the bond agreement or of (partial) subrogation of the creditor
(obligee) thereunder, is visible in the instant case. Of equal importance is the fact that the unilateral notation of the respondents
was not inserted in the new bearer bond certificates. The mischief implicit in the (assumed) suggestion of the spouses is plain
to see.
No consent from Land Bank or its agent, nor of the third party transferee of the new bonds, was obtained in the undertaking.
The “new terms” were inserted by a unilateral notation done by the spouses on the LBP Forms 64. The notation apportioned the
interest from November 21, 1974 to May 20, 1975 between the spouses (from November 21, 1974 to March 17, 1975 or
P11,877.24) and the third party transferees (from March 18, 1975 to May 20, 1975 or P6,822.96). This was done without the
consent of either Land Bank or the unknown third party transferee.
Secondly, petitioner Land Bank did not really reject the demand absolutely and unconditionally. What the Land Bank required
respondent spouses to do on May 20, 1975 was to produce the relevant bond certificates, then already in bearer form.
Thirdly, the was no negligence on the part of Land Bank’s agent in approving the LBP Form 64 and failing to cross out the
notation made by the spouses Suarez as it was an undertaking done by the spouses and not by the Bank. Further, the defense
of estoppel due to the allegedly negligent acts of Land Bank Manager Bajada cannot be raised by the spouses thus against the
government. In view of the critical role of petitioner Land Bank, in the government’s Operation Land Transfer and its program of
land reform generally, the Land Bank was exercising functions indubitably governmental in nature and accordingly must be
deemed part of the government so far as concern the application of the rule that the government is not estopped by the
negligence of its officers or agents. 
 the creation of a new obligation that takes the place of the former; it is merely modificatory when the old obligation subsists to
Any negligence, emphasized the SC, must be laid at the door of the spouses Suarez for their formulation of the notation. If that
notation had been formulated with the specificity and clarity necessary to convey the meaning they now pretend it had, this
prolonged litigation would in all probability have been avoided. Of course, if the notation had clearly and specifically stated that
the Land Bank was being instructed and required to withhold from the holder of new bearer bonds a certain portion of the interest
that on May 20, 1975 the Land Bank was explicitly bound under the terms of the new bonds to pay to such holder, and to pay
such interest to the respondents Suarez instead, Mr. Bajada would, in all probability too, have expressly rejected such instruction
and manually cancelled the notation.
Moreover, the Land Bank Regulations or Implementing Guidelines or Procedures on The Processing/Payment of Interest on
LBP Bonds promulgated pursuant to an express statutory grant of authority to the Land Bank, are binding not only upon officers
and employees of the Land Bank but also upon holders or owners of Lank Bank bonds and other members of the general public
who have to deal with the Land Bank in respect of its bonds. They cannot be modified, nor exemption therefrom demanded, by
a bond holder, and certainly not by a prior bond holder, without the consent of the Land Bank.
The spouses Suarez proper remedy was to file an action against the first bearer to whom respondents delivered the bonds to
enforce their presumed agreement concerning the allocation as between them of the interest pertaining to the period from
November 21, 1974 to May 20, 1975, and not to insist that the Bank be doubly liable for interest to both spouses Suarez and the
third party bearer of the notes.
REYES V. CA, 264 SCRA 35
Obligations; Novation; Requisites.—Admittedly, in order that a novation can take place, the concurrence of the following
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
requisites is 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.
Same; Same; Same; The absence of a new contract extinguishing the old one destroys any possibility of novation by
conventional subrogation.—Upon the facts shown in the record, there is no doubt that the last three essential requisites of
novation are wanting in the instant case. No new agreement for substitution of creditor was forged among the parties concerned
which would take the place of the preceding contract. The absence of a new contract extinguishing the old one destroys any
possibility of novation by conventional subrogation.
Same; Same; Same; Novation by substitution of creditor requires an agreement among the three parties concerned—the original
creditor, the debtor and the new creditor.—In concluding that a novation took place, the respondent court relied on the two letters
dated March 19, 1991, which, according to it, formalized petitioner’s and respondent Eleazar’s agreement that BERMIC would
directly settle its obligation with the real owners of the funds—the AFP-MBAI and DECS-IMC. Be that as it may, a cursory reading
of these letters, however, clearly and unmistakably shows that there was nothing therein that would evince that respondent AFP-
MBAI agreed to substitute for the petitioner as the new creditor of respondent Eleazar in the contract of loan. It is evident that
the two letters merely gave respondent Eleazar an authority to directly settle the obligation of petitioner to AFP-MBAI and DECS-
IMC. It is essentially an agreement between petitioner and respondent Eleazar only. There was no mention whatsoever of AFP-
MBAI’s consent to the new agreement between petitioner and respondent Eleazar much less an indication of AFP-MBAI’s
intention to be the substitute creditor in the loan contract. Well settled is the rule that novation by substitution of creditor requires
an agreement among the three parties concerned—the original creditor, the debtor and the new creditor. It is a new contractual
relation based on the mutual agreement among all the necessary parties. Hence, there is no novation if no new contract was
executed by the parties.
Same; Same; Same; Novation is never presumed—there must be an express intention to novate.—The fact that respondent
Eleazar made payments to AFP-MBAI and the latter accepted them does not ipso facto result in novation. There must be an
express intention to novate—animus novandi. Novation is never presumed. Article 1300 of the Civil Code provides inter alia that
conventional subrogation must be clearly established in order that it may take effect.
Obligations; Novation; It is a rule that novation by substitution of debtor must always be made with the consent of the creditor.—
This contention is bereft of any legal and factual basis. Just like in the first questioned resolution, no novation took place in this
case. A thorough examination of the records shows that no hard evidence was presented which would expressly and
unequivocably demonstrate the intention of respondent AFP-MBAI to release petitioner from her obligation to pay under the
contract of sale of securities. It is a rule that novation by substitution of debtor must always be made with the consent of the
creditor.
Same; Same; The mere circumstance of the creditor receiving payments from a third party who acquiesced to assume the
obligation of the debtor when there is clearly no agreement to release the debtor from her responsibility does not constitute
novation—at most, it only creates a juridical relation of co-debtorship or suretyship on the part of the third party to the contractual
obligation of the debtor, and the creditor can still enforce the obligation against the debtor.—The consent of the creditor to a
novation by change of debtor is as indispensable as the creditor’s consent in conventional subrogation in order that a novati on
shall legally take place. The mere circumstance of AFP-MBAI receiving payments from respondent Eleazar who acquiesced to
assume the obligation of petitioner under the contract of sale of securities, when there is clearly no agreement to release
petitioner from her responsibility, does not constitute novation, at most, it only creates a juridical relation of co-debtorship or
suretyship on the part of respondent Eleazar to the contractual obligation of petitioner to AFP-MBAI and the latter can still enforce
the obligation against the petitioner.
QUINTO V. PEOPLE, 305 SCRA 708
Civil Law; Contracts; Novation; Novation may be extinctive or modificatory; Essential requisites for extinctive novation to exist.—
Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive when an old obligation is terminated by
the extent it remains compatible with the amendatory agreement. An extinctive novation results either by changing the object or
principal conditions (objective or real), or by substituting the person of the debtor or subrogating a third person in the rights of
the creditor (subjective or personal). Under this mode, novation would have dual functions—one to extinguish an existing
obligation, the other to substitute a new one in its place—requiring a conflux of four essential requisites: (1) a previous valid
obligation; (2) an agreement of all parties con cerned to a new contract; (3) the extinguishment of the old obligation; and (4) the
birth of a valid new obligation.
Same; Same; Same; Novation is never presumed.—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 unequivocal to be mistaken.
Same; Same; Same; Extinguishment of the old obligation by the new one is a necessary element of novation which may be
effected either expressly or impliedly.—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.
Same; Same; Same; Two ways which could indicate the presence of novation; Test of incompatibility is whether or not the two
obligations can stand together, each one having its independent existence.—There are two ways which could indicate, in fine,
the presence of novation and thereby produce the effect of extinguishing an obligation by another which substitutes the same.
The first is when novation has been explicitly stated and declared in unequivocal terms. The second is 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,
55
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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.
Same; Same; Same; There are two forms of novation by substituting the person of the debtor, depending on whose initiative it
comes from, to wit: expromision and delegacion.—There are two forms of novation by substituting the person of the debtor,
depending on whose initiative it comes from, to wit: expromision and delegacion. In the former, the initiative for the change does
not come from the debtor and may even be made without his knowledge. Since a third person would substitute for the original
debtor and assume the obligation, his consent and that of the creditor would be required. In the latter, the debtor offers, and the
creditor accepts, a third person who consents to the substitution and assumes the obligation, thereby releasing the original
debtor from the obligation; here, the intervention and the consent of all parties thereto would perforce be necessary. In either of
these two modes of substitution, the consent of the creditor, such as can be seen, is an indispensable requirement.
FOUNDATION SPECIALISTS V. BETONVAL, 596 SCRA 697 [2009]
Facts:
FSI (buyer) and Betonval (seller) entered into a contract of sale of cement. The provisions of the contract state that:
(a) for FSI to supply the cement to be made into ready mixed concrete;
(b) for FSI to pay Betonval within seven days after presentation of the invoices plus 30% interest p.a. in case of
overdue payments and
(c) a credit limit of P600,000 for FSI.
FSI failed to pay on time since it was having financial difficulties. As an accommodation to FSI, Betonval extended the seven
day credit period to 45 days. After a while, Betonval demanded again (P2,349,460) and informed FSI that further defaults would
leave it no other choice but to impose the stipulated interest for late payments and take appropriate legal action to protect its
interest. FSI in turn replied that it was still verifying the correctness of Betonval’s claims but nevertheless sent Betonval a
proposed schedule of payments devised with a liability for late payments fixed at 24% p.a. FSI eventually paid P1,114,203.34,
which is the principal amount without interest.
Betoval filed case in RTC + attached properties of FSI. Betonval won, but FSI was awarded damages because of the wrongful
attachment of their properties. Thus Betonval and FSI appealed (but FSI didn’t pay docket fees so their appeal was dismissed).
CA ruled that FSI should pay Betonval the value of unpaid ready mixed concrete at 24% p.a. with the aggregate sum to further
earn an annual interest rate of 12% from the finality of this decision, until full payment. FSI appealed to SC.
FSI is claiming that since Betonval gave them a 45 day credit extension, and only claimed 24% interest when they filed the case
in court, the provisions of the contract were waived. Therefore, the interest should only be 6% because their contract stipulated
no interest since it was novated (extinctive novation).
Issue:
W/N contract was novated such that interest is now 24% p.a. instead of 30% as stipulated
Held:
Rate should be 24%
Ratio:
Novation is one of the modes of extinguishing an obligation. It is done by the substitution or change of the obligation by a
subsequent one which extinguishes the first, either by changing the object or principal conditions, or by substituting the person
of the debtor, or by subrogating a third person in the rights of the creditor. Novation may either be
1. Extinctive novation
 never presumed;
 there must be an express intention to novate;
 has the twin effects of,
o first, extinguishing an existing obligation and,
o second, creating a new one in its stead.
• presupposes a confluence of four essential requisites:
(1) a previous valid obligation,
(2) an agreement of all parties concerned to a new contract,
(3) the extinguishment of the old obligation, and
(4) the birth of a valid new obligation.
2. Modificatory
• the change brought about by any subsequent agreement is merely incidental to the main obligation (e.g., a change in
interest rates or an extension of time to pay; in this instance, the new agreement will not have the effect of extinguishing
the first but would merely supplement it or supplant some but not all of its provisions.)
Implied novation
• the acts of the parties must clearly demonstrate their intent to dissolve the old obligation as the moving consideration
for the emergence of the new one.
• necessitates that the incompatibility between the old and new obligation be total on every point such that the old
obligation is completely superseded by the new one.
• The test of incompatibility is whether they can stand together, each one having an independent existence; if they
cannot and are irreconcilable, the subsequent obligation would also extinguish the first.
The obligation to pay a sum of money is not novated by an instrument that expressly recognizes the old, changes only the terms
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
of payment, adds other obligations not incompatible with the old ones or the new contract merely supplements the old one.
The extension of the 45 day credit did not novate the obligation to extinguish it because
a. 1. it wasn’t incompatible with the 30% provision
b. 2. there was no intention to supersede the contract
45 day extension was precisely to revive the application of the contract since it expired without the obligation having been fulfilled.
Besides, there was no waiver. A waiver is a voluntary and intentional relinquishment or abandonment of a known legal right or
privilege. A waiver must be couched in clear and unequivocal terms which leave no doubt as to the intention of a party to give
up a right or benefit which legally pertains to him.
Nonetheless, the interest should be 24%.Betonval sent FSI a statement of account with 24% interest + this was impliedly
accepted by FSI when it sent a proposed schedule of payments with the same 24% interest. FSI is thus estopped from claiming
that there was NO interest. (So in effect what happened was merely a modificatory novation, not an extinctive novation.)
*12% interest after finality of decision is correct = it is treated as a forbearance of credit.
Article 1292
Art. 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. (1204)
FUA V. YAP, 74:287
We concur in the theory that appellants liability under the judgment in civil case No. 42125 had been extinguished by the
settlement evidenced by the mortgage executed by them in favor of the appellee on December 16, 1933. Although said mortgage
did not expressly cancel the old obligation, this was impliedly novated by reason of incompatibly resulting from the fact that,
whereas the judgment was for P1,538.04 payable at one time, did not provide for attorney's fees, and was not secured, the new
obligation is or P1,200 payable in installments, stipulated for attorney's fees, and is secured by a mortgage. The appellee,
however, argues that the later agreement merely extended the time of payment and did not take away his concurrent right to
have the judgment executed. This court not have been the purpose for executive the mortgage, because it was therein recited
that the appellants promised to pay P1,200 to the appellee as a settlement of the judgment in civil case No. 42125 (en forma de
transaccion de la decision . . . en el asunto civil No. 42125). Said judgment cannot be said to have been settled, unless it was
extinguished.
Upon the issue of whether the agreement extinguished the judgment and plaintiff's right to an execution thereunder, this Court
held:
A final judgment is one of the most solemn obligations incurred by parties known to law. The Civil Code, in
article 1156, provides the method by which all civil obligations may be extinguished. One of the methods
recognized by said code for the extinguishment of obligations is that by novation. (Civil Code, arts. 1156, 1203,
1213.) In order, however, that an obligation shall be extinguished by another obligation (novation) which
substitutes it, the law requires that the novation or extinguishment shall be expressly declared or that the old
and the new obligations shall be absolutely incompatible. (Civil Code, art. 1204.) In the present case, the
contract referred to does not expressly extinguish the obligations existing in said judgment. Upon the contrary,
it expressly recognizes the obligation existing between the parties in said judgment and expressly provides a
method by which the same shall be extinguished which method is, as is expressly indicated in said contract, by
monthly payments. The contract, instead of containing provisions "absolutely incompatible" with the obligations
of the judgment, expressly ratifies such obligations and contains provisions for satisfying them. The said
agreement simply gave the plaintiff a method and more time for the satisfaction of said judgment. It did not
extinguish the obligations contained in the judgment, until the terms of said contract had been fully complied
with. Had the plaintiff continued to comply with the conditions of said contract, he might have successfully
invoked its provisions against the issuance of an execution upon said judgment. The contract and the punctual
compliance with its terms only delayed the right of the defendant to an execution upon the judgment. The
judgment was not satisfied and the obligations existing thereunder still subsisted until the terms of the
agreement had been fully complied with. The plaintiff was bound to perform the conditions mentioned in said
contract punctually and fully, in default of which the defendant was remitted to the original rights under his
judgment. (pp. 159-160.)
I see no reason why this decision cannot be made to control in the instant case. Here, as in the Zapanta case, there was an
agreement providing for the manner of payment of the obligation under the judgment. In both cases plaintiff has by express
stipulation, the option to enter an independent suit against defendant should the latter fail to comply with the terms of the
settlement. If, in the Zapante case plaintiff alternative right to execute the judgment has been upheld. I perceive no cogent reason
why plaintiff in the instant case would be denied a like option to merely execute the judgment and be compelled, instead, to enter
an independent suit on the terms of the settlement The spirit of the new Rules which frowns upon multiplicity of suits lends
additional argument against the majority view.
The majority maintains that here there is an implied novation by "reason of incompatibility resulting from the fact that, whereas
the judgment was for P1,538.04 payable at one time, did not provide for attorney's fees, and was not secured, the new obligation
is for P1,200 payable in installments, stipulates for attorney's fees, and is secured by a mortgage." With respect to the amount,
it should be noted that, "while the obligation under the judgment was reduced to P1,200, there was, however, a stipulation to the
effect that the discount would be recoverable in the event of appellants' default to comply with the terms of the agreement. And
as to attorney's fees and the security by way of mortgage, the stipulation therefor contained in the agreement is of no moment,
for it is merely incidental to, and anticipatory of, a suit which appellee may choose to take against appellants. Far, therefore,
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from extinguishing the obligation under the judgment, the agreement ratifies it and provides merely a new method and more time
for the judgment debtor to satisfy it. If the judgment debtor fail to comply with the terms of the agreement, the judgment creditor
shall be deemed remitted to his original rights under the judgment which he may choose to execute or enter, instead, a separate
suit on the terms of the settlement. This is the ratio decidendi in the Zapanta case; this is the ratio decidendi here.
MILLAR V. CA, 38 SCRA 642
Facts:
Eusebio Millar obtained a favorable judgment from the CFI in a collection case against Antonio Gabriel. After the remand of the
CA of the case, the petitioner moved ex parte for the execution of the judgment. The respondent, however, pleaded with the
petitioner to release the jeep under an arrangement whereby the respondent, to secure the payment of the judgment debt,
agreed to mortgage the vehicle in favor of the petitioner. The petitioner agreed to the arrangement; thus, the parties, on February
22, 1957, executed a chattel mortgage on the jeep. It was stipulated that upon failure to pay the first instalment, a writ of execution
would be obtained against respondent Gabriel.
For failure to pay, the sheriff levied on the properties of respondent. However, Gabriel filed a motion to suspend the execution
sale on the ground that there is payment of the judgment obligation. The lower court ruled that novation had taken place, and
that the parties had executed the chattel mortgage only "to secure or get better security for the judgment.
The appellate court stated that there are circumstances that sufficiently demonstrate the incompatibility between the judgment
debt and the obligation embodied in the deed of chattel mortgage, warranting a conclusion of implied novation.
Issue:
WON the subsequent agreement of the parties as embodied in the deed of chattel mortgage impliedly novated the judgment
obligation in the case? NO
Ratio:
Where the new obligation merely reiterates or ratifies the old obligation, although the former effects but minor alterations or slight
modifications with respect to the cause or object or conditions of he latter, such changes do not effectuate any substantial
incompatibility between the two obligations Only those essential and principal changes introduced by the new obligation
producing an alteration or modification of the essence of the old obligation result in implied novation. In the case at bar, the mere
reduction of the amount due in no sense constitutes a sufficient indictum of incompatibility, especially in the light of (a) the
explanation by the petitioner that the reduced indebtedness was the result of the partial payments made by the respondent
before the execution of the chattel mortgage agreement and (b) the latter's admissions bearing thereon.
At best, the deed of chattel mortgage simply specified exactly how much the respondent still owed the petitioner by virtue of the
judgment in civil case 27116. The parties apparently in their desire to avoid any future confusion as to the amounts already paid
and as to the sum still due, decoded to state with specificity in the deed of chattel mortgage only the balance of the judgment
debt properly collectible from the respondent. All told, therefore, the first circumstance fails to satisfy the test of substantial and
complete incompatibility between the judgment debt an the pecuniary liability of the respondent under the chattel mortgage
agreement.
We see no substantial incompatibility between the mortgage obligation and the judgment liability of the respondent sufficient to
justify a conclusion of implied novation. The stipulation for the payment of the obligation under the terms of the deed of chattel
mortgage serves only to provide an express and specific method for its extinguishment - payment in two equal installments. The
chattel mortgage simply gave the respondent a method and more time to enable him to fully satisfy the judgment indebtedness.
The chattel mortgage agreement in no manner introduced any substantial modification or alteration of the judgment. Instead of
extinguishing the obligation of the respondent arising from the judgment, the deed of chattel mortgage expressly ratified and
confirmed the existence of the same, amplifying only the mode and period for compliance by the respondent.
The defense of implied novation requires clear and convincing proof of complete incompatibility between the two obligations. 2
The law requires no specific form for an effective novation by implication. The test is whether the two obligations can stand
together. If they cannot, incompatibility arises, and the second obligation novates the first. If they can stand together, no
incompatibility results and novation does not take place.
We do not see any substantial incompatibility between the two obligations as to warrant a finding of an implied novation. Nor do
we find satisfactory proof showing that the parties, by explicit terms, intended the full discharge of the respondent's liability under
the judgment by the obligation assumed under the terms of the deed of chattel mortgage so as to justify a finding of express
novation.
SANDICO V. PIGUING, 42 SCRA 322
Judgments; Interpretation of parties as embodied in a subsequent agreement.—–No doubt exists that the parties entered into
the agreement, fully aware of the judgment of the appellate court ordering the respondent to comply with two obligations, to wit,
payment of a sum of money and recognition of the easement. The receipt evidencing the agreement, aside from providing for
the reduction of the money judgment, provides for the reconstruction of the irrigation canal. Such constitutes the interpretation
accorded by the parties to that part of the dispositive portion of the appellate court’s judgment condemning the respondent to
recognize the easement. This stipulation—– one wherein the respondent clearly recognizes his obligation “to reconstruct the
irrigation canal”—– embodied in precise and clear terms in the receipt binds the said respondent, a signatory to the said receipt,
and requires from him full compliance.
Same; Reduction of money judgment by subsequent agreement of parties; Effect of.—We adjudge the respondent’s judgment
debt as having been fully satisfied. We see no valid objection to the petitioners and the respondent entering into an agreement
regarding the monetary obligation of the latter under the judgment of the Court of Appeals, reducing the same from P6,000 to
P4,000. The payment by the respondent of the lesser amount of P4.000, accepted by the petitioners without any protest or
objection and acknowledged by them as “in full satisfaction of the money judgment” in civil case 1554, completely extinguished
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
the judgment debt and released the respondent from his pecuniary responsibility.
Same; Contempt of court for failure to execute judgment; Section 9, Rule 39 of the Rules of Court in connection with Section 10
of the same Rule.—–Section 9 refers to a judgment directing the performance of a specific act which the said judgment requires
the party or person to personally do because of his personal qualifications and circumstances. Section 10 refers to a judgment
requiring the execution of a conveyance of land or the delivery of deeds or other documents or the performance of any other
specific act susceptible of execution by some other person or in some other way provided by law with the same effect. Under
section 10, the court may designate some other person todo the act ordained to be done by the judgment, the reasonable cost
of its performance chargeable to the disobedient party. The act, when so done, shall have the same effect as if performed by
the party himself. In such an instance, the dis-obedient party incurs no liability for contempt. Under section 9, the court may
resort to proceedings for contempt in order to enforce obedience to a judgment which requires the personal performance of a
specific act other than the payment of money, or the sale or delivery of real or personal property.
Civil law; Obligations and contracts; Novation.—Novation results in two stipulations—one to extinguish an existing obligation,
the other to substitute a new one in its place. Fundamental it is that novation effects a substitution or modification of an obligation
by another or an extinguishment of one obligation by the creation of another. Additionally, to sustain novation necessitates that
the same be so declared in unequivocal terms—– clearly and unmistakably shown by the express agreement of the parties or
by acts of equivalent import—– or that there is complete and substantial incompatibility between the two obligations.
Remedial law; Writ of execution; Grounds for the quashal of the writ of execution.—Courtshave jurisdiction to entertain motions
to quash previously issued writs of execution because courts have the inherent power, for the advancement of justice, to correct
the errors of their ministerial officers and to control their own processes. However, this power, well circumscribed, to quash the
writ, may be exercised only in certain situations, as when it appears that (a) the writ has been improvidently issued, or (b) the
writ is defective in substance, or (c) the writ has been issued against the wrong party, or (d) the judgment debt has been paid or
otherwise satisfied, or (e) the writ has been issued without authority, or (f) there has been a change in the situation of the parties
which renders such execution inequitable, or (g) the controversy has never been submitted to the judgment of the court, and,
therefore, no judgment at all has ever been rendered thereon.
NPC V. DAYRIT, 125 SCRA 849
Civil Law; Novation; Novation is never presumed but must be explicitly stated; No novation in the absence of explicit novation or
incompatibility on every point between the old and the new agreements of the parties; Case at bar.—It is elementary that novation
is never presumed; it must be explicitly stated or there must be manifest incompatibility between the old and the new obligations
in every aspect. x x x In the case at bar there is nothing in the May 14, 1982, agreement which supports the petitioner’s contention.
There is neither explicit novation nor incompatibility on every point between the “old” and the “new” agreements.
COCHINGYAN V. R&B SURETY, 151 SCRA 339
Civil Law; Obligations and Contracts; Novation defined.—Novation is the extinguishment of an obligation by the substitution or
change of the obligation by a subsequent one which terminates it, either by changing its object or principal conditions, or by
substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor. Novation through
a change of the object or principal conditions of an existing obligation is referred to as objective (or real) novation. Novation by
the change of either the person of the debtor or of the creditor is described as subjective (or personal) novation. Novation may
also be both objective and subjective (mixed) at the same time. In both objective and subjective novation, a dual purpose is
achieved—an obligation is extinguished and a new one is created in lieu thereof.
Same; Same; Same; Novation is never presumed.—If objective novation is to take place, it is imperative that the new obligation
expressly declare that the old obligation is thereby extinguished, or that the new obligation be on every point incompatible with
the old one. 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 discernible.
Same; Same; Same; If old debtor is not released, no novation occurs and the third person who assumed the obligation becomes
a codebtor or surety or a co-surety.—Again, if subjective novation by a change in the person of the debtor is to occur, it is not
enough that the juridical relation between the parties to the original contract is extended to a third person. It is essential that the
old debtor be released from the obligation, and the third person or new debtor take his place in the new relation. If the old debtor
is not released, no novation occurs and the third person who has assumed the obligation of the debtor becomes merely a co-
debtor or surety or a co-surety.
Same; Same; Same; Novation is not implied when the parties to the new obligation expressly negated the lapsing of the old
obligation.—Neither can the petitioners anchor their defense on implied novation. Absent an unequivocal declaration of
extinguishment of a pre-existing obligation, a showing of complete incompatibility between the old and the new obligation (and
nothing else) would sustain a finding of novation by implication. But where, as in this case, the parties to the new obligati on
expressly recognize the continuing existence and validity of the old one, where, in other words, the parties expressly negated
the lapsing of the old obligation, there can be no novation. The issue of implied novation is not reached at all.
Same; Same; Same; Article 2079 of the Civil Code, not applicable; Case at bar.—The Indemnity Agreement speaks of the
several indemnitors “apply[ing] jointly and severally (in solidum) to the [R & B Surety]—to become SURETY upon a SURETY
BOND demanded by and in favor of [PNB] in the sum of [P400,000.00] for the faithful compliance of the terms and conditions
set forth in said SURETY BOND—”. This part of the Agreement suggests that the indemnitors (including the petitioners) would
become co-sureties on the Security Bond in favor of PNB. The record, however, is bereft of any indication that the petitioners-
indemnitors ever in fact became cosureties of R & B Surety vis-a-vis the PNB. The petitioners, so far as the record goes,
remained simply indemnitors bound to R & B Surety but not to PNB, such that PNB could not have directly demanded payment
of the Principal Obligation from the petitioners. Thus, we do not see how Article 2079 of the Civil Code—which provides in part
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that “[a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty”—could
apply in the instant case. The petitioner-indemnitors are, as it were, secondtier parties so far as the PNB was concerned and
any extension of time granted by PNB to any of the first-tier obligors (PAGRICO, R & B Surety and the trustor[s]) could not
prejudice the second-tier parties.
Same; Same; Same; Same; Theory behind Art 2079 is that an extension of time given to the principal debtor by the creditor
without the surety’s consent would deprive the latter of his right to pay the creditor and to be immediately subrogated to the
creditor’s remedies against the principal debtor upon original maturity.—The theory behind Article 2079 is that an extension of
time given to the principal debtor by the creditor without the surety’s consent would deprive the surety of his right to pay the
creditor and to be immediately subrogated to the creditor’s remedies against the principal debtor upon the original maturity date.
The surety is said to be entitled to protect himself against the contingency of the principal debtor or the indemnitors becoming
insolvent during the extended period. The underlying rationale is not present in the instant case.
Same; Same; Same; Indemnity clauses held enforceable and not against any public policy.—The last issue can be disposed of
quickly, Clauses (b) and (c) of the Indemnity Agreements (quoted above) allow R & B Surety to recover from petitioners even
before R & B Surety shall have paid the PNB. We have previously held similar indemnity clauses to be enforceable and not
violative of any public policy. The petitioners lose sight of the fact that the Indemnity Agreements are contracts of indemnification
not only against actual loss but against liability as well. While in a contract of indemnity against loss an indemnitor will not be
liable until the person to be indemnified makes payment or sustains loss, in a contract of indemnity against liability, as in this
case, the indemnitor’s liability arises as soon as the liability of the person to be indemnified has arisen without regard to whether
or not he has suffered actual loss. Accordingly, R & B Surety was entitled to proceed against petitioners not only for the partial
payments already made but for the full amount owed by PAGRICO to the PNB.
BALILA V. IAC, 155 SCRA 262
Civil Law; Mortgage; Consolidation of Ownership; Subsequent mutual agreements and actions of petitioners and private
respondents allowing the former extension of time to pay their obligation and in installment novated and amended the period of
payment decreed by the trial court in its judgment by compromise.—The fact therefore remains that the amount of P84,000.00
payable on or before May 15, 1981 decreed by the trial court in its judgment by compromise was novated and amended by the
subsequent mutual agreements and actions of petitioners and private respondents. Petitioners paid the aforestated amount on
an installment basis and they were given by private respondents no less than eight extensions of time to pay their obligation.
These transactions took place during the pendency of the motion for reconsideration of the Order of the trial court dated April
26, 1983 in Civil Case No. U-3501, during the pendency of the petition for certiorari in AC-G.R. SP 01307 before the Intermediate
Appellate Court and after the filing of the petition before Us. This answers the claim of the respondents on the failure of the
petitioners to present evidences ot proofs of payment in the lower court and the appellate court.
PEOPLE’S BANK V. SYVEL’S, 164 SCRA 247
Civil Law; Obligations; Novation; When does novation take place; Novation is never presumed.—Novation takes place when the
object or principal condition of an obligation is changed or altered. It is elementary that novation is never presumed; it must be
explicitly stated or there must be manifest incompatibility between the old and the new obligations in every aspect (Goni v. CA,
144 SCRA 223 [1986]; National Power Corp. v. Dayrit, 125 SCRA 849 [1983]).
Same; Same; Same; Absence of existence of an explicit novation nor incompatibility between the old and the new agreements.—
In the case at bar, there is nothing in the Real Estate Mortgage which supports appellants’ submission. The contract on its face
does not show the existence of an explicit novation nor incompatibility on every point between the “old” and the “new agreements
as the second contract evidently indicates that the same was executed as new additional security to the chattel mortgage
previously entered into by the parties.
Same; Same; Same; Novation was not intended in the case at bar as the real estate mortgage was taken as additional security
for the performance of the contract.—It is clear, therefore, that a novation was not intended. The real estate mortgage was
evidently taken as additional security for the performance of the contract (Bank of P.I. v. Herrige, 47 Phil. 57).
BROADWAY CENTRUM V. TROPICAL HUT, 224 SCRA 302
Civil Law; Contracts; Novation; Novation is the extinguishment of an obligation by the substitution of that obligation with a
subsequent one which terminates it.—We start with the basic conception that novation is 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
through a change of the object or principal conditions of an existing obligation is referred to as objective (or real) novation.
Novation by the change of either the person of the debtor or of the creditor is described as subjective (or personal) novation.
Novation may also be objective and subjective (mixed) at the same time. In both objective and subjective novation, a dual
purpose is achieved—an obligation is extinguished and a new one is created in lieu thereof.
Same; Same; Same; If objective novation is to take place, it is essential that the new obligation expressly declare that the old
obligation is to be extinguished or that new obligation be on every point incompatible with the old one.—If objective novation is
to take place, it is essential that the new obligation expressly declare that the old obligation is to be extinguished, or that new
obligation be on every point incompatible with the old one. 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. It is hardly necessary to add
that the rule that novation is never presumed, is not avoided by merely referring to partial novation. The will to novate, whether
totally or partially, must appear by express agreement of the parties, by their acts which are too clear and unequivocal to be
mistaken.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
Same; Same; Same; 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.—We conclude that the Court of Appeals fell into reversible
error when it affirmed the decision of the trial court. We believe 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.
AJAX MARKETING V. CA, 248 SCRA 222
Civil Law; Obligations and Contracts; 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.—Basic principles
on novation need to be stressed at the outset. Novation is the extinguishment of an obligation by the substitution or change of
the obligation by a subsequent one which extinguishes or modifies the first, either by changing the object or principal conditions,
or by substituting another in place of the debtor, or by subrogating a third person in the rights of the creditor. Novation, unlike
other modes of extinction of obligations, is a juridical act with a dual function, namely, it extinguishes an obligation and creates
a new one in lieu of the old. It can be objective, subjective, or mixed. Objective novation occurs when there is a change of the
object or principal conditions of an existing obligation while subjective novation occurs when there is a change of either the
person of the debtor, or of the creditor in an existing obligation. When the change of the object or principal conditions of an
obligation occurs at the same time with the change of either in the person of the debtor or creditor a mixed novation occurs.
Same; Same; Same; Novation will not be allowed unless it is clearly shown by express agreement, or by acts of equal import.—
The well settled rule is that novation is never presumed. Novation will not be allowed unless it is clearly shown by express
agreement, or by acts of equal import. Thus, to effect an objective novation it is imperative that the new obligation expressly
declare that the old obligation is thereby extinguished, or that the new obligation be on every point incompatible with the new
one. In the same vein, to effect a subjective novation by a change in the person of the debtor it is necessary that the old debtor
be released expressly from the obligation, and the third person or new debtor assumes his place in the relation. There is no
novation without such release as the third person who has assumed the debtor’s obligation becomes merely a co-debtor or
surety.
Same; Same; Same.—The attendant facts herein do not make a case of novation. There is nothing in the records to show the
unequivocal intent of the parties to novate the three loan agreements through the execution of PN No. BDS-3065. The provisions
of PN No. BDS-3065 yield no indication of the extinguishment of, or an incompatibility with, the three loan agreements secured
by the real estate mortgages over TCT No. 105233. On its face, PN No. BDS-3065 has these words typewritten: “secured by
REM” and “9. COLLATERAL. This is wholly/partly secured by: (x) real estate” which strongly negate petitioners’ asseveration
that the consolidation of the three loans effected the discharge of the mortgaged real estate property.
Same; Same; Same; Novation arising from a purported change in the person of the debtor must be clear and express as it is
never presumed.—Neither can it be validly contended that there was a change or substitution in the persons of either the creditor
(Metrobank) or more specifically the debtors (petitioners) upon the consolidation of the loans in PN No. BDS 3605. The bare fact
of petitioners’ conversion from a partnership to a corporation, without sufficient evidence, either testimonial or documentary, that
they were expressly released from their obligations, did not make petitioner AJAX, with its new corporate personality, a third
person or new debtor within the context of a subjective novation. If at all, petitioner AJAX only became a co-debtor or surety.
Without express release of the debtor from the obligation, any third party who may thereafter assume the obligation shall be
considered merely as co-debtor or surety. Novation arising from a purported change in the person of the debtor must be clear
and express because, to repeat, it is never presumed. Clearly then, from the aforediscussed points, neither objective nor
subjective novation occurred here.
Same; Same; Mortgage; Action to foreclose a mortgage is usually limited to the amount mentioned in the mortgage, but where
the intent of contracting parties is manifest that the mortgaged property shall also answer for future loans or advancements then
the same is not improper as it is valid and binding between the parties.—An action to foreclose a mortgage is usually limited to
the amount mentioned in the mortgage, but where on the four corners of the mortgage contracts, as in this case, the intent of
the contracting parties is manifest that the mortgaged property shall also answer for future loans or advancements then the same
is not improper as it is valid and binding between the parties. For merely consolidating and expediently making current the three
previous loans, the loan of P1.0 million under PN BDS No. 3605, secured by the real estate property, was correctly included in
the foreclosure’s bid price. The inclusion of the unsecured loan of P970,000.00 under PN BDS NO. 3583, however, was found
to be improper by public respondent which ruling we shall not disturb for Metrobank’s failure to appeal therefrom. Nonetheless,
the inclusion of PN BDS No. 3583 in the bid price did not invalidate the foreclosure proceedings. As correctly pointed out by the
Court of Appeals, the proceeds of the auction sale should be applied to the obligation pertaining to PN BDS No. 3605 only, plus
interests, expenses and other charges accruing thereto. It is Metrobank’s duty as mortgagee to return the surplus in the selling
price to the mortgagors.
CRUZ V. CA, 293 SCRA 239
Doctrine:
Contracts constitute the law between the parties. They must be read together and interpreted in an manner that reconciles and
gives life to all of them. The intent of the parties, as shown by the clear language used, prevails over post facto explanations
that find no support from the words employed by the parties of from their contemporary and subsequent acts showing their
understanding of such contracts. Furthermore, a subsequent agreement cannot novate or change by implication a previous one,
unless old and new contracts are, on every point, incompatible with each other. Finally, collateral facts may be admitted in
evidence when a rational similarity exists between the conditions giving rise to the fact offered and the circumstances surrounding
the issue or fact to be proved.
Facts:
A notarized deed of partial partition and a memorandum of agreement were executed by the Cruz children and their mother on
lands in Taytay. The MOA states that “despite the execution of this Deed of Partial Partition and the eventual disposal or sale of
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their respective shares, the contracting parties herein covenanted and agreed among themselves and by these presents do
hereby bind themselves to one another that they shall share alike and received equal shares from the proceeds of the sale of
any lot or lots allotted to and adjudicated in their individual names by virtue of this deed of partial partition; That this Agreement
shall continue to be valid and enforceable among the contracting parties herein up to and until the last lot covered by the Deed
of [P]artial [P]artition above adverted to shall have been disposed of or sold and the proceeds thereof equally divided and their
respective shares received by each of them.”
The documents were registered and annotated in the TCTs of the properties involved.
Meanwhile, Sps Malolos filed a complaint against one of the Cruz children for sum of money. The case was decided in favor of
the spouses thus the sheriff of the court levied upon the lands in question. For failure to redeem the property, the Malolos asked
for the owner’s duplicate copy of the 7 titles of the land but Nerissa Cruz refused to give such title. The Malolos couple then
asked the court to declare the titles null and void. The other Cruz children then moved for intervention by alleging that they are
co-owners of the land. The court then issued an order directing the surrender of the titles and annotation of the interests of the
Malolos.
A case was then subsequently filed by the Cruzes for the partition of the lands in question.
Issue:
WON the Deed of Partial Partition was cancelled or novated by the MOA? NO NOVATION
Ratio:
The foregoing provision in the MOA does not novate, much less cancel, the earlier DPP. Novation, one of the modes of
extinguishing an obligation, requires the concurrence of the following: (1) there is a previous valid obligation; (2) the par ties
concerned agree to a new contract; (3) the old contract is extinguished; and (4) there is a valid new contract. Novation may be
express or implied. Article 1292 of the Code provides: “In order that an obligation may be extinguished by another which
substitutes the same, it is imperative that it be so declared in unequivocal terms [express novation], or that the old and new
obligations be on every point incompatible with each other [implied novation].”
Tested against the foregoing standards, petitioners’ stance is shattered to pieces. The stipulation that the petitioners and
Spouses Tamayo were co-owners was merely the introductory part of the MOA.
Following the above-quoted stipulation is a statement that the subject parcels of land had in fact been partitioned, but that the
former co-owner intended to share with petitioners the proceeds of any sale of said land.
The MOA falls short of producing a novation, because it does not express a clear intent to dissolve the old obligation as a
consideration for the emergence of the new one. Likewise, petitioners fail to show that the DPP and the MOA are materially and
substantially incompatible with each other. Petitioners admit that, under the MOA, they and the Tamayo spouses agreed to
equally share in the proceeds of the sale of the lots. Indeed, the DPP granted title to the lots in question to the co-owner to whom
they were assigned, and the MOA created an obligation on the part of such co-owner to share with the others the proceeds of
the sale of such parcels. There is no incompatibility between these two contracts.
Verily, the MOA cannot be construed as a repudiation of the earlier DPP. Both documents can exist together and must be so
interpreted as to give life to both.
All in all, the basic principle underlying this ruling is simple: when the text of a contract is explicit and leaves no doubt as to its
intention, the court may not read into it any intention that would contradict its plain import. The hornbook rule on interpretation of
contracts gives primacy to the intention of the parties, which is the law among them. Ultimately, their intention is to be deciphered
not from the unilateral post facto assertions of one of the parties, but from the language used in the contract. And when the
terms of the agreement, as expressed in such language, are clear, they are to be understood literally, just as they appear on the
face of the contract.
Indeed, the legal effects of a contract are determined by extracting the intention of the parties from the language they used and
from their contemporaneous and subsequent acts. This principle gains more force when third parties are concerned. To require
such persons to go beyond what is clearly written in the document is unfair and unjust. They cannot possibly delve into the
contracting parties’ minds and suspect that something is amiss, when the language of the instrument appears clear and
unequivocal.
Article 1293
Art. 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. (1205a)
RODRIGUEZ V. REYES, 37 SCRA 195
Civil law; Mortgage; Caveat emptor; Mortgage is merely an encumbrance on the property.—The maxim “caveat emptor” applies
only to execution sales, and this was not one such. The mere fact that the purchaser of an immovable has notice that the required
realty is encumbered with a mortgage does not render him liable for the payment of the debt guaranteed by the mortgage, in the
absence of stipulation or condition that he is plain: the mortgage is merely an encumbrance on the property, entitling the
mortgagee to have the property foreclosed, i.e., sold, in case the principal obligor does not pay the mortgage debt, and appl y
the proceeds of the sale to the satisfaction of his credit. Mortgage is merely an accessory undertaking for the convenience and
security of the mortgage creditor, and exists independently of the obligation to pay the debt secured by it. The mortgagee, if he
is so minded, can waive the mortgage security and proceed to collect the principal debt by personal action against the original
mortgagor.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
Same; Obligations and contracts; Novation; Buyer cannot obligate himself to replace the debtor in principal obligation nor do so
in law without creditor’s consent.—By buying the property covered by TCT No. 48979 with notice that it was mortgaged,
respondent Dualan only undertook either to pay or else allow the land’s being sold if the mortgage creditor could not or did not
obtain payment from the principal debt when the debt matured. Nothing else. Certainly the buyer did not obligate himself to
replace the debtor in the principal obligation, and he could not do so in law without the creditor’s consent. Article 1293 of the
Civil Code governs.
Same; Same; Same; Obligation to discharge the mortgage indebtedness.—The obligation to discharge the mortgage
indebtedness remained on the shoulders of the original debtors and their heirs since the record is devoid of any evidence of
contrary intent.
Same; Same; Liability of respondent to discharge mortgage by paying or settling with the mortgage creditor when original
mortgagors fail to satisfy the debt.—Upon the other hand, the orders complained of, in so far as they require the vendors-heirs
to clear the title to the land sold to respondent Dualan, when the latter did it with full knowledge that the same was subject to a
valid and subsisting mortgage, is plainly erroneous. In submitting his bid, Dualan is presumed to know, and in fact did know, that
the property was subject to a mortgage lien that such encumbrance would make him, as purchaser, eventually liable to discharge
mortgage by paying or settling with the mortgage creditor, should the original mortgagors fail to satisfy the debt. Normally,
therefore, he would have taken this eventuality into account in making his bid, and offer a lower amount for the lot than if it were
not encumbered. If he intended his bid to be understood as conditioned upon the property being conveyed to him free from
encumbrance, it was his duty to have so stated in his bid, or at least before depositing the purchase price. He did not do so, and
the bid must be understood and taken to conform to the normal practice of the buyer’s taking the mortgaged property subject to
the mortgage. Consequently, he may not demand that the vendors should discharge the encumbrance aforesaid.
Same; No meeting of the minds on the bidding is belied by the conduct.—The claim that there was no meeting of the minds is
not only inconsistent with petitioners’ own argument on the main issue, but, is belied by their conduct. The fact is that an offer to
sell was advertised, a bidding was conducted, and the winning bidder deposited the price. A rebidding would have been proper
had all the parties agreed to it, but did not. Instead, the petitioners authorized their lawyer to negotiate for the redemption of the
property, thereby implying that they have accepted the validity of the sale and that their questioning it row is but an afterthought.
Same; Annulling of the sale for the participation of the respondent’s counsel.—The third ground relied upon in the petition for
annuling the sale is the participation of Atty. Ambrosio Padilla in the auction sale on behalf of respondent Bualan while still the
counsel of record for respondent Benipayo. The ground lacks merit, for the reason that petitioners have not shown that they
were in any way prejudiced, and they had, by their conduct, accepted the validity of the sale.
Article 1305
Art. 1305. A contract is a meeting of minds between two persons whereby one binds himself, with respect
to the other, to give something or to render some service. (1254a)
BATCHELDER V. CB, 44 SCRA 45
Taken from http://www.scribd.com/doc/104366840/George-DIGEST.
DOCTRINE
Monetary Board resolutions do not create contracts between Central Bank and dollar earner - Considering the fundamental
meaning of „contracts under the Civil Law and the nature of the administrative authority of the Monetary Board to promulgate
rules and regulations governing the monetary and banking system of the Philippines, the Monetary Board Resolutions Nos. 857
dated June 17, 1960 and 695 dated April 28, 1961 are not contracts that give rise to obligations which must be fulfilled by the
Central Bank in favor of affected parties. These resolutions merely lay down a general policy on the utilization of the dollar
earnings of Filipino and resident. American contractors undertaking projects in U.S. military bases.
FACTS:
Monetary Board Resolution No. 857 requires Filipino and American resident contractors for constructions in U.S. military bases
in the Philippines to surrender to the Central Bank their dollar earnings under their respective contracts but were entitled to utilize
90% of their surrendered dollars for importation at the preferred rate of commodities for use within or outside said U.S. military
bases. Resolution 695 moreover, denies their right to reacquire at the preferred rate ninety per cent (90%) of the foreign
exchange the sold or surrendered earnings to Central Bank for the purpose of determining whether the imports against proceeds
of contracts entered into prior to April 25, 1960 are classified as dollar-to-dollar transactions or not. George Batchelder, an
American Citizen permanently residing in the Philippines who is engaged in the Construction Business, surrendered to the
Central Bank his dollar earnings amounting to U.S. $199,966.00. He compels Central Bank of the Philippines to resell to
him$170,210.60 at the preferred rate of exchange of two Philippine pesos for one American dollar, more specifically P2.00375
which was denied by the court. He then contended that said decision failed to consider that if there was no contract obligating
the bank to resell to him at the preferred rate, the judgment of the lower court canand should nevertheless be sustained on the
basis of there being such an obligation arising from law.
ISSUE:
Whether or not Central Bank has the obligation arising from law to resell theUS$154,094.56 to Batchelder at the preferred rate.
Otherwise stated
Whether or not the issuance of a monetary policy by the Central Bank, thereafter implemented by the appropriate resolutions,
as to the rate of exchange at which dollars after being surrendered and sold to it could be re-acquired, creates a contractual
obligation.
HELD:
NO.
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Central Bank was intended to attain basic objectives in the field of currency and finance.
“It shall be the responsibility of the Central Bank of the Philippines to administer the monetary and banking system of the
Republic. It shall be the duty of the Central Bank to use the powers granted to it under this Act to achieve the following objectives:
(a) to maintain monetary stability in the Philippines; (b) to preserve the international value of the peso and the convertibility of
the peso into other freely convertible currencies; and (c) to promote a rising level of production, employment and real income in
the Philippines." It is, of course, true that obligations arise from 1) law; 2) contracts; 3) quasi-contracts;4) acts or omissions
punished by law and 5) quasi-delicts. One of the sources an obligation then is a law. A legal norm could so require that a
particular party be chargeable with a prestation or undertaking to give or to deliver or to do or to render some service.
It is an indispensable requisite though that such a provision, thus in fact exists. There must be a showing to that effect.
As early as 1909 in Pelayo v. Lauron, Court through Justice Torres, categorically declared: "Obligation arising from law are not
presumed." For in the language of Justice Street in Leung Ben v. O'Brien, a 1918 decision, such an obligation is "a creation of
the positive law." They are ordinarily traceable to code or statute. It is true though, as noted in the motion for reconsideration
following People v. Que Po Lay, that a Central Bank circular may have the force and effect of law, especially when issued in
pursuance of its quasi-legislative power. That of itself, however, is no justification to conclude that it has thereby assumed an
obligation.
CAPITOL MEDICAL CENTER V. CA, 178 SCRA 493
Contracts; Manual of Regulations for Private School; Once a student is accepted for enrollment in a given course, the school
may not expel him or refuse to re-enroll him until he completes his course except when he is academically deficient or has
violated the rules of discipline.—The meaning of this provision is that the school, after having accepted a student for enrollment
in a given course may not expel him or refuse to re-enroll him until he completes his course, except when he is academically
deficient or has violated the rules of discipline. He is presumed to be qualified to study there for the entire period it will take to
complete his course.
Same; Same; There is no contract between the student and the school for the latter to remain open for the entire duration of his
course.—However, there is no contract between him and the school for the latter to remain open for the entire duration of his
course.
Same; Same; Same; The contract between the college and a student who is enrolled and pays the fees for a semester is for the
entire semester only, not for the entire course.—The contract between the college and a student who is enrolled and pays the
fees for a semester, is for the entire semester only, not for the entire course. The law does not require a school to see a student
through to the completion of his course. If the school closes or is closed by proper authority at the end of a semester, the student
has no cause of action for breach of contract against the school.
Same; Same; Same; Same; Court cannot sanction the order of the lower court which gave aid and comfort to the students who
paralyzed the operation of the school by their mass actions forcing it to shut down altogether.—If in Alcuaz, this Court recognized
the right of the school to refuse admission to students guilty of breaches of discipline, and of the peace, its right to close when
the entire faculty and student population have boycotted their classes, may not be denied. The irony for the school in this case
is that it was forced to close by student action, and is now being forced to reopen by student action also, assisted by the l ower
court. We cannot sanction the order of the lower court which gave aid and comfort to the students who paralyzed the operation
of the school by their mass actions forcing it to shut down altogether. We cannot approve a situation which would place a school
at the mercy of its students.
Same; Same; Same; Same; Same; Lower court gravely abused its discretion in compelling the CMCC to reopen and re-admit
the striking students for enrollment in the second semester of their courses.—We, therefore, hold that the lower court gravely
abused its discretion in compelling the CMCC to reopen and re-admit the striking students for enrollment in the second semester
of their courses. Since their contracts with the school were terminated at the end of the first semester of 1987, and as the school
has already ceased to operate, they have no “clear legal right” to re-enroll and the school has no legal obligation to reopen and
re-admit them. No provision in the Education Act of 1982, nor in the Manual of Regulations for Private Schools can be, or has
been, cited to support the novel view that a school is obligated to remain open until its students have completed their courses
therein. Indeed, neither is there a law or rule that obligates a student who has enrolled in a school, to remain there until he
finishes his course. On the contrary he may transfer at any time to any school that is willing to accept him.
Same; Since a contract creates reciprocal rights and obligations, the obligation of a school to educate a student would imply a
corresponding obligation on the part of the student to study and obey the rules and regulations of the school.—But even if it can
be supposed that the enrollment of a student creates an implied “binding contract” with the school to educate him for the entire
course, since a contract creates reciprocal rights and obligations, the obligation of the school to educate a student would imply
a corresponding obligation on the part of the student to study and obey the rules and regulations of the school. When students
breach that supposed contract by refusing to attend their classes, preferring to take to the streets to mount a noisy demonstration
against their school, the latter may cancel the contract and close its doors. Its action would neither be arbitrary nor unfair.
Article 1306
Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they
may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public
policy. (1255a)
REPUBLIC V. PLDT, 26 SCRA 620
Facts:
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
 PLDT and RCA Communications, an American company authorized to transact business in the Phils, entered into an
agreement whereby tel. msgs coming from the US and received by RCA’s domestic station could automatically be
transferred to PLDT and vice versa
 Contracting parties agreed to divide tolls as follows: 30% to PLDT, 70% to RCA
 Contract contained a stipulation that either party could terminate the contract w/in a 24-month notice.
 PLDT then gave notice to RCA to terminate the contract.
 Soon after its creation in 1947, Bureau of Telecommunications, a branch of gov, rented trunk lines of PLDT to enable gov
offices to call private parties. Their agreement stated that public use of the service would be prohibited.
 BOT then entered into an agreement w/ RCA for a service where BOT would convey radio-telephone calls received by
RCA’s station to and from local residents.
 PLDT complained that BOT violated the conditions of the agreement, by providing services not only to government officers
but also to the public and private persons, competing with the business of PLDT.
 It gave notice that it would server tel connections if violations were not stopped. When it received no reply, PLDT
disconnected trunk lines, resulting in the isolation of the Phils in telephone services from the rest of the world, save the
US.
 Republic filed a complaint against PLDT to restrain severance of tel connections
Issue:
W/n PLDT could be compelled to enter into a contract with Republic
Held/ Ratio:
No, PLDT cannot be compelled. But gov can exercise power of eminent domain.
 Parties cannot be coerced to enter into a contract where no agreement is had between them as to the principal
terms and conditions of the contract. Freedom to stipulate such terms and conditions is of the essence of our
contractual system, and by express provision of the statute, a contract may be annulled if tainted by violence,
intimidation, or undue influence (Articles 1306, 1336, 1337, Civil Code of the Philippines).
 HOWEVER, while the Republic may not compel the PLDT to celebrate a contract with it, the Republic may, in the exercise
of the sovereign power of eminent domain, require the telephone company to permit interconnection of the government
telephone system and that of the PLDT, as the needs of the government service may require, subject to the payment of
just compensation to be determined by the court.
CUI V. ARELLANO UNIVERSITY, 2 SCRA 205
FACTS:
Cui, before the schoolyear 1948-1949 took up preparatory law course in Arellano University. After he finished, he enrolled in the
College of Law of the same university. He finished his law studies up to and including the 1 st semester of 4th year. During all the
years he studied there, his uncle was the dean of the College of Law and legal counsel of the said university. Cui enrolled for
the last semester of law but failed to pay his tuition because his uncle severed his connection with Arellano and instead accepted
deanship and chancellorship of the Abad Santos University College of Law. Cui then left Arellano and instead enrolled in that
school. During all his years in Arellano, he was awarded scholarship grants for scholastic merit, so that his semestral tuition fees
were returned to him after the end of each semester.
The whole amount of tuition fees that Cui paid to Arellano was refunded to him from the 1 st to the last semester of 4th year, in
total P1,033.87. When he graduated from Abad Santos, he applied to take the Bar. In order to take it, he needed the transcripts
of records from Arellano and he petitioned the latter to issue him the needed transcripts. Arellano refused after he had paid back
the P1,033 87 which defendant refunded to him as above stated. As he could not take the bar examination without those
transcripts, Cui paid to Arellano the said sum under protest. This is the sum which plaintiff seeks to recover from defendant in
this case.
Before Cui was given the scholarship grants, he was made to sign the ff contract:
"In consideration of the scholarship granted to me by the University, I hereby waive my right to transfer to another school without
having refunded to the University (defendant) the equivalent of my scholarship cash.”
In 1949, the Director of Private Schools issued Memorandum No. 38 regarding SCHOLARSHIP ADDRESSED TO “all heads of
private schools, colleges and universities,” which said: “[b]ut to stipulate the condition that such scholarships are good only if the
students concerned continue in the same school nullifies the principle of merit in the award of these scholarships; When students
are given full or partial scholarships, it is understood that such scholarships are merited and earned. The amount in tuition and
other fees corresponding to these scholarships should not be subsequently charged to the recipient students when they decide
to quit school or to transfer to another institution.”
Arellano received this memorandum and the Bureau of Private Schools upheld Cui’s position that he had the right to secure his
transcript without having to refund the tuition. Arellano still refused, and even said to issue an official order requiring them to do
so, so that it may be brought up to court.
ISSUE:
Whether the provisions of the contract is valid? NO
RATIO:
The court ruled that the nature of the issue, and its far reaching effects, transcend personal equations and demand a
determination of the case from a high impersonal plane. Neither was it essential to pass upon the validity of said Memorandum
No. 38, for, regardless of the same, the court was of the opinion that the stipulation in question is contrary to public policy and,
hence, null and void. The aforesaid memorandum merely incorporates a sound principle of public policy.
As the Director of Private Schools correctly pointed out, In the case of Zeigel vs. Illinois Trust and Savings Bank, the court said:
'In determining a public policy of the state, courts are limited to a consideration of the Constitution, the judicial decisions, the
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 CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE
statutes, and the practice of government officers.' It might take more than a government bureau or office to lay down or establish
a public policy, as alleged in your communication, but courts consider the practices of government officials as one of the four
factors in determining a public policy of the state. It has been consistently held in America that under the principles relating to
the doctrine of public policy, as applied to the law of contracts, courts of justice will not recognize or uphold a transaction which
its object, operation, or tendency is calculated to be prejudicial to the public welfare, to sound morality or to civic honesty.
If Arellano University understood clearly the real essence of scholarships and the motives which prompted this office to issue
Memorandum No. 38, it should have not entered into a contract of waiver with Cui on September 10, 1951, which is a direct
violation of our Memorandum and an open challenge to the authority of the Director of Private Schools because the contract was
repugnant to sound morality and civic honesty.
'In order to declare a contract void as against public policy, a court must find that the contract as to consideration or the thing to
be done, contravenes some established interest of society, or is inconsistent with sound policy and good morals or tends clearly
to undermine the security of individual rights. The policy enunciated in Memorandum No. 38, is sound policy. Scholarship are
awarded in recognition of merit not to keep outstanding students in school to bolster its prestige. In the understanding of that
university scholarships award is a business scheme designed to increase the business potential of an education institution. Thus
conceived it is not only inconsistent with sound policy but also good morals. But what is morals? Manresa has this definition. It
is good customs; those generally accepted principles of morality which have received some kind of social and practical
confirmation. The practice of awarding scholarships to attract students and keep them in school is not good customs nor has it
received some kind of social and practical confirmation except in some private institutions as in Arellano University.
SAURA V. SINDICO, 107:336
FACTS:
Saura and Sandico were contesting for nomination as the official candidate for the Nacionalista Party for the 4 th district of
Pangasinan. They entered into a pledge that said: Each aspirant shall respect the result of the aforesaid convention, i.e., no one
of us shall either run as a rebel or independent candidate after losing in said convention. Saura was elected to represent the
Nacionalista Party in the elections, however, Sindico, in disregard of the convenant, still filed her CoC and actively campaigned
for the position.
Saura filed a suit for recovery of damages. RTC dismissed stating that (1) the subject matter of the contract, being a public office,
is not within the commerce of man; and (2) the "pledge" was in curtailment of the free exercise of elective franchise and therefore
against public policy.
ISSUE:
W/N the contract is valid (NO)
RATIO:
Among those that may not be the subject matter (object) of contracts are certain rights of individuals, which the law and public
policy have deemed wise to exclude from the commerce of man. Among them are the political rights conferred upon citizens,
including, but not limited to, one's right to vote, the right to present one's candidacy to the people and to be voted to public office,
provided, however, that all the qualifications prescribed by law obtain. Such rights may not, therefore, be bargained away
curtailed with impunity, for they are conferred not for individual or private benefit or advantage but for the public good and interest.
LEAL V. IAC, 155 SCRA 394
Civil Law; Contracts; Contracts are generally binding between the parties, their assigns and heirs; Under Art 1255 of the Civil
Code of Spain, parts, clauses and conditions which are contrary to public order are null and void.—Contracts are generally
binding between the parties, their assigns and heirs; however, under Art. 1255 of the Civil Code of Spain, which is applicable in
this instance, pacts, clauses, and conditions which are contrary to public order are null and void, thus, without any binding effect.
Same; Same; Same; Same; The equivalent provision in the Civil Code of the Philippines of Art. 1255 of the Civil Code of Spain
is Art. 1306; Public order and public policy, interpreted.—Parenthetically, the equivalent provision in the Civil Code of the
Philippines is that of Art. 1306, which states: ‘That contracting parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law, morals good customs, public order, or public
policy.” Public order signifies the public weal-public policy. Essentially, therefore, public order and public policy mean one and
the same thing. Public policy is simply the English equivalent of “orden publico” in Art. 1255 of the Civil Code of Spain.
Same: Same; Sale; Land Registration; Annotation on title; Prohibition to sell property to third parties which is indefinite and
unlimited as to time, which shall continue to be applicable even beyond the lifetime of the original parties to the contract, is a
nullity.—One such condition which is contrary to public policy is the present prohibition to sell to third parties, because the same
virtually amounts to a perpetual restriction on the right of ownership, specifically the owner’s right to freely dispose of his
properties. Thus, we hold that any such prohibition, indefinite and unlimited as to time, so much so that it shall continue to be
applicable even beyond the lifetime of the original parties to the contract, is, without doubt, a nullity. In the light of this
pronouncement, we grant the petitioners’ prayer for the cancellation of the annotations of this prohibition at the back of their
Transfer Certificates of Title.
Same; Same; Same; Redemption; Right to redeem must be expressly stipulated in the contract of sale to have legal existence.—
The law provides that for conventional redemption to take place, the vendor should reserve, in no uncertain terms, the right to
repurchase the thing sold. Thus, the right to redeem must be expressly stipulated in the contract of sale in order that it may have
legal existence.
Same; Same; Same; Same; Same; Interpretation; Absence of any express or implied grant of a right of repurchase in the
contract; Phrase “in case of sale,” interpreted in case at bar.—In the case before us, we cannot find any express or implied grant
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
of a right to repurchase, nor can we infer, from any word or words in the questioned paragraph, the existence of any such right.
The interpretation in the resolution (Justice Sison) is rather strained. The phrase “in case of sale” should be construed to mean
“should the buyers wish to sell” which is the plain and simple import of the words, and not “the buyers should sell,” which i s
clearly a contorted construction of the same phrase.
Same; Same; Same; Same; Prescription; Under Art. 1508 of the Civil Code of Spain (Art 1606 of New Civil Code), the right to
redeem or repurchase in the absence of an express agreement as to time, shall last four years from the date of the contract;
Alleged right to repurchase in case at bar had expired as it was made only after 25 years from the date of the contract.—In the
respondent court’s resolution, it is further ruled that the right to repurchase was given birth by the condition precedent provided
for in the phrase “siempre y cuando estos ultimos pueden hacer la compra” (when the buyer has money to buy). In other words,
it is the respondent court’s contention that the right may be exercised only when the buyer has money to buy. If this were so, the
second paragraph of Article 1508 would apply—there is agreement as to the time, although it is indefinite, therefore, the right
should, be exercised within ten years, because the law does not favor suspended ownership. Since the alleged right to
repurchase was attempted to be exercised by Vicente Santiago only in 1966, or 25 years from the date of the contract, the said
right has undoubtedly expired.
PAKISTAN INTERNATIONAL AIRLINES V. OPLE, 190 SCRA 90
FACTS
Amelia Tan under the company Able Printing Press filed a complaint for damages versus PAL. The trial court rendered judgment
in favor of Tan and ordered PAL to pay damages. PAL appealed the judgment which the CA granted by reducing the amount of
damages.
Judgment became final and executory and was correspondingly entered in the case, which was remanded to the trial court for
execution. The trial court upon the motion of Amelia Tan issued an order of execution with the corresponding writ in favor of the
respondent. Said writ was duly referred to Deputy Sheriff Reyes for enforcement.
Four months later, Amelia Tan moved for the issuance of an alias writ of execution, stating that the judgment rendered by the
lower court, and affirmed with modification by the CA, remained unsatisfied. PAL opposed the motion, stating that it had already
fully paid its obligation to plaintiff through the issuance of checks payable to the deputy sheriff who later did not appear with his
return and instead absconded.
The CA denied the issuance of the alias writ for being premature. After two months the CA granted her an alias writ of execution
for the full satisfaction of the judgment rendered, when she filed another motion. Deputy Sheriff del Rosario is appointed special
sheriff for enforcement thereof.
PAL filed an urgent motion to quash the alias writ of execution stating that no return of the writ had as yet been made by Deputy
Sheriff Reyes and that judgment debt had already been fully satisfied by the former as evidenced by the cash vouchers signed
and received by the executing sheriff.
Deputy Sheriff del Rosario served a notice of garnishment on the depository bank of PAL, through its manager and garnished
the latter’s deposit. Hence, PAL brought the case to the Supreme Court and filed a petition for certiorari.
ISSUE:
WON the payment of judgment to the implementing officer as directed in the writ of execution constitutes satisfaction of
judgment? Or did the payment made to the absconding sheriff by check in his name operate to satisfy the judgment debt? NO.
RATIO:
In general, a payment, in order to be effective to discharge an obligation, must be made to the proper person. Article 1240 of the
Civil Code provides:
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. (Emphasis supplied)
Thus, payment must be made to the obligee himself or to an agent having authority, express or implied, to receive the particular
payment. Payment made to one having apparent authority to receive the money will, as a rule, be treated as though actual
authority had been given for its receipt. Likewise, if payment is made to one who by law is authorized to act for the creditor, it
will work a discharge. The receipt of money due on a judgment by an officer authorized by law to accept it will, therefore, satisfy
the debt.
The theory is where payment is made to a person authorized and recognized by the creditor, the payment to such a person so
authorized is deemed payment to the creditor. Under ordinary circumstances, payment by the judgment debtor in the case at
bar, to the sheriff should be valid payment to extinguish the judgment debt.
There are circumstances in this case, however, which compel a different conclusion.
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 Able Printing Press but to the absconding sheriff.
Did such payments extinguish the judgment debt?
Article 1249 of the Civil Code provides:
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.
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In the absence of an agreement, either express or implied, payment means the discharge of a debt or obligation in money and
unless the parties so agree, a debtor has no rights, except at his own peril, to substitute something in lieu of cash as medium of
payment of his debt. Consequently, unless authorized to do so by law or by consent of the obligee a public officer has no authority
to accept anything other than money in payment of an obligation under a judgment being executed. Strictly speaking, the
acceptance by the sheriff of the petitioner's checks, in the case at bar, does not, per se, operate as a discharge of the judgment
debt.
Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does not, by
itself, operate as payment. A check, whether a manager's check or ordinary cheek, 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. Mere delivery of
checks does not discharge the obligation under a judgment. The obligation is not extinguished and remains suspended until the
payment by commercial document is actually realized (Art. 1249, Civil Code, par. 3).
If bouncing checks had been issued in the name of Amelia Tan and not the Sheriff's, there would have been no payment. After
dishonor of the checks, Ms. Tan could have run after other properties of PAL. The theory is that she has received no value for
what had been awarded her. Because the checks were drawn in the name of Emilio Z. Reyes, neither has she received anything.
The same rule should apply.
It is argued that if PAL had paid in cash to Sheriff Reyes, there would have been payment in full legal contemplation. The
reasoning is logical but is it valid and proper? Logic has its limits in decision making. We should not follow rulings to their logical
extremes if in doing so we arrive at unjust or absurd results.
In the first place, PAL did not pay in cash. It paid in cheeks.
And second, payment in cash always carries with it certain cautions. Nobody hands over big amounts of cash in a careless and
inane manner. Mature thought is given to the possibility of the cash being lost, of the bearer being waylaid or running off with
what he is carrying for another. Payment in checks is precisely intended to avoid the possibility of the money going to the wrong
party. The situation is entirely different where a Sheriff seizes a car, a tractor, or a piece of land. Logic often has to give way to
experience and to reality. Having paid with checks, PAL should have done so properly.
Payment in money or cash to the implementing officer may be deemed absolute payment of the judgment debt but the Court
has never, in the least bit, suggested that judgment debtors should settle their obligations by turning over huge amounts of cash
or legal tender to sheriffs and other executing officers. Payment in cash would result in damage or interminable litigations each
time a sheriff with huge amounts of cash in his hands decides to abscond.
As a protective measure, therefore, the courts encourage the practice of payments by cheek 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. Actual transfer of funds
takes place within the safety of bank premises. These practices are perfectly legal. The object is always the safe and incorrupt
execution of the judgment.
It is, indeed, out of the ordinary that checks intended for a particular payee are made out in the name of another. Making the
checks payable to the judgment creditor would have prevented the encashment or the taking of undue advantage by the sheriff,
or any person into whose hands the checks may have fallen, whether wrongfully or in behalf of the creditor. The issuance of the
checks in the name of the sheriff clearly made possible the misappropriation of the funds that were withdrawn.
As explained and held by the respondent court:
... [K]nowing as it does that the intended payment was for the private party respondent Amelia Tan,
the petitioner corporation, utilizing the services of its personnel who are or should be knowledgeable
about the accepted procedures and resulting consequences of the checks drawn, nevertheless, in
this instance, without prudence, departed from what is generally observed and done, and placed as
payee in the checks the name of the errant Sheriff and not the name of the rightful payee. Petitioner
thereby created a situation which permitted the said Sheriff to personally encash said checks and
misappropriate the proceeds thereof to his exclusive personal benefit. For the prejudice that resulted,
the petitioner himself must bear the fault. The judicial guideline which we take note of states as
follows:
As between two innocent persons, one of whom must suffer the consequence of a breach of trust,
the one who made it possible by his act of confidence must bear the loss.
Having failed to employ the proper safeguards to protect itself, the judgment debtor whose act made possible the loss had but
itself to blame.
NON V. DAMES, 185 SCRA 523
Schools and Universities; Constitutional Law; Due Process; Imposition of sanctions on students requires observance of
procedural due process.·There are withal minimum standards which must be met to satisfy the demands of procedural due
process; and these are, that (1) the students must be informed in writing of the nature and cause of any accusation against them;
(2) they shall have the right to answer the charges against them, with the assistance of counsel, if desired; (3) they shall be
informed of the evidence against them; (4) they shall have the right to adduce evidence in their own behalf; and (5) the evidence
must be duly considered by the investigating committee or official designated by the school authorities to hear and decide the
case. Moreover, the penalty imposed must be proportionate to the offense committed.
Same; Same; Contracts; Contracts between school and students not ordinary; It is impressed with public interest.·The Court, in
Alcuaz, anchored its decision on the „termination of contract‰ theory. But it must be repeatedly emphasized that the contract
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
between the school and the student is not an ordinary contract. It is imbued with public interest, considering the high priority
given by the Constitution to education and the grant to the State of supervisory and regulatory powers over all educational
institutions.
Same; Same; Same; A school cannot refuse to enrol a student on the simple ground that his contract expires every end of a
semester. ·Respondent school cannot justify its actions by relying on Paragraph 137 of the Manual of Regulations for Private
Schools, which provides that „[w]hen a student registers in a school, it is understood that he is enrolling . . . for the entire semester
for collegiate courses,‰ which the Court in Alcuaz construed as authority for schools to refuse enrollment to a student on the
ground that his contract, which has a term of one semester, has already expired. The „termination of contract‰ theory does not
even find support in the Manual. Paragraph 137 merely clarifies that a college student enrolls for the entire semester. It serves
to protect schools wherein tuition fees are collected and paid on an installment basis, i.e. collection and payment of the
downpayment upon enrollment and the balance before examinations. Thus, even if a student does not complete the semester
for which he was enrolled, but has stayed on for more than two weeks, he may be required to pay his tuition fees for the whole
semester before he is given his credentials for transfer.
Same; Same; Same; Exclusion of a student for academic deficiency where the real cause of action for doing so is related to
possible breach of discipline·staging of a mass action and rally· violates tenets of fair play.·On the other hand, it does not appear
that the petitioners were afforded due process, in the manner expressed in Guzman, before they were refused re-enrollment. In
fact, it would appear from the pleadings that the decision to refuse them re-enrollment because of failing grades was a mere
afterthought. It is not denied that what incurred the ire of the school authorities was the student mass actions conducted in
February 1988 and which were led and/or participated in by petitioners. Certainly, excluding students because of failing grades
when the cause for the action taken against them undeniably related to possible breaches of discipline not only is a denial of
due process but also constitutes a violation of the basic tenets of fair play.
Same; Same; Same; Enrolment in another school no bar for readmission.·With regard to petitioner Emmanuel Barba who
respondents claim has enrolled in Ago Foundation, such fact alone, if true, will not bar him from seeking readmission in
respondent school. Same; Same; Same; Penalty to be imposed on student for breach of discipline must be commensurate to
offense committed.· But the penalty that could have been imposed must be commensurate to the offense committed and, as set
forth in Guzman, it must be imposed only after the requirements of procedural due process have been complied with. This is
explicit from the Manual of Regulations for Private Schools, which provides in Paragraph 145 that „[n]o penalty shall be imposed
upon any student, except for cause as defined in this Manual and/or in the schoolÊs rules and regulations duly promulgated and
only after due investigation shall have been conducted.‰ But this matter of disciplinary proceedings and the imposition of
administrative sanctions have become moot and academic. Petitioners, who have been refused readmission or re-enrollment
and who have been effectively excluded from respondent school for four (4) semesters, have already been more than sufficiently
penalized for any breach of discipline they might have committed when they led and participated in the mass actions that,
according to respondents, resulted in the disruption of classes. To still subject them to disciplinary proceedings would serve no
useful purpose and would only further aggravate the strained relations between petitioners and the officials of respondent school
which necessarily resulted from the heated legal battle here, in the Court of Appeals and before the trial court.
MELENCIO-HERRERA, J., Concurring:
Schools and Universities; Contracts: The „termination of contract‰ doctrine should be overturned.·In other words, I agree with
Mme. Justice Cortes that the „termination of contract doctrine‰ should be overturned for being a doctrinal error. It is now clear
(it was quoted out of context before) that paragraph 137 of the Manual of Regulations for Public Schools falls under Section VII
on Tuition and Other Fees and is intended merely to protect schools wherein tuition fees are collected and paid on installment
basis. It cannot be construed to mean that a student shall be enrolled for only one semester.
PADILLA, J., Concurring:
Schools and Universities; The school may still refuse re- enrollment on other grounds.·It would indeed appear that, consistent
with this constitutional priority given to education, par. 107 of the Manual of Regulations for Private Schools should be
underscored. It provides that every student has the right to enroll in any school college or university upon meeting its specific
requirements and reasonable regulations; x x x and that „the student is presumed to be qualified for enrollment for the entire
period he is expected to complete the course, without prejudice to his right to transfer.‰ It should be stressed, however, that
this right of students to enroll is not designed to leave schools completely helpless to deny enrollment or re-enrollment. For, par.
107 itself of the Manual of Regulations for Private Schools still recognizes the right of the school to refuse enrollment in case of
academic deficiency or violation of disciplinary regulations of the school.
SARMIENTO, J., Concurring:
Schools and Universities; Mere fact that student rally disrupted classes is not a ground for imposition of disciplinary action.·To
be sure, the school may punish students for breach of discipline, as, say, for breaking chairs or window panes or for disrupting
classes in the course of a demonstration, but they may be penalized for those actions alone and not because of the content of
their speech or the vociferousness with which it was said. Moreover, violations of school discipline must be judged on a case to
case basis and measured depending on gravity before school authorities may legitimately act. I do not think that the fact that a
demonstration has disrupted ongoing classes is a ground for penalizing students taking part therein because a demonstration,
from its very nature, is likely to disrupt classes. The school must convincingly show that the demonstrators had deliberately
turned to lawlessness, say, by barricading the schoolgate or the classroom entrances or otherwise prevented non-demonstrating
students or members of the faculty from attending a class or finishing one by threats or intimidation. Only in that sense may
school heads validly invoke „disruption of classes.
DE LUNA V. ABRIGO, 181 SCRA 150
Facts:
P. de Luna donated a portion of Lot 3707 to the Luzonian Colleges. The donation was embodied in a Deed of Donation Intervivos
as subject to certain terms and conditions and provided for the automatic reversion to the donor of the donated property in case
of violation or non-compliance. The foundation failed to comply with the conditions of the donation. On April 9, 1971, Prudencio
de Luna "revived" the said donation in favor of the foundation, in a document entitled "Revival of Donation Intervivos." One of
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the terms of the revival document is the construction of a chapel, nursery and kindergarten named after St. Veronica. Another
term is the construction of such must be at least 70% by the end of 3 years from the construction of the date of donation. The
document also provided for automatic reversion to the donor of the donated area in case of violation of the conditions. The
foundation, through its president, accepted the donation in the same document, subject to all the terms and conditions stated in
the donation. The donation was registered and annotated.
Upon P’s death, his children filed a complaint with the RTC alleging that the terms and conditions of the donation were not
complied with by the foundation. Among others, it prayed for the cancellation of the donation and the reversion of the donated
land to the heirs.
Respondent foundation claimed that it had partially and substantially complied with the conditions of the donation and that the
donor has granted the foundation an indefinite extension of time to complete the construction of the chapel. It also invoked the
affirmative defense of prescription of action and prayed for the dismissal of the complaint.
Issue:
WON the rules on donation applies? NO, the rules on contracts is applicable
Ratio:
Under Article 1306 of the New Civil Code, the parties to a contract have the right "to 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." Paragraph 11 of the "Revival of Donation Intervivos, has provided that "violation of any of the conditions (herein) shall
cause the automatic reversion of the donated area to the donor, his heirs, . . ., without the need of executing any other document
for that purpose and without obligation on the part of the DONOR". Said stipulation not being contrary to law, morals, good
customs, public order or public policy, is valid and binding upon the foundation who voluntarily consented thereto.
The validity of the stipulation in the contract providing for the automatic reversion of the donated property to the donor upon non-
compliance cannot be doubted. It is in the nature of an agreement granting a party the right to rescind a contract unilaterally in
case of breach, without need of going to court. Upon the happening of the resolutory condition of non-compliance with the
conditions of the contract, the donation is automatically revoked without need of a judicial declaration to that effect.
The case was then ordered by the court to be heard by a judge to determine the propriety of the revocation of the donation.
LLORIN V. CA, 218 SCRA 436
Civil Law; Contracts; Escalation clause; Requisites for validity.
·xxx For a stipulation on an escalation clause to be valid, it should specifically provide (1) that there can be an increase in interest
if increased by law or by the Monetary Board, and (2) it must include a provision for reduction of the stipulated interest in the
event that the applicable maximum rate of interest is reduced by law or by the Monetary Board. The purpose of the law in
mandating the inclusion of a de-escalation clause is to prevent one-sidedness in favor of the lender which is considered
repugnant to the principle of mutuality of contracts. xxx xxx x x x. The inescapable conclusion is that a de-escalation clause is
an indispensable requisite to the validity and enforceability of an escalation clause in the contract. In other words, in the absence
of a corresponding de-escalation clause, the escalation clause shall be considered null and void.
Same; Same; Same; Same; Exception in case at bar.·xxx. x x x. There is no dispute that the escalation clause in the promissory
note involved in this case does not contain a correlative de- escalation clause or a provision providing for the reduction of the
stipulated interest in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board.
Notwithstanding the absence of such stipulation, however, it is similarly not controverted but, as a matter of fact, specifically
admitted by petitioner that respondent APEX unilaterally and actually decreased the interest charges it imposed on herein
petitioner on three occasions. Consequently, we hold that with this actuality, the escalation clause involved in this case remains
valid and enforceable.
PALANCA V. CA, 238 SCRA 593
Obligations; Contracts; Statutes; Cuenco Law (Uniform Currency Act [R.A. 529]); Extraordinary Inflation; The autonomy of parties
to provide escalator clauses may be limited by law; A contractual stipulation providing for an upward adjustment in the purchase
price the moment there is a deterioration of the Philippine peso vis-a-vis the U.S. dollar violates R.A. No. 529.·In the case at
bench, the clear understanding of the parties is that there should be an upward adjustment of the purchase price the moment
there is a deterioration of the Philippine peso vis-a-vis the U.S. dollar. This is the „monetary fluctuation‰ contemplated by them
as would justify the adjustment. Under this scenario, it is an idle task to determine whether the contract has been visited by an
„extraordinary inflation‰ as to trigger the operation of Article 1250. While the contract may contain an „escalator clause‰
providing that in the occurrence of certain events, the contract price shall be increased to a fixed percentage of the base price
(„Escalator‰ price adjustment clauses, 63 ALR 2d 1337 [1959]), still the autonomy of the parties to provide such escalator
clauses may be limited by law. The petition should be dismissed on the ground that the stipulation of the parties is in violation of
R.A. No. 529, as amended, entitled „An Act to Assure Uniform Value To Philippine Coin and Currency,‰ otherwise known as
the Cuenco Law.
Same; Same; Same; Same; R.A. 529 prohibits in all domestic contracts: (1) giving the obligee the right to require payment in a
specified currency other than Philippine currency; and (2) giving the obligee the right to require payment „in an amount of money
of the Philippines measured thereby.‰·Often lost sight of is the fact that the said law prohibits two things in all domestic contracts:
(1) giving the obligee the right to require payment in a specified currency other than Philippine currency; and (2) giving the
obligee the right to require payment „in an amount of money of the Philippines measured thereby.‰ When the parties stipulated
that „x x x in the event of monetary fluctuation (meaning any change in the rate of exchange of the Philippine peso to the U.S.
dollar), the unpaid balance account of the herein vendee on the aforesaid subdivision lot shall be increased proportionately on
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
the basis of the present value of P6.72 to US$1.00,‰ the obligee was given the right to demand payment of the balance of the
purchase price „in an amount of money of the Philippines measured‰ by a foreign coin or currency.
Same; Same; Same; Same; Congress passed R.A. 529, having in mind the preservation of the value of the Philippine
peso.·Congress passed Republic Act No. 529, having in mind the preservation of the value of the Philippine peso. A currency
has value because people are willing to accept it in exchange for goods and services and in payment for debts. Thus, despite
the fact that money has no value as a commodity, it has value to those willing to use it as a medium of exchange (Cargill, Money,
The Financial System and Monetary Policy 18 [2nd ed., 1983]; Grubel, The International Monetary System 185 [3rd ed.]). If
goods and services are available in return for a definite medium of exchange, the value of all goods and services necessarily
will be measured in terms of that medium. But hese functions of money are not capable of performance if there is no confidence
in the currency (Nusbaum, Money in the Law 3-4 [1939 ed.]). If instead of the Philippine currency, the people would use a foreign
currency as the mode of payment or as basis for measuring the amount of money to be paid in Philippine currency, such usage
would adversely affect the confidence of the public on the Philippine monetary system.
Same; Same; Same; Same; The liberalization of the foreign exchange regulations did not repeal or in any way amend R.A. 529.
·The liberalization of the foreign exchange regulations on receipts and disbursements of residents arising from both non-trade
and trade transactions (Resolution of the Monetary Board dated August 7, 1992; Central Bank Circulars No. 1353, Series of
1992; No. 1318 dated January 3, 1992; No. 1338 dated April 28, 1992; No. 1348 dated July 28, 1992) did not repeal or in any
way amend R.A. No. 529. In essence, the said Circulars of the Central Bank merely allowed the free sale and purchase of foreign
exchange outside the banking system and other transactions involving foreign currency previously subject to Central Bank
control.
Statutes; Statutory Construction; A Central Bank Circular cannot repeal a law, as it is only a law that can repeal another law.
·Besides, a Central Bank Circular cannot repeal a law. Only a law can repeal another law. Article 7 of the Civil Code of the
Philippines provides: „Laws are repealed only by subsequent ones and their violation or nonobservance shall not be excused by
disuse, or custom or practice to the contrary.‰
ERMITAÑO V. CA, 306 SCRA 218
Facts:
Luis Ermitaño applied for a credit card from BPI Express Card, with Manuelita, his wife as extension card holder. One day,
Manuelita’s bag was snatched. Among the items were her credit card. The same night, she informed BPI of the loss through a
phone call. It was followed by a letter and requested for replacement. In her letter, Manuelita stated that she “shall not be
responsible for any and all charges incurred [through the use of the lost card] after August 29, 1989.” However, when Luis
received his monthly billing statement from BECC dated September 20, 1989, the charges included amounts for purchases
made on August 30, 1989 through Manuelita’s lost card. Two purchases were made. Manuelita received a billing statement
dated October 20, 1989 which required her to immediately pay the total amount of P3,197.70 covering the same (unauthorized)
purchases. Manuelita again wrote BECC disclaiming responsibility for those charges, which were made after she had served
BECC with notice of the loss of her card.
Despite the spouses’ refusal to pay and the fact that they repeatedly exceeded their monthly credit limit, BECC sent them a
stating that their cards had been renewed until March 1991. Notwithstanding this, however, BECC continued to include in the
spouses’ billing statements those purchases made through Manuelita’s lost card. Luis protested this billing in his letter dated
June 20, 1990.
However, BECC, in a letter dated July 13, 1990, pointed out to Luis the following stipulation in their contract:
“In the event the card is lost or stolen, the cardholder agrees to immediately report its loss or theft in writing to
BECC ... purchases made/incurred arising from the use of the lost/stolen card shall be for the exclusive account of
the cardholder and the cardholder continues to be liable for the purchases made through the use of the lost/stolen
BPI Express Card until after such notice has been given to BECC and the latter has communicated such loss/theft
to its member establishments.”
Issue:
WON the stipulation embodied in a standard application form for credit cards making the cardholder liable for purchases made
through his lost or stolen card is valid? NO
Ratio:
At the outset, we note that the contract between the parties in this case is indeed a contract of adhesion, so-called because its
terms are prepared by only one party while the other party merely affixes his signature signifying his adhesion thereto. Such
contracts are not void in themselves. They are as binding as ordinary contracts. Parties who enter into such contracts are free
to reject the stipulations entirely. This Court, however, will not hesitate to rule out blind adherence to such contracts if they prove
to be too one-sided under the attendant facts and circumstances.
In this case, the cardholder, Manuelita, has complied with what was required of her under the contract with BECC. Having thus
performed her part of the notification procedure, it was reasonable for Manuelita -- and Luis, for that matter -- to expect that
BECC would perform its part of the procedure, which is to forthwith notify its member-establishments. It is not unreasonable to
assume that BECC would do this immediately, precisely to avoid any unauthorized charges. Clearly, what happened in this case
was that BECC failed to notify promptly the establishment in which the unauthorized purchases were made with the use of
Manuelita’s lost card. Thus, Manuelita was being liable for those purchases, even if there is no showing that Manuelita herself
had signed for said purchases, and after notice by her concerning her card’s loss was already given to BECC.
Prompt notice by the cardholder to the credit card company of the loss or theft of his card should be enough to relieve the former
of any liability occasioned by the unauthorized use of his lost or stolen card. The questioned stipulation in this case, which still
requires the cardholder to wait until the credit card company has notified all its member-establishments, puts the cardholder at
the mercy of the credit card company which may delay indefinitely the notification of its members to minimize if not to eliminate
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the possibility of incurring any loss from unauthorized purchases. Or, as in this case, the credit card company may for some
reason fail to promptly notify its members through absolutely no fault of the cardholder. To require the cardholder to still pay for
unauthorized purchases after he has given prompt notice of the loss or theft of his card to the credit card company would simply
be unfair and unjust. The Court cannot give its assent to such a stipulation which could clearly run against public policy.
REGINO V. PANGASINAN COLLEGES, 443 SCRA 46
FACTS:
Regino was a first year computer science student at respondent school. During the 2 nd semester she was enrolled in logic and
statistic subjects. During the 2nd semester (February) respondent held a fund raising campaign in order to finish the construction
of the school’s tennis and volleyball courts. Each student was required to pay for two tickets at 100 each and those who were
unable to pay would be denied the opportunity to take the final examinations. Regino coming from a poor family and because
she was prohibited by her religion from attending dance parties and celebrations refused to pay for the tickets. Thus she was
disallowed from taking her final examinations in statistics and logic. She then filed a case for damages against the school.
ISSUE:
WON there was a breach of contract on the part of school when it imposed the ticket payment requirement before students could
take their exams. -- YES
HELD:
In a number of cases, the relationship between school and student has been characterized as contractual which lasts not only
for a semester but the entire period the latter are expected to complete it. It is also reciprocal, the school undertakes to provide
the students with education sufficient to enable them to pursue higher education or a profession while the students agree to
abide by the academic requirements of the school and observe its rules and regulations.
The terms of the contract are defined at the moment of its inception or upon enrolment. The standards of academic performance
and the code of behavior and discipline are in the manual which are distributed at the start of every school new year. Further,
schools inform prospective enrollees of the amount of fees and terms of payment.
If a student fails to comply with its financial obligations as set out by the school, the latter has a valid ground to withhold their
grades or from refraining them from taking their exams. In this case however, the assailed revenue raising measure was made
belatedly during the middle of the second semester. This fee was not part of the student-school contract entered into at the start
of the school year and therefore could not be unilaterally imposed to the prejudice of the enrollees.
DUNCAN V. GLAXO, 438 SCRA 343 [2004]
FACTS:
Tecson was hired by Glaxo as medical representative in 1995. He 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.
Tecson was initially assigned to market Glaxo’s products in the Camarines Sur-Camarines Norte sales area. Subsequently,
Tecson entered into a romantic relationship with Bettsy, an employee of Astra Pharmaceuticals, a competitor of Glaxo. Bettsy
was Astra’s Branch Coordinator in Albay. 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 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 defied the transfer order and continued acting as medical
representative in the Camarines Sur-Camarines Norte sales area. Because the parties failed to resolve the issue at the grievance
machinery level, they submitted the matter for voluntary arbitration. Glaxo offered Tecson a separation pay of one-half (½) month
pay for every year of service, or a total of P50,000.00 but he declined the offer. On November 15, 2000, the National Conciliation
and Mediation Board (NCMB) rendered its Decision declaring as valid Glaxo’s policy on relationships between its employees
and persons employed with competitor companies, and affirming Glaxo’s right to transfer Tecson to another sales territory.
Aggrieved, Tecson filed a Petition for Review with the Court of Appeals assailing the NCMB Decision.
ISSUE:
W/N Glaxo’s policy prohibiting its employees from marrying an employee of a competitor company is valid? Yes.
W/N the Court of Appeals erred in not finding that Tecson was constructively dismissed when he was transferred to a new sales
territory, and deprived of the opportunity to attend products seminars and training sessions? No.
RATIO:
As noted earlier, the challenged policy has been implemented by Glaxo impartially and disinterestedly for a long period of time.
In the case at bar, the record shows that Glaxo gave Tecson several chances to eliminate the conflict of interest brought about
by his relationship with Bettsy. When their relationship was still in its initial stage, Tecson’s supervisors at Glaxo constantly
reminded him about its effects on his employment with the company and on the company’s interests. After Tecson married
Bettsy, Glaxo gave him time to resolve the conflict by either resigning from the company or asking his wife to resign from Astra.
Glaxo even expressed its desire to retain Tecson in its employ because of his satisfactory performance and suggested that he
ask Bettsy to resign from her company instead. Glaxo likewise acceded to his repeated requests for more time to resolve the
conflict of interest. When the problem could not be resolved after several years of waiting, Glaxo was constrained to reassign
Tecson to a sales area different from that handled by his wife for Astra. Notably, the Court did not terminate Tecson from
employment but only reassigned him to another area where his home province, Agusan del Sur, was included. In effecting
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
Tecson’s transfer, Glaxo even considered the welfare of Tecson’s family. Clearly, the foregoing dispels any suspicion of
unfairness and bad faith on the part of Glaxo.
Glaxo has the right to guard its trade secrets, manufacturing formulas, marketing strategies, and other confidential programs
from competitors. The prohibition against personal marital relationships with employees of competitor companies upon Glaxo’s
employees is reasonable under the circumstances because relationships of that nature might compromise the interests of the
company. Also, the said policy has been implemented by Glaxo impartially and disinterestedly for a long period of time; Glaxo
also gave Tecson several chances to eliminate the conflict of interest. When the problem cannot be solved after several years,
it was constrained to reassign Tecson, and in doing so, it even considered the welfare of Tecson’s family. There was no
unfairness or bad faith.
STAR PAPER V. SIMBOL, 487 SCRA 228 [2006]
FACTS:
At bar is a Petition for Review on Certiorari of the Decision of the Court of Appeals reversing the decision of the NLRC which
affirmed the ruling of the Labor Arbiter. The following facts were presented:
(a) The respondents were all regular employees of the company;
(b) On October 27, 1993, Simbol was hired by the company. He met Alma Dayrit, also an employee of the company. He married
her on June 27, 1998. Prior to the marriage, Ongsitco advised the couple that should they decide to get married, one of them
should resign pursuant to a company policy promulgated in 1995. Simbol resigned on June 20, 1998.
(c) On February 5, 1997, Comia was hired by the company. She met Howard Comia, a co-employee whom she married on
June 1, 2000. Ongsitco likewise reminded them pursuant to the aforementioned company policy. Comia resigned on June 30,
2000.
(d) Simbol and Comia alleged that they did not resign voluntarily; they were compelled to resign in view of an illegal company
policy.
(e) On July 29, 1994, Estrella was hired by the company. She met Luisito Zuniga, also a co-worker, whom petitioners claimed
to be a married man who got Estrella impregnated. The company allegedly could have terminated her services due to immorality
but she opted to resign on December 21, 1999.
(f) Estrella alleged that she had a relationship with co-worker Zuniga who misrepresented himself as a married but a separated
man. After he got her pregnant, she discovered that he was not separated. Thus, she severed her relationship with him to avoid
dismissal due to company policy.
(g) On November 30, 1999, Estrella met an accident and had to recuperate for twenty-one (21) days as advised by the doctor
of the Orthopaedic Hospital. On December 21, 1999 but she found out that her name was on hold at the gate. She was directed
to the personnel office and handed a memorandum that stated that she was being dismissed for immoral conduct. Estrella was
asked to submit an explanation but she was dismissed nonetheless. She resigned because she was in dire need of money and
resignation could give her the thirteenth month pay.
On May 31, 2001, Labor Arbiter Del Rosario dismissed the complaint for lack of merit.
On January, 11, 2002, NLRC affirmed the decision of the Labor Arbiter.
On August 3, 2004, the CA reversed the NLRC decision and declared that:
(a) The petitioners’ dismissal from employment was illegal:
(b) The private respondents are ordered to reinstate the petitioners to their former positions without loss of seniority rights with
full backwages from the time of their dismissal until actual reinstatement; and
(c) The private respondents are to pay petitioners’ attorney’s fees amounting to 10% of the award and the cost of the suit.
Hence, this petition.
ISSUES:
(1) Whether or not the CA erred in holding that the subject 1995 policy/ regulation is violative of the constituional rights towards
marriage and the family of employees and of Article 136 of the Labor Code: and
HELD:
(1) No. The CA did not err in holding that the subject 1995 policy/ regulation is violative of the constitutional rights towards
marriage and the family of employees and or Article 136 of the Labor Code:
RATIO:
(ARTICLE 136. Stipulation against marriage. – 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.)
According to Star Paper, the rule does not require the woman employee to resign. The employee spouses have the right to
choose who between them should resign. Further, they are free to marry persons other than co-employees. Hence, it is not the
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marital status of the employee, per se, that is being discriminated. It is only intended to carry out its no-employment-for-relatives-
within-the-third-degree-policy which is within the ambit of the prerogatives of management
We note that two types of employment policies involve spouses: policies banning only spouses from working in the same
company (no-spouse employment policies), and those banning all immediate family members, including spouses, from
working in the same company (anti-nepotism employment policies)
Courts have struck down the no-spouse employment policies based on the broad legislative intent of the state statute. They
reason that the no-spouse employment policy violate the marital status provision because it arbitrarily discriminates against all
spouses of present employees without regard to the actual effect on the individual's qualifications or work performance.
These courts also find the no-spouse employment policy invalid for failure of the employer to present any evidence of business
necessity other than the general perception that spouses in the same workplace might adversely affect the business. They hold
that the absence of such a bona fide occupational qualification invalidates a rule denying employment to one spouse due to
the current employment of the other spouse in the same office.
We do not find a reasonable business necessity in the case at bar.
It is significant to note that in the case at bar, 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. If we uphold the questioned rule without valid justification, the employer
can create policies based on an unproven presumption of a perceived danger at the expense of an employee’s right to security
of tenure.
ACOL V. PCCCI, 496 SCRA 422 [2006]
FACTS:
In 1982, Manuel Acol obtained a Bankard credit card and extension which he used for the following years. On April 18, 1987
Manuel discovered that he lost his card and on the following morning he called respondent’s to report the loss.
Again, on April 20, 1987, Manuel called again to reiterate his report of the lost card and asked if there were additional
requirements to report the loss. He was told to write a letter notifying the company of the loss, which he promptly did the same
day. The letter was received by respondent on April 22, 1987.
On April 21, respondent issued a notice to its establishments of the loss of the card. Unfortunately, somebody was able to use
the card on April 19 and 20 and made charges on it amounting to P76,067.28. These charges appeared on Manuel’s April 30
billing statement. Manuel informed respondent he would not pay for the purchases made after April 19, 1987, the day he notified
respondent of the loss
An investigation by respondent company confirmed that it was not the petitioner who used his Bankard on April 19 and 20, 1987.
Nevertheless, respondent still required Manuel to pay within 15 days from notice. The company cited provision no. 1 in its terms
and conditions:
xxx Holder's responsibility for all charges made through the use of the card shall continue until the expiration or its
return to the Card Issuer or until a reasonable time after receipt by the Card Issuer of written notice of loss of the Card
and its actual inclusion in the Cancellation Bulletin. xxx
Manuel refused to pay so respondent filed a case in the RTC of Manila for collection of sum of money plus damages. RTC
dismissed the case but on appeal the CA held Manuel liable for the P76K.
ISSUE:
(1) W/N the stipulation was valid? No.
HELD:
PETITION Granted. The stipulation is void for being contrary to public policy.
RATIONALE:
A stipulation providing that the effectivity of the credit card cancellation rests on an act entirely beyond the control of the
cardholder is void for being contrary to public policy. Worse, the phrase "after a reasonable time" gives the issuer the opportunity
to actually profit from unauthorized charges despite receipt of immediate written notice from the cardholder.
Under such a stipulation, petitioner could have theoretically done everything in his power to give respondent the required written
notice. But if respondent took a "reasonable time” (which could be indefinite) to include the card in its cancellation bulletin, it
could still hold the cardholder liable for whatever unauthorized charges were incurred within that span of time. This would have
been truly iniquitous, considering the amount respondent wanted to hold petitioner liable for.
Article 1306 of the Civil Code7 prohibits contracting parties from establishing stipulations contrary to public policy.
7
Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals good customs, public order or public policy.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
AZNAR V. CITIBANK, 519 SCRA 287 [2007]
FACTS:
Aznar, a known businessman in Cebu, is a holder of a Preferred Master Credit Card (Mastercard) bearing number issued by
Citibank with a credit limit of P150,000. As he and his wife, Zoraida, planned to take their two grandchildren, on an Asian tour,
Aznar made a total advance deposit of P485,000 with Citibank with the intention of increasing his credit limit to P635,000. With
the use of his Mastercard, Aznar purchased plane tickets to Kuala Lumpur for his group worth P237,000.
Aznar claims that when he presented his Mastercard in some establishments in Malaysia, Singapore and Indonesia, the same
was not honored. And when he tried to use the same in Ingtan Tour&Travel Agency (Ingtan Agency) in Indonesia to purchase
plane tickets to Bali, it was again dishonored for the reason that his card was blacklisted by Citibank. Such dishonor forced him
to buy the tickets in cash. He further claims that his humiliation caused by the denial of his card was aggravated when Ingtan
Agency spoke of swindlers trying to use blacklisted cards.
Aznar filed a complaint for damages against Citibank, claiming that Citibank fraudulently or with gross negligence blacklisted his
Mastercard which forced him, his wife and grandchildren to abort important tour destinations and prevented them from buying
certain items in their tour. He further claimed that he suffered mental anguish, serious anxiety, wounded feelings, besmirched
reputation and social humiliation due to the wrongful blacklisting of his card. To prove that Citibank blacklisted his Mastercard,
Aznar presented a computer print-out, denominated as ON-LINE AUTHORIZATIONS FOREIGN ACCOUNT ACTIVITY
REPORT, issued to him by Ingtan Agency with the signature of one Victrina Elnado Nubi (Nubi) which shows that his card in
question was "DECL OVERLIMIT" or declared over the limit.
Citibank denied the allegation that it blacklisted Aznar’s card. It also contended that under the terms and conditions governing
the issuance and use of its credit cards, Citibank is exempt from any liability for the dishonor of its cards by any merchant affiliate,
and that its liability for any action or incident which may be brought against it in relation to the issuance and use of its credit cards
is limited to P1,000.00 or the actual damage proven whichever is lesser.
To prove that they did not blacklist Aznar’s card, Citibank’s Credit Card Department Head, Dennis Flores, presented Warning
Cancellation Bulletins which contained the list of its canceled cards covering the period of Aznar’s trip.
ISSUE:
W/N Aznar has established his claim against Citibank? NO
HELD:
Petition is denied for lack of merit
RATIONALE:
The Court agrees with Aznar that the terms and conditions of Citibank’s Mastercard constitute a contract of adhesion. It is settled
that contracts between cardholders and the credit card companies are contracts of adhesion, so-called, because their terms are
prepared by only one party while the other merely affixes his signature signifying his adhesion thereto.
In this case, paragraph 7 of the terms and conditions states that "[Citibank is] not responsible if the Card is not honored by any
merchant affiliate for any reason x x x". While it is true that Citibank may have no control of all the actions of its merchant affiliates,
and should not be held liable therefor, it is incorrect, however, to give it blanket freedom from liability if its card is dishonored by
any merchant affiliate for any reason. Such phrase renders the statement vague and as the said terms and conditions constitute
a contract of adhesion, any ambiguity in its provisions must be construed against the party who prepared the contract, in this
case Citibank.
Citibank also invokes paragraph 15 of its terms and conditions which limits its liability to P1,000.00 or the actual damage proven,
whichever is lesser. Again, such stipulation cannot be considered as valid for being unconscionable as it precludes payment of
a larger amount even though damage may be clearly proven. This Court is not precluded from ruling out blind adherence to the
terms of a contract if the attendant facts and circumstances show that they should be ignored for being obviously too one-sided.
The invalidity of the terms and conditions being invoked by Citibank, notwithstanding, the Court still cannot award damages in
favor of petitioner. In culpa contractual or breach of contract, moral damages are recoverable only if the defendant has acted
fraudulently or in bad faith, or is found guilty of gross negligence amounting to bad faith, or in wanton disregard of his contractual
obligations. The breach must be wanton, reckless, malicious or in bad faith, oppressive or abusive.
While the Court commiserates with Aznar for whatever undue embarrassment he suffered when his credit card was dishonored
by Ingtan Agency, especially when the agency’s personnel insinuated that he could be a swindler trying to use blacklisted cards,
the Court cannot grant his present petition as he failed to show by preponderance of evidence that Citibank breached any
obligation that would make it answerable for said suffering.
MACALINAO V. BPI, 600 SCRA 67 [2009]
FACTS:
Petitioner Ileana Macalinao was an approved cardholder of BPI Mastercard, one of the credit card facilities of respondent
BPI. She made some purchases through the use of the said credit card and defaulted in paying for said purchases. She
subsequently received a letter dated from respondent BPI, demanding payment of the amount of PhP 141,518.34. Under the
Terms and Conditions Governing the Issuance and Use of the BPI Credit and BPI Mastercard, the charges or balance thereof
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remaining unpaid after the payment due date indicated on the monthly Statement of Accounts shall bear interest at the rate of
3% per month and an additional penalty fee equivalent to another 3% per month.
For failure of petitioner Macalinao to settle her obligations, respondent BPI filed with the MeTC of Makati City a complaint for a
sum of money against her and her husband, Danilo SJ. Macalinao. (BPI vs. Spouses Ileana Dr. Macalinao and Danilo SJ.
Macalinao). In said complaint, respondent BPI prayed for the payment of the PhP 154,608.78 plus 3.25% finance charges and
late payment charges equivalent to 6% of the amount due and an amount equivalent to 25% of the total amount due as attorney’s
fees, and of the cost of suit. After the summons and a copy of the complaint were served upon petitioner Macalinao and her
husband, they failed to file their Answer. Thus, respondent BPI moved that judgment be rendered in accordance with Section 6
of the Rule on Summary Procedure. This was granted. In its Decision, the MeTC ruled in favor of BPI and ordered petitioner
Macalinao and her husband to pay the amount of PhP 141,518.34 plus interest and penalty charges of 2% per month,
Petitioner Macalinao and her husband appealed to the RTC of Makati City which affirmed the decision of the MeTC. Then they
filed a petition for review with the CA. The CA affirmed with modification the Decision of the RTC. The modification was with
respect to the total amount due and interest rate (3%). In its assailed decision, the CA held that the amount of PhP 141,518.34
(the amount sought to be satisfied in the demand letter of respondent BPI) is clearly not the result of the re-computation at the
reduced interest rate as previous higher interest rates were already incorporated in the said amount. Thus, the said amount
should not be made as basis in computing the total obligation of petitioner Macalinao. Further, the CA also emphasized that
respondent BPI should not compound the interest in the instant case absent a stipulation to that effect. The CA also held,
however, that the MeTC erred in modifying the amount of interest rate from 3% monthly to only 2% considering that petitioner
Macalinao freely availed herself of the credit card facility offered by respondent BPI to the general public. It explained that
contracts of adhesion are not invalid per se and are not entirely prohibited.
ISSUES/HELD:
 Should the interest rate be reduced from 9.25% to 2% since the stipulated rate of interest was unconscionable and
iniquitious? Yes
RATIONALE:
 The Interest Rate and Penalty Charge of 3% Per Month or 36% Per Annum Should Be Reduced to 2% Per
Month or 24% Per Annum
In its Complaint, respondent BPI originally imposed the interest and penalty charges at the rate of 9.25% per month
or 111% per annum. This was declared as unconscionable by the lower courts for being clearly excessive, and
was thus reduced to 2% per month or 24% per annum. On appeal, the CA modified the rate of interest and penalty
charge and increased them to 3% per month or 36% per annum based on the Terms and Conditions Governing
the Issuance and Use of the BPI Credit Card, which governs the transaction between petitioner Macalinao and
respondent BPI. BPI asserts that said interest rate and penalty charge are reasonable as the same are based on
the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card.
 We find for petitioner. The interest rate and penalty charge of 3% per month should be equitably reduced to 2%
per month or 24% per annum.
 Indeed, in the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card, there was a
stipulation on the 3% interest rate. Nevertheless, it should be noted that this is not the first time that this Court has
considered the interest rate of 36% per annum as excessive and unconscionable. We held in Chua vs. Timan:
“The stipulated interest rates of 7% and 5% per month imposed on respondents’ loans must be equitably reduced
to 1% per month or 12% per annum. We need not unsettle the principle we had affirmed in a plethora of cases that
stipulated interest rates of 3% per month and higher are excessive, iniquitous, unconscionable and exorbitant.
Such stipulations are void for being contrary to morals, if not against the law.” Since the stipulation on the interest
rate is void, it is as if there was no express contract thereon. Hence, courts may reduce the interest rate as reason
and equity demand.
 The same is true with respect to the penalty charge. Notably, under the Terms and Conditions Governing the
Issuance and Use of the BPI Credit Card, it was also stated therein that respondent BPI shall impose an additional
penalty charge of 3% per month. Pertinently, Article 1229 of the Civil Code states: “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 the instant case, the records would reveal that petitioner Macalinao made partial payments to respondent BPI,
as indicated in her Billing Statements. Further, the stipulated penalty charge of 3% per month or 36% per annum,
in addition to regular interests, is indeed iniquitous and unconscionable.
 Thus, under the circumstances, the Court finds it equitable to reduce the interest rate pegged by the CA at 1.5%
monthly to 1% monthly and penalty charge fixed by the CA at 1.5% monthly to 1% monthly or a total of 2% per
month or 24% per annum in line with the prevailing jurisprudence and in accordance with Art. 1229 of the Civil
Code.
 Accordingly, petitioner Macalinao is ordered to pay respondent BPI the following:
(1) The amount of one hundred twelve thousand three hundred nine pesos and fifty-two centavos (PhP 112,309.52)
plus interest and penalty charges of 2% per month from January 5, 2004 until fully paid;
(2) PhP 10,000 as and by way of attorney’s fees; and
(3) Cost of suit.
CASTRO V. TAN, 605 SCRA 231 [2009]
Facts:
Angelina and her husband Ruben Tan loaned P30,000 from the Spouses Castro and mortgaged their house and lot as security.
Spouses Tan agreed to pay within 6 months, with an interest rate of 5% per month, compounded monthly. Barely 7 months
later, Ruben Tan died and Angelina failed to pay. She offered to pay Spouses Castro the principal amount plus a portion of the
interest but Spouses Castro refused and demanded payment of the total accumulated sum of P359,000. Spouses Castro
foreclosed the mortgage. Angelina failed to redeem the property. Angelina filed a Complaint for Nullification of Mortgage and
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
Foreclosure and/or Partial Rescission of Documents and Damages in the RTC, alleging that the interest rate imposed was
unconscionable. The RTC did not declare the mortgage & foreclosure void but reduced the interest to 12% per annum. The CA
ruled that Angelina could redeem the property by paying the P30,000 with 12% interest per annum.
Issue:
W/N freedom to contract is absolute, thus leaving the parties to stipulate an unconscionable interest. – NO.
Held:
The interest stipulated is unconscionable and should be equitably reduced to the legal rate of 12% per annum.
Rationale:
Freedom of contract is not absolute. The same subject to reasonable legislative regulation aimed at the promotion of public
health, morals, safety and welfare. One such legislative regulation is found in Article 1306 of the Civil Code which allows the
contracting parties to "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."
The compounded interest rate of 5% per month, is iniquitous and unconscionable. Being a void stipulation, it is deemed inexistent
from the beginning. The debt is to be considered without the stipulation of the iniquitous and unconscionable interest rate.
Accordingly, the legal interest of 12% per annum must be imposed in lieu of the excessive interest stipulated in the agreement.
TIU V. PLATINUM PLANS, 517 SCRA 101
FACTS:
Platinum Plans Philippines, Inc. is a domestic corporation engaged in the pre-need industry. From 1987 to 1989, Tiu Daisy B.
Tiu was its Division Marketing Director.
In 1993, Platinum re-hired Tiu as Senior AVP and Territorial Operations Head in charge of its Hongkong and Asean operations
and executed a contract of employment valid for five years. In 1995, Tiu stopped reporting for work. After a couple of months,
she became the VP for Sales of Professional Pension Plans, Inc., a pre-need company.
Platinum sued Tiu for damages for violation of the non-involvement clause in her contract of employment which states that during
her employment with Platinum and for the next TWO (2) years thereafter, she cannot engage with any corporation belonging to
the same pre-need industry. Breach thereof would amount to 100,000.00.
Tiu countered that the non-involvement clause was unenforceable for being against public order or public policy.
ISSUE/HELD:
Is the non-involvement clause valid? Yes.(So Tiu must pay Platinum damages.)
RATIO:
A non-involvement clause is not necessarily void for being in restraint of trade as long as there are reasonable limitations as to
time, trade, and place.
In this case, the non-involvement clause has a time limit: two years from the time Tiu’s employment with Platinum ends. It is also
limited as to trade, since it only prohibits Tiu from engaging in any pre-need business akin to Platinum’s.
More significantly, since Tiu was the Senior Assistant Vice-President and Territorial Operations Head in charge of Platinum’s
Hongkong and Asean operations, she had been privy to confidential and highly sensitive marketing strategies of Platinum’s
business. To allow her to engage in a rival business soon after she leaves would make Platinum’s trade secrets vulnerable
especially in a highly competitive marketing environment. In sum, we find the non-involvement clause not contrary to public
welfare and not greater than is necessary to afford a fair and reasonable protection to Platinum.
FREEDOM TO CONTRACT DOCTRINE:
In any event, Article 1306 of the Civil Code 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.
Article 1159 of the same Code also provides that obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith. Courts cannot stipulate for the parties nor amend their agreement where the
same does not contravene law, morals, good customs, public order or public policy, for to do so would be to alter the real intent
of the parties, and would run contrary to the function of the courts to give force and effect thereto. Not being contrary to public
policy, the non-involvement clause, which Tiu and Platinum freely agreed upon, has the force of law between them, and thus,
should be complied with in good faith.
BALANE NOTE
Non-involvement clause. Court traced the jurisprudential history of the non-involvement clause. The clause is not itself void, it
can be valid if it is reasonable and can be restricted as to time, place or industry.
HEIRS OF MANUEL UY V. MEER CASTILLO, 697 SCRA 294 [2013]
Viewed in the light of the autonomous nature of contracts enunciated under Article 1306 of the Civil Code, on the other hand,
we find that the Kasunduan was correctly found by the RTC to be a valid and binding contract between the parties. Already
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partially executed with respondents’ receipt of P1,000.00 from Manuel upon the execution thereof, the Kasunduan simply
concerned the sale of the former’s 60% share in the subject parcel, less the 1,750-square meter portion to be retained, for the
agreed consideration of P180,000.00. As a notarized document that carries the evidentiary weight conferred upon it with respect
to its due execution, the Kasunduan was shown to have been signed by respondents with full knowledge of its contents, as may
be gleaned from the testimonies elicited from Philip and Leovina.
Although Philip had repeatedly claimed that respondents had been forced to sign the Agreement and the Kasunduan, his
testimony does not show such vitiation of consent as would warrant the avoidance of the contract. He simply meant that
respondents felt constrained to accede to the stipulations insisted upon by Atty. Zepeda and Manuel who were not otherwise
willing to push through with said contracts.
At any rate, our perusal of the record shows that respondents’ main objection to the enforcement of the Kasunduan was the
perceived inadequacy of the P180,000.00 which the parties had fixed as consideration for 60% of the subject parcels. Rather
than claiming vitiation of their consent in the answer they filed a quo, respondents, in fact, distinctly averred that the Kasunduan
was tantamount to unjust enrichment and “a clear source of speculative profit” at their expense since their remaining share in
said properties had “a current market value of P9,594,900.00, more or less.” In their 22 March 1993 letter to petitioners,
respondents also cited prices then prevailing for the sale of properties in the area and offered to sell their 60% share for the price
of P500.00 per square meter or a total of P15,991,500.00. In response to petitioners’ insistence on the price originally agreed
upon by the parties, respondents even invoked the last paragraph of the Kasunduan to the effect that the parties agreed to enter
into such other stipulations as would be necessary to ensure the fruition of the sale.
In the absence of any showing, however, that the parties were able to agree on new stipulations that would modify their
agreement, we find that petitioners and respondents are bound by the original terms embodied in the Kasunduan. Obligations
arising from contracts, after all, have the force of law between the contracting parties who are expected to abide in good faith
with their contractual commitments, not weasel out of them. Moreover, when the terms of the contract are clear and leave no
doubt as to the intention of the contracting parties, the rule is settled that the literal meaning of its stipulations should govern. In
such cases, courts have no authority to alter a contract by construction or to make a new contract for the parties. Since their
duty is confined to the interpretation of the one which the parties have made for themselves without regard to its wisdom or folly,
it has been ruled that courts cannot supply material stipulations or read into the contract words it does not contain.
ADVOCATES V. BSP, 688 SCRA 530 [2013]
Facts
Petitioners, claiming that they are raising issues of transcendental importance to the public, directly filed a Petition for Certiorari,
seeking to declare that the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), replacing the Central Bank Monetary Board
(CB-MB) by virtue of Republic Act (R.A.) No. 7653, has no authority to continue enforcing a circular issued by the CB-MB in
1982, which "suspended" the Usury Law of 1916.cralawlibrary
Petitioner "Advocates for Truth in Lending, Inc." (AFTIL) is a non- profit, non-stock corporation organized to engage in pro bono
concerns and activities relating to money lending issues. The law, RA 265, that created the Central Bank empowered the CB-
MB to set the maximum interest rates which banks may charge within limits prescribed by the Usury Law.
However, the Usury Law was amended by PD1684, giving the CB-MB authority to prescribe the maximum rate or rates of interest
for the loan or renewal thereof or the forbearance of any money, goods or credits, and to change such rate or rates whenever
warranted by prevailing economic and social conditions.
The CB-MB issued CB Circular No. 905 which removed the ceilings on interest rates on loans or forbearance of any money,
goods or credits. In 1993, FVR signed a law creating the Bangko Sentral ng Pilipinas (BSP) to replace the CB.
Issue:
WON BSP-MB can continue enforcing the CB-MB circular lifting the ceilings on interest rates (thus allowing interests to go
beyond the rates under the Usury Law)
Held
The power of the CB to effectively suspend the Usury Law pursuant to P.D. No. 1684 has long been recognized and upheld in
many cases (because a circular cannot repeal a law). P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting
parties to stipulate freely regarding any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of
money, goods or credits. In fine, they can agree to adjust, upward or downward, the interest previously stipulated.
Thus, by lifting the interest ceiling, CB Circular No. 905 merely upheld the parties' freedom of contract to agree freely on the rate
of interest. It cited Article 1306 of the New Civil Code, under which the contracting parties may establish such stipulations,
clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public
order, or public policy.crala
However, the lifting of the ceilings for interest rates does not authorize stipulations charging excessive, unconscionable, and
iniquitous interest. Stipulations authorizing iniquitous or unconscionable interests have been invariably struck down for being
contrary to morals, if not against the law.
DAVID V. MOECI, GR 194785, 11 JULY 2012
Stipulation of 24% per annum reduced to legal interest. Interest rate was seen as a penalty.
Article 1307
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
Art. 1307. Innominate contracts shall be regulated by the stipulations of the parties, by the provisions
of Titles I and II of this Book, by the rules governing the most analogous nominate contracts, and by
the customs of the place. (n)
CORPUS V. CA, 98 SCRA 424
Attorneys; Contracts; An attorney-client relationship can be created by implied agreement, as when the attorney actually
rendered legal services for a person who is a close friend. The obligation of such a person to pay attorney’s fees is based on
the law of contracts’ concept of facio ut des (I do and you give).—WE find respondent David’s position meritorious. While there
was no express agreement between petitioner Corpus and respondent David as regards attorney’s fees, the facts of the case
support the position of respondent David that there was at least an implied agreement for the payment of attorney’s fees.
Petitioner s act of giving the check for P2,000.00 through his aforestated April 18, 1962 letter to respondent David indicates
petitioner’s commitment to pay the former attorney’s fees, which is stressed by expressing that “I wish I could give more but as
you know we were banking on a SC decision reinstating me and reimbursing my back salaries.’ This last sentiment constitutes
a promise to pay more upon his reinstatement and payment of his back salaries. Petitioner ended his letter that he was “looking
forward to a continuation of the case in the lower court, x x x”, to which the certiorari-mandamus-quo warranto case was
remanded by the Supreme Court for further proceedings.
Same; Same; Same.—It may be advanced that respondent David may be faulted for not reducing the agreement for attorney’s
fees with petitioner Corpus in writing. However, this should be viewed from their special relationship. It appears that both have
been friends for several years and were co-members of the Civil Liberties Union. In addition, respondent David and petitioner’s
father, the late Rafael Corpus, were also close friends. Thus, the absence of an express contract for attorney’s fees between
respondent David and petitioner Corpus is no argument against the payment of attorney’s fees, considering their close
relationship which signifies mutual trust and confidence between them.
Same; Same; Same.—Moreover, the payment of attorney’s fees to respondent David may also be justified by virtue of the
innominate contract of facio ut des (I do and you give) which is based on the principle that “no one shall unjustly enrich himself
at the expense of another.” Innominate contracts have been elevated to a codal provision in the New Civil Code by providing
under Article 1307 that such contracts shall be regulated by the stipulations of the parties, by the general provisions or principles
of obligations and contracts, by the rules governing the most analogous nominate contracts, and by the customs of the people.
Same; Same; An attorney cannot charge his client a percentage of the amount recovered as his fees in the absence of an
expressagreement.—There was no contract for contingent fee between Corpus and respondent David. Contingent fees depend
on an express contract therefor. Thus, “an attorney is not entitled to a percentage of the amount recovered by his client in the
absence of an express contract to that effect” (7 C.J.S. 1063 citing Thurston v. Travelers Ins. Co., 258 N.W. 66, 128 Neb. 141).
Same; Same; Attorney’s fees on a quantum meruit basis will be resolved by taking all relevant factors into consideration.—In
determining a reasonable fee to be paid to respondent David as compensation for his services, on a quantum meruit basis, it is
proper to consider all the facts and circumstances obtaining in this case particularly the following: x x x.
HELD & RATIO
Moreover, the payment of attorney’s fees to respondent David may also be justified by virtue of the innominate contract
of facio ut des (I do and you give) which is based on the principle that “no one shall unjustly enrich himself at the
expense of another.” Innominate contracts have been elevated to a codal provision in the New Civil Code by providing under
Article 1307 that such contracts shall be regulated by the stipulations of the parties, by the general provisions or principles of
obligations and contracts, by the rules governing the most analogous nominate contracts, and by the customs of the people.
The rationale of this article was stated in the 1903 case of Perez vs. Pomar (2 Phil. 982). In that case, the Court sustained the
claim of plaintiff Perez for payment of services rendered against defendant Pomar despite the absence of an express contract
to that effect, thus:
“It does not appear that any written contract was entered into between the parties for the employment of the plaintiff as interpreter,
or that any other innominate contract was entered into; but whether the plaintiffs services were solicited or whether they were
offered to the defendant for his assistance, inasmuch as these services were accepted and made use of by the latter, we must
consider that there was a tacit and mutual consent as to the rendition of the services. This gives rise to the obligation upon the
person benefited by the services to make compensation therefor, since the bilateral obligation to render service as interpreter,
on the one hand, and on the other to pay for the service rendered, is thereby incurred. (Arts. 1088, 1089, and 1262 of the Civil
Code).
x x x x x x
“x x x. Whether the service was solicited or offered, the fact remains that Perez rendered to Pomar services as interpreter.
As it does not appear that he did this gratuitously, the duty is imposed upon the defendant, he having accepted the benefit of
the service, to pay a just compensation therefor, by virtue of the innominate contract of facio ut des implicitly established.
“x x x x x.
“x x x because it is a well-known principle of law that no one shouls be permitted to enrich himself to the damage of
another” (italics supplied; see also Tolentino, Civil Code of the Philippines, p. 388, Vol. IV [1962], citing Estate of Heguera vs.
Tandra, 81 Phil. 404 [1948]; Arroyo vs. Azur. 76 Phil. 493 [1946]; and Perez vs. Pomar, 2 Phil. 682 [1903]).
WE reiterated this rule in Pacific Merchandising Corp. vs. Consolacion Insurance & Surety Co., Inc. (73 SCRA 564 [1976]) citing
the case of Perez v. Pomar, supra, thus:
“Where one has rendered services to another, and these services are accepted by the latter, in the absence of proof that
the service was rendered gratuitously, it is but just that he should pay a reasonable remuneration therefor because it is a well-
known principle of law, that no one should be permitted to enrich himself to the damage of another’ ” (italics supplied).
Article 1308 – principle of relativity
Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to
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the will of one of them. (1256a)
LAO LIM V. CA, 191 SCRA 150
Obligations and Contracts; Potestative and Suspensive Conditions; The disputed stipulation “for as long as the defendant needed
the premises and can meet and pay said increases” is a purely potestative condition because it leaves the effectivity and
enjoyment of leasehold rights to the sole and exclusive will of the lessee.—Contrary to the ruling of respondent court, the disputed
stipulation “for as long as the defendant needed the premises and can meet and pay said increases” is a purely potestative
condition because it leaves the effectivity and enjoyment of leasehold rights to the sole and exclusive will of the lessee. It is
likewise a suspensive condition because the renewal of the lease, which gives rise to a new lease, depends upon said condition.
It should be noted that a renewal constitutes a new contract of lease although with the same terms and conditions as those in
the expired lease. It should also not be overlooked that said condition is not resolutory in nature because it is not a condition that
terminates the lease contract. The lease contract is for a definite period of three (3) years upon the expiration of which the lease
automatically terminates.
Same; Lease Contracts; Ejectment; In an action for ejectment, the defense interposed by the lessees that the contract of lease
authorized them to continue occupying the premises as long as they pay the rents is untenable, because it leaves to the lessees
the sole power to determine whether the lease should continue or not.—The invalidity of a condition in a lease contract similar
to the one at bar has been resolved in Encarnacion vs. Baldomar, et al., where we ruled that in an action for ejectment, the
defense interposed by the lessees that the contract of lease authorized them to continue occupying the premises as long as
they paid the rents is untenable, because it would leave to the lessees the sole power to determine whether the lease should
continue or not. As stated therein, “(i)f this defense were to be allowed, so long as defendants elected to continue the lease by
continuing the payment of the rentals, the owner would never be able to discontinue it; conversely, although the owner should
desire the lease to continue, the lessees could effectively thwart his purpose if they should prefer to terminate the contract by
the simple expedient of stopping payment of the rentals. This, of course, is prohibited by the aforesaid article of the Civil Code.
(8 Manresa, 3d ed., pp. 626, 627; Cuyugan vs. Santos, 34 Phil. 100.)” 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 is dictated solely by the
lessee.
Same; Compromise Agreements; Statutory Construction; Where the instrument is susceptible of two interpretations, one which
will make it invalid and illegal and another which will make it valid and legal, the latter interpretation should be adopted.—
Resultantly, the contract of lease should be and is hereby construed as providing for a definite period of three (3) years and that
the automatic increase of the rentals by twenty percent (20%) will take effect only if the parties decide to renew the lease. A
contrary interpretation will result in a situation where the continuation and effectivity of the contract will depend only upon the will
of the lessee, in violation of Article 1308 of the Civil Code and the aforesaid doctrine in Encarnacion. The compromise agreement
should be understood as bearing that import which is most adequate to render it effectual. Where the instrument is susceptible
of two interpretations, one which will make it invalid and illegal and another which will make it valid and legal, the latter
interpretation should be adopted.
Same; Same; Same; Lease; A lease will not be construed to create a right to perpetual renewals unless the language employed
indicates clearly and unambiguously that it was the intention and purpose of the parties to do so.—Moreover, perpetual leases
are not favored in law, nor are covenants for continued renewals tending to create a perpetuity, and the rule of construction is
well settled that a covenant for renewal or for an additional term should not be held to create a right to repeated grants in
perpetuity, unless by plain and unambiguous terms the parties have expressed such intention. A lease will not be construed to
create a right to perpetual renewals unless the language employed indicates clearly and unambiguously that it was the intention
and purpose of the parties to do so. A portion in a lease giving the lessee and his assignee the right to perpetual renewals is not
favored by the courts, and a lease will be construed as not making such a provision unless it does so clearly.
PNB V. CA, 238 SCRA 20
Facts:
Spouses Fernandez, obtained a 50K loan under the Cottage Industry Guaranty Loan Fund (CIGLF) from PNB which is evidenced
by a Credit Agreement. A real estate mortgage on an unregistered agricultural land was executed to secure a loan. The credit
agreement provided that the bank may increase the interest rate at anytime depending on whatever policy it may adopt in the
future. Aside from the credit agreement, the promissory note and the real estate mortgage contained the aforementioned
stipulation.
Several debt instruments were subsequently executed by the spouses. PNB then informed the Fernandez that the interest rate
of the loan is now 25% per annum plus a penalty of 6% per annum in August 1984. It further increased the interest rate to 30%
on Oct 15, 1984, and to 42% on Oct 25, 1984.
The spouses then filed an action for the release of the mortgage and damages. PNB now contends that the disallowance made
by the lower courts on the increase in interest rates are not proper.
Issue:
WON the unilateral increase in interest rates made by PNB is proper? NO
Ratio:
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely regarding any subsequent
adjustment in the interest rate that shall accrue on a loan or forbearance of money, goods or credits. In fine, they can agree to
adjust, upward or downward, the interest previously stipulated. However, contrary to the stubborn insistence of petitioner bank,
the said law and circular did not authorize either party to unilaterally raise the interest rate without the other's consent.
It is basic that there can be no contract in the true sense in the absence of the element of agreement, or of mutual assent of the
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
parties. If this assent is wanting on the part of the one who contracts, his act has no more efficacy than if it had been done under
duress or by a person of unsound mind.
Similarly, contract changes must be made with the consent of the contracting parties. The minds of all the parties must meet as
to the proposed modification, especially when it affects an important aspect of the agreement. In the case of loan contracts, it
cannot be gainsaid that the rate of interest is always a vital component, for it can make or break a capital venture. Thus, any
change must be mutually agreed upon, otherwise, it is bereft of any binding effect.
We cannot countenance petitioner bank's posturing that the escalation clause at bench gives it unbridled right to unilaterall y
upwardly adjust the interest on private respondents' loan. That would completely take away from private respondents the right
to assent to an important modification in their agreement, and would negate the element of mutuality in contracts.
Private respondents are not also estopped from assailing the unilateral increases in interest rate made by petitioner bank. No
one receiving a proposal to change a contract to which he is a party, is obliged to answer the proposal, and his silence per se
cannot be construed as an acceptance.
FLORENDO V. CA, 265 SCRA 678
Contracts; Loans; Interest; Escalation clauses are valid stipulations in commercial contracts to maintain fiscal stability and to
retain the value of money in long term contracts.—In Banco Filipino Savings v. Mortgage Bank vs. Navarro, this Court in essence
ruled that in general there is nothing inherently wrong with escalation clauses. In IBAA vs. Spouses Salazar, the Court reiterated
the rule that escalation clauses are valid stipulations in commercial contracts to maintain fiscal stability and to retain the value
of money in long term contracts.
Same; Same; Same; Usury; By virtue of CB Circular 905, the Usury Law has been rendered ineffective.—We have already
mentioned (and now reiterate our holding in several cases) that by virtue of CB Circular 905, the Usury Law has been rendered
ineffective. Thus, petitioners' contention that the escalation clause is violative of the said law is bereft of any merit.
Same; Same; Same; The unilateral determination and imposition of increased interest rates by the herein respondent bank is
obviously violative of the principle of mutuality of contracts.—On the other hand, it will not be amiss to point out that the unilateral
determination and imposition of increased interest rates by the herein respondent bank is obviously violative of the principle of
mutuality of contracts ordained in Article 1308 of the Civil Code.
SAMPAGUITA BUILDERS V. PNB, 435 SCRA 565
Mini digest:
Sampaguita loaned money from PNB. PNB unilaterally increased rates of interest in the loan w/o informing Sampaguita. PNB
claimed they were authorized to do it as there was a clause in the agreement that they may do so. Besides, Usury law was no
longer in force = SC said NO! PNB cannot do so; it will violate mutuality of contracts under 1308. Besides, SC may intervene
when amount of interest is unconscionable.
Facts:
Sampaguita secured a loan from PNB in an aggregate amount of 8M pesos, mortgaging the properties of Sampaguita’s president
and chairman of the board. Sampaguita also executed several promissory notes due on different dates (payment dates). The
first promissory note had 19.5% interest rate. The 2 nd and 3rd had 21.5%. a uniform clause therein permitted PNB 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. There was also a clause in the promissory note that stated that if the same is not paid 2 years
after release then it shall be converted to a medium term loan – and the interest rate for such loan would apply.
Later on, Sampaguita defaulted on its payments and failed to comply with obligations on promissory notes. Sampaguita thus
requested for a 90 day extension to pay the loan. Again they defaulted, so they asked for loan restructuring. It partly paid the
loan and promised to pay the balance later on. AGAIN they failed to pay so PNB extrajudicially foreclosed the mortgaged
properties. It was sold for 10M. PNB claimed that Sampaguita owed it 12M so they filed a case in court asking sampaguita to
pay for deficiency.
RTC found that Sampaguita was automatically entitled to the debt relief package of PNB and ruled that the latter had no cause
of action against the former. CA reversed, saying Sampaguita was not entitled, thus ordered them to pay the deficiency – Appeal
= Went to SC. Sampaguita claims the loan was bloated so they don’t really owe PNB anymore, but it just overcharged them!
ISSUES/RULING:
W/N the loan accounts are bloated: YES. There is no deficiency; there is actually an overpayment of more than 3M based on
the computation of the SC.
Whether PNB could unilaterally increase interest rates: NO
RATIO:
Sampaguita’s accessory duty to pay interest did not give PNB unrestrained freedom to charge any rate other than that which
was agreed upon. No interest shall be due, unless expressly stipulated in writing. It 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 rates is “violative of the principle of mutuality of contracts ordained in
Article 1308 of the Civil Code.” One-sided impositions do not have the force of law between the parties, because such impositions
are not based on the parties’ essential equality.
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Although escalation clauses are valid in maintaining fiscal stability and retaining the value of money on long-term contracts,
giving respondent an unbridled right to adjust the interest independently and upwardly would completely take away from
petitioners the “right to assent to an important modification in their agreement” and would also negate the element of mutual ity
in their contracts. The clause cited earlier made the fulfillment of the contracts “dependent exclusively upon the uncontrolled
will” of respondent and was therefore void. Besides, the pro forma promissory notes have the character of a contract d’adhésion,
“where the parties do not bargain on equal footing, the weaker party’s [the debtor’s] participation being reduced to the alternative
‘to take it or leave it.’”
Circular that lifted the ceiling of interest rates of usury law did not authorize either party to unilaterally raise the interest rate
without the other’s consent.
the interest ranging from 26 percent to 35 percent in the statements of account -- “must be equitably reduced for being iniquitous,
unconscionable and exorbitant.” Rates found to be iniquitous or unconscionable are void, as if it there were no express contract
thereon. Above all, it is undoubtedly against public policy to charge excessively for the use of money.
It cannot be argued that assent to the increases can be implied either from the June 18, 1991 request of petitioners for loan
restructuring or from their lack of response to the statements of account sent by respondent. Such request does not indicate
any agreement to an interest increase; there can be no implied waiver of a right when there is no clear, unequivocal and decisive
act showing such purpose. Besides, the statements were not letters of information sent to secure their conformity; and even if
we were to presume these as an offer, there was no acceptance. No one receiving a proposal to modify a loan contract,
especially interest -- a vital component -- is “obliged to answer the proposal.”
Besides, PNB did not comply with its own stipulation that should the loan not be paid 2 years after release of money then it shall
be converted to a medium term loan.
*Court applied 12% interest rate instead for being a forbearance of money
(there were some pieces of evidence presented by PNB in court that sampaguita objected to. Lower courts overruled the
objections but SC said the objections were correct and the evidence should not have been admitted. i.e. contract wasn’t signed
by the parties, a part of the contract wasn’t properly annexed/no reference was made in the main contract.)
In addition to the preceding discussion, it is then useless to labor the point that the increase in rates violates the impairment
clause of the Constitution, because the sole purpose of this provision is to safeguard the integrity of valid contractual agreements
against unwarranted interference by the State in the form of laws. Private individuals’ intrusions on interest rates is governed
by statutory enactments like the Civil Code
Article 1311
Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where
the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation
or by provision of law. The heir is not liable beyond the value of the property he received from the
decedent.
If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment
provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit
or interest of a person is not sufficient. The contracting parties must have clearly and deliberately
conferred a favor upon a third person. (1257a)
VELASCO V. CA, 95 SCRA 616
Same; Contracts; In the Deed of Quitclaim in question wherein Laigo Realty Corp. waived in favor of GSIS its rights in favor of
the subdivision in question arising out of its development and assumed to pay the claims of any contractor, material furnisher,
lot buyer, etc. having connection with said development, the GSIS was not relieved of any liability to petitioner for the cost of
materials and labor the latter incurred in building the subdivision houses if Laigo Realty Corp. is unable to pay them.—What is
more, the reliance of GSIS on the Deed of Quitclaim of May 7, 1970 is to Our mind misplaced. We have analyzed this document
carefully, and We are of the considered view that it is actually evidence against GSIS. Even if what is unnatural in ordinary
business or industrial experience were assumed, that is, that GSIS was unaware all along during the period of their construction
of the work then being done by petitioners,—albeit it is possible there was no express consent given thereto—by and thru the
aforementioned deed of quitclaim, GSIS agreed to receive and did actually receive the benefits of what petitioners had
accomplished or would accomplish under their contracts with Laigo. So much so, that the dispositive portion of the quitclaim
deed does not really relieve GSIS from liability to petitioners. Properly viewed, GSIS virtually assumed under said deed, liability
in regard to claims like those of petitioners who might not be paid by Laigo albeit said liability has been made subject to the
reservation that it could seek indemnity from Laigo.
Same; Same; Mortgages; GSIS benefited, as buyer of the mortgaged subdivision in the constructions made by petitioners while
the same was owned by Laigo Realty Corp. It has to pay for the said improvements as GSIS is in law the owner of said houses
presently.—And in the Joint Manifestation filed by the parties with the trial court as late as February 20, 1976, GSIS made it
clear that “defendant (GSIS) up to the present has not collected from the house owners of the 63 houses built by the plaintiffs
notwithstanding the foreclosure proceedings and consolidation of ownership.” Again, it is thus obvious that GSIS assumed
ownership of the houses built by petitioners and was benefited by the same, and the fact that it has not collected any payment
from the “house owners” for the construction of the houses respectively occupied by them is of no moment insofar as its liability
to petitioners is concerned. Surely, it is not pretended that those “house owners” would be allowed to enrich themselves at the
expense of petitioners. Indeed, the term “house owners” is inappropriate, if only because in Paragraph 16 of its Comment on the
petition herein, GSIS unequivocally states that “GSIS foreclosed the properties including all improvements (the houses) in 1970”
and, thereby, became the owner of said houses.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
Same; Same; Same; Same.—Upon the foregoing factual premises, the legal issue that arises is whether or not GSIS is liable to
the petitioners for the cost of the materials and labor furnished by them in construction of the 63 houses now owned by the GSIS
and for the construction of which no payment has been made on the balance due petitioners. Our considered view is and We so
hold that even in equity alone, GSIS should pay the petitioners. After all, it admits it has not collected from the ones who appear
to be the buyers thereof, albeit it must be collecting the installments on the lots. All it has to do then is to pass on to them what
it has to pay petitioners. In all, GSIS is, under the peculiar circumstances of this case, the owner of said houses.
Same: Same; Liability of houseowner to laborers and materialmen.—Laigo admittedly has not paid petitioners. The “bouncing”
checks issued by it in their favor is mentioned by GSIS itself in its statement of the facts. We hold that upon this premise, it is a
fair construction of the Deed of Quitclaim aforementioned, that GSIS can be held liable to petitioners, without prejudice to its
securing corresponding indemnity from Laigo. It is obvious from the terms of said deed that GSIS contemplated the possibility
of its being liable for Laigo’s account, otherwise, there was no need for the reservation. This is one such liability. In this connection,
while, indeed, Article 1729 refers to the laborers and materialmen themselves, under the peculiar circumstances of this case, it
is but fair and just that petitioners be deemed as suing for the reimbursement of what they have already paid the laborers and
materialmen as otherwise they (petitioners) would be unduly prejudiced while either Laigo, GSIS or the occupants of the houses
would enrich themselves at their expense. It is a bad law that would allow such a result.
Same; Same; Obligations; Article 1311 of the Civil Code on privity of contracts is not applicable where the situation contemplated
falls under Art. 1727 on liability of houseowner to laborers and materialmen.—At this juncture, We need to add only that Article
1311 of the Civil Code which GSIS invokes is not applicable where the situation contemplated in Article 1729 obtains. The
intention of the latter provision is to protect the laborers and the materialmen from being taken advantage of by unscrupulous
contractors and from possible connivance between owners and contractors. Thus, a constructive vinculum or contractual privity
is created by this provision, by way of exception to the principle underlying Article 1311 between the owner, on the one hand,
and those who furnish labor and/or materials, on the other. As a matter of fact, insofar as the laborers are concerned, by a
special law, Act No. 3959, they are given added protection by requiring contractors to file bonds guaranteeing payment to them.
And under Article 2242 of the Civil Code, paragraphs (3) and (4), claims of laborers and materialmen, respectively, enjoy
preference among the creditors of the owner in regard to specific immovable property.
Action; Mortgagor, after the mortgaged property was already sold, becomes a mere necessary party, in an action by labor
contractor against new owner to recover cost of houses constructed on the subdivision.—GSIS contends that Laigo should have
been joined as defendant in this case. While petitioners could have done so, they were not under such obligation mandatorily.
Under the circumstances, of this case, Laigo is only a necessary party, not an indispensable one. And to allay GSIS, its right to
secure reimbursement from Laigo is hereby reserved.
KAUFFMAN V. PNB, 42:182
FACTS
George B. Wicks, treasurer of the Company, requested that a telegraphic transfer of $45,000 be made to the plaintiff in New
York City. Wicks drew and delivered a check for the amount of P90,355.50, total cost of said transfer, including exchange and
cost of message which was accepted by the officer selling the exchange in payment of the transfer in question. As evidence of
this transaction a document was made out and delivered to Wicks, which is referred to by the bank’s assistant cashier as its
official receipt.
On the same day the Philippine National Bank dispatched to its New York agency a cablegram:
Pay George A. Kauffman, New York, account Philippine Fiber Produce Co., $45,000. (Sgd.) PHILIPPINE NATIONAL BANK,
Manila.
However, the bank’s representative in New York replied suggesting the advisability of withholding this money from Kauffman.
The PNB dispatched to its New York agency another message to withhold the Kauffman payment as suggested.
Meanwhile, upon advice of Wicks that the money has been placed to his credit, Kauffman presented himself at the office of the
Philippine National Bank in New York and demanded the money. By this time, however, the message from the Philippine
National Bank directing the withholding of payment had been received in New York, and payment was therefore refused. Thus
the present complaint to recover said sum, with interest and costs.
ISSUE:
WON the Negotiable Instruments Law applies to present case?
HELD:
NO. Before the provisions of the Negotiable Instruments Law can come into operation- there must be a document in existence
of the character described in section 1 of the Law; and no rights properly speaking arise in respect to said instrument until it is
delivered. In the case before us there was an order, it is true, transmitted by the defendant bank to its New York branch, for the
payment of a specified sum of money to George A. Kauffman. But this order was not made payable “to order or “to bearer,” as
required in subsection (d) of that Act; and inasmuch as it never left the possession of the bank, or its representative in New York
City, there was no delivery in the sense intended in section 16 of the same Law. In this connection it is unnecessary to point out
that the official receipt delivered by the bank to the purchaser of the telegraphic order, and already set out above, cannot itself
be viewed in the light of a negotiable instrument, although it affords complete proof of the obligation actually assumed by the
bank.
BONIFACIO BROS. V. MORA, 20 SCRA 261
Contracts; Contracts take effect only between the parties thereto; Exception.—Contracts take effect only between the parties
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thereto, except in some specific instances provided by law where the contract contains some stipulation in favor of a third person
which is known as a stipulation pour autrui or a provision in favor of a third person not a party to the contract. Under this doctrine,
a third person is allowed to avail himself of a benef it granted to him by the terms of the contract, provided that the contracting
parties have clearly and deliberately conferred a favor upon such person. Consequently, a third person, not a party to the contract,
has no action against the parties thereto, and cannot generally demand the enforcement of the same.
Same; Stipulation pour autrui; When a third person has an enforceable interest in the contract.—The question of whether a third
person has an enforceable interest in a contract must be settled by determining whether the contracting parties intended to
tender him such an interest by deliberately inserting terms in their agreement with the avowed purpose of conferring a favor
upon such third person. The fairest test to determine whether the interest of a 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.
Same; Insurance; Nature of insurance policy.—A policy of insurance is a distinct and independent contract between the insured
and insurer. A third person has no right in law or equity to the proceeds of an insurance unless there is a contract or trust,
expressed or implied, between the insured and third person.
Same; Interpretation of clause in insurance contract regarding repair of damaged vehicle.—The clause in an insurance policy,
authorizing the owner of the damaged vehicle to contract for its repair does not mean that the repairman is entitled to collect the
cost of repair out of the proceeds of the insurance. It merely establishes the procedure that the insured has to follow in order to
be entitled to indemnity for repair.
Same; Meaning of loss in insurance.—The word "loss" in insurance law embraces injury or damage. A loss may be total or
partial.
Same; When mortgagee of damaged car, as beneficiary, is preferred to the repairman with respect to insurance proceeds.—
Where the mortgagee is the beneficiary in a car insurance, it has a better right than the repairman to the insurance proceeds.
FLORENTINO V. ENCARNACION, 79 SCRA 192
Contracts; Extra-judicial partition; Land Registration; The validity of or compliance with a stipulation appearing in an extra-judicial
partition cannot be left to the will of one of the parties.—The stipulation (Exhibit 0-1) is part of an extra-judicial partition (Exh. 0)
duly agreed and signed by the parties, hence the same must bind the contracting parties thereto and its validity or compliance
cannot be left to the will of one of them (Art. 1308, N.C.C.). Under Art. 1311 of the New Civil Code, this stipulation takes effect
between the parties, their assigns and heirs.
Same; Same; Same; A stipulation that the fruits of a parcel of land shall be used to defray certain expenses connected with
religious festivities or occasions is a stipulation pour autrui.—The second paragraph of Article 1311 above-quoted states the law
on stipulations pour autrui. Considering the nature and purpose of the stipulation (Exh. 0-1), We hold that said stipulation 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 demands its fulfillment provided that he communicates his acceptance to the obligor
before it is revoked. The requisites are: (1) that the application 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.
Same; Same; Same; Test to be used in determining whether stipulation constitutes a valid stipulation pour autrui.—The fairest
test to determine whether the interest of third person in a contract is a stipulation pour autrui or merely an incidental interest, is
to rely upon the intention of the parties as disclosed by their contract. In applying this test, it matters not whether the stipulation
is in the nature of a gift or whether there is an obligation owing from the promisee to the third person. That no such obligation
exists may in some degree assist in determining whether the parties intended to benefit a third person.
Same: Same; Same; Same.—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. Suffice it to say that were it not for Exhibit 0-1, the
Church would have necessarily expended for this religious occasion, the annual religious procession during the Holy Week and
also for the repair and preservation of all the statues, tables, carriages and all other things necessary for the celebration of the
Seven Last Words.
Same; Same; Same; A stipulation pour autrui may be accepted anytime before it is revoked. Acceptance of a stipulation pour
autrui need not be in any particular form and may be inferred from the beneficiary’s enjoyment of the fruits flowing therefrom for
a good number of years.—While a stipulation in favor of a third person has no binding effect in itself before its acceptance by
the party favored, the law does not provide when the third person must make his acceptance. As a rule, there is no time limit;
such third person has all the time until the stipulation is revoked. Here, We find that the Church accepted the stipulation in its
favor before it is sought to be revoked by some of the co-owners, namely the petitioners-appellees herein. It is not disputed that
from the time of the death of Dona Encarnacion Florentino in 1941, as had always been the case since time immemorial, up to
a year before the filing of their application in May 1964, the Church had been enjoying the benefits of the stipulation. The
enjoyment of benefits flowing therefrom for almost seventeen years without question from any quarters can only be construed
as an implied acceptance by the Church of the stipulation pour autrui before its revocation.
Same; Action; A party to a contract pour autrui may also bring an action for its enforcement in the same manner as the beneficiary
thereof.—That one of the parties to a contract pour autrui is entitled to bring an action for its enforcement or to prevent its breach
is too clear to need any extensive discussion. Upon the other hand, that the contract involved contained a stipulation pour autrui
amplifies this settled rule only in the sense that the third person for whose benefit the contract was entered into may also demand
its fulfillment provided he had communicated his acceptance thereof to the obligor before the stipulation in his favor is revoked.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
Land Registration; Jurisdiction; In special and exceptional circumstances, the kind registration has authority and jurisdiction
adjudge the conflicting interests of the parties before it without need of requiring the filing of a separate action, such as the
annotation on the torrens title being applied for of a stipulation pour autrui.—Firstly, the otherwise rigid rule that the jurisdiction
of the Land Registration Court, being special and limited in character and proceedings thereon summary in nature, does not
extend to cases involving issues properly litigable in other independent suits or ordinary civil actions, has time and again been
relaxed in special and exceptional circumstances. x x x From these cases, it may be gleaned and gathered that the peculiarity
of the exceptions is based not alone on the fact that Land Registration Courts are likewise the same Court of First Instance, but
also the following premises: (1) Mutual consent of the parties or their acquiescence in submitting the aforesaid issues for
determination by the court in the registration proceedings; (2) Full opportunity given to the parties in the presentation of their
respective sides of the issues and of the evidence in support thereto; (3) Consideration by the court that the evidence already of
record is sufficient and adequate for rendering a decision upon these issues. In the case at bar, the records clearly show that
the second and third premises enumerated above are fully met. With regards to the first premise, the petitioners-appellants
cannot claim that the issues anent Exhibit 0-1 were not put in issue because this is contradictory to their stand before the lower
court where they took the initial step in praying for the court’s determination of the merits of Exhibit 0-1 as an encumbrance to
be annotated on the title to be issued by such court. On the other hand, the petitioners-appellees who had the right to invoke the
limited jurisdiction of the registration court failed to do so but met the issues head-on. Secondly, for this very special reason, We
will uphold the actuation of the lower court in determining the conflicting interests of the parties in the registration proceedings
before it. This case has been languishing in our courts for thirteen long years. To require that it be remanded to the lower court
for another proceeding under its general jurisdiction is not in consonance with our avowed policy of speedy justice.
BANK OF AMERICA V. IAC, 145 SCRA 419
Mercantile Law; Banks; Contracts; Restitution; No restitution of amount sent by a foreign bank thru telex with apatent ora latent
ambiguity payable to another person where the person credited by the local bank is the proper beneficiary and the account
number is correct.—It is our considered opinion that, in the tested telex, considered either as a patent ambiguity or as a latent
ambiguity, the beneficiary is Minami. The mention of Account No. 24506–01–7, as well as the name of Minami, has to be given
more weight than the mention of the name of ACTC. BANKAMERICA could not have very well disregarded that account number.
It could also be that the mention of ACTC’s name was a further identification of Minami, to prevent payment to a possible another
“Toshiyuko Minami” who may not be connected with ACTC. On the other hand, it should be difficult to concede that, in the tested
telex, Account No. 24506–01–7 was erroneously written and should be substituted by Account No. 19842–01–2 in the name of
ACTC.
Same; Same; Same; Stipulation pour autrui; Contract between foreign bank and a local bank asking the latter topay an amount
to a beneficiary, is a stipulation pour autrui.—In Vargas Plow Factory, Inc. vs. Central Bank, it was held that “the opening of a
letter of credit in favor of the exporter becomes ultimately but the result of a stipulation pour autrui” (27 SCRA 84 [1969]). Similarly,
when KYOWA asked BANKAMERICA to pay an amount to a beneficiary (either ACTC or Minami), the eontract was between
KYOWA and BANKAMERICA and it had a stipulation pour autrui.
Same; Same; Same; Same; Absence of protest by the alleged true beneficiary means that the beneficiary ofthe amount is
correct; Identity of the beneficiary should be in accordance with the identification by the foreign bank and cannot be questioned
by one not a party to the arrangement between the foreign bank and the local bank.—It should be recalled that the tested telex
originated from KYOWA at the behest of Tokyo Tourist Corporation with whom ACTC had business dealings. Minami, on the
other hand, was the liaison officer of ACTC in Japan. As the entity responsible for the tested telex was Tokyo Tourist Corporation,
it can reasonabiy be eoncluded that if it had intended that the US$23,595.00 should be credited to ACTC, upon leaming that the
amount was credited to Minami, it should have gone, together with the representatives of ACTC, in protest to KYOWA and
lodged a protest. Since that was not done, it could well be that Tokyo Tourist Corporation had really intended its remittance to
be credited to Minami The identity of the beneficiary should be in accordance with the identification made by KYOWA, and ACTC
cannot question that identification as it is not a party to the arrangement between KYOWA and BANKAMERICA (see Manila
Railroad Co. vs. Compania Trasatlantica, 38 Phil. 875 [1918]).
MARIMPERIO V. CA, 156 SCRA 368
Civil Law; Contracts; Art. 1311 of Civil Code; A party who has not taken part in the contract, cannot sue or be sued for the
performance or cancellation thereof, unless he has a real interest affected thereby.·According to Article 1311 of the Civil Code,
a contract takes effect between the parties who made it, and also their assigns and heirs, except in cases where the rights and
obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. Since a contract
may be violated only by the parties, thereto as against each other, in an action upon that contract, the real parties in interest,
either as plaintiff or as defendant, must be parties to said contract. Therefore, a party who has not taken part in it cannot sue or
be sued for performance or for cancellation thereof, unless he shows that he has a real interest affected thereby (Macias & Co.
v. Warner Barnes & Co., 43 Phil. 155 [1922] and Salonga v. Warner Barnes & Co., Ltd., 88 Phil. 125 [1951]; Coquia v. Fieldmen's
Insurance Co., Inc., 26 SCRA 178 [1968]).
Same; Same; Lease; In a contract of sub-lease, the personality of the lessee does not disappear and the sub-lease generally
does not have any direct action against the owner of the premises as lessor. ·In a sub-lease, there are two leases and two
distinct judicial relations although intimately connected and related to each other, unlike in a case of assignment of lease, where
the lessee transmits absolutely his right, and his personality disappears; there only remains in the juridical relation two persons,
the lessor and the assignee who is converted into a lessee (Moreno, Philippine Law Dictionary, 2nd ed., p. 594). In other words,
in a contract of sub- lease, the personality of the lessee does not disappear; he does not transmit absolutely his rights and
obligations to the sub-lessee; and the sub-lessee generally does not have any direct action against the owner of the premises
as lessor, to require the compliance of the obligations contracted with the plaintiff as lessee, or vice versa (10 Manresa, Spanish
Civil Code, 438).
Same; Same; Transportation Laws; Article 52 of Code of Commerce provides that the charter party shall contain the name,
surname and domicile of the charterer, and if he is acting by commission, that of the person for whose account he makes the
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contract.·It is undisputed that the charter party, basis of the complaint, was entered into between petitioner Marimperio Compañia
Naviera, S.A., through its duly authorized agent in London, the N & J Vlassopulos, Ltd., and the Interocean Shipping Company
of Manila through the latter's duly authorized broker, the Overseas Steamship Co., Inc., represented by Matthews, Wrightson
Burbridge Ltd., for the Charter of the "SS PAXOI" (Amended Complaint, Amended Record on Appeal, p. 33; Complaint-in-
Intervention, Amended Record on Appeal, p. 87), It is also alleged in both the Complaint (Amended Record on Appeal, p. 18)
and the Amended Complaint (Amended Record on Appeal, p. 39) that the Interocean Shipping Company sublet the said vessel
to respondent Union Import and Export Corporation which in turn sublet the same to respondent Philin Traders Corporation. It
is admitted by respondents that the charterer is the Interocean Shipping Company. Even paragraph 3 of the complaintin-
intervention alleges that respondents were given the use of the vessel "pursuant to paragraph 20 of the Uniform Time Charter x
x x" which precisely provides for the subletting of the vessel by the charterer (Rollo, p. 24). Furthermore, Article 652 of the Code
of Commerce provides that the charter party shall contain, among others, the name, surname, and domicile of the charterer, and
if he states that he is acting by commission, that of the person for whose account he makes the contract. It is obvious from the
disclosure made in the charter party by the authorized broker, the Overseas Steamship Co., Inc., that the real charterer is the
Interocean Shipping Company (which sublet the vessel to Union Import and Export Corporation which in turn sublet it to Philin
Traders Corporation).
Same; Same; Same; Petitioner can rescind the charter party extrajudicially.·Premises considered, (1) the decision of the Court
of Appeals affirming the amended decision of the Court of First Instance of Manila, Branch VIII, is hereby REVERSED and SET
ASIDE except for that portion of the decision dismissing the complaint-in intervention; and (2) the original decision of the trial
court is hereby REINSTATED.
CAPITAL INSURANCE V. CENTRAL AZUCARERA, 221 SCRA 98
Contracts; Non-parties to agreement cannot he prejudiced by its terms.·As against Capital Insurance and Surety Co., Inc.,
Central Azucarera del Danao cannot invoke by way of defense the March 3, 1960 Agreement to evade liability. The binding
effect of the March 3, 1960 Agreement does not extend to those not parties to the contract, Capital Insurance & Surety Co., Inc.
in this instance. Thus, Article 1311, Civil Code of the Philippines provides, inter alia: „ART. 1311. Contracts take effect only
between the parties, their assigns and heirs, except in case where the rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by provision of law. The heir is not liable beyond the value of the property he
received from the decedent.‰ x x x x Capital Insurance & Surety Co., Inc., cannot, therefore, be prejudiced by the terms of the
March 3, 1960 Agreement. Insofar as the insurance company is concerned, Central Azucarera del Danao is and shall remain to
be its debtor until payment is made.
Same; Interpretation; Contemporaneous and subsequent acts of parties considered.·The facts of the case before us show every
indication of the contracting partiesÊ conflicting interpretation of paragraphs 9 & 10. Judicial determination of the partiesÊ
intention is thus, inevitable. To ascertain the same, the contemporaneous and subsequent acts of the parties shall be considered.
It should be recalled that at the time PNB acquired Central Azucarera del Danao from Talisay-Silay Milling Co., Inc. the identities
of its creditors were not yet disclosed because at the time the settlement was reached, the books of Central Azucarera del
Danao, then in the possession of Talisay-Silay Milling, Co., Inc. and/or Mr. J. Amado Araneta as President of petitioner, had not
yet been turned over to PNB. Apprehensive and wary of a sudden emergence of unknown creditors after its actual takeover of
Central Azucarera del Danao, PNBÊs representatives insisted on the insertion of paragraphs 9 and 10 in the proposed
Agreement of March 3, 1960 to protect the bank from the assumption of all unsettled obligations of Central Azucarera del Danao,
especially fraudulent claims. It is thus illogical to hold liable, without a right to indemnification, as the lower court did, Central
Azucarera del Danao, just because the unsettled obligation of P57,323.71 worth of premiums was recorded in its books. For if
this were the case, there would have been no need for PNBÊs insistence on the inclusion of paragraphs 9 and 10 in the March
3, 1960 Agreement.
BARFEL V. CA, 223 SCRA 268
Civil Law; Contract; Real Interest defined; A real interest has been defined as a present substantial interest, as distinguished
from a mere expectancy or a future, contingent, subordinate or consequential interest.—In Marimperio Compania Naviera, S.A.
v. CA, G.R. 40234, December 14, 1987, the Court held: “According to Article 1311 of the Civil Code, a contract takes effect
between the parties who made it, and also their assigns and heirs, except in cases where the rights and obligations arising from
the contract are not transmissible by their nature, or by stipulation or by provision of law. Since a contract may be violated only
by the parties, thereto as against each other, in an action upon that contract, the real parties in interest, either as plaintiff or as
defendant, must be parties to said contract. Therefore, a party who has not taken part in it cannot sue or be sued for performance
or for cancellation thereof, unless he shows that he has a real interest affected thereby.” A “real interest” has been defined as “a
present substantial interest, as distinguished from a mere expectancy or a future, contingent, subordinate or consequential
interest.” (Moreno, Federico B. Philippine Law Dictionary. Third Edition)
Remedial Law; Civil Procedure; Indispensable or necessary party; PISO is not an indispensable or necessary party without
whom no final determination can be had of the action for specific performance with damages.—Complete relief by private
respondents against petitioners may be had even if PISO/Central Bank were not impleaded as party defendant in the original
case. PISO is not an indispensable or necessary party without whom no final determination can be had of the action for specific
performance with damages. (Sec. 7, Rule 3, Rules of Court).
Same; Same; Amendments by leave of court; Substantial amendment; The amendment sought by private respondents which is
to include a new party defendant at a late stage in the proceeding is not a formal but a substantial one.—Moreover, the
amendment sought by private respondents, which is to include a new party defendant at a late stage in the proceeding is not a
formal but a substantial one. Private respondents will have to present additional evidence on the PISO second mortgage. The
effect would be to start trial anew with the parties recasting their theories of the case. The correct amount of the second mortgage
owed by petitioners to PISO bank (apparently a controverted point), would have to be litigated and this could be time consuming.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
MANDARIN VILLA V. CA, 257 SCRA 538
FACTS:
In the evening of 19 Oct 1989, private respondent de Jesus hosted a dinner for his friends at the petitioner’s restaurant, the
Mandarin Villa Seafoods Village in Mandaluyong City. After dinner, the waiter handed to de Jesus the bill amounting to
P2,658.50. De Jesus offered his BANKARD credit card to the waiter for payment. Minutes later, the waiter returned and audibly
informed that said credit card had expired. De Jesus demonstrated that the card had yet to expire on Sept 1990, as embossed
on its face. De Jesus approached the cashier who again dishonored such card. De Jesus offered his BPI express credit card
instead and this was accepted, honored and verified. The incident triggered the filing of a suit for damages by private respondent.
Following trial, judgment was rendered in favor of De Jesus. Bankard on appeal contends that it cannot be faulted for its cashier's
refusal to accept private respondent's BANKARD credit card, the same not being a legal tender. It argued that De Jesus’ offer
to pay by means of credit card partook of the nature of a proposal to novate an existing obligation (originally to pay with money)
for which Bankard, as creditor, must first give its consent otherwise there will be no binding contract between them.
ISSUE and HELD:
WON Bankard may be obliged to accept the credit card. YES.
RATIO:
We note that Mandarin Villa Seafood Village is affiliated with Bankard. In fact, an "Agreement" entered into by petitioner and
Bankard provides that it shall honor credit cards presented by its holders as long as the same has not yet expired. While
respondent (card holder) is not a party to the said contract, the above stipulation is POUR ATRUI and under Article 1311 of the
Civil Code, private respondent may demand its fulfillment provided he communicated his acceptance to the petitioner before its
revocation. In this case, private respondent's offer to pay by means of his Bankard credit card constitutes not only an acceptance
of the said stipulation but also an explicit communication of his acceptance to the obligor.
In addition, the record shows that petitioner posted a logo inside Mandarin Villa Seafood Village stating that "Bankard is accepted
here”. This representation is conclusive upon the estblishment which it cannot deny or disprove as against the respondent card
holder, the party relying thereon. Mandarin Villa, therefore, cannot disclaim its obligation to accept private respondent's Bankard
credit card without violating the equitable principle of estoppel.
Minor issue (on negligence of Mandarin Villa)
The SC ruled that Mandarin Villa was indeed negligent. The test for determining the existence of negligence in a case may be
stated as follows: did the defendant in doing the alleged negligent act use the reasonable care and caution which an ordinary
prudent person would have used in the same situation? If not, then he is guilty of negligence. In the case at bar, the Point of
Sale Guidelines which outlined the steps that petitioner must follow under the circumstances reveals that whenever the words
CARD EXPIRED flashes on screen, petitioner should check card’s expiry date as embossed in the card itself. If unexpired,
petitioner should honor the card. Clearly, it has not yet expired in 19 Oct 1989 when the same was dishonored by petitioner.
Hence, petitioner did not use the reasonable care and caution which an ordinary prudent person would have used in the same
situation and as such, petitioner is guilty of negligence.
The humiliation and embarrassment of private respondent was brought about by the fact of dishonor by petitioner of private
respondent’s valid BANKARD. Hence, petitioner’s negligence is the proximate cause of private respondent’s damage.
SUMMA INSURANCE V. CA, 253 SCRA 175
Arrastre Service; Common Carriers; Warehousemen; The relationship between the consignee and the arrastre operator is much
akin to that existing between the consignee or owner of shipped goods and the common carrier, or that between a depositor and
a warehouseman.—Petitioner was subrogated to the rights of the consignee. The relationship therefore between the consignee
and the arrastre operator must be examined. This relationship is much akin to that existing between the consignee or owner of
shipped goods and the common carrier, or that between a depositor and a warehouseman. In the performance of its obligations,
an arrastre operator should observe the same degree of diligence as that required of a common carrier and a warehouseman
as enunciated under Article 1733 of the Civil Code and Section 3(b) of the Warehouse Receipts Law, respectively. Being the
custodian of the goods discharged from a vessel, an arrastre operator’s duty is to take good care of the goods and to turn them
over to the party entitled to their possession.
Same; Contracts; Stipulations Pour Autrui; In the performance of its job, an arrastre operator is bound by the
management contract it had executed with the Bureau of Customs which is a sort of a stipulation pour autrui which is also binding
on the consignee (and the insurer, as successor-in-interest of the consignee)—indeed, upon taking delivery of the cargo, a
consignee tacitly accepts the provisions of the management contract, including those which are intended to limit the liability of
the arrastre operator.—In the performance of its job, an arrastre operator is bound by the management contract it had executed
with the Bureau of Customs. However, a management contract, which is a sort of a stipulation pour autrui within the meaning of
Article 1311 of the Civil Code, is also binding on a consignee because it is incorporated in the gate pass and delivery receipt
which must be presented by the consignee before delivery can be effected to it. The insurer, as successor-in-interest of the
consignee, is likewise bound by the management contract. Indeed, upon taking delivery of the cargo, a consignee (and
necessarily its successor-in-interest) tacitly accepts the provisions of the management contract, including those which are
intended to limit the liability of one of the contracting parties, the arrastre operator.
Same; Same; A consignee who does not avail of the services of the arrastre operator is not bound by the management
contract.—However, a consignee who does not avail of the services of the arrastre operator is not bound by the management
contract. Such an exception to the rule does not obtain here as the consignee did in fact accept delivery of the cargo from the
arrastre operator.
Same; Same; The advance notice of the actual invoice of the goods entrusted to the arrastre operator is for the purpose of
determining its liability, that it may obtain compensation commensurate to the risk it assumes, and not for the purpose of
determining the degree of care or diligence it must exercise as a depository or warehouseman.—In the same case, the Court
added that the advance notice of the actual invoice of the goods entrusted to the arrastre operator is “for the purpose of
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 CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE
determining its liability, that it may obtain compensation commensurable to the risk it assumes, (and) not for the purpose of
determining the degree of care or diligence it must exercise as a depository or warehouseman” since the arrastre operator should
not discriminate between cargoes of substantial and small values, nor exercise care and caution only for the handling of goods
announced to it beforehand to be of sizeable value, for that would be spurning the public service nature of its business.
BALUYOT V. CA, 311 SCRA 29
FACTS:
This is a case between Petitioners Baluyot, Benito, et. al, residents of Brgy. Cruz-na-Ligas, and Cruz-na-Ligas Homeowner’s
Association against UP and the Quezon City Government.
Petitioners allege that they have been in open, continuous, and adverse possession over the lands where Brgy. Cruz-na-Ligas
is situated while UP is assailing that the lands are registered in their name. The issue between the ownership over the lands
have been the subject of numerous disputes, both administratively and judicially. Finally, the Association and UP was able to
make an agreement that the latter will donate 9.2 hectares of land to the petitioners, which was later on increased to 15.8. The
execution of the agreement failed to formalize, however, when the petitioners demanded a larger area.
Eventually, UP backed-out from the arrangement and negotiated with the Quezon City Government instead. They executed a
deed of donation with the Quezon City Government stating that the former will donate the land to QC who in turn will make the
necessary improvements over the land, and after 3 years, QC will donate the land to the petitioners.
QC failed to comply with some of the provisions of the donation, however, which forced UP to revoke the donation. Petitioners
in this case then filed an action for specific performance with a prayer for a Preliminary Injunction against UP. Trial Court denied
the prayer for injunction assailing that the petitioners were not parties to the deed of donation, thus they have no cause of action
against UP to require its enforcement. CA affirmed that petitioners have no cause of action.
ISSUE/HELD:
Whether petitioners have a cause of action?
Yes, they have. The donation was executed in their favor.
RATIONALE:
We find all the elements of a cause of action contained in the amended complaint of petitioners. While, admittedly, petitioners
were not parties to the deed of donation, they anchor their right to seek its enforcement upon their allegation that they are
intended beneficiaries of the donation to the Quezon City government. Art. 1311, second paragraph, of the Civil Code provides:
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.
Under this provision of the Civil Code, the following requisites must be present in order to have a stipulation pour autrui:[15
(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.
The allegations in the following paragraphs of the amended complaint are sufficient to bring petitioners action within the purview
of the second paragraph of Art. 1311 on stipulations pour autrui:
1. Paragraph 17, that the deed of donation contains a stipulation that the Quezon City government, as donee, is
required to transfer to qualified residents of Cruz-na-Ligas, by way of donations, the lots occupied by them;
2. The same paragraph, that this stipulation is part of conditions and obligations imposed by UP, as donor, upon
the Quezon City government, as donee;
3. Paragraphs 15 and 16, that the intent of the parties to the deed of donation was to confer a favor upon petitioners
by transferring to the latter the lots occupied by them;
4. Paragraph 19, that conferences were held between the parties to convince UP to surrender the certificates of
title to the city government, implying that the donation had been accepted by petitioners by demanding fulfillment
thereof[16 and that private respondents were aware of such acceptance; and
5. All the allegations considered together from which it can be fairly inferred that neither of private respondents
acted in representation of the other; each of the private respondents had its own obligations, in view of conferring
a favor upon petitioners.
The amended complaint further alleges that respondent UP has an obligation to transfer the subject parcel of land to the city
government so that the latter can in turn comply with its obligations to make improvements on the land and thereafter transfer
the same to petitioners but that, in breach of this obligation, UP failed to deliver the title to the land to the city government and
then revoked the deed of donation after the latter failed to fulfill its obligations within the time allowed in the contract.
For the purpose of determining the sufficiency of petitioners cause of action, these allegations of the amended complaint must
be deemed to be hypothetically true. So assuming the truth of the allegations, we hold that petitioners have a cause of action
against UP.
UY V. CA, 314 SCRA 69
FACTS:
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
Uy and Roxas are agents authorized to sell eight (8) parcels of land. They offered said properties to National Housing Authority
(NHA) to be used for housing. NHA Board of Directors passed a resolution approving the acquisition. Of the eight (8) properties,
only five (5) were paid for by NHA upon knowing from the DENR that the others were located in a landslide prone area. NHA
passed a resolution cancelling the purchase of the three (3) parcels of land.
Petitioners filed a complaint for damages against NHA. RTC ruled that though cancellation of the contract was justified,
petitioners were entitled to damages. CA reversed the lower court’s decision. CA ruled that petitioners were mere attorneys-in-
fact, thus not real parties-in-interest.
Petitioners assailed the CA decision. They argued that they were not suing in behalf of their principals but in their own name as
agents. Their claim is based on “unrealized income” and loss incurred due to the cancellation of the contract.
ISSUES:
1. Are petitioners the real parties-in-interest? NO
2. Was NHA justified in cancelling the contract? YES
RATIONALE:
Petitioners are NOT real parties-in-interest
Article 1311 of the Civil Code, states:
Contracts take effect only between the parties, their assigns, and heirs, except in case where
the rights and obligations arising from the contract are not transmissible by their nature, or by
stipulation, or by provision of law. x x x.
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. (Underscoring supplied.)
Petitioners are not parties to the contract of sale between their principals and NHA. They are mere agents of the owners of the
land subject of the sale. As agents, they only render some service or do something in representation or on behalf of their
principals. Rendering of such service did not make them parties to the contracts of sale executed in behalf of the latter. Since a
contract may be violated only by the parties thereto as against each other, the real parties-in-interest, either as plaintiff or
defendant, in an action upon that contract must, generally, either be parties to said contract. Neither are they heirs nor assigns
of the owners of the property.
Also, it does not appear that petitioners are beneficiaries of a stipulation pour autrui under the second paragraph of Article
1311 of the Civil Code. Indeed, there is no stipulation in any of the Deeds of Absolute Sale “clearly and deliberately” conferring
a favor to any third person.
As petitioners are not parties, heirs, assignees, or beneficiaries of a stipulation pour autrui under the contracts of sale, they do
not, under substantive law, possess the right they seek to enforce. Therefore, they are not the real parties-in-interest in this
case.
NHA was justified in cancelling the contract
Petitioners were wrong to say that NHA “rescinded” the contract. NHA cannot rescind the contract because did not commit any
breach of their contract. The cancellation, therefore, was not a rescission under Article 1191. Rather, the cancellation was based
on the negation of the cause arising from the realization that the lands, which were the object of the sale, were not suitabl e for
housing.
Cause is the essential reason which moves the contracting parties to enter into it. In other words, the cause is the immediate,
direct and proximate reason which justifies the creation of an obligation through the will of the contracting parties. Cause, which
is the essential reason for the contract, should be distinguished from motive, which is the particular reason of a contracting party
which does not affect the other party.
Ordinarily, a party’s motives for entering into the contract do not affect the contract. However, when the motive predetermines
the cause, the motive may be regarded as the cause. In this case, NHA would not have entered into the contract had it known
that properties were not suitable for housing. On the part of the NHA, therefore, the motive was the cause for its being a party
to the sale.
The realization of the mistake as regards the quality of the land resulted in the negation of the motive/cause thus rendering the
contract inexistent. Article 1318 of the Civil Code states that:
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. (Underscoring supplied.)
SPS. MAMARIL V. BOY SCOUTS OF THE PHILIPPINES, 688 SCRA 437 [2013]
Civil Law; Quasi-Delicts; Article 20 of the Civil Code provides that every person, who, contrary to law, willfully or negligently
causes damage to another, shall indemnify the latter for the same.―Article 20 of the Civil Code provides that every person, who,
contrary to law, willfully or negligently causes damage to another, shall indemnify the latter for the same. Similarly, Article 2176
of the Civil Code states: Art. 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is
obliged to pay for the damage done. Such fault or negligence, if there is no preexisting contractual relation between the parties,
is called a quasi-delict and is governed by the provisions of this Chapter. In this case, it is undisputed that the proximate cause
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of the loss of Sps. Mamaril’s vehicle was the negligent act of security guards Peña and Gaddi in allowing an unidentified person
to drive out the subject vehicle. Proximate cause has been defined as that cause, which, in natural and continuous sequence,
unbroken by any efficient intervening cause, produces the injury or loss, and without which the result would not have occurred.
Moreover, Peña and Gaddi failed to refute Sps. Mamaril’s contention that they readily admitted being at fault during the
investigation that ensued.
Same; Same; Security Guards; It is settled that where the security agency, as here, recruits, hires and assigns the work of its
watchmen or security guards, the agency is the employer of such guards and watchmen. Liability for illegal or harmful acts
committed by the security guards attaches to the employer agency, and not to the clients or customers of such agency.―Neither
will the vicarious liability of an employer under Article 2180 of the Civil Code apply in this case. It is uncontested that Peña and
Gaddi were assigned as security guards by AIB to BSP pursuant to the Guard Service Contract. Clearly, therefore, no employer-
employee relationship existed between BSP and the security guards assigned in its premises. Consequently, the latter’s
negligence cannot be imputed against BSP but should be attributed to AIB, the true employer of Peña and Gaddi. In the case of
Soliman, Jr. v. Tuazon, 209 SCRA 47 (1992), the Court enunciated thus: It is settled that where the security agency, as here,
recruits, hires and assigns the work of its watchmen or security guards, the agency is the employer of such guards and watchmen.
Liability for illegal or harmful acts committed by the security guards attaches to the employer agency, and not to the clients or
customers of such agency. As a general rule, a client or customer of a security agency has no hand in selecting who among the
pool of security guards or watchmen employed by the agency shall be assigned to it; the duty to observe the diligence of a good
father of a family in the selection of the guards cannot, in the ordinary course of events, be demanded from the client whose
premises or property are protected by the security guards. The fact that a client company may give instructions or directions to
the security guards assigned to it, does not, by itself, render the client responsible as an employer of the security guards
concerned and liable for their wrongful acts or omissions. Those instructions or directions are ordinarily no more than requests
commonly envisaged in the contract for services entered into with the security agency.
Same; Same; Agency; Article 1868 of the Civil Code states that “[b]y the contract of agency, a person binds himself to render
some service or to do something in representation or on behalf of another, with the consent or authority of the latter.”―Nor can
it be said that a principal-agent relationship existed between BSP and the security guards Peña and Gaddi as to make the former
liable for the latter’s complained act. Article 1868 of the Civil Code states that “[b]y the contract of agency, a person binds himself
to render some service or to do something in representation or on behalf of another, with the consent or authority of the latter.”
The basis for agency therefore is representation, which element is absent in the instant case. Records show that BSP merely
hired the services of AIB, which, in turn, assigned security guards, solely for the protection of its properties and premises.
Nowhere can it be inferred in the Guard Service Contract that AIB was appointed as an agent of BSP. Instead, what the parties
intended was a pure principal-client relationship whereby for a consideration, AIB rendered its security services to BSP.
Same; Stipulation Pour Autrui; Requisites in order that a third person benefited by a stipulation pour autrui may demand its
fulfillment.―In order that a third person benefited by the second paragraph of Article 1311, referred to as a stipulation pour autrui,
may demand its fulfillment, the following requisites must concur: (1) There is a stipulation in favor of a third person; (2) The
stipulation is a part, not the whole, of the contract; (3) The contracting parties clearly and deliberately conferred a favor to the
third person―the favor is not merely incidental; (4) The favor is unconditional and uncompensated; (5) The third person
communicated his or her acceptance of the favor before its revocation; and (6) The contracting parties do not represent, or are
not authorized, by the third party. However, none of the foregoing elements obtains in this case.
Same; Lease; It has been held that the act of parking a vehicle in a garage, upon payment of a fixed amount, is a lease.―The
Court concurs with the finding of the CA that the contract between the parties herein was one of lease as defined under Article
1643 of the Civil Code. It has been held that the act of parking a vehicle in a garage, upon payment of a fixed amount, is a lease.
Even in a majority of American cases, it has been ruled that where a customer simply pays a fee, parks his car in any available
space in the lot, locks the car and takes the key with him, the possession and control of the car, necessary elements in bailment,
do not pass to the parking lot operator, hence, the contractual relationship between the parties is one of lease.
Same; Same; Article 1664 of the Civil Code states that “[t]he lessor is not obliged to answer for a mere act of trespass which a
third person may cause on the use of the thing leased; but the lessee shall have a direct action against the intruder.”―In the
instant case, the owners parked their six (6) passenger jeepneys inside the BSP compound for a monthly fee of P300.00 for
each unit and took the keys home with them. Hence, a lessor-lessee relationship indubitably existed between them and BSP.
On this score, Article 1654 of the Civil Code provides that “[t]he lessor (BSP) is obliged: (1) to deliver the thing which is the object
of the contract in such a condition as to render it fit for the use intended; (2) to make on the same during the lease all the
necessary repairs in order to keep it suitable for the use to which it has been devoted, unless there is a stipulation to the contrary;
and (3) to maintain the lessee in the peaceful and adequate enjoyment of the lease for the entire duration of the contract.” In
relation thereto, Article 1664 of the same Code states that “[t]he lessor is not obliged to answer for a mere act of trespass which
a third person may cause on the use of the thing leased; but the lessee shall have a direct action against the intruder.” Here,
BSP was not remiss in its obligation to provide Sps. Mamaril a suitable parking space for their jeepneys as it even hired security
guards to secure the premises; hence, it should not be held liable for the loss suffered by Sps. Mamaril.
Same; Contracts; Contracts of Adhesion; Contracts of adhesion are not void per se. It is binding as any other ordinary contract
and a party who enters into it is free to reject the stipulations in its entirety. If the terms thereof are accepted without objection,
then the contract serves as the law between them.―Anent Sps. Mamaril’s claim that the exculpatory clause: “Management shall
not be responsible for loss of vehicle or any of its accessories or article left therein” contained in the BSP issued parking ticket
was void for being a contract of adhesion and against public policy, suffice it to state that contracts of adhesion are not void per
se. It is binding as any other ordinary contract and a party who enters into it is free to reject the stipulations in its entirety. If the
terms thereof are accepted without objection, as in this case, where plaintiffs-appellants have been leasing BSP’s parking space
for more or less 20 years, then the contract serves as the law between them. Besides, the parking fee of P300.00 per month or
P10.00 a day for each unit is too minimal an amount to even create an inference that BSP undertook to be an insurer of the
safety of plaintiffs-appellants’ vehicles.
Same; Damages; Actual Damages; Actual damages must be proved with reasonable degree of certainty and a party is entitled
only to such compensation for the pecuniary loss that was duly proven.―On the matter of damages, the Court noted that while
Sonia P. Mamaril testified that the subject vehicle had accessories worth around P50,000.00, she failed to present any receipt
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
to substantiate her claim. Neither did she submit any record or journal that would have established the purported P275.00 daily
earnings of their jeepney. It is axiomatic that actual damages must be proved with reasonable degree of certainty and a party is
entitled only to such compensation for the pecuniary loss that was duly proven. Thus, absent any competent proof of the amount
of damages sustained, the CA properly deleted the said awards.
Article 1312
Art. 1312. In contracts creating real rights, third persons who come into possession of the object of the
contract are bound thereby, subject to the provisions of the Mortgage Law and the Land Registration Laws.
(n)
BEL-AIR V. DIONISIO, 174 SCRA 589
Land Titles; Automatic membership in the respondent Bel-Air Association duly annotated on petitioner’s Transfer Certificate of
Title.—There is no dispute that Transfer Certificate of Title No. 81136 covering the subject parcel of land issued in the name of
the petitioner contains an annotation to the effect that the lot owner becomes an automatic member of the respondent Bel-Air
Association and must abide by such rules and regulations laid down by the Association in the interest of the sanitation, security
and the general welfare of the community. It is likewise not disputed that the provision on automatic membership was expressly
annotated on the petitioner’s Transfer Certificate of Title and on the title of his predecessor-in-interest.
Same; Same; Purchasers of registered land bound by the annotations found at the back of the Certificate of Title.—Thus, in the
case of Tanchoco v. Aquino, (154 SCRA 1 [1987]), we ruled that purchasers of a registered land are bound by the annotations
found at the back of the certificate of title covering the subject parcel of land.
Same; Same; Same; Petitioner’s contention that he has no privity of contract with respondent association, not persuasive.—In
effect, the petitioner’s contention that he has no privity of contract with the respondent association is not persuasive. When the
petitioner voluntarily bought the subject parcel of land it was understood that he took the same free of all encumbrances except
the notations at the back of the certificate of title, among them, that he automatically becomes a member of the respondent
association.
Same; Same; Same; Same; Dues are not in the concept of property tax.—The mode of payment as well as the purposes for
which the dues are intended clearly indicate that the dues are not in the concept of a property tax as claimed by the petitioner.
They are shares in the common expenses for necessary services. A property tax is assessed according to the value of the
property (Philippine Transit Association v. Treasurer of the City of Manila, et al., 83 Phil. 722 [1949]) but the basis of the sharing
in this case is the area of the lot.
Same; Same; Same; Same; Same; Contention that the lien collides with the constitutional guarantee of freedom of association,
not tenable.—The contention that this lien collides with the constitutional guarantee of freedom of association is not tenable. The
transaction between the defendants and the original seller (defendant’s immediate predecessor) of the land covered by TCT No.
81136 is a sale and the conditions have been validly imposed by the said vendor/the same not being contrary to law, morals and
good customs and public policy. The fact that it has been approved by the Land Registration Commission did not make it a
governmental act subject to the constitutional restriction against infringement of the right of association. The constitutional
proscription that no person can be compelled to be a member of an association against his will applies only to government acts
and not to private transactions like the one in question.
Article 1314
Art. 1314. Any third person who induces another to violate his contract shall be liable for damages to the
other contracting party. (n)
DAYWALT V. CORP DE PP AGUSTINOS, 39:587
Facts:
In 1902, Teodorica Endencia executed a contract whereby she obligated herself to convey to Geo W. Daywalt a 452-hectare
parcel of land for P 4000. They agreed that a deed should be executed as soon as Endencia’s title to the land was perfected in
the Court of Land Registration and a Torrens title issued in her name. When the Torrens title was issued, Endencia found out
that the property measured 1248 hectares instead of 452 hectares, as she initially believed. Because of this, she became
reluctant to transfer the whole tract to Daywalt, claiming that she never intended to sell so large an amount and that she had
been misinformed as to its area. Daywalt filed an action for specific performance. The SC ordered Endencia to convey the entire
tract to Daywalt.
Meanwhile, La Corporacion de los Padres Agustinos Recoletos (Recoletos), was a religious corp., w/c owned an estate
immediately adjacent to the property sold by Endencia to Daywalt. It also happened that Fr. Sanz, the representative of the
Recoletos, exerted some influence and ascendancy over Endencia, who was a woman of little force and easily subject to the
influence of other people. Fr. Sanz knew of the existence of the contracts with Daywalt and discouraged her from conveying the
entire tract.
Daywalt filed an action for damages against the Recoletos on the ground that it unlawfully induced Endencia to refrain from the
performance of her contract for the sale of the land in question and to withhold delivery of the Torrens title. Daywalt’s claim for
damages against the Recoletos was for the huge sum of P 500000 [in the year 1919], since he claims that because of the
interference of the Recoletos, he failed to consummate a contract with another person for the sale of the property and its
conversion into a sugar mill.
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Issue:
Whether Recoletos is liable to Daywalt?
Held:
Yes, it is not liable.
The stranger who interferes in a contract between other parties cannot become more extensively liable in damages for the non-
performance of the contract than the party in whose behalf he intermediates. Hence, in order to determine the liability of the
Recoletos, there is first a need to consider the liability of Endencia to Daywalt. The damages claimed by Daywalt from Endencia
cannot be recovered from her, first, because these are special damages w/c were not w/in the contemplation of the parties when
the contract was made, and secondly, these damages are too remote to be the subject of recovery. Since Endencia is not liable
for damages to Daywalt, neither can the Recoletos be held liable. As already suggested, by advising Endencia not to perform
the contract, the Recoletos could in no event render itself more extensively liable than the principal in the contract.
Article 1257 of the Civil Code declares that contracts are binding only between the parties and their privies. In conformity with
this it has been held that a stranger to a contract has no right of action for the nonfulfillment of the contract except in the case
especially contemplated in the second paragraph of the same article. (Uy Tam and Uy Yet vs. Leonard, 30 Phil. Rep., 471.) As
observed by this court in Manila Railroad Co. vs. Compañia Transatlantica, R. G. No. 11318 (38 Phil. Rep., 875), a contract,
when effectually entered into between certain parties, determines not only the character and extent of the liability of the
contracting parties but also the person or entity by whom the obligation is exigible. The same idea should apparently be
applicable with respect to the person against whom the obligation of the contract may be enforced; for it is evident that there
must be a certain mutuality in the obligation, and if the stranger to a contract is not permitted to sue to enforce it, he cannot
consistently be held liable upon it.
Article 1318
Art. 1318. There is no contract unless the following requisites concur:
(1) Consent of the contracting parties;
 fact performed their obligations thereunder and their respective signatures and those of their witnesses appear upon the face of
(2) Object certain which is the subject matter of the contract;
 the document. Thus, even assuming that the Building Contract in Exhibit "5" was signed by the private respondent only after the
(3) Cause of the obligation which is established. (1261)
ONG YIU V. CA, 91 SCRA 223
Civil Law; Transportation; Breach of contract of transportation; Bad faith, Concept of; No bad faith committed when airline
company exerted due diligence with its duty in locating a passenger’s lost luggage; Case at bar.—From the facts of the case,
we agree with respondent Court that PAL had not acted in bad faith. Bad faith means a breach of a known duty through some
motive of interest or ill will. It was the duty of PAL to look for petitioner’s luggage which had been miscarried. PAL exerted due
diligence in complying with such duty.
Same; Same; Same; Same; Moral Damages; No award of moral damages when bad faith is absent.—In the absence of a
wrongful act or omission or of fraud or bad faith, petitioner is not entitled to moral damages.
Same; Same; Same; Same; Exemplary Damages; Exemplary damages not awarded when defendant had not acted fraudulently
or oppressively.—Petitioner is neither entitled to exemplary damages. In contracts, as provided for in Article 2232 of the Civil
Code, exemplary damages can be granted if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent
manner, which has not been proven in this case.
Same; Same; Same; Contracts of adhesion; Philippine Air Lines’ limited carriage liability of P100.00 for loss or delay of its
passengers’ baggage held valid and binding absent higher value declared for luggage and actual value of goods lost.—While it
may be true that petitioner had not signed the plane ticket (Exh. “12”), he is nevertheless bound by the provisions thereof. “Such
provisions have been held to be a part of the contract of carriage, and valid and binding upon the passenger regardless of the
latter’s lack of knowledge or assent to the regulation”. It is what is known as a contract of “adhesion”, in regards which it has
been said that contracts of adhesion wherein one party imposes a ready made form of contract on the other, as the plane ticket
in the case at bar, are contracts not entirely prohibited.
The one who adheres to the contract is in reality free to reject it entirely; if he adheres, he gives his consent. And as held in
Randolph v. American Airlines, 103 Ohio App. 172, 144 N.E. 2d 878; Rosenchein vs. Trans World Airlines, Inc., 349 S.W. 2d
483, “a contract limiting liability upon an agreed valuation does not offend against the policy of the law forbidding one from
contracting against his own negligence.” Considering, therefore, that petitioner had failed to declare a higher value for his
baggage, he cannot be permitted a recovery in excess of P100.00. Besides, passengers are advised not to place valuable items
inside their baggage but “to avail of our V-cargo service” (Exh. “1”). It is likewise to be noted that there is nothing in the evidence
to show the actual value of the goods allegedly lost by petitioner.
Article 1319
Art. 1319. Consent is manifested by the meeting of the offer and the acceptance upon the thing and
the cause which are to constitute the contract. The offer must be certain and the acceptance absolute.
A qualified acceptance constitutes a counter-offer.
Acceptance made by letter or telegram does not bind the offerer except from the time it came to his
knowledge. The contract, in such a case, is presumed to have been entered into in the place where the
offer was made. (1262a)
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
VELASCO V. CA, 51 SCRA 439
Sales; A definite agreement on manner of payment essential to a binding contract of sale.—It is not difficult to glean from the
aforequoted averments that the petitioners themselves admit that they and the respondent still had to meet and agree on how
and when the down-payment and the installment payments were to be paid. Such being the situation, it cannot, therefore, be
said that a definite and firm sales agreement between the parties had been perfected over the lot in question. Indeed, this Court
has already ruled before that a definite agreement on the manner of payment of the purchase price is an essential element in
the formation of a binding and enforceable contract of sale. The fact, therefore, that the petitioners delivered to the respondent
the sum of P10,000.00 as part of the down-payment that they had to pay cannot be considered as sufficient proof of the perfection
of any purchase and sale agreement between the parties under article 1482 of the new Civil Code.
WELDON V. CA, 154 SCRA 618
Civil Law; Contracts; Only an absolute or unqualified acceptance of a definite offer manifests the consent necessary to perfect
a contract—The first proposal submitted by Weldon Construction for rendering service under a contract of supervision (Exhibit
"A") is simply that, a proposal. It never attained perfection as the contract between the parties. Only an absolute or unqualified
acceptance of a definite offer manifests the consent necessary to perfect a contract (Article 1319, New Civil Code). The advance
payment of P10,000.00 Pesos was not an unqualified acceptance of the offer contained in the first proposal (Exhibit "A") as in
fact an entirely new proposal (Exhibit "4") was submitted by Weldon Construction subsequently. If, as claimed by the petitioner,
the parties had already agreed upon a contract of supervision under Exhibit "A," why then was a second proposal made? Res
ipsa loquitur. The existence of the second proposal belies the perfection of any contract arising from the first proposal.
Same; Same; Once a contract is shown to have been consummated or fully performed by the parties thereto, its existence and
binding effect can no longer be disputed—Petitioner's position is untenable. Once a contract is shown to have been
consummated or fully performed by the parties thereto, its existence and binding effect can no longer be disputed. It is irrelevant
and immaterial to dispute the due execution of a contract. i.e. the date of signing by one of the parties, if both of them have in
Gay Theater building had been completed and the stipulated price of P600,000.00 Pesos fully paid, such fact can no longer
negate the binding effect of that agreement if its existence and especially, its consummation can be established by other evidence,
e.g by the contemporaneous acts of the parties and their having performed their respective obligations pursuant to the agreement.
Same; Same; Absence of written authority by the owner for the changes in the plan and specifications of the building and of
written agreement between the parties on the additional price bars recovery of additional cost.—ln the case before this Court,
the records do not yield any written authority for the changes made on the plans and specifications of the Gay Theater building.
Neither can there be found any written agreement on the additional price to be paid for said "extra works." While the trial court
may have found in the instant case that the private respondent admitted his having requested the "extra works" done by the
contractor (Record on Appeal, p. 66 [C.F.I. Decision]), this does not save the day for the petitioner. The private respondent
claims that the contractor agreed to make the additions without additional cost. Expectedly, the petitioner vigorously denies said
claim of the private respondent. This is precisely a misunderstanding between parties to a construction agreement which the
lawmakers sought to avoid in prescribing the two requisites under Article 1724 (Report of the Code Commission, p. 148). And
this case is a perfect example of a tedious litigation which had ensued between the parties as a result of such misunderstanding.
Again, this is what the law endeavors to prevent (San Diego vs. Sayson, supra.).
MARIA CRISTINA V. CA, 273 SCRA 152
Contracts; An offer must be clear and definite, while an acceptance must be unconditional and unbounded, in order that their
concurrence can give rise to a perfected contract.—Whether deemed to be an offer or an acceptance, the letter obviously is far
from the requisite offer or acceptance contemplated under Article 1319 of the Civil Code. An offer must be clear and definite,
while an acceptance must be unconditional and unbounded, in order that their concurrence can give rise to a perfected contract.
The law provides: “Art. 1319. Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause
which are to constitute the contract. The offer must be certain and the acceptance absolute. A qualified acceptance constitutes
a counter-offer.”
The letter of MCFC and MSC referred to in the questioned decision of the appellate court, cannot be so considered as a perfected
agreement between the parties as it proposed new terms and conditions for the alleged contract – it was a counteroffer.
Article 1324
Art. 1324. When the offerer has allowed the offeree a certain period to accept, the offer may be
withdrawn at any time before acceptance by communicating such withdrawal, except when the option
is founded upon a consideration, as something paid or promised. (n)
SANCHEZ V. RIGOS, 45 SCRA 368
FACTS:
In an instrument entitled "Option to Purchase," executed on April 3, 1961, defendant-appellant Severina Rigos "agreed, promised
and committed ... to sell" to plaintiff-appellee Nicolas Sanchez for the sum of P1,510.00 within two (2) years from said date, a
parcel of land situated in the barrios of Abar and Sibot, San Jose, Nueva Ecija. It was agreed 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. On March
12, 1963, Sanchez deposited the sum of Pl,510.00 with the CFI of Nueva Ecija and filed an action for specific performance and
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damages against Rigos for the latter’s refusal to accept several tenders of payment that Sanchez made to purchase the subject
land.
Defendant Rigos contended that the contract between them was only “a unilateral promise to sell, and the same being
unsupported by any valuable consideration, by force of the New Civil Code, is null and void." Plaintiff Sanchez, on the other
hand, alleged in his compliant that, by virtue of the option under consideration, "defendant agreed and committed to sell" and
"the plaintiff agreed and committed to buy" the land described in the option. The lower court rendered judgment in favor of
Sanchez and ordered Rigos to accept the sum Sanchez judicially consigned, and to execute in his favor the requisite deed of
conveyance. The Court of Appeals certified the case at bar to the Supreme Court for it involves a question purely of law.
ISSUE:
Was there a contract to buy and sell between the parties or only a unilateral promise to sell?
HELD:
The Supreme Court affirmed the lower court’s decision. The instrument executed in 1961 is not a "contract to buy and sell," but
merely granted plaintiff an "option" to buy, as indicated by its own title "Option to Purchase." The option did not impose upon
plaintiff Sanchez the obligation to purchase defendant Rigos' property. Rigos "agreed, promised and committed" herself to sell
the land to Sanchez 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. The lower court relied
upon Article 1354 of the Civil Code when it presumed the existence of said consideration, but the said Article only applies to
contracts in general.
However, it is not Article 1354 but the Article 1479 of the same Code which is controlling in the case at bar because the latter’s
2nd paragraph refers to "sales" in particular, and, more specifically, to "an accepted unilateral promise to buy or to sell." Since
there may be no valid contract without a cause or consideration, the promisor is not bound by his promise and may, accordingly,
withdraw it. Pending notice of its withdrawal, his accepted promise partakes, however, of the nature of an offer to sell which, if
accepted, results in a perfected contract of sale. Upon mature deliberation, the Court reiterates the doctrine laid down in the
Atkins case and deemed abandoned or modified the view adhered to in the Southwestern Company case
NATINO V. IAC, 197 SCRA 323
Sales; Mortgage; Redemption; A commitment by the bank to resell a property within a specified period, although accepted by
the party in whose favor it was made, is considered an option not supported by consideration distinct from the price, and therefore,
not binding upon the promissor.—Even if Mrs. Brodeth is to be understood to have promised to allow the petitioners to buy the
property at any time they have the money, 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. x x x Thus in Rural Bank of Parañaque Inc. vs. Remolado, et al., a commitment by the bank to resell
a property, within a specified period, although accepted by the party in whose favor it was made, was considered an option not
supported by a consideration distinct from the price and, therefore, not binding upon the promissor. Pursuant to Southwestern
Sugar and Molasses Co. vs. Atlantic Gulf and Pacific Company, it was void.
SERRA V. CA, 229 SCRA 60
Obligations and Contracts; Contracts of adhesion; These types of contracts are as binding as ordinary contracts.—A contract of
adhesion is one wherein a party, usually a corporation, prepares the stipulations in the contract, while the other party merely
affixes his signature or his “adhesion” thereto. These types of contracts are as binding as ordinary contracts. Because in reality,
the party who adheres to the contract is free to reject it entirely. Although, this Court will not hesitate to rule out blind adherence
to terms where facts and circumstances will show that it is basically one-sided. We do not find the situation in the present case
to be inequitable. Petitioner is a highly educated man, who, at the time of the trial was already a CPA-Lawyer, and when he
entered into the contract, was already a CPA, holding a respectable position with the Metropolitan Manila Commission. It is
evident that a man of his stature should have been more cautious in transactions he enters into, particularly where it concerns
valuable properties. He is amply equipped to drive a hard bargain if he would be so minded to.
Same; Sales; Arts. 1324 and 1479 of the Civil Code explained.—Article 1324 of the Civil Code provides that when an offeror has
allowed the offeree a certain period to accept, the offer may be withdrawn at anytime before acceptance by communicating such
withdrawal, except when the option is founded upon consideration, as something paid or promised. On the other hand, Article
1479 of the Code provides that an accepted unilateral promise to buy and 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.
Same; Same; In a unilateral promise to sell, where the debtor fails to withdraw the promise before the acceptance by the creditor,
the transaction becomes a bilateral contract to sell and to buy and the parties may reciprocally demand performance.—In a
unilateral promise to sell, where the debtor fails to withdraw the promise before the acceptance by the creditor, the transaction
becomes a bilateral contract to sell and to buy, because upon acceptance by the creditor of the offer to sell by the debtor, there
is already a meeting of the minds of the parties as to the thing which is determinate and the price which is certain. In which case,
the parties may then reciprocally demand performance. Jurisprudence has taught us that an optional contract is a privilege
existing only in one party—the buyer. For a separate consideration paid, he is given the right to decide to purchase or not, a
certain merchandise or property, at any time within the agreed period, at a fixed price. This being his prerogative, he may not be
compelled to exercise the option to buy before the time expires.
Same; Same; Consideration separate from the price, explained.—On the other hand, what may be regarded as a consideration
separate from the price is discussed in the case of Vda. de Quirino v. Palarca wherein the facts are almost on all fours with the
case at bar. The said case also involved a lease contract with option to buy where we had occasion to say that “the consideration
for the lessor’s obligation to sell the leased premises to the lessee, should he choose to exercise his option to purchase the
same, is the obligation of the lessee to sell to the lessor the building and/or improvements constructed and/or made by the former,
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
if he fails to exercise his option to buy said premises.” In the present case, the consideration is even more onerous on the part
of the lessee since it entails, transferring of the building and/or improvements on the property to petitioner, should respondent
bank fail to exercise its option within the period stipulated.
Same; Same; The price “not greater than TWO HUNDRED PESOS” in the Contract of Lease with Option to Buy is, under the
circumstances of the case, certain and definite.—The bugging question then is whether the price “not greater than TWO
HUNDRED PESOS” is certain or definite. A price is considered certain if it is so with reference to another thing certain or when
the determination thereof is left to the judgment of a specified person or persons. And generally, gross inadequacy of price does
not affect a contract of sale. Contracts are to be construed according to the sense and meaning of the terms which the parties
themselves have used. In the present dispute, there is evidence to show that the intention of the parties is to peg the price of
P210 per square meter. This was confirmed by petitioner himself in his testimony. Moreover, by his subsequent acts of having
the land titled under the Torrens System, and in pursuing the bank manager to effect the sale immediately, means that he
understood perfectly well the terms of the contract. He even had the same property mortgaged to the respondent bank sometime
in 1979, without the slightest hint of wanting to abandon his offer to sell the property at the agreed price of P210 per square
meter.
ANG YU V. CA, 238 SCRA 602
FACTS:
Ang Yu and Keh Tiong filed for specific performance against Bobby, Rose, and Jose. Plaintiffs are tenants or lessees of
commercial spaces owned by defendants, complying with the conditions and paying rent. Defendants allegedly promised to sell
to them the property. Bobby made and offer of 6M, while plaintiffs made a counteroffer of 5M. Plaintiffs asked that the defendants
put their offer in writing to which defendants acceded. Plaintiffs replied asking that they specify the terms and conditions.
Defendants did not reply. When the plaintiffs obtained information that the defendants were about to sell the property, the
plaintiffs filed a complaint to compel the defendants to sell to them.
TC: No terms and conditions. No sale. Nonetheless, the lower court ruled that should the defendants subsequently offer their
property for sale at a price of 11M or below, plaintiffs will have the right of first refusal
CA: No meeting of the minds. No sale. Affirmed. Specific performance does not lie. The lower court in the decision gave the
plaintiffs-appellants the right of first refusal only if the property is sold for a purchase price of 11M or lower; however, considering
the mercurial and uncertain forces in our market economy today. We find no reason not to grant the same right of first refusal to
appellants in the event that the subject property is sold for a price in excess of 11M.
SC denied, but while pending consideration in the SC, defendants sold the property for 15M to Buen Realty. TCT was issued.
Buen Realty demanded that the plaintiffs vacate the property. Plaintiffs replied that the property’s TCT had a notice of lis
pendens under the Cu Unjiengs/defendants.
CA executed on this annotation, and ordered the defendants to execute the deed of sale to plaintiffs for a consideration
of 15M based on their right of first refusal. Transactions with Buen Realty are set aside.
Brought on appeal, the previous execution order was set aside. So the plaintiffs/petitioners contend that the notice of lis pendens
was carried over when Buen Realty bought the property
ISSUE:
Was the execution of the notice of lis pendens proper?
No. The decision in the civil case could not have decreed at the time the execution of any deed of sale between
the Cu Unjiengs and petitioners.
Could the offer be withdrawn?
Yes, subject to art. 19.
Held/Ratio:
A negotiation is formally initiated by an offer. An imperfect promise (policitacion) is merely an offer. Public advertisements or
solicitations and the like are ordinarily construed as mere invitations to make offers or only as proposals. These relations, until
a contract is perfected, are not considered binding commitments. Thus, at any time prior to the perfection of the contract, either
negotiating party may stop the negotiation. The offer, at this stage, may be withdrawn; the withdrawal is effective immediately
after its manifestation, such as by its mailing and not necessarily when the offeree learns of the withdrawal. Where a period is
given to the offeree within which to accept the offer, the following rules generally govern:
(1) If the period is not itself founded upon or supported by a consideration, the offeror is still free and has the right to withdraw
the offer before its acceptance, or, if an acceptance has been made, before the offeror's coming to know of such fact, by
communicating that withdrawal to the offeree (see Art. 1324, Civil Code). The right to withdraw, however, must not be exercised
whimsically or arbitrarily; otherwise, it could give rise to a damage claim under Article 19 of the Civil Code which ordains that
"every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and
observe honesty and good faith."
(2) If the period has a separate consideration, a contract of "option" is deemed perfected, and it would be a breach of that contract
to withdraw the offer during the agreed period. The option, however, is an independent contract by itself, and it is to be
distinguished from the projected main agreement (subject matter of the option) which is obviously yet to be concluded. If, in fact,
the optioner-offeror withdraws the offer before its acceptance (exercise of the option) by the optionee-offeree, the latter may not
sue for specific performance on the proposed contract ("object" of the option) since it has failed to reach its own stage of
perfection. The optioner-offeror, however, renders himself liable for damages for breach of the option. In these cases, care
should be taken of the real nature of the consideration given, for if, in fact, it has been intended to be part of the consideration
for the main contract with a right of withdrawal on the part of the optionee, the main contract could be deemed perfected; a
similar instance would be an "earnest money" in a contract of sale that can evidence its perfection (Art. 1482, Civil Code).
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In the law on sales, the so-called "right of first refusal" is an innovative juridical relation. Needless to point out, it cannot be
deemed a perfected contract of sale under Article 1458. Neither can the right of first refusal, understood in its normal concept,
per se be brought within the purview of an option under the second paragraph of Article 1479, aforequoted, or possibly of an
offer under Article 1319 of the same Code. An option or an offer would require, among other things, a clear certainty on both the
object and the cause or consideration of the envisioned contract. In a right of first refusal, while the object might be made
determinate, the exercise of the right, however, would be dependent not only on the grantor's eventual intention to enter into a
binding juridical relation with another but also on terms, including the price, that obviously are yet to be later firmed up. Prior
thereto, it can at best be so described as merely belonging to a class of preparatory juridical relations governed not by contracts
(since the essential elements to establish the vinculum juris would still be indefinite and inconclusive) but by, among other laws
of general application, the pertinent scattered provisions of the Civil Code on human conduct.
Even on the premise that such right of first refusal has been decreed under a final judgment, like here, its breach cannot justify
correspondingly an issuance of a writ of execution under a judgment that merely recognizes its existence, nor would it sanction
an action for specific performance without thereby negating the indispensable element of consensuality in the perfection of
contracts. It is not to say, however, that the right of first refusal would be inconsequential for, such as already intimated above,
an unjustified disregard thereof, given, for instance, the circumstances expressed in Article 19 of the Civil Code, can warrant a
recovery for damages.
The final judgment in this case, it must be stressed, has merely accorded a "right of first refusal" in favor of petitioners. The
consequence of such a declaration entails no more than what has heretofore been said. In fine, if, as it is here so conveyed to
us, petitioners are aggrieved by the failure of private respondents to honor the right of first refusal, the remedy is not a writ of
execution on the judgment, since there is none to execute, but an action for damages in a proper forum for the purpose.
Furthermore, whether private respondent Buen Realty Development Corporation, the alleged purchaser of the property, has
acted in good faith or bad faith and whether or not it should, in any case, be considered bound to respect the registration of the
lis pendens are matters that must be independently addressed in appropriate proceedings. Buen Realty, not having been
impleaded in the case, cannot be held subject to the writ of execution issued by respondent Judge, let alone ousted from the
ownership and possession of the property, without first being duly afforded its day in court.
EQUATORIAL V. MAYFAIR, 264 SCRA 483
FACTS:
Carmelo (Petitioner) owned a 2-storey bldg in Recto, Manila. In 1967 and 1969, he entered into 2 separate CONTRACTS OF
LEASE with Mayfair for the lease of 2 portions of the the bldg which the latter used as a motion picture theater known as MAXIM
and MIRAMAR THEATER. Both lease contracts contained an identically worded paragraph 8 which reads:
“If the LESSOR should desire to sell the leased premises, the LESSEE shall be given 30-days exclusive option to
purchase the same.
In the event, however, that the leased premises is sold to someone other than the LESSEE, the LESSOR is bound
and obligated, as it hereby binds and obligates itself, to stipulate in the Deed of Sale hereof that the purchaser
shall recognize this lease and be bound by all the terms and conditions thereof.”
In 1974 Carmelo informed Mayfair that they wanted to sell the entire property ( and that a certain JOSE ARANETA was offering
to buy the whole property for 1.2M USD. They also asked Mayfair if they wanted to buy the property for P6-7M.
Mayfair replied stating par 8 of their contract and communicating his willingness to purchase the entire property. Carmelo did
not reply.
In 1978, Carmelo sold the property to Equitorial or P11.3M. This prompted Mayfair to file a case for specific performance and
annulment of the sale.
RTC – Ruled in favor of Carmelo stating, among other things, that paragraph 8 of the contract is an “option clause” (under Art
1324) which is not supported by a separate consideration. Under Art 1352, “Contracts without cause or with unlawful cause,
produce no effect whatever. The cause is unlawful if it is contrary to law, morals, good custom, public order or public policy.”
Therefore contracts without consideration produce no effect.
CA – Reversed the CA saying that paragraph 8 is not an “option contract/clause” under 1324 but a “right of first refusal” under
1479, which does not need a separate distinct consideration.
ISSUE:
W/N paragraph 8 is an option contract/ clause which needs a separate consideration. NO, its a right of first refusal.
RATIO:
Article 1324 speaks of an "offer" made by an offeror which the offeree may or may not accept within a certain period. Under this
article, the offer may be withdrawn by the offeror before the expiration of the period and while the offeree has not yet accepted
the offer. However, the offer cannot be withdrawn by the offeror within the period if a consideration has been promised or given
by the offeree in exchange for the privilege of being given that period within which to accept the offer. The consideration i s
distinct from the price which is part of the offer. The contract that arises is known as option. In the case of Beaumont the SC,
defined an option as follows: "A contract by virtue of which A, in consideration of the payment of a certain sum to B, acquires the
privilege of buying from or selling to B, certain securities or properties within a limited time at a specified price."
Article 1479, second paragraph, on the other hand, contemplates of an "accepted unilateral promise to buy or to sell a
determinate thing for a price within (which) is binding upon the promisee if the promise is supported by a consideration distinct
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
from the price." That "unilateral promise to buy or to sell a determinate thing for a price certain" is called an offer. An "offer", in
laws, is a proposal to enter into a contract.
Based on the foregoing discussion, it is evident that the provision granting Mayfair "30-days exclusive option to purchase" the
leased premises is NOT AN OPTION. Although the provision is certain as to the object (the sale of the leased premises) the
price for which the object is to be sold is not stated in the provision. Otherwise stated, the questioned stipulation is not by itself,
an "option" or the "offer to sell" because the clause does not specify the price for the subject property.
Although the provision giving Mayfair "30-days exclusive option to purchase" cannot be legally categorized as an option, it is,
nevertheless, a valid and binding stipulation. What the trial court failed to appreciate was the intention of the parties behind the
questioned proviso.
The provision in question is not of the pro-forma type customarily found in a contract of lease. Even appellees have recognized
that the stipulation was incorporated in the two Contracts of Lease at the initiative and behest of Mayfair. Evidently, the stipulation
was intended to benefit and protect Mayfair in its rights as lessee in case Carmelo should decide, during the term of the lease,
to sell the leased property. This intention of the parties is achieved in two ways in accordance with the stipulation. The first is by
giving Mayfair "30-days exclusive option to purchase" the leased property. The second is, in case Mayfair would opt not to
purchase the leased property, "that the purchaser (the new owner of the leased property) shall recognize the lease and be bound
by all the terms and conditions thereof."
In other words, paragraph 8 of the two Contracts of lease, particularly the stipulation giving Mayfair "30-days exclusive option to
purchase the (leased premises)," was meant to provide Mayfair the opportunity to purchase and acquire the leased property in
the event that Carmelo should decide to dispose of the property. In order to realize this intention, the implicit obligation of Carmelo
once it had decided to sell the leased property, was not only to notify Mayfair of such decision to sell the property, but, more
importantly, to make an offer to sell the leased premises to Mayfair, giving the latter a fair and reasonable opportunity to accept
or reject the offer, before offering to sell or selling the leased property to third parties. The right vested in Mayfair is analogous
to the right of first refusal, which means that Carmelo should have offered the sale of the leased premises to Mayfair before
offering it to other parties, or, if Carmelo should receive any offer from third parties to purchase the leased premises, then
Carmelo must first give Mayfair the opportunity to match that offer.
Besides the ruling that paragraph 8 vests in Mayfair the right of first refusal as to which the requirement of distinct consideration
indispensable in an option contract, has no application, respondent appellate court also addressed the claim of Carmelo and
Equatorial that assuming arguendo that the option is valid and effective, it is impossible of performance because it covered only
the leased premises and not the entire Claro M. Recto property, while Carmelo's offer to sell pertained to the entire property in
question.
BIBLE BAPTIST CHURCH V. CA, 444 SCRA 399 [2004]
FACTS:
On June 7, 1985, the Bible Baptist Church entered into a contract of lease [4] with Mr. & Mrs. Elmer Tito Medina Villanueva. The
pertinent stipulations in the lease contract were:
4. That upon signing of the LEASE AGREEMENT, the LESSEE shall pay the sum of Eighty Four Thousand
Pesos (P84,000.00) Philippine Currency. Said sum is to be paid directly to the Rural Bank, Valenzuela, Bulacan
for the purpose of redemption of said property which is mortgaged by the LESSOR.
8. That the LESSEE has the option to buy the leased premises during the Fifteen (15) years of the lease. If the
LESSEE decides to purchase the premises the terms will be: A) A selling Price of One Million Eight Hundred
Thousand Pesos (P1.8 million), Philippine Currency. B) A down payment agreed upon by both parties. C) The
balance of the selling price may be paid at the rate of One Hundred Twenty Thousand Pesos (P120,000.00),
Philippine Currency, per year.
The foregoing stipulations of the lease contract are the subject of the present controversy.
ISSUE:
1) Whether or not the option to buy given to the Baptist Church is founded upon a consideration; NO
2) WON the consideration for the option could be the agreement for petitioners to rescue the property of the
respondents. -NO
HELD:
(1) The second paragraph of Article 1479 provides for the definition and consequent rights and obligations under an option
contract. For an option contract to be valid and enforceable against the promissor, there must be a separate and distinct
consideration that supports it.
In this case, petitioner Baptist Church seeks to buy the leased premises from the spouses Villanueva, under the option given to
them. Petitioners claim that the Baptist Church “agreed to advance the large amount needed for the rescue of the property but, in
exchange, it asked the Villanuevas to grant it a long term lease and an option to buy the property for P1.8 million.”[8] They argue
that the consideration supporting the option was their agreement to pay off the Villanueva’s P84,000 loan with the bank, thereby
freeing the subject property from the mortgage encumbrance.
In the petition, the Baptist Church states that “[t]rue, the Baptist Church did not pay a separate and specific sum of money to
cover the option alone. But the P84,000 it paid the Villanuevas in advance should be deemed consideration for the one contract
they entered into – the lease with option to buy.”[9] They rely on the case of Teodoro v. Court of Appeals[10] to support their stand.
This Court finds no merit in these contentions.
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First, petitioners cannot insist that the P84,000 they paid in order to release the Villanuevas’ property from the mortgage should
be deemed the separate consideration to support the contract of option. It must be pointed out that said amount was in fact
apportioned into monthly rentals spread over a period of one year, at P7,000 per month. Thus, for the entire period of June 1985
to May 1986, petitioner Baptist Church’s monthly rent had already been paid for, such that it only again commenced paying the
rentals in June 1986. This is shown by the testimony of petitioner Pastor Belmonte where he states that the P84,000 was
advance rental equivalent to monthly rent of P7,000 for one year, such that for the entire year from 1985 to 1986 the Baptist
Church did not pay monthly rent.[11]
This Court agrees with respondents that the amount of P84,000 has been fully exhausted and utilized by their occupation of the
premises and there is no separate consideration to speak of which could support the option.[12]
Second, petitioners’ reliance on the case of Teodoro v. Court of Appeals[13] is misplaced. Consequently, unlike this case, Teodoro
paid over and above the amount due for her own occupation of a portion of the property. Hence, in Teodoro, this Court was able
to find that a separate consideration supported the option contract and thus, its enforcement may be demanded..
(2) In Villamor v. Court of Appeals,[14] this Court defined consideration as “the why of the contracts, the essential reason which
moves the contracting parties to enter into the contract.” [15]This definition illustrates that the consideration contemplated to
support an option contract need not be monetary.
[16]
Specifically, in Villamor v. Court of Appeals, half of a parcel of land was sold to the spouses Villamor for P70 per square meter,
an amount much higher than the reasonable prevailing price. Thereafter, a deed of option was executed whereby the sellers
undertook to sell the other half to the same spouses. It was stated in the deed that the only reason the spouses bought the first
half of the parcel of land at a much higher price, was the undertaking of the sellers to sell the second half of the land, also at the
same price. This Court held that the cause or consideration for the option, on the part of the spouses-buyers, was the undertaking
of the sellers to sell the other half of the property. On the part of the sellers, the consideration supporting the option was the
much higher amount at which the buyers agreed to buy the property. It was explicit from the deed therein that for the parties,
this was the consideration for their entering into the contract.
Villamor is distinct from the present case because, First, this Court cannot find that petitioner Baptist Church parted with anything
of value, aside from the amount of P84,000 which was in fact eventually utilized as rental payments. Second, there is no
document that contains an agreement between the parties that petitioner Baptist Church’s supposed rescue of the mortgaged
property was the consideration which the parties contemplated in support of the option clause in the contract. As previously
stated, the amount advanced had been fully utilized as rental payments over a period of one year. While the Villanuevas may
have them to thank for extending the payment at a time of need, this is not the separate consideration contemplated by law.
VILLEGAS V. CA, 499 SCRA 276 [2006]
FACTS
 Respondent-heirs told petitioner-lessees that they had decided to sell their interest in the property. They asked if the
petitioners would like to exercise their right of pre-emption as lessees and were given 30 days to exercise their right.
Silence would mean a waiver of the right.
 Offer #1 by P: P asked for a 30-day extension to come up with their bid for the property. Their first proposal was a bid
price of P4M, 80% payment upon signing = P3.2M, and upon delivery of the certificate of title to each one = 20% of the
balance (P800K).
 The respondents requested petitioner-lessees to increase their bid for the property but the latter failed to make another
offer so the heirs had decided to sell to another buyer who offered a higher price. Nevertheless, R informed the P that
they would wait for a reply within 15 days and that should the period lapse without any reply from petitioner-lessees, it
would mean that petitioner-lessees were no longer interested in buying the property.
 Asking price of R (counter-offer): When P requested for their asking price, respondents indicated 5M.
 In a conference subsequently held, the parties failed to agree on the price and terms for the sale of the property.
 Offer #2 by P: P’s wrote another stating that after waiting for R’s reply (for 68 days) but not receiving any, they announced
their willingness to pay the P5M asking price, excluding unpaid taxes and documentary stamps shall be for the account
of the sellers.
 R’s replied that as previously informed, some of the co-owners were no longer willing to sell. Only a few who represent
75% of the property were still willing ; thus, the offer to sell the entire property was no longer effective. They added that
the P5M was meant to be the net price, meaning the taxes should be for the account of the buyers.
 Counter-offer by R: The respondent-heirs who were still willing to sell collectively owned 75% of the property. Their
asking price was P3.8M. P were given 2 week to respond. The petitioners did not reply so the property was sold to a third
party, Lita Sy. The other heirs sold the remaining 25% portion of the property to "Villegas brothers".
 P filed an action against respondent-heirs and Spouses Sy for Annulment of Deed of Sale/Title.
Note: The Spouses Sy filed a complaint for Specific Performance against the heirs of Atanacio Villegas (apparently the
Spouses redeemed the 25% portion from the latter).  not so important to the issue
 P’s insist that there was already a perfected contract of sale when the R accepted the P5M offer for the property and that
the contract of sale between R and Lita Sy should be annulled since it violated the right of first refusal of P.
 On the other hand, R maintain that the P5M offer already lapsed because petitioner-lessees did not accept the offer within
the period granted. Instead, petitioner-lessees opted for a conference during which the parties failed to agree on the price.
There was therefore no perfected contract of sale because there was no meeting of minds between the parties.
ISSUES:
Whether the contract of sale between respondent-heirs and Lita Sy violated the right of first refusal of petitioner-lessees
(second issue about redemption not relevant to contracts)
RULING:
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
A right of first refusal is a contractual grant, not of the sale of a property, but of the first priority to buy the property in the event
the owner sells the same. The exercise of the right of first refusal is dependent not only on the owner’s eventual intention to sell
the property but also on the final decision of the owner as regards the terms of the sale including the price.
When a lease contains a right of first refusal, the lessor has the legal duty to the lessee not to sell the leased property to anyone
at any price until after the lessor has made an offer to sell the property to the lessee and the lessee has failed to accept it. Only
after the lessee has failed to exercise his right of first priority could the lessor sell the property to other buyers under the same
terms and conditions offered to the lessee, or under terms and conditions more favorable to the lessor.
The records show that the heirs of Dr. Lorenzo C. Reyes did recognize the right of first refusal of petitioner-lessees over the
property. This is clear from the letter dated 19 May 1988 informing petitioner-lessees that the property they were leasing is for
sale. There was an exchange of letters between the R and P evidencing the offer and counter-offer of both parties.
There was no meeting of the minds between the parties. Where a time is stated in an offer for its acceptance, the offer is
terminated at the expiration of the time given for its acceptance. The offer may also be terminated when the person to whom the
offer is made either rejects the offer outright or makes a counter-offer of his own.
The offer of P5,000,000 in the letter already lapsed when petitioner-lessees failed to accept it within the period granted. The
offer was superseded by the new offer of respondent-heirs during the conference. However, it appears from the records that no
settlement was reached between the parties during their conference.
Petitioner-lessees admit that there was an ongoing negotiation for the sale of the property. Precisely, theP5,000,000 price for
the property indicated in the letter dated 3 August 1988 was superseded by the subsequent offer of respondent-heirs during the
conference. Thus, the letter dated 18 October 1988 of petitioner-lessees is merely another counter-offer for the property in their
continuing negotiation for the property. The latest offer of respondent-heirs was contained in their letter dated 3 November 1988
wherein only the 75% undivided interest of the property was for sale at P3,825,000. When petitioner-lessees opted not to respond
to this offer, respondent-heirs had the right to sell the property to other buyers.
Petitioner-lessees already exercised their right of first refusal when they refused to respond to the latest offer of respondent-
heirs, which amounted to a rejection of the offer. Upon petitioner-lessees’ failure to respond to this latest offer of respondent-
heirs, the latter could validly sell the property to other buyers under the same terms and conditions offered to petitioner-
lessees. Thus, when respondent-heirs sold the property to Lita Sy, respondent-heirs did not violate the right of first refusal of
petitioner-lessees. Indeed, petitioner-lessees were given more than ample opportunity to purchase the property
EULOGIO V. SPOUSES APELES, 576 SCRA 561 [2009]
FACTS:
In 1979, Sps. Apeles leased their house and lot in QC to Arturo Eulogio, Enrico’s father. Upon his father’s death, Enrico
succeeded as lessee. He used the property as his residence and place of business. He was engaged in buying and selling
imported cars. On 1987, Sps. Apeles and Eulogio allegedly entered into a contract of lease with an option to purchase involving
the said property. According to the contract, Atty. Luz Apeles was authorized to enter in behalf of her husband Clemente. The
contract gave Enrico before the expiration of the three-year lease period the option to purchase the property for a price not
exceeding P1.5million.
Before the expiration, Enrico exercised his option to purchase by communicating verbally and in writing to Luz but the spouses
ignored his manifestation. This prompted Enrico to seek the help of the barangay to enforce his right to purchase the subject
property, but despite several notices, the spouses failed to appear before the barangay for settlement proceedings. Hence, it
issued to Enrico a Certificate to File Action.
Enrico filed a case with the RTC claiming his right based on paragraph 5 of the Contract of Lease with Option to Purchase
vesting him the right to acquire ownership of the subject property after paying the agreed amount of consideration. He testified
for himself as the sole witness.
On the other hand, the spouses denied that Luz signed the contract claiming that the signature of Luz therein is a forgery. They
presented some specimens of her signature to show the difference. They also established by documentary evidence that Luz
was out of the country at the time of the execution of the contract. In rebuttal, Enrico said that Luz signed the contract upon
returning to the Philippines and that she took it with her and upon returning it to him, it was already notarized. The RTC ruled in
favor of Enrico.
The spouses appealed to the CA which granted their appeal. Enrico filed an MR but was denied. Hence, this case.
ISSUE:
W/N the option to purchase was enforceable. NO
W/N the CA erred in disturbing the factual findings of the RTC as regards the contract. NO
HELD:
The Contract with an Option to Purchase remains unenforceable. An option is a contract by which the owner of the property
agrees with another person that the latter shall have the right to buy the former’s property at a fixed price within a
certain time. It is a condition offered or contract by which the owner stipulates with another that the latter shall have
the right to buy the property at a fixed price within a certain time, or under, or in compliance with certain terms and
conditions; or which gives to the owner of the property the right to sell or demand a sale.
An option is not of itself a purchase, but merely secures the privilege to buy. It is not a sale of property but a sale of the right to
purchase. It is simply a contract by which the owner of the property agrees with another person that he shall have the right to
buy his property at a fixed price within a certain time. He does not sell his land; he does not then agree to sell it; but he does sell
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something, i.e., the right or privilege to buy at the election or option of the other party. Its distinguishing characteristi c is that it
imposes no binding obligation on the person holding the option, aside from the consideration for the offer.
It is also sometimes called an "unaccepted offer" and is sanctioned by Article 1479 of the Civil Code:
Art. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally demandable.
An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if the promise
is supported by a consideration distinct from the price.
The second paragraph of Article 1479 provides for the definition and consequent rights and obligations under an option contract.
For an option contract to be valid and enforceable against the promissor, there must be a separate and distinct consideration
that supports it. In this case, there was none.
As to the other issue, Enrico’s insistence on the infallibility of the findings of the RTC seriously impairs the discretion of the
appellate tribunal to make independent determination of the merits of the case appealed before it. Certainly, the Court of Appeals
cannot swallow hook, line, and sinker the factual conclusions of the trial court without crippling the very office of review. Although
we have indeed held that the factual findings of the trial courts are to be accorded great weight and respect, they are not
absolutely conclusive upon the appellate court. However, it must be noted that in an appeal via Rule 41 to the CA, the parties
may raise both questions of fact and law.
Article 1326
Art. 1326. Advertisements for bidders are simply invitations to make proposals, and the advertiser is not
bound to accept the highest or lowest bidder, unless the contrary appears. (n)
C&C COMMERCIAL CORP. V. MENOR, 120 SCRA 112
DOCTRINE
Judgment; Jurisdiction; A judgment that had already been satisfied can no longer be amended.—The said order was an
amendment of a judgment that had already been satisfied. The case was closed and terminated. Judge Cloribel had no right
and authority to issue such an order after he had lost jurisdiction over the case. The award of the contract to C & C Commercial
Corporation was not the lis mota in the mandamus case before Judge Cloribel It was an extraneous matter that could not have
been injected into that case nor resolved therein. What was in issue was whether C & C Commercial Corporation should be
allowed to take part in the bidding even if it had no tax clearance certificate.
Taxation; Contracts; Government agency justified in refusing to avoid a contract to a bidder who had no tax clearance certificate
as required by Adm. Order No. 66 dated June 26, 1967, 63 O.G. 6391.—The Nawasa was justified in not awarding the contract
to C & C Commercial Corporation because it had no tax clearance certificate. It had a pending tax case in the Bureau of Internal
Revenue. The award to C & C Commercial Corporation would be in gross contravention of Administrative Order No. 66.
Same; Same; Same.—Under Administrative Order No. 66, the Nawasa officials would be subject to administrative disciplinary
action if they awarded the contract to C & C Commercial Corporation in spite of its unsettled tax liabilities.
Same; Same; Statutes; An administrative order requiring that bidders for government contract must have a tax clearance
certificate is applicable even though it was issued after the bidding, but before execution of the contract with the lowest bidder.—
It erred because Administrative Order No. 66 (promulgated after Judge Cloribel had rendered his decision of March 1, 1967)
covers not only the bidding but also the “execution of any contract with” the lowest bidder. In this case, at the time the said order
was issued, no award had as yet been made and when the award was to be made, the said order was already in force.
Same; Same; A reservation “to reject the bid of any bidder” does not make it obligatory for a government agency to
award its contract to the lowest bidder.—Moreover, it was not the ministerial duty of the Nawasa officials to award the contract
to C & C Commercial Corporation even if it was the lowest bidder. The Nawasa in its addendum No. 1 to the invitation to bid
dated July 6, 1966 reserved the right “to reject the bid of any bidder” (p. 35, Record on Appeal). Therefore, a bidder whose bid
is rejected has no cause for complaint nor a right to dispute the award to another bidder (Esguerra & Sons vs. Aytona, 114 Phil.
1189; Surigao Mineral Reservation Board vs. Cloribel, L-27072, July 31, 1968, 24 SCRA 491).
HELD
It should be noted that “advertisements for bidders are simply invitations to make proposals, and the advertiser is not bound to
accept the highest or lowest bidder, unless the contrary appears” (Art. 1326, Civil Code). No such contrary intention appears in
this case.
RATIO
We hold that Judge Cloribel acted without jurisdiction and with grave abuse of discretion in issuing his erroneous order, directing
that the Nawasa officials should award the contract to C & C Commercial Corporation. The order is erroneous and void for the
following reasons:
1. The said order was an amendment of a judgment that had already been satisfied. The case was closed and terminated. Judge
Cloribel had no right and authority to issue such an order after he had lost jurisdiction over the case. The award of the contract
to C & C Commercial Corporation was not the lis mota in the mandamus case before Judge Cloribel. It was an extraneous matter
that could not have been injected into that case nor resolved therein. What was in issue was whether C & C Commercial
Corporation should be allowed to take part in the bidding even if it had no tax clearance certificate.
2. The Nawasa was justified in not awarding the contract to C & C Commercial Corporation because it had no tax clearance
certificate. It had a pending tax case in the Bureau of Internal Revenue. The award to C & C Commercial Corporation would be
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
in gross contravention of Administrative Order No. 66.
That was the ruling in Nawasa vs. Reyes, L-28597, February 29, 1968, 22 SCRA 905, where the bidder was also the appellee
herein, C & C Commercial Corporation. It was held therein that C & C Commercial Corporation was disqualified under the said
order to take part in the bidding to supply the Nawasa with steel pipes because it had “tremendous tax liabilities”.
Under Administrative Order No. 66, the Nawasa officials would be subject to administrative disciplinary action if they awarded
the contract to C & C Commercial Corporation in spite of its unsettled tax liabilities.
The trial court erred in holding that Administrative Order No. 66 could not be given a retroactive effect to the bid of C & C
Commercial Corporation which allegedly had been allowed to bid in prior transactions with the Nawasa in spite of its pending
tax case.
It erred because Administrative Order No. 66 (promulgated after Judge Cloribel had rendered his decision of March 1, 1967)
covers not only the bidding but also the “execution of any contract with” the lowest bidder. In this case, at the time the said order
was issued, no award had as yet been made and when the award was to be made, the said order was already in force.
3. Moreover, it was not the ministerial duty of the Nawasa officials to award the contract to C & C Commercial Corporation even
if it was the lowest bidder. The Nawasa in its addendum No. 1 to the invitation to bid dated July 6, 1966 reserved the right “to
reject the bid of any bidder” (p. 35, Record on Appeal).
Therefore, a bidder whose bid is rejected has no cause for complaint nor a right to dispute the award to another bidder (Esguerra
& Sons vs. Aytona, 114 Phil. 1189; Surigao Mineral Reservation Board vs. Cloribel, L-27072, July 31, 1968, 24 SCRA 491).
DE CASTRO, J. (DISSENTING)
I find merit in the contention of appellee. In bringing the action to compel appellants to allow it to take part in the bidding in
question, appellee necessarily meant to be also awarded the corresponding contract if its bid is found to be the lowest within the
meaning of the term “lowest bidder” under the law and jurisprudence. The judgment ordering appellants to allow appellee to
enter its bid would be empty and meaningless if despite the fact that appellee is found to be the “lowest bidder,” the award of
the contract is not made in its favor, without any valid reason to reject the bid under the reserved authority of the appellants to
reject any or all bids as is generally set forth in all invitations to bid. No valid reason is intimated by appellants other than the
promulgation of Presidential Administrative Order No. 66, after the judgment has become final and even already executed, at
least insofar as it ordered appellants to allow appellee to enter its bid. This is evident from the fact that appellants gave appellee
ten (10) days within which to comply with its provision, indicating that if the requirement thereof is complied with by appellee, the
contract would be awarded to it as the lowest bidder.
As may be seen, the presidential administrative order disqualified a person, natural or juridical, who has a pending tax case,
administrative or judicial, from participating in public biddings or any contract with the Government or any of its subdivisions,
branches or instrumentalities, including government-owned or controlled corporation. The judgment in question, on the other
hand, qualified appellee to participate in the public bidding, which necessarily includes the award to him of the corresponding
contract, if found to be the lowest bidder, otherwise taking part in the bidding would be a meaningless exercise and the judgment,
an empty victory for appellee. The judgment has become the “law of the case,” and in a true sense, the judgment has become
“property” of which it may not be deprived without due process of law. This is exactly what Administrative Order No. 66 of the
President of the Philippines would do if it is made to apply to the instant case, for while the Court, by final judgment, qualified
appellee to participate in the bidding, the Administrative Order would disqualify said party. This would be an illegal interference
on the power of the judiciary.
Article 1332
Art. 1332. When one of the parties is unable to read, or if the contract is in a language not understood by
him, and mistake or fraud is alleged, the person enforcing the contract must show that the terms thereof
have been fully explained to the former. (n)
TANG V. CA, 90 SCRA 236
DOCTRINES
Contract law; Concealment; Art. 1332. – It should be noted that under Art. 1332 abovequoted, the obligation to show that the
terms of the contract had been fully explained to the party who is unable to read or understand the language of the contract,
when fraud or mistake is alleged, devolves on the party seeking to enforce it. Here the insurance company is not seeking to
enforce the contracts; on the contrary, it is seeking to avoid their performance. It is petitioner who is seeking to enforce them
even as fraud or mistake is not alleged. Accordingly, respondent company was under no obligation to prove that the terms of
the insurance contracts were fully explained to the other party. Even if we were to say that the insurer is the one seeking the
performance of the contracts by avoiding paying the claim, it has to be noted as above stated that there has been no imputation
of mistake or fraud by the illiterate insured whose personality is represented by her beneficiary the petitioner herein. In sum, Art.
1332 is inapplicable to the case at bar. Considering the findings of both the CFI and Court of Appeals that the insured was guilty
of concealment as to her state of health, we have to affirm.
Contracts; Insurance Law; Evidence; Where the insurer sought to avoid payment of life insurance policy on the ground that
insured concealed or misrepresented her state of health, said insurer is not obliged to show under Art. 1332 of the Civil Code
that the English terms of the contract were read and explained to the insured, a Chinese. That duty devolves on the ones—the
beneficiaries—who would like to enforce the insurance agreement.—It should be noted that under Art. 1332 abovequoted, the
obligation to show that the terms of the contract had been fully explained to the party who is unable to read or understand the
language of the contract, when fraud or mistake is alleged, devolves on the party seeking to enforce it. Here the insurance
company is not seeking to enforce the contracts; on the contrary, it is seeking to avoid their performance. It is petitioner who is
seeking to enforce them even as fraud or mistake is not alleged. Accordingly, respondent company was under no obligation to
prove that the terms of the insurance contracts were fully explained to the other party. Even if we were to say that the insurer is
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the one seeking the performance of the contracts by avoiding paying the claim, it has to be noted as above stated that there has
been no imputation of mistake or fraud by the illiterate insured whose personality is represented by her beneficiary the petitioner
herein. In sum, Art. 1332 is inapplicable to the case at bar. Considering the findings of both the CFI and Court of Appeals that
the insured was guilty of concealment as to her state of health, we have to affirm.
Antonio, J., concurring:
Contracts; Insurance Law; Evidence; Insurance contracts are contracts “uberimae fidei.” Insured must reveal all material facts
within his knowledge.—In a contract of insurance each party “must communicate to the other, in good faith, all facts within his
knowledge which are material to the contract, and which the other has not the means of ascertaining ***” (Section 27, Act 2427,
as amended. Italics supplied). As a general rule, a failure by the insured to disclose conditions affecting the risk, of which he is
aware makes the contract voidable at the option of the insurer (45 C.J.S. 153). The reason for this rule is that insurance policies
are traditionally contracts “uberimae fidei” which means most abundant good faith; absolute and perfect candor or openness and
honesty; the absence of any concealment or deception however slight.
HELD
Art. 1332 is inapplicable, the appellant is guilty of concealment.
The issue in this appeal is the application of Art. 1332 of the Civil Code which stipulates:
“Art. 1332. When one of the parties is unable to read, or if the contract is in a language not understood by
him, and mistake or fraud is alleged, the person enforcing the contract must show that the terms thereof
have been fully explained to the former.’’
According to the Code Commission: “This rule is especially necessary in the Philippines where unfortunately there is still a fairly
large number of illiterates, and where documents are usually drawn up in English or Spanish.” (Report of the Code Commission,
p. 136.) Art. 1332 supplements Art. 24 of the Civil Code which provides that “In all contractual, property or other relations, when
one of the parties is at a disadvantage on account of his moral dependence, ignorance, indigence, mental weakness, tender age
or other handicap, the court must be vigilant for his protection.’’
It is the position of the petitioner that because Lee See Guat was illiterate and spoke only Chinese, she could not be held guilty
of concealment of her health history because the applications for insurance were in English and the insurer has not proved that
the terms thereof had been fully explained to her.
It should be noted that under Art. 1332 abovequoted, the obligation to show that the terms of the contract had been fully explained
to the party who is unable to read or understand the language of the contract, when fraud or mistake is alleged, devolves on the
party seeking to enforce it. Here the insurance company is not seeking to enforce the contracts; on the contrary, it is seeking to
avoid their performance. It is petitioner who is seeking to enforce them even as fraud or mistake is not alleged. Accordingly,
respondent company was under no obligation to prove that the terms of the insurance contracts were fully explained to the other
party. Even if we were to say that the insurer is the one seeking the performance of the contracts by avoiding paying the claim,
it has to be noted as above stated that there has been no imputation of mistake or fraud by the illiterate insured whose personality
is represented by her beneficiary the petitioner herein. In sum, Art. 1332 is inapplicable to the case at bar. Considering the
findings of both the CFI and Court of Appeals that the insured was guilty of concealment as to her state of health, we have to
affirm.
CAYABYAB V. IAC, 232 SCRA 1
DOCTRINE
Same; Fraud; Whosoever alleges fraud or mistake in any transaction must substantiate his allegation.—Indeed, the general rule
is that whosoever alleges fraud or mistake in any transaction must substanti-ate his allegation, since it is presumed that a person
takes ordinary care for his concerns and that private transactions have been fair and regular. This rule is especially applied when
fraud or mistake is alleged to annul notarial documents which are clothed with the prima facie presumption of regularity and due
execution (Revised Rules on Evidence, Rule 132 [B], Sec. 30).
Same; Same; Same; Exceptions.—Nevertheless, the general rule admits of exceptions, one of which is Article 1332 of the Civil
Code which provides: “When one of the parties is unable to read, or if the contract is in a language not understood by him, and
mistake or fraud is alleged, the person enforcing the contract must show that the terms thereof have been fully explained to the
former.” Under the foregoing provision, where a party to a contract is illiterate, or can not read nor understand the language in
which the contract is written, the burden is on the party interested in enforcing the contract to prove that the terms thereof are
fully explained to the former in a language understood by him (Sales v. Court of Appeals, 211 SCRA 858 [1992]; Heirs of Enrique
Zambales v. Court of Appeals, 120 SCRA 897 [1983]; Bunyi v. Reyes, 39 SCRA 504 [1971]). In all contractual, property or other
relations, where one of the parties is at a disadvantage on account of his physical, mental or other handicap, the courts must be
careful and vigilant for his protection (Civil Code of the Philippines, Art. 24; Rural Bank of Caloocan, Inc. v. Court of Appeals,
104 SCRA 151 [1981]; Tang v. Court of Appeals, 90 SCRA 236 [1979]).
HELD
There was fraud.
Since fraud and undue influence in the execution of the subject deeds are alleged by respondents, the burden, under the
circumstances, shifted to petitioner to prove that the contents thereof had been adequately explained to the vendors and that
the latter fully understood the same (Heirs of Enrique Zambales v. Court of Appeals, supra., at 904).
As very well found by the Court of Appeals, petitioner failed to discharge this burden.
The testimonies of Bartolome Ceralde and Dr. Alfredo Cerezo are not sufficient and credible enough to tip the scale in favor of
petitioner.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
First, Ceralde is a “compadre” of petitioner. The fact that the respondent Faustino Landingin and Agapita Ferrer sold a parcel of
land to him in 1973, does not necessarily make the sale of the lots to petitioner valid and binding. Dr. Cerezo, on the other hand,
has been the spouses’ physician since 1955 and his testimony that he never knew of Agapita Ferrer’s eye operation and hospital
confinement in Manila (TSN, August 27, 1982, p. 25) raises serious doubts about his credibility.
Second, when the two contracts were executed and witnessed by Dr. Cerezo in 1977, Agapita Ferrer and respondent Faustino
Landingin were 81 years old. In fact, barely six months later, Agapita actually died of senility, as stated in her death certificate
(Exh. “A”).
Third, both Dr. Cerezo and Ceralde testified that Atty. Tandoc, the lawyer who allegedly drew up the deeds of sale in 1977, read
and explained in Pangasinense the contents of said deeds to the spouses. Ceralde, however, was not present when Atty. Tandoc
allegedly performed the said act. Surprisingly too, Atty. Tandoc was never presented as a witness. Even Attys. Caguioa and
Siapno, who notarized respectively the same deeds of sale, as well as the 1973 contract, were never called to testify. No
explanation whatsoever was given as to the failure of petitioners to present these two notaries public who notarized the deeds
of sale in question.
The weight of the testimony of Dr. Cerezo is therefore undermined by this lapse on the part of petitioner. Only the two notaries
public could be examined and cross-examined on the accuracy of their translation of the contents of the documents written in
English into the dialect known to and understood by the vendors.
Fourth, the couple was not assisted by any of their children in the execution of the subject contracts. This circumstance is strange
and highly suspicious. Magdalena, respondent Faustino Landingin’s daughter by his first marriage, and Soledad Landingin were
then living with their parents. Like Amparo Francisco, their step-niece, they actually assisted the couple in their correspondences
and transactions (TSN, June 22, 1981, pp. 4, 15; Id., June 30, 1981, p. 17; Id., Sept. 10, 1981, pp. 3, 14; Id., October 21, 1982,
pp. 3-4). However, neither of the sisters nor Amparo was invited to act as an instrumental witness, much less informed of the
execution of the contracts at petitioner’s house which is merely one meter away from their house (TSN, Aug. 27, 1982, p. 18).
Fifth, there is no satisfactory showing that the consideration for the sale of the lots was ever paid to Agapita Ferrer and
respondent Faustino Landingin. Where it is claimed that the signature and thumbmark of the vendors were procured by the
vendees through fraud, undue influence and abuse of confidence, a showing that valuable consideration passed hands and that
the vendors benefitted therefrom, may help erase any thought that such sinister designs attended the transaction.
Indeed, all these facts and circumstances lend credence to the claim that the sale of the subject lots and the execution of the
deeds of sale were done surreptitiously and in fraud of the couple and their heirs (Aguinaldo v. Esteban, 135 SCRA 645 [1985]).
Article 1335
Art. 1335. There is violence when in order to wrest consent, serious or irresistible force is employed.
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, or upon the person or property of his
spouse, descendants or ascendants, to give his consent.
To determine the degree of intimidation, the age, sex and condition of the person shall be borne in mind.
A threat to enforce one's claim through competent authority, if the claim is just or legal, does not vitiate
consent. (1267a)
DE LEON V. CA, 186 SCRA 345
Contracts; Statutory Construction; Ambiguous contract is construed against the party who caused the ambiguity.—Besides, the
Letter-Agreement shows on its face that it was prepared by Sylvia, and in this regard, the ambiguity in a contract is to be taken
contra proferentem, i.e., construed against the party who caused the ambiguity and could have also avoided it by the exercise
of a little more care. Thus, Article 1377 of the Civil Code provides: “The interpretation of obscure words or stipulations in a
contract shall not favor the party who caused the obscurity”.
Same; Same; Consent; Art. 1335; Intimidation to vitiate consent, requisites.—According to Article 1335, in order that intimidation
may vitiate consent and render the contract invalid, the following requisites must concur: (1) that the intimidation must be the
determining cause of the contract, or must have caused the consent to be given; (2) that the threatened act be unjust or unlawful;
(3) that the threat be real and serious, there being an evident disproportion between the evil and the resistance which all men
can offer, leading to the choice of the contract as the lesser evil; and (4) that it produces a reasonable and well-grounded fear
from the fact that the person from whom it comes has the necessary means or ability to inflict the threatened injury. Applying the
foregoing to the present case, the claim of Macaria that Sylvia threatened her to bring Jose Vicente to court for support, to
scandalize their family by baseless suits and that Sylvia would pardon Jose Vicente for possible crimes of adultery and/or
concubinage subject to the transfer of certain properties to her, is obviously not the intimidation referred to by law. With respect
to mistake as a vice of consent, neither is Macaria’s alleged mistake in having signed the Letter-Agreement because of her belief
that Sylvia will thereby eliminate inheritance rights from her and Jose Vicente, the mistake referred to in Article 1331 of the Civil
Code, supra. It does not appear that the condition that Sylvia “will eliminate her inheritance rights” principally moved Macaria to
enter into the contract. Rather, such condition was but an incident of the consideration thereof which, as discussed earlier, is the
termination of marital relations.
Same; Same; Same; Pari delicto; Article 1414 of the New Civil Code, exception to the pari delicto rule.—In the ultimate analysis,
therefore, both parties acted in violation of the laws. However, the pari delicto rule, expressed in the maxims “Ex dolo malo non
oritur actio” and “In pari delicto potior est conditio defendentis,” which refuses remedy to either party to an illegal agreement and
leaves them where they are, does not apply in this case. Contrary to the ruling of the respondent Court that “x x x. [C]onsequently,
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intervenor appellees’ obligation under the said agreement having been annulled, the contracting parties shall restore to each
other that things which have been subject matter of the contract, their fruits and the price or its interest, except as provided by
law (Art. 1398, Civil Code).” Article 1414 of the Civil Code, which is an exception to the pari delicto rule, is the proper law to be
applied.
Article 1338
Art. 1338. There is fraud when, through insidious words or machinations of one of the contracting parties,
the other is induced to enter into a contract which, without them, he would not have agreed to. (1269)
ABANDO V. LOZADA, 178 SCRA 509
Contracts; Fraud; Definition of Fraud.—As correctly pointed out by the appellate court, the strategem, the deceit, the
misrepresentations employed by Cuevas and Pucan are facts constitutive of fraud which is defined in Article 1338 of the Civil
Code as that insiduous words or machinations of one of the contracting parties, by which the other is induced to enter into a
contract which, without them, he would not have agreed to.
Same; Same; When fraud is employed to obtain the consent of the other party to enter into a contract, the resulting contract is
merely a voidable contract.—When fraud is employed to obtain the consent of the other party to enter into a contract, the resulting
contract is merely a voidable contract, that is, a valid and subsisting contract until annulled or set aside by a competent court.
Thus, contrary to the assertion of petitioners the joint venture agreement and the deed of assignment which they unknowingly
signed are not void contracts. In fact, this Court has ruled upon a similar question in the case of Rivero vs. Court of Appeals. In
that particular case, this Court held that when one party was made to think by the other that the contract he had signed was one
of mortgage when in fact it was one of sale, the resulting contract is a voidable contract of sale.
Same; Same; Same; Court finds and so holds that no substantial reason exists to disturb the finding that private respondents
are indeed in good faith.—While concededly there is a point in petitioners’ argument that “[a] mortgagee in bad faith cannot shed
his bad faith color by the mere expedient of an auction sale of the same property where he himself is the highest bidder,” however,
even if We consider the environmental circumstance of the present controversy, this Court finds and so holds that no substantial
reason exists to disturb the finding that private respondents are indeed in good faith.
Same; Same; Same; Same; Good faith refers to a state of the mind which is manifested by the acts of the individual concerned.—
Good faith refers to a state of the mind which is manifested by the acts of the individual concerned. It consists of the honest
intention to abstain from taking an unconscionable and unscrupulous advantage of another. It is the opposite of fraud, and its
absence should be established by convincing evidence.
Same; Same; Same; Same; Fact that private respondents did not investigate the title to the properties offered as collaterals
does not constitute convincing evidence to rebut the presumption that they are in good faith.—While it is true that at the time the
real estate mortgage was executed, title was not yet registered in the name of the mortgagor, however, the evidence on record
does not disclose that the mortgagees were privy to or even aware of the fraud and deceit used by Pucan upon the original
owners of the land. Standing alone, the fact that the private respondents did not investigate the title to the properties offered as
collaterals does not constitute convincing evidence to rebut the presumption that they are in good faith. Under the rules on
evidence, a presumption exists that private transactions have been fair and regular. More so when, as in this instant case,
investigation of the titles had become moot, when on the following day, titles to the mortgage lots were issued in the name of
the mortgagor Pucan.
ALCASID V. CA, 237 SCRA 419
DOCTRINES
Contracts; Annulment of Contracts; Fraud; Requisites for the annulment of contract based on fraud.—In order that fraud may
vitiate consent and be a cause for annulment of contract, the following must concur: 1.) It must have been employed by one
contracting party upon the other (Art. 1342 and 1344); 2.) It must have induced the other party to enter into the contract (Art.
1338); 3.) It must have been serious (Art. 1344); 4.) It must have resulted in damage and injury to the party seeking annulment
(Tolentino, IV Commentaries on the Civil Code of the Philippines, 507 [1991 ed]).
Same; Same; Mistake; An error so patent and obvious that nobody could have made it, or one which could have been avoided
by ordinary prudence, cannot be invoked by the one who made it in order to annul his contract.—To invalidate consent, the error
must be real and not one that could have been avoided by the party alleging it. The error must arise from facts unknown to him.
He cannot allege an error which refers to a fact known to him or which he should have known by ordinary diligent examination
of the facts. An error so patent and obvious that nobody could have made it, or one which could have been avoided by ordinary
prudence, cannot be invoked by the one who made it in order to annul his contract (Tolentino, supra at pp. 486-487).
Same; Same; Undue Influence; If a competent person has once assented to a contract freely and fairly, he is bound thereby.—
Undue influence, therefore, is any means employed upon a party which, under the circumstances, he could not well resist and
which controlled his volition and induced him to give his consent to the contract, which otherwise he would not have entered into.
It must in some measure destroy the free agency of a party and interfere with the exercise of that independent discretion which
is necessary for determining the advantages or disadvantages of a proposed contract (Tolentino, supra at p. 501). If a competent
person has once assented to a contract freely and fairly, he is bound thereby.
HELD
The finding of the Court of Appeals that petitioner executed the contract of her own free will and choice and not from duress is
fully supported by the evidence. Such finding should not be disturbed (Martinez v. Hongkong & Shanghai Bank, 15 Phil. 252
[1910]).
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
Private respondent did not commit any wrongful act or omission which violated the primary right of petitioner. Hence, petitioner
did not have a cause of action (State Investment House, Inc. v. Court of Appeals, 206 SCRA 348 [1992]).
SAMSON V. CA, 238 SCRA 397
Words and Phrases; Bad Faith; Bad Faith is essentially a state of mind affirmatively operating with furtive design or with some
motive of ill-will.—Bad faith is essentially a state of mind affirmatively operating with furtive design or with some motive of ill-will.
It does not simply connote bad judgment or negligence. It imports a dishonest purpose or some moral obliquity and conscious
doing of wrong. Bad faith is thus synonymous with fraud and involves a design to mislead or deceive another, not prompted by
an honest mistake as to one’s rights or duties, but by some interested or sinister motive.
Same; Dolo Causante; Dolo causante or causal fraud is basically a deception employed by one party prior to or simultaneous to
the contract in order to secure the consent of the other.—In contracts, the kind of fraud that will vitiate consent is one where,
through insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which,
without them, he would not have agreed to. This is known as dolo causante or causal fraud which is basically a deception
employed by one party prior to or simultaneous to the contract in order to secure the consent of the other.
Civil Law; Words and Phrases; Caveat Emptor; As a buyer of the store and lease right in question appellee was charged with
the obligation of caution aptly expressed in the universal maxim caveat emptor.—Public respondent Court of Appeals was correct
when it faulted petitioner for failing to exercise sufficient diligence in verifying first the status of private respondent’s lease. We
thus quote with approval the decision of the Court of Appeals when it ruled, thus: “When appellant Angel C. Santos said that the
lease contract had expired but that it was impliedly renewed, that representation should have put appellee on guard. To protect
his interest, appellee should have checked with the lessor whether that was so, and this he failed to do; or he would have simply
deferred his decision on the proposed sale until Miss Madrigal’s arrival, and this appellee also failed to do. In short, as a buyer
of the store and lease right in question—or as a buyer of any object of commerce for that matter—appellee was charged with
the obligation of caution aptly expressed in the universal maxim caveat emptor.”
Same; Same; Same; The rule caveat emptor requires the purchaser to be aware of the supposed title of the vendor and he who
buys without checking the vendor’s title takes all the risks and losses consequent to such failure.—Indeed, petitioner had every
opportunity to verify the status of the lease contract of private respondent with Susana Realty. As held by this Court in the case
of Caram, Jr. v. Laureta, the rule caveat emptor requires the purchaser to be aware of the supposed title of the vendor and he
who buys without checking the vendor’s title takes all the risks and losses consequent to such failure. In the case at bench, the
means of verifying for himself the status of private respondent’s lease contract with Susana Realty was open to petitioner.
Nonetheless, no effort was exerted by petitioner to confirm the status of the subject lease right. He cannot now claim that he has
been deceived.
Same; Same; Causal Fraud; Evidence; Causal fraud or bad faith on the part of one of the contracting parties which allegedly
induced the other to enter into a contract must be proved by clear and convincing evidence.—In sum, we hold that under the
facts proved, private respondent cannot be held guilty of fraud or bad faith when he entered into the subject contract with
petitioner. Causal fraud or bad faith on the part of one of the contracting parties which allegedly induced the other to enter into
a contract must be proved by clear and convincing evidence. This petitioner failed to do.
Article 1345
Art. 1345. Simulation of a contract may be absolute or relative. The former takes place when the parties
do not intend to be bound at all; the latter, when the parties conceal their true agreement. (n)
UMALI V. CA, 189 SCRA 529
Same; Civil Law; Contracts; Absolute simulation renders the contract null and void, when the parties do not intend to be bound
by the same.—There is absolute simulation, which renders the contract null and void, when the parties do not intend to be bound
at all by the same. The basic characteristic of this type of simulation of contract is the fact that the apparent contract is not really
desired or intended to either produce legal effects or in any way alter the juridical situation of the parties. The subsequent act of
Rivera in receiving and making use of the tractor subject matter of the Sales Agreement and Chattel Mortgage, and the
simultaneous issuance of a surety bond in favor of Bormaheco, concomitant with the execution of the Agreement of Counter-
Guaranty with Chattel/Real Estate Mortgage, conduce to the conclusion that petitioners had every intention to be bound by these
contracts. The occurrence of these series of transactions between petitioners and private respondents is a strong indication that
the parties actually intended, or at least expected, to exact fulfillment of their respective obligations from one another.
PAYONGAYONG V. CA, 430 SCRA 210 [2004]
FACTS:
Eduardo Mendoza was the registered owner of a 200 square meter parcel of land in Caloocan. On 18 April 1985, Mendoza
mortgaged this land to the Meralco Employees Savings and Loan Association (MESALA) to secure a loan of P81,700. The
mortgaged was annotated.
Thereafter, on 11 July 1987, Mendoza executed a Deed of Sale with Assumption of Mortgage over the same parcel of land in
favor of petitioners spouses Payongayong in consideration of P50k. It is stated in the deed that Payongayong spouses bound
themselves to assume payment of the balance of the mortgage indebtedness of Mendoza to MESALA.
However, on 7 December 1987, without knowledge of spouses Payongayong, Mendoza mortgaged the same property in favor
of respondents spouses Salvador to secure a loan of P758,000. This second mortgage was also duly annotated on Mendoza's
title.
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Years later, on 28 November 1991, Mendoza executed a Deed of Absolute Sale over the same property in favor of spouses
Salvador in consideration of P50k. The sale was duly annotated on Mendoza's title.
Thus, MESALA issued a Cancellation of Mortgage acknowleding that for sufficient and valuable consideration which it received
from Mendoza, it was cancelling and releasing the real estate mortgage over the property. The cancellation was annotated.
The spouses Salvador caused the cancellation of Mendoza's title and the issuance of a TCT in their name.
Upon knowledge of the sale to spouses Salvador, spouses Payongayong filed on 16 July 1993 a complaint for annulment of
deed of absolute sale and transfer certificate of title with recovery of possession and damages against Mendoza and spouses
Salvador before the RTC Quezon City. In their complaint, spouses Payongayong alleged that Mendoza maliciously sold to
spouses Salvador the property which was priorly sold to them and that the spouses Salvador acted in bad faith in acquiring it,
the latter having had knowledge of the existence of the Deed of Absolute Sale with Assumption of Mortgage between them
(spouses Payongayong) and Mendoza.
The RTC QC rule in favor of Mendoza and spouses Salvador. Payongayong spouses appealed to the CA which affirmed the
same.
ISSUE:
Whether the deed of sale executed by Mendoza in favor of spouses Salvador was simulated and therefore void - NO, It was not
a simulated sale
HELD:
Simulation occurs when an apparent contract is a declaration of a fictitious will, deliberately made by agreement of the parties,
in order to produce, for the purpose of deception, the appearance of a juridical act which does not exist or is different from that
which was really executed.
Its requisites are: a) an outward declaration of will different from the will of the parties; b) the false appearance must have been
intended by mutual agreement; and c) the purpose is to deceive third persons.
The basic characteristic then of a simulated contract is that it is not really desired or intended to produce legal effects or does
not in any way alter the juridical situation of the parties.
The cancellation of Mendoza’s certificate of title over the property and the procurement of one in its stead in the name of
respondents, which acts were directed towards the fulfillment of the purpose of the contract, unmistakably show the parties’
intention to give effect to their agreement. The claim of simulation does not thus lie.
That petitioners and respondents were forced to litigate due to the deceitful acts of the spouses Mendoza, this Court is not
unmindful. It cannot be denied, however, that petitioners’ failure to register the sale in their favor made it possible for the
Mendozas to sell the same property to respondents.
Under the circumstances, this Court cannot come to petitioners’ succor at the expense of respondents-innocent purchasers in
good faith. Petitioners are not without remedy, however. They may bring an action for damages against the spouses Mendoza.
HEIRS OF URETA V. HEIRS OF URETA, 657 SCRA 555
G.R. No. 165748. September 14, 2011
DOCTRINE
Where a person, in order to place his property beyond the reach of his creditors, simulates a transfer of it to another, he does
not really intend to divest himself of his title and control of the property; hence, the deed of transfer is but a sham.
Valerio v. Refresca, 485 SCRA 494 (2006) differentiates absolute simulation of contracts from relative simulation:
In absolute simulation, there is a colorable contract but it has no substance as the parties have no intention to be bound by it.
The main characteristic of an absolute simulation is that the apparent contract is not really desired or intended to produce legal
effect or in any way alter the juridical situation of the parties. As a result, an absolutely simulated or fictitious contract is void,
and the parties may recover from each other what they may have given under the contract.
However, if the parties state a false cause in the contract to conceal their real agreement, the contract is relatively simulated
and the parties are still bound by their real agreement. Hence, where the essential requisites of a contract are present and the
simulation refers only to the content or terms of the contract, the agreement is absolutely binding and enforceable between the
parties and their successors in interest. Lacking, therefore, in an absolutely simulated contract is consent which is essential to a
valid and enforceable contract.
FACTS
Alfonso Ureta was a well-off man with several properties and 14 children. His property included several fishpens, a fishpond, a
sari-sari store, a passenger jeep, and the business of buying and selling copra. In order to avoid paying inheritance tax he made
it appear that he sold some of his properties to his children. Alfonso executed four (4) Deeds of Sale covering several parcels of
land in favor of his children Policronio, Liberato, Prudencia, and his common-law wife, Valeriana Dela Cruz.
The Deed of Sale executed on October 25, 1969, in favor of Policronio, covered six parcels of land, which are the properties in
dispute in this case.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
Alfonso, however, continued to pay and declare the properties for tax purposes and continued to own, possess and enjoy the
lands and their produce.
After Alfonso died, his younger children, Liberato and Prudencio, became administratrix of his estate.
Except for a portion of parcel 5, the rest of the parcels transferred to Policronio were tenanted by the Fernandez Family. These
tenants never turned over the produce of the lands to Policronio or any of his heirs, but to Alfonso and, later, to the administrators
of his estate.
Policronio died on November 22, 1974. Except for the said portion of parcel 5, neither Policronio nor his heirs ever took
possession of the subject lands.
On April 19, 1989, Alfonso's heirs executed a Deed of Extra-Judicial Partition, which included all the lands that were covered by
the four (4) deeds of sale that were previously executed by Alfonso for taxation purposes. Conrado, Policronio's eldest son,
representing the Heirs of Policronio, signed the Deed of Extra-Judicial Partition in behalf of his co-heirs.
After their father's death, the Heirs of Policronio found tax declarations in his name covering the six parcels of land. On June 15,
1995, they obtained a copy of the Deed of Sale executed on October 25, 1969 by Alfonso in favor of Policronio.
Believing that the six parcels of land belonged to their late father, and as such, excluded from the Deed of Extra-Judicial Partition,
the Heirs of Policronio sought to amicably settle the matter with the Heirs of Alfonso. Earnest efforts proving futile, the Heirs of
Policronio filed a Complaint for Declaration of Ownership, Recovery of Possession, Annulment of Documents, Partition, and
Damages against the Heirs of Alfonso before the RTC on November 17, 1995
RTC dismissed the complaint and found that the deed of sale was void because no price was paid, and even if there was P2000
paid such price was grossly inadequate. In addition, the RTC stated that the circumstances showed that Alfonso and his heirs
never lost possession of the property and the tenants acknowledged Alfonso and his heirs as the owner by sending them the
produce.
Conrado’s assertion that he did not understand the significance of signing the deed of extrajudicial partition was disregarded.
CA affirmed the finding of the RTC that the Deed of Sale was void. It found the Deed of Sale to be absolutely simulated as the
parties did not intend to be legally bound by it. As such, it produced no legal effects and did not alter the juridical situation of
the parties.
ISSUE/S
1. Whether or not the Deed of Sale was valid
2. Whether or not the Deed of sale absolutely simulate – void – or relatively simulated.
3. Whether or not the Deed of Extra-Judicial Partition was valid
4. Whether the right to set-up inexistence of the contract has prescribed
HELD
1. NO. The Deed of Sale was void because it is simulated as the parties did not intend to be legally bound by it. As such, it
produced no legal effects and did not alter the juridical situation of the parties. It is only made to avoid tax purposes. The CA
also noted that Alfonso continued to exercise all the rights of an owner even after the execution of the Deed of Sale, as it was
undisputed that he remained in possession of the subject parcels of land and enjoyed their produce until his death.
The most protuberant index of simulation of contract is the complete absence of an attempt in any manner on the part of the
ostensible buyer to assert rights of ownership over the subject properties. Policronio’s failure to take exclusive possession of the
subject properties or, in the alternative, to collect rentals, is contrary to the principle of ownership. Such failure is a clear badge
of simulation that renders the whole transaction void.
Two veritable legal presumptions bear on the validity of the Deed of Sale: (1) that there was sufficient consideration for the
contract; and (2) that it was the result of a fair and regular private transaction. If shown to hold, these presumptions infer prima
facie the transaction's validity, except that it must yield to the evidence adduced.
It is well-settled in a long line of cases that where a deed of sale states that the purchase price has been paid but in fact has
never been paid, the deed of sale is null and void for lack of consideration. Thus, although the contract states that the purchase
price of P2,000.00 was paid by Policronio to Alfonso for the subject properties, it has been proven that such was never in fact
paid as there was no money involved. It must, therefore, follow that the Deed of Sale is void for lack of consideration.
2. It is ABSOLUTELY SIMULATED OR VOID. A simulated contract of sale is without any cause or consideration, and is,
therefore, null and void; in such case, no independent action to rescind or annul the contract is necessary, and it may be treated
as non-existent for all purposes. A void or inexistent contract is one which has no force and effect from the beginning, as if it has
never been entered into, and which cannot be validated either by time or ratification. A void contract produces no effect
whatsoever either against or in favor of anyone; it does not create, modify or extinguish the juridical relation to which it refers.
Therefore, it was not necessary for the Heirs of Alfonso to first file an action to declare the nullity of the Deed of Sale prior to
executing the Deed of Extra-Judicial Partition.
The primary consideration in determining the true nature of a contract is the intention of the parties. If the words of a contract
appear to contravene the evident intention of the parties, the latter shall prevail. Such intention is determined not only from the
express terms of their agreement, but also from the contemporaneous and subsequent acts of the parties. The true intention of
the parties in this case was sufficiently proven by the Heirs of Alfonso. The Heirs of Alfonso established by a preponderance of
evidence that the Deed of Sale was one of the four (4) absolutely simulated Deeds of Sale which involved no actual monetary
consideration, executed by Alfonso in favor of his children, Policronio, Liberato, and Prudencia, and his second wife, Valeriana,
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for taxation purposes.
For guidance, the following are the most fundamental characteristics of void or inexistent contracts: 1) As a general rule, they
produce no legal effects whatsoever in accordance with the principle quod nullum est nullum producit effectum. 2) They are not
susceptible of ratification. 3) The right to set up the defense of inexistence or absolute nullity cannot be waived or renounced. 4)
The action or defense for the declaration of their inexistence or absolute nullity is imprescriptible. 5) The inexistence or absolute
nullity of a contract cannot be invoked by a person whose interests are not directly affected.
Valerio v. Refresca, 485 SCRA 494 (2006), is instructive on the matter of simulation of contracts: In absolute simulation, there
is a colorable contract but it has no substance as the parties have no intention to be bound by it. The main characteristic of an
absolute simulation is that the apparent contract is not really desired or intended to produce legal effect or in any way alter the
juridical situation of the parties. As a result, an absolutely simulated or fictitious contract is void, and the parties may recover
from each other what they may have given under the contract. However, if the parties state a false cause in the contract to
conceal their real agreement, the contract is relatively simulated and the parties are still bound by their real agreement. Hence,
where the essential requisites of a contract are present and the simulation refers only to the content or terms of the contract, the
agreement is absolutely binding and enforceable between the parties and their successors in interest. Lacking, therefore, in an
absolutely simulated contract is consent which is essential to a valid and enforceable contract. Thus, where a person, in order
to place his property beyond the reach of his creditors, simulates a transfer of it to another, he does not really intend to divest
himself of his title and control of the property; hence, the deed of transfer is but a sham. Similarly, in this case, Alfonso simulated
a transfer to Policronio purely for taxation purposes, without intending to transfer ownership over the subject lands.
3. YES. It has been held in several cases that partition among heirs is not legally deemed a conveyance of real property resulting
in change of ownership. It is not a transfer of property from one to the other, but rather, it is a confirmation or ratification of title
or right of property that an heir is renouncing in favor of another heir who accepts and receives the inheritance. It is merely a
designation and segregation of that part which belongs to each heir. The Deed of Extra-Judicial Partition cannot, therefore, be
considered as an act of strict dominion. Hence, a special power of attorney is not necessary.
In fact, as between the parties, even an oral partition by the heirs is valid if no creditors are affected. The requirement of a written
memorandum under the statute of frauds does not apply to partitions effected by the heirs where no creditors are involved
considering that such transaction is not a conveyance of property resulting in change of ownership but merely a designation and
segregation of that part which belongs to each heir.
4. NO. Art. 1410. The action for the declaration of the inexistence of a contract does not prescribe. This is one of the most
fundamental characteristics of void or inexistent contracts. As the Deed of Sale is a void contract, the action for the declaration
of its nullity, even if filed 21 years after its execution, cannot be barred by prescription for it is imprescriptible. Furthermore, the
right to set up the defense of inexistence or absolute nullity cannot be waived or renounced. Therefore, the Heirs of Alfonso
cannot be precluded from setting up the defense of its inexistence.
Article 1412 is not applicable to fictitious or simulated contracts, because they refer to contracts with an illegal cause or subject-
matter. This article presupposes the existence of a cause, it cannot refer to fictitious or simulated contracts which are in reality
non-existent. As it has been determined that the Deed of Sale is a simulated contract, the provision cannot apply to it.
Further: Article 1311 and Article 1421 of the Civil Code provide: Art. 1311. Contracts take effect only between the parties, their
assigns and heirs, x x x Art. 1421. The defense of illegality of contracts is not available to third persons whose interests are not
directly affected. The right to set up the nullity of a void or non-existent contract is not limited to the parties, as in the case of
annullable or voidable contracts; it is extended to third persons who are directly affected by the contract. Thus, where a contract
is absolutely simulated, even third persons who may be prejudiced thereby may set up its inexistence. The Heirs of Alfonso are
the children of Alfonso, with his deceased children represented by their children (Alfonso’s grandchildren). The Heirs of Alfonso
are clearly his heirs and successors-in-interest and, as such, their interests are directly affected, thereby giving them the right to
question the legality of the Deed of Sale.
Article 1346
Art. 1346. An absolutely simulated or fictitious contract is void. A relative simulation, when it does not
prejudice a third person and is not intended for any purpose contrary to law, morals, good customs, public
order or public policy binds the parties to their real agreement. (n)
 contract." The cause or the impelling reason on the part of private respondent in executing the deed of option as appearing in
CARINO V. CA, 152 SCRA 529
Contracts; Contracts which are absolutely simulated or fictitious are inexistent and null and void ab initio.—There is merit to the
Encabos' claim that the simulated deed of sale in favor of the Cariños was executed in order to protect the money Quesada
invested in the purchase of the rights to the lot in question, which transfer of said lot to his name was later on disapproved by
the LTA. As can be gleaned from the testimony of Josue Quesada, he did this by putting Cirila Vicencio as the vendee in the
simulated Deed of Sale, when in fact, Encabo and Quesada meant her only as a dummy for the latter. To this effect Quesada
testified, despite the warning given to him by the court that his statement might incriminate him. Such candor in the testimony of
Quesada gives credibility to the Encabos' claim.
JAVIER V. CA, 183 SCRA 171
Civil Law; Contracts; It is settled that the previous and simultaneous and subsequent acts of the parties are properly cognizable
indicia of their true intention.—The aforesaid contemporaneous and subsequent acts of petitioners and private respondent reveal
that the cause stated in the questioned deed of assignment is false. It is settled that the previous and simultaneous and
subsequent acts of the parties are properly cognizable indicia of their true intention. Where the parties to a contract have given
it a practical construction by their conduct as by acts in partial performance, such construction may be considered by the court
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
in construing the contract, determining its meaning and ascertaining the mutual intention of the parties at the time for contracting.
The parties’ practical construction of their contract has been characterized as a clue or index to, or as evidence of, their intention
or meaning and as an important, significant, convincing, persuasive, or influential factor in determining the proper construction
of the agreement.
Same; Same; A contract with a false consideration is null and void per se.—The deed of assignment of February 15, 1966 is a
relatively simulated contract which states a false cause or consideration, or one where the parties conceal their true agreement.
A contract with a false consideration is not null and void per se . Under Article 1346 of the Civil Code, a relatively simulated
contract, when it does not prejudice a third person and is not intended for any purpose contrary to law, morals, good customs,
public order or public policy binds the parties to their real agreement.
Same; Same; When a contract is subject to a suspensive condition, its birth or effectivity can take place only if and when the
event which constitutes the condition happens or is fulfilled.—As to the alleged nullity of the agreement dated February 28, 1966,
we agree with petitioners that they cannot be held liable thereon. The efficacy of said deed of assignment is subject to the
condition that the application of private respondent for an additional area for forest concession be approved by the Bureau of
Forestry. Since private respondent did not obtain that approval, said deed produces no effect. When a contract is subject to a
suspensive condition, its birth or effectivity can take place only if and when the event which constitutes the condition happens or
is fulfilled. If the suspensive condition does not take place, the parties would stand as if the conditional obligation had never
existed.
FORMARAN V. ONG, GR 186264, 8 JULY 2013
The Court believes and so holds that the subject Deed of Sale is indeed simulated, as it is: (1) totally devoid of consideration;
(2) it was executed on August 12, 1967, less than two months from the time the subject land was donated to petitioner on June
25, 1967 by no less than the parents of respondent Glenda Ong; (3) on May 18, 1978, petitioner mortgaged the land to the Aklan
Development Bank for a P23,000.00 loan; (4) from the time of the alleged sale, petitioner has been in actual possession of the
subject land; (5) the alleged sale was registered on May 25, 1991 or about twenty four (24) years after execution; (6) respondent
Glenda Ong never introduced any im provement on the subject land; and (7) petitioner’s house stood on a part of the subject
land. These are facts and circumstances which may be considered badges of bad faith that tip the balance in favor of petitioner.
The Court is in accord with the observation and findings of the (RTC, Kalibo, Aklan) thus: “The amplitude of foregoing undisputed
facts and circumstances clearly shows that the sale of the land in question was purely simulated. It is void from the very beginning
(Article 1346, New Civil Code). If the sale was legitimate, defendant Glenda should have immediately taken possession of the
land, declared in her name for taxation purposes, registered the sale, paid realty taxes, introduced improvements therein and
should not have allowed plaintiff to mortgage the land. These omissions properly militated against defendant Glenda’s
submission that the sale was legitimate and the consideration was paid. While the Deed of Absolute Sale was notarized, it cannot
justify the conclusion that the sale is a true conveyance to which the parties are irrevocably and undeniably bound. Although the
notarization of Deed of Absolute Sale, vests in its favor the presumption of regularity, it does not validate nor make binding an
instrument never intended, in the first place, to have any binding legal effect upon the parties thereto (Suntay vs. Court of Appeals,
G.R. No. 114950, December 19, 1995; cited in Ruperto Viloria vs. Court of Appeals, et al., G.R. No. 119974, June 30, 1999).”
Article 1350
Art. 1350. In onerous contracts the cause is understood to be, for each contracting party, the prestation
or promise of a thing or service by the other; in remuneratory ones, the service or benefit which is
remunerated; and in contracts of pure beneficence, the mere liberality of the benefactor. (1274)
VILLAMOR V. CA, 202 SCRA 607
Civil Law; Contracts; Sales; As expressed in Gonzales v. Trinidad, 67 Phil. 682, consideration is "the why of the contracts, the
essential reason which moves the contracting parties to enter into the contract."—As expressed in Gonzales v. Trinidad, 67 Phil.
682, consideration is "the why of the contracts, the essential reason which moves the contracting parties to enter into the
the deed itself is the petitioners' having agreed to buy the 300 square meter portion of private respondents' land at P70.00 per
square meter "which was greatly higher than the actual reasonable prevailing price."
Same; Same; Same; The acceptance of an offer to sell for a price certain created a bilateral contract to sell and buy and upon
acceptance, the offeree, ipso facto assumes obligations of a vendee.—In the instant case, the option offered by private
respondents had been accepted by the petitioner, the promisee, in the same document. The acceptance of an offer to sell for a
price certain created a bilateral contract to sell and buy and upon acceptance, the offeree, ipso facto assumes obligations of a
vendee (See Atkins, Kroll & Co. v. Cua Mian Tek, 102 Phil. 948). Demandability may be exercised at any time after the execution
of the deed.
Same; Same; Same; A contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the object
of the contract and upon the price.—A contract of sale is, under Article 1475 of the Civil Code," perfected at the moment there
is a meeting of 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." Since there was, between
the parties, a meeting of minds upon the object and the price, there was already a perfected contract of sale. What was, however,
left to be done was for either party to demand from the other their respective undertakings under the contract. It may be
demanded at any time either by the private respondents, who may compel the petitioners to pay for the property or the petitioners,
who may compel the private respondents to deliver the property.
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Same; Same; Same; Prescription; Failure of either parties to demand performance of the obligation of the other for an
unreasonable length of time renders the contract ineffective.—However, the Deed of Option did not provide for the period within
which the parties may demand the performance of their respective undertakings in the instrument. The parties could not have
contemplated that the delivery of the property and the payment thereof could be made indefinitely and render uncertain the
status of the land. The failure of either parties to demand performance of the obligation of the other for an unreasonable length
of time renders the contract ineffective.
Same; Same; Same; Same; Actions upon a written contract must be brought within ten (10) years.—Under Article 1144 (1) of
the Civil Code, actions upon a written contract must be brought within ten (10) years. The Deed of Option was executed on
November 11, 1971. The acceptance, as already mentioned, was also accepted in the same instrument. The complaint in this
case was filed by the petitioners on July 13, 1987, seventeen (17) years from the time of the execution of the contract. Hence,
the right of action had prescribed.
Article 1351
Art. 1351. The particular motives of the parties in entering into a contract are different from the cause
thereof. (n)
OLEGARIO V. CA, 238 SCRA 96
Civil Law; Sale; In a contract of sale, consideration is, as a rule, different from the motive of the parties.—In a contract of sale,
consideration is, as a rule, different from the motive of the parties. Consideration is defined as some right, interest, benefit, or
advantage conferred upon the promisor, to which he is otherwise not lawfully entitled, or any detriment, prejudice, loss, or
disadvantage suffered or undertaken by the promisee other than to such as he is at the time of consent bound to suffer. As
contradistinguished, motive is the condition of mind which incites to action, but includes also the inference as to the existence of
such condition, from an external fact of a nature to produce such a condition. Under certain circumstances, however, the motive
of the parties may be regarded as the consideration when it predetermines the purpose of the contract. When they blend to that
degree, and the motive is unlawful, then the contract entered into is null and void.
Same; Same; The primary motive of Marciliano in selling the controverted 91-square meter lot to private respondents was to
illegally frustrate petitioners’ right of inheritance and to avoid payment of estate tax.—In the case at bench, the primary motive
of Marciliano in selling the controverted 91-square meter lot to private respondents was to illegally frustrate petitioners’ right of
inheritance and to avoid payment of estate tax. This was unabashedly admitted by witness Susan Rivera, wife of private
respondent Manuel Rivera, on cross-examination.
Same; Same; The purported sale of April 15, 1986 of the subject lot is null and void.—We also note that in their comment,
rejoinder, and memorandum private respondents did not refute petitioners’ charge that the said sale is fictitious. The conclusion
is thus inescapable that the purported sale of April 15, 1986 of the subject lot is null and void. Illegal motive predetermined the
purpose of the contract.
Same; Same; Even if the contract of sale is valid, it cannot adversely affect third persons because of its non-registration.—It is
also obvious to the eye that the contract of sale in 1986 is unregistered.
Section 51 of Presidential Decree No. 1529, otherwise known as the Property Registration Decree, provides that “[T]he act of
registration shall be the operative act to convey or affect the land insofar as third persons are concerned.” Thus, even if the
contract of sale is valid, it cannot adversely affect third persons because of its non-registration. More specifically, it cannot
prejudice petitioners as well as Elena Adaon and Nestor Tejon.
Article 1352
Art. 1352. Contracts without cause, or with unlawful cause, produce no effect whatever. The cause is
unlawful if it is contrary to law, morals, good customs, public order or public policy. (1275a)
LAGUNZAD V. GONZALES, 92 SCRA 476
Contracts; Duties must comply with contracts entered into where provisions thereof are not contrary to law, morals, good customs,
public orders or public policy.—It is necessary to distinguish between real duress and the motive which is present when one
gives his consent reluctantly. A contract is valid even though one of the parties entered into it against his own wish and desires,
or even against his better judgment. In legal effect, there is no difference between a contract wherein one of the contracting
parties exchanges one condition for another because he looks for greater profit or gain by reason of such change, and an
agreement wherein one of the contracting parties agrees to accept the lesser of two disadvantages. In either case, he makes a
choice free and untramelled and must accordingly abide by it. The Licensing Agreement has the force of law between the
contracting parties and since its provisions are not contrary to law, morals, good customs, public order or public policy (Art. 1306,
Civil Code), petitioner should comply with it in good faith.
Constitutional law; Freedom of speech and of the press; These freedoms are limited by the clear and present danger rule and
the “balancing-of-interests test.”—Neither do we find merit in peti-tioner’s contention that the Licensing Agreement infringes on
the constitutional right of freedom of speech and of the press, in that, as a citizen and as a newspaperman, he had the right to
express his thoughts in film on the public life of Moises Padilla without prior restraint. The right of freedom of expression, indeed,
occupies a preferred position in the “hierarchy of civil liberties.” It is not, however, without limitations. x x x The prevailing doctrine
is that the clear and present danger rule is such a limitation. Another criterion for permissible limitation on freedom of speech
and of the press, which includes such vehicles of the mass media as radio, television and the movies, in the “balancing-of-
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
interests test.” That principle “requires a court to take conscious and detailed consideration of the interplay of interest observable
in a given situation or type of situation.”
Same; Same; Same; The limits of the freedom of speech and press are reached when it touches on matters of private concern.—
The interests observable are the right to privacy asserted by respondent and the right of freedom of expression invoked by
petitioner. Taking into account the interplay of those interests, we hold that under the particular circumstances presented, and
considering the obligations assumed in the Licensing Agreement entered into by petitioner, the validity such agreement will have
to be upheld particularly because the limits of freedom of expression are reached when expression touches upon matters of
essentially private concern.
Article 1354
Art. 1354. Although the cause is not stated in the contract, it is presumed that it exists and is lawful, unless
the debtor proves the contrary. (1277)
LAW V. OLYMPIC SAWMILL, 129 SCRA 439
Facts:
On 7 September 1957, Liam Law loaned P10,000, without interest, to defendant Olympic Sawmill Co. and defendant Elino Lee
Chi, as managing partner. The loan became due on January 31, 1960 but was not paid on that date. Olympic Sawmill and Chi
asked for an extension of three months, or until April 30, 1960, within which to pay.
On 17 March 1960, the parties executed another loan document. The payment of the P10,000 was extended to 30 April 1960,
but the obligation was increased by P6,000.
Defendants again failed to pay so Law instituted a collection case. Olympic Sawmill and Chi admitted the P10,000 principal
obligation, but claimed that the additional P6,000 constituted usurious interest.
On June 26, 1961, the Trial Court rendered decision ordering defendants to pay plaintiff "the amount of P10,000.00 plus the
further sum of P6,000.00 by way of liquidated damages . . . with legal rate of interest on both amounts from April 30, 1960." It is
from this judgment that defendants have appealed. Defendants insist that the claim of usury should have been deemed admitted
by Law as it was "not denied specifically under oath."
Issue:
Whether P6,000 constituted usurious interest hence illegal – NO
Held:
Under Article 1354 of the Civil Code, in regards to the agreement of the parties relative to the P6,000.00 obligation, "it is
presumed that it exists and is lawful, unless the debtor proves the contrary". No evidentiary hearing having been held, it has to
be concluded that defendants had not proven that the P6,000.00 obligation was illegal. Confirming the Trial Court's finding, we
view the P6,000.00 obligation as liquidated damages suffered by plaintiff, as of March 17, 1960, representing loss of interest
income, attorney's fees and incidentals.
Moreover, for sometime now, usury has been legally non-existent. Interest can now be charged as lender and borrower may
agree upon.
Article 1356
Art. 1356. Contracts shall be obligatory, in whatever form they may have been entered into, provided all
the essential requisites for their validity are present. However, when the law requires that a contract be in
some form in order that it may be valid or enforceable, or that a contract be proved in a certain way, that
requirement is absolute and indispensable. In such cases, the right of the parties stated in the following
article cannot be exercised. (1278a)
LAO SOK V. SABAYSABAY, 138 SCRA 134
Labor Law; Illegal Dismissal; Loss of business due to fire; Failure of employer to make a report about the fire to his establishment
and the consequent dismissal of his employees, only an administrative matter and does not make the dismissal of the employees
illegal per se, but the employer may be subjected to administrative penalties or sanctions.—Compliance with the above rules is
only an administrative matter and the failure to make a report does not make the dismissal illegal per se. But the employer who
fails to file such report may be subjected to such administrative penalties or sanctions as may be duly provided. (Oceanic Bic
Division (FFW) v. Romero, 130 SCRA 392, 405).
Same; Same; Same; Separation Pay; Perfected Contract; Where the employer offered the employees payment of separation
pay which offer was unconditionally accepted a contract was perfected; Contracts, though orally made are binding on the
parties.—Lao Sok made an offer which was duly accepted by the private respondents. There was, therefore, a meeting of the
minds between two parties whereby one bound himself with respect to the other, to give something or to render some service
(Article 1305, Civil Code). By the unconditional acceptance of the offer that they would be paid separation pay, a contract was
therefore perfected. As held in the case of Herrera v. Auditor General, (102 Phil. 875): x x x Contracts in whatever form they
may have been entered into are binding on the parties unless form is essential for the validity and enforceability of that particular
contract. (See Lopez v. Auditor General, 20 SCRA 655).
Same; Same; Same; Same; Employer remiss in his obligation to his employees where the employer has other department stores
where he promised to absorb the workers; Cessation of business, not a case of, as the entire enterprise of the employer consists
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of the operation of various department stores that did not really close down, and the fire closed only a division or unit of the
employee’s business; Law and equity dictate that workers be compensated for the loss of the jobs as they were kept waiting that
they would be reemployed if not paid their severance pay.—Furthermore, it was also established that petitioner Lao Sok has
other department stores where he promised to absorb the salesladies. He was likewise remiss in this obligation. There is merit
in the Solicitor General’s submission that, in effect, the fire closed only a division or unit of Lao Sok’s business. His entire
enterprise consisting of the operation of various department stores did not really close down or cease. x x x Both the law and
equity dictate that private respondents must be compensated for the loss of their jobs considering that they were kept waiting
and hoping that they would be re-employed by the petitioner, if not paid their severance pay.
ODEJAR V. GUICO, 180 SCRA 372
Civil Law; Sales; Property; Ostensible conveyance of the property was executed solely to prevent the property from being levied
upon in execution of the judgment or applied in satisfaction of an adjudicated liability which cannot be allowed.—The facts above
detailed, considered conjointly, irresistibly conduce to the conclusion that Rufino Tamisin and Fermina Maluto never intended to
effect a genuine, bona fide transfer of property when they entered into the sale of April 10, 1953, a reality made manifest and
according to which the parties, vendors and vendees as well as their privies guided their actions, during the period of twenty (20)
years or so following the transaction. The Tamisins’ acts clearly show that they considered themselves still the owners of the
property and as never having parted therewith even after the sale, publicly and openly proclaiming their title and demanding
recognition thereof on several occasions. The Guicos, for their part, tacitly acquiesced, at least never presented any opposition,
to such assertions of title by the Tamisins until March 12, 1975, when it had already become apparent that the latter had
exhausted every possible recourse for the recovery of the property from the Odejars. All indications, therefore, are that the
ostensible conveyance was executed solely to prevent the property of the Tamisins from being levied upon in execution of the
judgment in Civil Case No. 9401, or ever applied in satisfaction of the Tamisins’ adjudicated liability to the Odejars. Such a
stratagem cannot be allowed to succeed.
Same; Same; Same; Same; Contracts; The sale in case at bar was absolutely simulated or fictitious and inexistent and void;
The action or defense for the declaration of the inexistence of a contract does not prescribe.—The defect of the sale of April 10,
1953 thus produced effects transcending mere rescissibility. The sale could not be treated merely as a simple conveyance of
“things under litigation x x entered into by the defendant without the knowledge and approval of the litigants or of competent
judicial authority,” rescindible by action within four (4) years. It was in reality “absolutely simulated or fictitious” and hence
“inexistent and void” in contemplation of Article 1409 of the Civil Code, and this Court’s early rulings in de Belen v. Collector of
Customs and Sheriff of Manila, 46 Phil. 241, Gonzales and Trinidad v. Trinidad and Ynares, 67 Phil. 682, and Onglengco v.
Ozaeta and Hernandez, 70 Phil. 43. Since, as Article 1411 of the Civil Code provides, the “action or defense for the declaration
of the inexistence of a contract does not prescribe,” the Odejars were not precluded from invoking such nullity, as they did, even
after the lapse of twenty-two years.
DELOSO V. SANDIGANBAYAN, 217 SCRA 49
DOCTRINE
"It is axiomatic that contracts may be entered into in any form orally or in writing or parol in part and written it being needful
merely that the essential requisites for their validity be present."
FACTS
Deloso is the incumbent Governor of Zambales, former Mayor of Botolan.
He was charged w/ violating Anti-Graft and Corrupt Practices Act, that while he was Mayor, he gave unwarranted benefits to 5
pvt individuals by issuing to them a tractor purchased by the municipality w/o any agreement as to payment of rentals, causing
injury to the municipality.
Deloso filed Demurrer to evidence. Demurrer was denied as regards 3 cases but granted as to 2.
Sandiganbayan found Deloso guilty.
Other facts established:
Sangguniang Bayan of Botolan authorized the obtention by Municipality of loan for purpose of purchasing 5 farm tractos to aid
farmers in the area. But not one farmer opted to make use thereof.
To make the best of a bad situation, Sanggunian planned to lease them to affluent landowners selected by the municipality.
Deloso had no part in the selection. Tractors were turned over to lessees w/o written contract. Resolution was adopted by
Sanggunian setting out generally conditions for use. Tractors were returned and eventually deteriorated and were sold as junk.
Sandiganbayan’s conclusions
 Tractors were irresponsibly delivered w/o paper to evidence delivery.
 There was no written agreement. There was no bond w/c is usually posted.
 Beneficiaries paid nary a cent until NBI questioned them.
 Grant of tractors wasn’t made thru canvass or public bidding.
ISSUES
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
WON Deloso was correctly found guilty
HELD
NO. All 3 beneficiaries (Ferrer, Encarnacion, Lim) were presented and all declared that they rcvd tractors upon understanding
that they’d pay rentals and keep them in good repair. The facts they established are the same as those demonstrated by the
evidence of defense.
Sison (Municipal Treas) testified that payments were made by lessees.
Deloso himself took witness stand. He said he asked that the terms of lease be embodied in Resolution but Sanggunian had
declined at that time, saying it’s unable to do so bec docs weren’t yet in its possession. What Deloso did was to instruct Municipal
Treas to incorporate general terms in a memorandum receipt. Deloso also personally explained terms of lease to the
beneficiaries.
Sandiganbayan’s conclusions are erroneous. The lease in this case isn’t one of those required by law to be in writing / in any
particular form to be valid / enforceable. Absence of bond doesn’t make transactions criminal. There’s also no evidence that
canvass / bidding is a requirement.
Lower court said that beneficiaries were suborned by Deloso. This is too tenuous a premise. Also incorrect is that Deloso didn’t
follow requirement of Local Govt Audit Office that renting of government equipment must be based on fees set by DPWH. No
proof of such requirement was presented or proved.
Articles 1358
Art. 1358. The following must appear in a public document:
(1) Acts and contracts which have for their object the creation, transmission, modification or
extinguishment of real rights over immovable property; sales of real property or of an interest therein a
governed by Articles 1403, No. 2, and 1405;

(2) The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership
of gains;

 (3) The power to administer property, or any other power which has for its object an act appearing or
which should appear in a public document, or should prejudice a third person;

(4) The cession of actions or rights proceeding from an act appearing in a public document.
All other contracts where the amount involved exceeds five hundred pesos must appear in writing, even a
private one. But sales of goods, chattels or things in action are governed by Articles, 1403, No. 2 and 1405.
(1280a)
PNB V. IAC, 189 SCRA 680
Same; Agency; Special Power of Attorney; The revocation of a special power of attorney, although embodied in a private writing,
is valid and binding between the parties.—While Article 1358 of the New Civil Code requires that the revocation of Alcedo’s
Special Power of Attorney to mortgage his property should appear in a public instrument: x x x nevertheless, a revocation
embodied in a private writing is valid and binding between the parties (Doliendo v. Depino, 12 Phil. 758; Hawaiian-Philippines
Co. vs. Hernaez, 45 Phil. 746) for—“The legalization by a public writing and the recording of the same in the registry are not
essential requisites of a contract entered into, as between the parties, but mere conditions of form or solemnities which the law
imposes in order that such contract may be valid as against third persons, and to insure that a publicly executed and recorded
agreement shall be respected by the latter.” (Alano, et al. vs. Babasa, 10 Phil. 511.)
Civil Law; Estoppel; A party may not go back on his own acts and representations to the prejudice of the other party who relied
upon them.—We agree with the opinion of the appellate court that under the doctrine of promissory estoppel enunciated in the
case of Republic Flour Mills, Inc. vs. Central Bank, L-23542, August 11, 1979, the act and assurance given by the PNB to Alcedo
“that we shall exclude the aforementioned lot [Lot No. 1402] as a collateral of Leticia de la VinaSepe in our recommendation for
her 1971-72 sugar crop loan” (p. 37, Rollo) is binding on the bank. Having given that assurance, the bank may not turn around
and do the exact opposite of what it said it would not do. One may not take inconsistent positions (Republic vs. Court of Appeals,
133 SCRA 505). A party may not go back on his own acts and representations to the prejudice of the other party who relied
upon them (Lazo vs. Republic Surety & Insurance Co., Inc., 31 SCRA 329.)
TAPEC V. CA, 237 SCRA 749
Civil Law; Documents; Article 1358 does not invalidate the acts or contracts enumerated therein if they are not embodied in
public documents.—As correctly ruled by the Court of Appeals, the said private instrument is a deed of sale in which all the
requisites of a valid contract are present and which is binding upon the parties. The trial court erroneously held that it is invalid
because it is not in a public document as required by Article 1358 of the Civil Code and pursuant to Manotok Realty, Inc. vs.
Court of Appeals. Article 1358 does not invalidate the acts or contracts enumerated therein if they are not embodied in public
documents.
Civil Law; Documents; The Supreme Court agrees with the Court of Appeals that Exhibit “1” for the private respondent is an
ancient document whose proof of authenticity was no longer necessary because of the concurrence of the requisites in Section
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 CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE
21, Rule 132 of the Rules of Court.—We agree with the Court of Appeals that Exhibit “1” for the private respondent, the deed of
sale in a private writing executed on 15 May 1931 in favor of Manuel Raguirag and Clara Tapec, private respondent’s
grandparents, is an ancient document whose proof of authenticity was no longer necessary because of the concurrence of the
requisites in Section 21, Rule 132 of the Rules of Court. It was already more than thirty years old at the time it was offered in
evidence in 1986. It was produced from the custody of respondent Raguirag, an heir of the vendees in the said instrument. And
it is unblemished by any alteration or circumstances of suspicion.
Articles 1370-1379
Art. 1370. If the terms of a contract are clear and leave no doubt upon the intention of the contracting
parties, the literal meaning of its stipulations shall control.
If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the
former. (1281)
Art. 1371. In order to judge the intention of the contracting parties, their contemporaneous and subsequent
acts shall be principally considered. (1282)
Art. 1372. However general the terms of a contract may be, they shall not be understood to comprehend
things that are distinct and cases that are different from those upon which the parties intended to agree.
(1283)
Art. 1373. If some stipulation of any contract should admit of several meanings, it shall be understood as
bearing that import which is most adequate to render it effectual. (1284)
Art. 1374. The various stipulations of a contract shall be interpreted together, attributing to the doubtful
ones that sense which may result from all of them taken jointly. (1285)
Art. 1375. Words which may have different significations shall be understood in that which is most in
keeping with the nature and object of the contract. (1286)
Art. 1376. The usage or custom of the place shall be borne in mind in the interpretation of the ambiguities
of a contract, and shall fill the omission of stipulations which are ordinarily established. (1287)
Art. 1377. The interpretation of obscure words or stipulations in a contract shall not favor the party who
caused the obscurity. (1288)
Art. 1378. When it is absolutely impossible to settle doubts by the rules established in the preceding
articles, and the doubts refer to incidental circumstances of a gratuitous contract, the least transmission
of rights and interests shall prevail. If the contract is onerous, the doubt shall be settled in favor of the
greatest reciprocity of interests.
If the doubts are cast upon the principal object of the contract in such a way that it cannot be known what
may have been the intention or will of the parties, the contract shall be null and void. (1289)
Art. 1379. The principles of interpretation stated in Rule 123 of the Rules of Court shall likewise be
observed in the construction of contracts. (n)
 Art. 1372. However general the terms of a contract may be, they shall not be understood to comprehend
LIM V. CA, 99 SCRA 668
Contracts; Interpretation shall not favor the party who caused the ambiguity. Thus, the one who prepared the contract which
states: „Terms: Cash upon signing of this contract,‰ cannot deny that the agreement was not a cash transaction.·Considering
the admitted fact that the contract of sale (Exhibit „A‰) was prepared in the office of respondent company by Generoso Bongato,
Assistant to the Manager of the company, upon instruction of General Manager Emiliano L. Abalos who is a lawyer, and We are
now confronted with the varying or conflicting interpretations of the parties thereto, the respondent company contending that the
stipulation „Terms: Cash upon signing of this contract‰ does not mean that the agreement was a cash transaction because no
money was paid by the petitioner at the time of the signing thereof whereas the petitioner insists that it was a cash transaction
inasmuch as he paid cash amounting to P142,975.00 upon the signing of the contract, the payment having been made at around
1:30 in the afternoon of November 13, 1970 to the cashier, Teodoro Garcia, and Manager Abalos although the sale was agreed
to in the morning of the same day, November 13, 1970, the conflicting interpretations have shrouded the stipulation with
ambiguity or vagueness. Then, the cardinal rule should and must apply, which is that the interpretation shall not favor the party
who caused the ambiguity (Art. 1377, New Civil Code). We rule that in the instant case, the interpretation to be taken shall not
favor the respondent company since it is the party who caused the ambiguity in its preparation.
Same; Contemporaneous acts of the parties as indication of their contractual relation.·The above facts show contemporaneous
and subsequent acts of the parties in relation to the transaction between them as embodied in the Contract of Sale of Sugar
(Exh. „A‰) from which the intention of the contracting parties may be judged correctly. The trial court was correct in judging and
deciding the intention of the parties from their actuations contemporaneous with and subsequent to the agreement for the sale
of the sugar in question, and we sustain the trial court, applying Art. 1371, New Civil Code, supra.
Same; There is symbolic delivery of sugar upon delivery to vendee of the delivery orders which would authorize the vendee to
withdraw sugar from the warehouse.·In the case at bar, at the moment the delivery orders were issued and given to the petitioner-
vendee, there was a symbolic or feigned tradition of the sugar sold since the delivery orders are documents of title to goods
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
which, under Article 1636, New Civil Code, includes any bill of lading, dock, warrant, quedan, or warehouse receipt or order for
the delivery of goods, or any other document used in the ordinary course of business in the sale or transfer of goods, as proof
of the possession or control of the goods, or authorizing or purporting to authorize the possessor of the document to transfer or
receive, either by indorsement or by delivery, goods represented by such document. And when the petitioner-buyer withdraw
from the respondentÊs warehouse, hauled and took delivery on various dates and varying quantities of sugar piculs totalling
3,735 piculs, there was actual delivery thereof which consummated the sale.
Same; Appeal; Evidence; Exceptions to binding effect of factual findings of Court of Appeals.·In Ramos vs. Pepsi-Cola Bottling
Co., et al., L-22533, February 9, 1967, 19 SCRA 289, We enumerated the following as exceptions to the general rule: (1) Where
there is a grave abuse of discretion (Buyco vs. People, 95 Phil. 453); (2) When the finding is grounded entirely on speculation,
surmises or conjectures (Joaquin vs. Navarro, 93 Phil. 257); (3) When the inference made is manifestly mistaken, absurd or
impossible (Luna vs. Linatoc, 74 Phil. 15); (4) When the judgment of the Court of Appeals was based on a misapprehension of
facts (De la Cruz vs. Sosing, 94 Phil. 26); (5) When the factual findings are conflicting (Casica vs. Villaseca, 101 Phil. 1205); or
(6) When the Court of Appeals, in making its findings, went beyond the issues of the case and the same are contrary to the
admissions of both appellant and appellee (Evangelista vs. Alto Surety & Insurance Co., L-1139, April 23, 1958).
Same; Same; Same; Same.·And considering that in the case at bar the findings of the Court of Appeals are contrary to those of
the trial court, a minute scrutiny by the Supreme Court is in order, and resort to duly proven evidence becomes necessary.
Same; Same; Same; If the transaction for the purchase were not cash, contrary to what was stipulated in the contract, then the
vendor companyÊs record would have reflected that the sugar was withdrawn by or delivered to the vendee on credit.·The logical
implication of the ruling of the respondent court which upheld the position of the respondent company that the purchase of sugar
was not a cash transaction, is that the purchase was on credit. However, since it appears that the transaction was not recorded
in the company books and there was no document showing it was not cash, the inference arises that the respondent company
allowed, tolerated, and/or sanctioned a credit transaction to be unrecorded in the company books which is simply irregular,
unbusiness-like and anomalous. For a corporation or company like the respondent engaged in the big business of sugar central,
in the production and marketing as well as export of sugar, and in the present case involving more than a hundred thousand
pesos, to keep no record of the transaction in question is blatantly against ordinary business practice and procedure in
bookkeeping or accounting.
Same; Same; Same; The Court of Appeals erred in upholding the oral testimony of the vendorÊs manager as against the written
terms of the contract. Parol evidence rule, reinstated.·This ruling of the Court upholding the oral testimony and claim of Manager
Abalos as against the written contract itself is a grave and prejudicial error in the appreciation of the evidence because it is a
clear and flagrant disregard of the parol evidence rule (Section 7, Rule 130, Revised Rules of Court) providing that: When the
terms of an agreement have been reduced to writing, it is to be considered as containing all such terms, and, therefore, there
can be between the parties and their successors in interest, no evidence of the terms of the agreement other than the contents
of the writing, except in the following cases: (a) Where a mistake or imperfection of the writing, or its failure to express the true
intent and agreement of the parties, or the validity of the agreement is put in issue by the pleadings; (b) When there is an intrinsic
ambiguity in the writing.
Same; Judgment; Award of money should include legal interest.
·On the second cause of action, the judgment of the appellate court is correct insofar as it orders the respondent company to
return to the petitioner the latterÊs deposit of P55,000.00 but should be modified to include payment of legal interest from January
20, 1971 until fully paid and giving the option to petitioner either to receive the money or take delivery of 1,000 piculs of export
sugar from respondent company.
Article 1372
things that are distinct and cases that are different from those upon which the parties intended to agree.
(1283)
REPUBLIC V. CASTELLVI, 58 SCRA 336
Contracts; Construction of; General terms of contract cannot include things different from those intended by the parties.—
However general the terms of a contract may be, they shall not be understood to comprehend things that are distinct and cases
that are different from those upon which the parties intended to agree.
Contracts; Construction of; Intention cannot prevail over the clear and express terms of the contract.—Intention cannot prevail
over the clear and express terms of the lease contract. Intent is to be deduced from the language employed by the parties, and
the terms of the contract, when unambiguous, are conclusive in the absence of averment and proof of mistake or fraud—the
question being not what the intention was, but what is expressed in the language used. Moreover, in order to judge the intention
of the contracting parties, their contemporaneous and subsequent acts shall be principally considered.
Article 1377
Art. 1377. The interpretation of obscure words or stipulations in a contract shall not favor the party who
caused the obscurity. (1288)
EASTERN SHIPPING V. MARGARINE-VERKAUFS-UNION, 93 SCRA 257
Carriage of Goods by Sea Act; Contracts; Damages; A consignee’s claim for the full value of damages to its cargo while on
board ship is valid even though under Art 848 of the Code of Commerce where the damage amount does not exceed 5% of the
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claimant’s interest, a claim for averages may not be admitted, where the bill of lading stiputlates that in case of average, the
same shall be adjusted according to York-Antwerp Rules of 1950 which allows such full recovery without any limit as to claimants
interest.—The Court finds no error and upholds the lower court’s ruling sustaining respondent’s damage claim although the
amount thereof did not exceed 5% of respondent’s interest in the cargo and would have been barred by the cited article of the
Commerce Code. We hold that the lower court correctly ruled the cited codal article to be “not applicable in this particular case
for the reason that the bill of lading (Exhibit ‘F’) contains ‘an agreement to the contrary’ for it is expressly provided in the last
sentence of the first paragraph (Exhibit ‘1-A’) that ‘In case of average same shall be adjusted according to York-Antwerp Rules
of 1950.’ The insertion of said condition is expressly authorized by Commonwealth Act No. 65 which has adopted in toto the U.S.
Carriage of Goods by Sea Act. Now, it has not been shown that said rules limit the recovery of damage to cases within a certain
percentage or proportion that said damage may bear to claimant’s interest either in the vessel or cargo as provided in Article
848 of the Code of Commerce, On the contrary, Rule 3 of said York-Antwerp Rules expressly states that ‘Damage done to a
ship and cargo, or either of them, by water or otherwise, including damage by breaching or scuttling a burning ship, in
extinguishing a fire on board the ship, shall be made good as general average x x x.”
Same; Same; Same; Same; A contract of adhesion is construed strictly against the one who drew its terms.—There is a clear
and irreconcilable inconsistency between the York-Antwerp Rules expressly adopted by the parties as their contract under the
bill of lading which sustains respondent’s claim and the codal article cited by petitioner which would bar the same. Furthermore,
as correctly contended by respondent, what is here involved is a contract of adhesion as embodied in the printed bill of ladi ng
issued by petitioner for the shipment to which respondent as the consignee merely adhered, having no choice in the matter, and
consequently, any ambiguity therein must be construed against petitioner as the author.
Articles 1380-1381
Art. 1380. Contracts validly agreed upon may be rescinded in the cases established by law. (1290)
Art. 1381. The following contracts are rescissible:
(1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by
more than one-fourth of the value of the things which are the object thereof; 
 Alienations by onerous title are also presumed fraudulent when made by persons against whom some
(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding
number;

(3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims
due them;

(4) Those which refer to things under litigation if they have been entered into by the defendant without the
knowledge and approval of the litigants or of competent judicial authority; 

(5) All other contracts specially declared by law to be subject to rescission. (1291a)
GUZMAN, BOCALING & CO. V. BONNEVIE, 206 SCRA 668
Same; Statute of frauds; Rescissible contracts; Contract of sale in question not voidable under statute of frauds but rescissible
under Articles 1380 to 1381(3).—The petitioner argues that assuming the Contract of Sale to be voidable, only the parties thereto
could bring an action to annul it pursuant to Article 1397 of the Civil Code. It is stressed that private respondents are strangers
to that agreement and therefore have no personality to seek its annulment. The respondent court correctly held that the Contract
of Sale was not voidable but rescissible. Under Article 1380 to 1381(3) of the Civil Code, a contract otherwise valid may
nonetheless be subsequently rescinded by reason of injury to third persons, like creditors. The status of creditors could be validly
accorded the Bonnevies for they had substantial interests that were prejudiced by the sale of the subject property to the petitioner
without recognizing their right of first priority under the Contract of Lease.
Same; Rescissible contracts; Petitioner not deemed purchaser in good faith.—A purchaser in good faith and for value is one
who buys the property of another without notice that some other person has a right to or interest in such property and pays a full
and fair price for the same at the time of such purchase or before he has notice of the claim or interest of some other person in
the property. Good faith connotes an honest intention to abstain from taking unconscientious advantage of another. Tested by
these principles, the petitioner cannot tenably claim to be a buyer in good faith as it had notice of the lease of the property by
the Bonnevies and such knowledge should have cautioned it to look deeper into the agreement to determine if it involved
stipulations that would prejudice its own interests.
SIGUAN V. LIM, 318 SCRA 725
Same; Contracts; Rescission; Accion Pauliana; Requisites; Words and Phrases; The action to rescind contracts in fraud of
creditors is known as accion pauliana.—The action to rescind contracts in fraud of creditors is known as accion pauliana. For
this action to prosper, the following requisites must be present: (1) the plaintiff asking for rescission has a credit prior to the
alienation, although demandable later; (2) the debtor has made a subsequent contract conveying a patrimonial benefit to a third
person; (3) the creditor has no other legal remedy to satisfy his claim; (4) the act being impugned is fraudulent; (5) the third
person who received the property conveyed, if it is by onerous title, has been an accomplice in the fraud.
Same; Same; Same; Same; While it is necessary that the credit of the plaintiff in the accion pauliana must exist prior to the
fraudulent alienation, the date of the judgment enforcing it is immaterial—even if the judgment be subsequent to the alienation,
it is merely declaratory, with retroactive effect to the date when the credit was constituted.—The general rule is that rescission
requires the existence of creditors at the time of the alleged fraudulent alienation, and this must be proved as one of the bases
of the judicial pronouncement setting aside the contract. Without any prior existing debt, there can neither be injury nor fraud.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
While it is necessary that the credit of the plaintiff in the accion pauliana must exist prior to the fraudulent alienation, the date of
the judgment enforcing it is immaterial. Even if the judgment be subsequent to the alienation, it is merely declaratory, with
retroactive effect to the date when the credit was constituted fraud of creditors is known as accion pauliana. For this action to
prosper, the following requisites must be present: (1) the plaintiff asking for rescission has a credit prior to the alienation, although
demandable later; (2) the debtor has made a subsequent contract conveying a patrimonial benefit to a third person; (3) the
creditor has no other legal remedy to satisfy his claim; (4) the act being impugned is fraudulent; (5) the third person who received
the property conveyed, if it is by onerous title, has been an accomplice in the fraud.
Same; Same; Same; Same; While it is necessary that the credit of the plaintiff in the accion pauliana must exist prior to the
fraudulent alienation, the date of the judgment enforcing it is immaterial—even if the judgment be subsequent to the alienation,
it is merely declaratory, with retroactive effect to the date when the credit was constituted.—The general rule is that rescission
requires the existence of creditors at the time of the alleged fraudulent alienation, and this must be proved as one of the bases
of the judicial pronouncement setting aside the contract. Without any prior existing debt, there can neither be injury nor fraud.
While it is necessary that the credit of the plaintiff in the accion pauliana must exist prior to the fraudulent alienation, the date of
the judgment enforcing it is immaterial. Even if the judgment be subsequent to the alienation, it is merely declaratory, with
retroactive effect to the date when the credit was constituted. except when the party suffering damage has no other legal means
to obtain reparation for the same. The term “subsidiary remedy” has been defined as “the exhaustion of all remedies by the
prejudiced creditor to collect claims due him before rescission is resorted to.” It is, therefore, essential that the party asking for
rescission prove that he has exhausted all other legal means to obtain satisfaction of his claim. Petitioner neither alleged nor
proved that she did so. On this score, her action for the rescission of the questioned deed is not maintainable even if the fraud
charged actually did exist.
Article 1387
Art. 1387. All contracts by virtue of which the debtor alienates property by gratuitous title are presumed to
have been entered into in fraud of creditors, when the donor did not reserve sufficient property to pay all
debts contracted before the donation.
judgment has been issued. The decision or attachment need not refer to the property alienated, and need
not have been obtained by the party seeking the rescission.
In addition to these presumptions, the design to defraud creditors may be proved in any other manner
recognized by the law of evidence. (1297a)
CABALIW V. SADORRA, 64 SCRA 310
Sale; Contracts; A sale of a parcel of land by the husband is deemed fraudulent if made about seven months after a judgment
was rendered against the vendor for support of his wife and the vendor has not paid any part of the judgment.·For the heart of
the matter is that about seven months after a judgment was rendered against him in Civil Case No. 43192 of the Court of First
Instance of Manila and without paying any part of that judgment, Benigno Sadorra sold the only two parcels of land belonging to
the conjugal partnership to his son-in-law. Such a sale even if made for a valuable consideration is presumed to be in fraud of
the judgment creditor who in this case happens to be the offended wife.
Same; Same; Circumstances indicating sale of a parcel of land belonging to conjugal partnership is void.·Furthermore, the
presumption established by the law in favor of petitioners is bolstered by other indicia of bad faith on the part of the vendor and
vendee. Thus (1) the vendee is the son-in-law of the vendor. x x x close relationship between the vendor and the vendee is one
of the known badges of fraud. (2) At the time of the conveyance, the vendee, Sotero, was living with his father-in-law, the vendor,
and he knew that there was a judgment directing the latter to give a monthly support to his wife Isidora and that his father-in-law
was avoiding payment and execution of the judgment. (3) It was known to the vendee that his father-in-law had no properties
other than those two parcels of land which were being sold to him. The fact that a vendor transfers all of his property to a third
person when there is a judgment against him is a strong indication of a scheme to defraud one who may have a valid interest
over his properties.
Same; Same; Fraud; Where sale of land is presumed fraudulent, transferee has burden of proving otherwise.·On the part of the
transferee, he did not present satisfactory and convincing evidence sufficient to overthrow the presumption and evidence of a
fradulent transaction. His is the burden of rebutting the presumption of fraud established by law, and having failed to do so, the
fraudulent nature of the conveyance in question prevails.
Sale; Contracts; Conjugal assets; Wife may seek redress in courts for alienations prejudicial to her.·The decision of the Court of
Appeals makes mention of Art. 1413 of the old Civil Code which authorizes the husband as administrator to alienate and bind
by onerous title the property of the conjugal partnership without the consent of the wife. x x x On this point, counsel for petitioners
rightly claims that the lack of consent of the wife to the conveyances made by her husband was never invoked nor placed in
issue before the trial court. What was claimed all along by plaintiff-petitioner was that the conveyances or deeds of sale were
executed by her husband to avoid payment of the monthly support adjudged in her favor and to deprive her of the means to
execute said judgment. In other words, petitioner seeks relief not so much as an aggrieved wife but more as a judgment creditor.
Art. 1413 therefore is inapplicable; but even if it were, the result would be the same because the very article reserves to the wife
the right to seek redress in court for alienations which prejudice her or her heirs.
Article 1397
Art. 1397. The action for the annulment of contracts may be instituted by all who are thereby obliged
principally or subsidiarily. However, persons who are capable cannot allege the incapacity of those with
whom they contracted; nor can those who exerted intimidation, violence, or undue influence, or employed
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fraud, or caused mistake base their action upon these flaws of the contract. (1302a)
HOUSE INTERNATIONAL V. IAC, 151 SCRA 703
Remedial Law: Civil Procedure; Parties; Real party in interest, concept of; „Interest,‰ meaning of.·The real party in interest is
the party who stands to be benefited or injured by the judgment or the party entitled to the avails of the suit. „Interest‰ within
the meaning of the rule means material interest, an interest in issue and to be affected by the decree, as distinguished from
mere interest in the question involved, or a mere incidental interest. Consequently, a person who is not a party to a contract and
for whose benefit it was not expressly made cannot maintain an action thereon, notwithstanding that the contract, if performed
by the parties to it, would incidentally inure to his benefit. (Francisco, the Revised Rules of Court in the Phil., Vol., 1, p. 126).
Same; Same; Same; Same; Real parties in interest of the House International Building are the tenants, not the association of
tenants; Failure of petitioner association to show real and material interest in the subject matter of the action.·In the present
case, the real parties in interest are the tenants of the House International Building and not the petitioner ASSOCIATION, which
has a personality separate and distinct from that of its members and therefore it has the capacity to sue and be sued although it
is composed of the tenants. Petitioner has not shown any real, actual, material, or substantial interest in the subject matter of
the action.
Same; Civil Law; Contracts; Conditional sale of property by GSIS to a private corporation does not violate constitutional
provisions; Reason.·As bases for a declaration that the conditional sale between GSIS and CENTERTOWN is null and void for
being contrary to law or public policy, the constitutional provisions are inapposite. Not one of those provisions render unlawful
the contract in question. Except for the prohibition against the taking of private property for public use without just compensation,
the other provisions require implementing legislation to confer a legal right and impose a legal duty which can be judicially
invoked.
Same; Same; Same; Leases; Ejectment; P.D. 1517, not applicable where the property involved is land and building belonging
to the lessor.·P.D. 1517 which confers a preferential right to tenants of long standing to acquire leased land on which they have
constructed their houses. This has no application to the present case where the property involved is land and building belonging
to the lessor.
Same; Same; Void contract, different from ultra vires contract, which is merely voidable.·The main thrust of the petitionerÊs
challenge on the validity of the conditional sale is that the contract is ultra vires because the respondent CENTERTOWN is not
qualified to acquire properties under its Articles of Incorporation. The petitioner has confused a void contract with an ultra vires
contract which is merely voidable.
Same; Same; Same; Privity of petitioner to the deed of sale being absent, it cannot assail the validity of the contract between
the GSIS and the corporation and the assignment of the deed by the corporation to its sister corporation.·Petitioner is neither a
party nor a privy to the Deed of Conditional Sale and the assignment thereof: thus, it cannot assail the validity of the said
contracts.
MALABANAN V. GAW CHING, 181 SCRA 84
Civil Law; Contracts; Strangers to a contract cannot sue either or both of the contracting parties to annul and set aside that
contract.·The firmly settled rule is that strangers to a contract cannot sue either or both of the contracting parties to annul and
set aside that contract.
Same; Same; Same; It is the existence of an interest in a particular contract that is the basis of oneÊs right to sue for nullification
of that contract and that essential interest in a given contract is in general possessed only by one who is a party to the contract.·As
long ago as 1912, this Court in Ybañez v. Hongkong and Shanghai Bank, pointed out that it is the existence of an interest in a
particular contract that is the basis of oneÊs right to sue for nullification of that contract and that essential interest in a given
contract is, in general, possessed only by one who is a party to the contract.
Same; Same; Same; Same; Therefore he who has no right in a contract is not entitled to prosecute an action for nullity.·From
these legal provisions it is deduced that it is the interest had in a given contract, that is the determining reason of the right which
lies in favor of the party obligated principally or subsidiarily to enable him to bring an action for the nullity of the contract in which
he intervened, and therefore, he who has no right in a contract is not entitled to prosecute an action for nullity, for, according to
the precedents established by the courts, the person who is not a party to a contract, nor has any cause of action or
representation from those who intervened therein, is manifestly without right of action and personality such as to enable him to
assail the validity of the contract.
Same; Same; Same; Same; Same; He may perhaps be entitled to exercise an action for nullity if he is prejudiced in his rights
with respect to one of the contracting parties.·Mr. Justice Torres went on to indicate a possible qualification to the above general
principle, that is, a situation where a non-party to a contract could be allowed to bring an action for declaring that contract null:
„He who is not the party obligated principally or subsidiarily in a contract may perhaps be entitled to exercise an action for nullity,
if he is prejudiced in his rights with respect to one of the contracting parties; but, in order that such be the case, it is indispensable
to show the detriment which positively would result to him from the contract in which he had no intervention.‰
Same; Same; Same; Same; Same; Same; Respondent Gaw Ching does not fall within the possible exception recognized in
Ybañez v. Hongkong & Shanghai Bank.·What is important for present purposes is that respondent Gaw Ching, admittedly a
stranger to the contract of sale of a piece of land between petitioners Malabanan and Senolos inter se, does not fall within the
possible exception recognized in Ybañez v. Hongkong & Shanghai Bank. In the first place, Gaw Ching had no legal right of
preemption in respect of the house and lot here involved. The majority opinion of the appellate court itself explicitly found that
the subject piece of land is located outside the Urban Land Reform Zones declared pursuant to P.D. No. 1517. Even assuming,
for purposes of argument merely, that the land here involved was in fact embraced in a declared Urban Land Reform Zone
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
(which it was not), Gaw Ching would still not have been entitled to a right of preemption in respect of the land sold. In Santos v.
Court of Appeals, this Court held that the preemptive or redemptive right of a lessee under P.D. No. 1517 exists only in respect
of the urban land under lease on which the tenant or lessee had built his home and in which he had resided for ten (10) years
or more and that, in consequence, where both land and building belong to the lessor, the preemptive or redemptive right was
simply not available under the law.
Article 1403
Art. 1403. The following contracts are unenforceable, unless they are ratified:
(1) Those entered into in the name of another person by one who has been given no authority or legal
representation, or who has acted beyond his powers; 

(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases
an agreement hereafter made shall be unenforceable by action, unless the same, or some note or
memorandum, thereof, be in writing, and subscribed by the party charged, or by his agent; evidence,
therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents:
(a) An agreement that by its terms is not to be performed within a year from the making thereof;
(b) A special promise to answer for the debt, default, or miscarriage of another;

(c) An agreement made in consideration of marriage, other than a mutual promise to marry; 

(d) An agreement for the sale of goods, chattels or things in action, at a price not less than five
hundred pesos, unless the buyer accept and receive part of such goods and chattels, or the
evidences, or some of them, of such things in action or pay at the time some part of the purchase
money; but when a sale is made by auction and entry is made by the auctioneer in his sales book,
at the time of the sale, of the amount and kind of property sold, terms of sale, price, names of the
purchasers and person on whose account the sale is made, it is a sufficient memorandum; 

(e) An agreement of the leasing for a longer period than one year, or for the sale of real property
or of an interest therein;

(f) A representation as to the credit of a third person.
(3) Those where both parties are incapable of giving consent to a contract.
ORTEGA V. LEONARDO, 103:870
FACTS:
o The plaintiff averred that long before and until her house had been completely destroyed during the liberation of the City of
Manila, she occupied “Lot I”, located at San Andres Street, Malate, Manila. After liberation she re-occupied it. She asserted her
right thereto as occupant for purposes of purchase.
o Defendant also asserted a similar right, alleging occupancy of a portion of the land subsequent to plaintiff's. During the
investigation of such conflicting interests, defendant asked plaintiff to desist from pressing her claim and definitely promised that
if and when he succeeded in getting title to Lot I, he would sell to her a portion thereof with an area of 55.60 square meters,
provided she paid for the surveying and subdivision of the Lot and provided further that after he acquired title, she could continue
holding the lot as tenant by paying a monthly rental of P10.00 until said portion shall have been segregated and the purchase
price fully paid.
o Plaintiff accepted defendant's offer, and desisted from further claiming Lot I, thus defendant finally acquired title thereto.
o Plaintiff, relying upon their agreement, caused the survey and segregation of the portion which defendant had promised to sell
incurring expenses therefor. She also remodelled her son's house and extended it over to the said lot.
o After defendant had acquired Lot I plaintiff regularly paid him the monthly rental of P10.00. Thereafter, plaintiff tendered to
defendant the purchase price which the latter refused to accept, without cause or reason.
o The trial court dismissed plaintiff’s action, applying the general rule on statute of frauds, saying that an oral agreement to sell a
piece of land is not enforceable.
ISSUE:
WON the oral contract to sell a piece of land was enforceable! YES!!! There are exceptions to the general rule and this case falls
under one of those exceptions.
RATIO:
ACTS OF PARTIAL PERFORMANCE; EXCEPTIONS TO THE ABOVE STATED GENERAL RULE
American Jurisprudence in its title "Statute of Frauds" lists other acts of partial performance, such as possession, the making of
improvements, rendition of services, payment of taxes, relinquishment of rights, etc.
 Thus, it is stated that "The continuance in possession MAY, in a proper case, be sufficiently referable to the parol
contract of sale to constitute a part performance thereof. Continued possession under an oral contract of sale, by one
already in possession as a tenant, has been held a sufficient part performance, where accompanied by other acts which
characterize the continued possession and refer it to the contract of purchase.
 It is also stated that "The making of valuable permanent improvements on the land by the purchaser, in pursuance of
the agreement and with the knowledge of the vendor, has been said to be the strongest and the most unequivocal act of
part performance by which a verbal contract to sell land is taken out of the statute of frauds, and is ordinarily an important
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element in such part performance. The entry into possession and the making of the improvements are held on amount to
such an alteration in the purchaser's position as will warrant the court's entering a degree of specific performance."
 Again, it is stated that "A tender or offer of payment, declined by the vendor, has been said to be equivalent to actual
payment, for the purposes of determining whether or not there has been a part performance of the contract. This is
apparently true where the tender is by a purchaser who has made improvements. But the doctrine now generally accepted,
that not even the payment of the purchase price, without something more, . . . is a sufficient part performance.
 And the relinquishment of rights or the compromise thereof has likewise been held to constitute part performance.
THERE IS PARTIAL PERFORMANCE IN THIS CASE
 In the light of the above four paragraphs, it would appear that the complaint in this case described several circumstance
indicating partial performance: relinquishment of rights, continued possession, building of improvements, tender of payment
plus the surveying of the lot at plaintiff's expense and the payment of rentals.
 It is enough to hold that the combination of all of them amounted to partial performance; and we do so line with the accepted
basis of the doctrine, that it would be a fraud upon the plaintiff if the defendant were permitted to oppose performance of
his part after he has allowed or induced the former to perform in reliance upon the agreement.
 TAKE NOTE: "relinquishment" is not part performance, and that neither "surveying the land" nor tender of payment is
sufficient. The 4 precedents cited above are qualified.
As there was partial performance, the principle excluding parol contracts for the sale of realty, does not apply.
CARBONEL V. PONCIO, 103:655
FACTS:
 Carbonnel purchased from Poncio a parcel of land. Carbonnel paid P247.26 and assumed Poncio's obligation with the
Republic Savings Bank, with the understanding that the balance would be payable upon execution of the corresponding deed
of conveyance. One of the conditions of the sale was that Poncio would continue staying in said land for one year.
 Poncio refused to execute the corresponding deed of sale, despite repeated demand. Poncio instead conveyed the same
property to defendants Infantes, who knew, of the first sale to Carbonnel. Thus, Carbonnel claims having suffered damages
due to Poncio and the Infantes.
 Carbonnel prays that she be declared owner of the land in question; that the sale to the Infantes be annulled; that Poncio be
required to execute the corresponding deed of conveyance in Carbonnel's favor; and that defendants be sentenced to pay
damages.
 Defendants moved to dismiss said complaint upon the ground that Carbonnel's claim is unenforceable under the Statute of
Frauds.
 Carbonnel introduced presented a witness to prove that Carbonnel and Poncio entered into a written agreement and that
Poncio signed the agreement. The witness testified that the written agreement showed that Carbonnel allowed Poncio to
stay in the lot that Carbonnel bought until one year without payment and if after one year Poncio could not find a place, then
Poncio can remain as long as he pays according to the agreement.
 Carbonnel also took the witness stand. However, defense counsel moved to strike out the Carbonnel’s statement as witness,
invoking the Statute of Frauds.
ISSUE:
Whether the Statute of Frauds is applicable in this case – No. Case remanded.
RATIO:
 The Statute of Frauds is applicable only to executory contracts, not to contracts that are totally or partially performed.
 A sufficient part performance by the purchaser under a parol contract for the sale of real estate removes the contract from
the operation of the statute of frauds.
 Chief Justice Moran: "The reason is simple. In executory contracts there is a wide field for fraud because unless they be in
writing there is no palpable evidence of the intention of the contracting parties. The statute has precisely been enacted to
prevent fraud." However, if a contract has been totally or partially performed, the exclusion of parol evidence would promote
fraud or bad faith, for it would enable the defendant to keep the benefits already denied by him from the transaction in
litigation, and, at the same time, evade the obligations, responsibilities or liabilities assumed or contracted by him thereby.
 It is not enough for a party to allege partial performance in order to hold that there has been such performance and to render
a decision declaring that the Statute of Frauds is inapplicable. But neither is such party required to establish such partial
performance by documentary proof before he could have the opportunity to introduce oral testimony on the transaction.
Indeed, such oral testimony would usually be unnecessary if there were documents proving partial performance. Thus, the
rejection of any and all testimonial evidence on partial performance, would nullify the rule that the Statute of Frauds is
inapplicable to contracts which have been partly executed, and lead to the very evils that the statute seeks to prevent.
 The true basis of the doctrine of part performance is that it would be a fraud upon the plaintiff if the defendant were
permitted to escape performance of his part of the oral agreement after he has permitted the plaintiff to perform in reliance
upon the agreement. The oral contract is enforced in harmony with the principle that courts of equity will not allow the statute
of frauds to be used as an instrument of fraud. In other words, the doctrine of part performance was established for the same
purpose for which, the statute of frauds itself was enacted, namely, for the prevention of fraud, and arose from the necessity
of preventing the statute from becoming an agent of fraud for it could not have been the intention of the statue to enable any
party to commit a fraud with impunity.
 When the party concerned has pleaded partial performance, such party is entitled to a reasonable chance to; establish by
parol evidence the truth of this allegation, as well as the contract itself. "The recognition of the exceptional effect of part
performance in taking an oral contract out of the statute of frauds involves the principle that oral evidence is admissible in
such cases to prove both the contract and the part performance of the contract".
 If the evidence of record fails to prove clearly that there has been partial performance, then the Court should apply the Statute
of Frauds, if the cause of action involved falls within the purview thereof. If the Court is, however, convinced that the obligation
in question has been partly executed and that the allegation of partial performance was not resorted to as a devise to
circumvent the Statute, then the same should not be applied.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
 In the case at bar, Poncio admitted in his answer that plaintiff had offered several times to purchase his land. Carbonnel and
Poncio entered in a written agreement signed and read by Poncio. This agreement states that Poncio would stay in the
land sold by him to plaintiff for one year free of charge, and that, if he cannot find a place where to transfer his house thereon,
he may remain in said lot under such terms as may be agreed upon.
 How shall we know whether there is any relation between the P247.26 entry therein and the partial payment of P247.26
allegedly made by plaintiff to Poncio on account of the price of his land, if we do not allow the plaintiff to explain it on the
witness stand? Without expressing any opinion on the merits of plaintiff's claim, it is clear, therefore, that she is entitled,
legally as well as from the viewpoint of equity, to an opportunity to introduce parol evidence in support of the allegations of
her complaint.
 Case is remanded to the lower court.
BABAO V. PEREZ, 102:756
FACTS:
Santiago Babao married the niece of Celestina Perez. 1924, Santi and Celestina allegedly had a verbal agreement where Santi
was bound to improve the land of Celestina by leveling, clearing, planting fruits and other crops; that he will act as the
administrator of the land; that all expenses for labor and materials will be at his cost, in consideration of which Celestina in turn
bound herself to convey to Santi or his wife ½ of the land,, with all the improvements after the death of Celestina. But, shortly
before Celestina’s death, she sold the land to another part. Thus, Santi filed this complaint alleging the sale of the land as
fraudulent and fictitious and prays to recover the ½ land or the expenses he incurred in improving the land.
ISSUE:
Whether or not the verbal agreement falls within the Stature of Frauds.
RATIONALE:
Contracts which by their terms are not to be performed within one year, may be taken out of the statute through performance by
one party thereto. All that is required in such case is complete performance within the year by one party, however many tears
may have to elapse before the agreement is performed by the other party. But nothing less than full performance by one party
will suffice, and it has been held that, if anything remains to be done after the expiration of the year besides the mere payment
of money, the statute will apply. It is not therefore correct to state that Santiago Babao has fully complied with his part within the
year from the alleged contract in question.
Having reached the conclusion that all the parol evidence of appellee was submitted in violation of the Statute of Frauds, or of
the rule which prohibits testimony against deceased persons, we find unnecessary to discuss the other issues raised in
appellants' brief.
CABAGUE V. AUXILIO, 92:294
FACTS:
In the justice of the peace court of Basud, Camarines Norte, Felipe Cabague and his son Geronimo sued the defendant Matias
Auxilio and his daughter Socorro to recover damages resulting from defendants' refusal to carry out the previously agreed
marriage between Socorro and Geronimo.
The complaint alleged, in short: (a) that defendants promised such marriage to plaintiffs, provided the latter would improve the
defendants' house in Basud and spend for the wedding feast and the needs of the bride; (b) that relying upon such promises
plaintiffs made the improvement and spent P700; and (c) that without cause defendants refused to honor their pledged word.
The defendants moved to dismiss, arguing that the contract was oral, unenforceable under the rule of evidence hereinbefore
mentioned. And the court dismissed the case. On appeal to the Court of First Instance, the plaintiffs reproduced their complaint
and defendants reiterated their motion to dismiss. From an order of dismissal this appeal was perfected in due time and form.
It should be observed preliminarily that, under the former rules of procedure, when the complaint did not state whether the
contract sued on was in writing or not, the statute of frauds could be no ground for demurrer. Under the new Rules "defendant
may now present a motion to dismiss on the ground that the contract was not in writing, even if such fact is not apparent on the
face of the complaint. The fact may be proved by him." (Moran Rules of Court 2d ed. p. 139 Vol. I.)
ISSUE:
According to the Rules of Court parol evidence is not admissible to prove an agreement made upon the consideration of marriage
other than a mutual promise to marry. This litigation calls for application of that rule.
COURT’S RULING:
There is no question here that the transaction was not in writing. The only issue is whether it may be proved in court.
Wherefore this expediente will be returned to the lower court for further proceedings in accordance with this opinion. So ordered.
RATIONALE:
The understanding between the plaintiffs on one side and the defendants on the other, really involves two kinds of agreement.
One, the agreement between Felipe Cabague and the defendants in consideration of the marriage of Socorro and Geronimo.
Another, the agreement between the two lovers, as "a mutual promise to marry". For breach of that mutual promise to marry,
Geronimo may sue Socorro for damages. This is such action, and evidence of such mutual promise is admissible. However
Felipe Cabague's action may not prosper, because it is to enforce an agreement in consideration of marriage. Evidently as to
Felipe Cabague and Matias Auxilio this action could not be maintained on the theory of "mutual promise to marry". Neither may
it be regarded as action by Felipe against Socorro "on a mutual promise to marry."
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Consequently, we declare that Geronimo may continue his action against Socorro for such damages as may have resulted from
her failure to carry out their mutual matrimonial promises.
Paras, C.J., Pablo, Padilla, Montemayor, Jugo, Bautista Angelo and Labrador, JJ., concur.
YUVIENCO V. DACUYCUY, 104 SCRA 668
Remedial Law; Civil Procedure; Pleadings; Rule that a motion to dismiss based on lack of cause of action the movant is deemed
to admit the factual allegations of the complaint, not applicable where no absolute acceptance of prospective buyer to buy the
property.· Respondents maintain that under existing jurisprudence relative to a motion to dismiss on the ground of failure of the
complaint to state a cause of action, the movant-defendant is deemed to admit the factual allegations of the complaint, hence,
petitioners cannot deny, for purposes of their motion, that such terms of payment had indeed been agreed upon. While such is
the rule, those allegations do not detract from the fact that under Article 1319 of the Civil Code above-quoted, and judged in the
light of the telegram-reply of Yao to Atty. GamboaÊs letter of July 12, 1978, there was not an absolute acceptance, hence from
that point of view, petitionersÊ contention that the complaint of respondents state no cause of action is correct.
Civil Law; Sales; Although there was no perfected contract of sale, the complaint has a cause of action when there was an
agreement of sale of the property and a down payment of the sale was made.·Our conclusion, therefore, is that although there
was no perfected contract of sale in the light of the letter of Atty. Gamboa of July 12, 1978 and the letter-reply thereto of Yao; it
being doubtful whether or not, under Article 1319 of the Civil Code, the said letter may be deemed as an offer to sell that i s
„certain‰, and more, the Yao telegram is far from being an „absolute‰ acceptance under said article, still there appears to be
a cause of action alleged in Paragraphs 8 to 12 of the respondentsÊ complaint, considering it is alleged therein that subsequent
to the telegram of Yao, it was agreed that the petitioners would sell the property to respondents for P6.5 M, by paying P2 M
down and the balance in 90 days and which agreement was allegedly violated when in the deeds prepared by Atty. Gamboa
and taken to Tacloban, only 30 days were given to the respondents.
Same; Same; Statute of Frauds; Mere claim that petitioners have unjustifiably refused to proceed with the sale of the property
is unenforceable under the Statute of Frauds in the absence of any note or memorandum and signed agreement of sale.·We
hold that either way We view the situation, the conclusion is inescapable that the claim of respondents that petitioners have
unjustifiably refused to proceed with the sale to them of the property in question is unenforceable under the Statute of Frauds. It
is nowhere alleged in said paragraphs 8 to 12 of the complaint that there is any writing or memorandum, much less a duly signed
agreement to the effect that the price of P6,500,000 fixed by petitioners for the real property herein involved was agreed to be
paid not in cash but in installments as alleged by respondents.
Same; Same; Same; In any sale of real property on installments, the Statute of Frauds read together with the perfection
requirements of Article 1475 of the Civil Code must be applied such that payment on installments of the sale must be in the
requisite note or memorandum.·We hold that in any sale of real property on installments, the Statute of Frauds read together
with the perfection requirements of Article 1475 of the Civil Code must be understood and applied in the sense that the idea of
payment on installments must be in the requisite of a note or memorandum therein contemplated.
Same; Same; Same; Under the Statute of Frauds, the contents of a note or memorandum is considered as the contract itself,
except as to the form.·To put it the other way, under the Statute of Frauds, the contents of the note or memorandum, whether in
one writing or in separate ones merely indicative for an adequate understanding of all the essential elements of the entire
agreement, may be said to be the contract itself, except as to the form.
Same; Same; Same; Duty of plaintiff when a motion to dismiss based on the Statute of Frauds is filed.·We are of the considered
opinion that under the rules on proper pleading, the ruling of the trial court that, even if the allegation of the existence of a sale
of real property in a complaint is challenged as barred from enforceability by the Statute of Frauds, the plaintiff may simply say
there are documents, notes or memoranda without either quoting them in or annexing them to the complaint, as if holding an
ace in the sleeves is not correct. To go directly to the point, for Us to sanction such a procedure is to tolerate and even encourage
undue delay in litigation, for the simple reason that to await the stage of trial for the showing or presentation of the requisite
documentary proof when it already exists and is asked to be produced by the adverse party would amount to unnecessarily
postponing, with the concomitant waste of time and the prolongation of the proceedings, something that can immediately be
evidenced and thereby determinable with decisiveness and precision by the court without further delay.
CLARIN V. RULONA, 127 SCRA 512
Civil Law; Contracts; Sales; Contract of sale, how perfected.—While it is true that Exhibits A and B are, in themselves, not
contracts of sale, they are, however, clear evidence that a contract of sale was perfected between the petitioner and the
respondent and that such contract had already been partially fulfilled and executed. A contract of sale is perfected at the moment
there is a meeting of minds upon the thing which is the object of the contract and upon the price. (Article 1475, Civil Code; Phil.
Virginia Tobacco Administration v. De los Angeles, 87 SCRA 210). Such contract is binding in whatever form it may have been
entered into. (Lopez v. Auditor General, 20 SCRA 655).
Same; Same; Same; Payment; Acceptance of payment, an indication of party’s consent to the contract; Statute of Frauds;
Contract partially executed, not covered by Statute of Frauds.—Hence, it cannot be denied that there was a perfected contract
of sale between the parties and that such contract was already partially executed when the petitioner received the initial payment
of P800.00. The latter’s acceptance of the payment clearly showed his consent to the contract thereby precluding him from
rejecting its binding effect. (See Federation of United Namarco Distributors, Inc. v. National Marketing Corporation, 4 SCRA 884).
With the contract being partially executed, the same is no longer covered by the requirements of the Statute of Frauds in order
to be enforceable. (See Khan v. Asuncion, 19 SCRA 996). Therefore, with the contract being valid and enforceable, the petitioner
cannot avoid his obligation by interposing that Exhibit A is not a public document. On the contrary, under Article 1357 of the Civil
Code, the petitioner can even be compelled by the respondent to execute a public document to embody their valid and
enforceable contract.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
Same, Same; Same; Validity of contract even though one of the parties entered into it against his better judgment.—The reasons
given by the petitioner cannot operate against the validity of the contract in question. A contract is valid even though one of the
parties entered into it against his better judgment. (See Lagunzad v. Vda. de Gonzales, 92 SCRA 476; citing Martinez v.
Hongkong and Shanghai Bank, 15 Phil. 252).
Same; Same; Same; Co-owner’s share bound by effect of sale although he cannot dispose of a specific portion of the sale.—
Finally, we agree with the lower court’s holding that although as a co-owner, the petitioner cannot dispose of a specific portion
of the land, his share shall be bound by the effect of the sale.
BISAYA LAND TRANSPORTATION V. SANCHEZ, 153 SCRA 532
Remedial Law; Receiver, A Court-appointed receiver cannot validly enter into a contract without court approval.—The general
powers of a court-appointed receiver are provided in Section 7, Rule 59 of the Rules of Court. Under such rule, the receiver is
"subject to the control of the court in which the action is pending" and he can "generally do such acts respecting the property as
the court may authorize". The act of Receiver Amor in entering into a contract of agency with Sanchez is not one of the acts
specifically allowed in the mentioned rule. While such act of Amor may be arguably implied from the power of the receiver to
"take and keep possession of the property in controversy", and that the act of Amor is covered by the broad phrase that a receiver
can "generally do such acts respecting the property as the court may authorize", still, it is necessary that the acts of the receiver
have the approval or authorization of the court which appointed him as a receiver. As held in one case, a courtappointed receiver
cannot validly enter into a contract without the approval of the court.
Same; Same; Same; Status of contracts entered into without Court's approval.—What then is the status of the Contracts which
Receiver Amor entered into with Sanchez, without the approval of the court which appointed him receiver? Even the petitioners
noticeably waver as to the exact status of these Contracts. The petitioners alleged in their Memorandum submitted to this Court
that they are void contracts under Article 1409(1) of the Civil Code, whereas, in their Petition, they labelled the contracts as
unenforceable under Article 1403(1) of the Civil Code. The determination, therefore, of whether the questioned contracts are
void or merely unenforceable is important, because of the settled distinction that a void and inexistent contract can not be ratified
and become enforceable, whereas, an unenforceable contract may still be ratified and, thereafter, enforced. The petitioners
allege that the Contracts are void, citing Article 1409(1) of the Civil Code which provides that contracts whose cause, object or
purpose is contrary to law, morals, good customs, public order or public policy, are inexistent and void from the beginning. In the
case at bar, the contracts of agency were entered into for the management and operation of BISTRANCO's business in Butuan
City. Said Contracts necessarily imposed obligations and liabilities on the contracting parties, thereby affecting the disposition
of the assets and business of the company under receivership. But a perusal of the Contracts in question would show that there
is nothing in their cause, object or purpose which renders them void. The purpose of the Contracts was to create an agency for
BISTRANCO with Marciano Sanchez as its agent in Butuan City. Even as to the other provisions of the Contracts, there is
nothing in their cause or object which can be said as contrary to law, morals, good customs, public order or public policy so as
to render them void. On the other hand, paragraph 1, Article 1403 of the Civil Code provides that contracts "entered into in the
name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers"
are unenforceable, unless they are ratified. In the case at bar, it is undisputed that Atty. Adolfo Amor was entrusted, as receiver,
with the administration of BISTRANCO and its business. But the act of entering into a contract is one which requires the
authorization of the court which appointed him receiver. Consequently, the questioned Contracts can rightfully be classified as
unenforceable for having been entered into by one who had acted beyond his powers, due to Receiver Amor's failure to secure
the court's approval of said Contracts.
Same; Same; Same; Facts showing that the unenforceable contracts were nevertheless deemed ratified in the case at bar.—
Private respondent Sanchez filed his complaint in the lower court on 28 December 1979. But on 10 January 1980, co-petitioner
Benjamin G. Roa, as Executive Vice-President of BISTRANCO, still sent Sanchez three (3) separate letters with the following
contents: (1) reducing his passage commission from 10%, as he used to receive in the previous years, to 7½% "as stated in the
agency contract dated 27 July 1976;" (2) advising Sanchez that in view of "his failure to post a bond or such other securities
acceptable to the company in the sum of P5,000.00 pursuant to par. 8 of the Contract executed by Sanchez the plaintiff with
BISTRANCO on 27 July 1976, we are recalling all unused passage tickets issued your agency" and reminding him (Sanchez)
also that "pursuant to par. 2 of aforementioned Contract, solicitation of cargo and passengers shall be undertaken by you strictly
in accordance with the scheduled rates of the Company"; and (3) informing Sanchez that "we (petitioners) are abiding strictly
with the terms of the contracts executed between Marciano C. Sanchez and Atty. Adolfo V. Amor in behalf of BISTRANCO, etc.
etc." The three (3) letters of Benjamin G. Roa in effect recognized and gave efficacy to the Contracts in question. The declaration
of Benjamin G. Roa that BISTRANCO did not have any knowledge about the Contracts before the complaint was filed on 28
December 1979 is contradicted by his own testimony that, as early as 14 December 1979, he was already looking for the contract,
after he saw Exhibit "NN", wherein Sanchez requested the company "to abide with the terms of the contract which will expire on
July 1981". Besides, the pretended lack of knowledge of Benjamin G. Roa can not be equated with BISTRANCO's. It should be
noted that Roa started to work for BISTRANCO only on 27 April 1979, whereas, the Contracts were executed in 1976. The
people who were more in a position to know about the Contracts, like the company officers and members of the board of directors
at the time the Contracts were entered into, especially Antonio V. Cuenco, were never presented as witnesses. Aside from this,
the company cannot deny its ratification of the Contracts even before the time of Benjamin G. Roa, because when Atty. Fulveo
Pelaez succeeded Atty. Adolfo Amor as Receiver, he was represented by BISTRANCO's shipping manager as having taken
cognizance of these Contracts and sanctioned the acts of Sanchez as shipping agent of BISTRANCO in Butuan City. This is
shown by a letter, dated 15, February 1977, written by Capt. Federico Reyes, the shipping manager of BISTRANCO at that time.
The letter states that "the Receiver (Atty. Fulveo Pelaez) maintains that the previous agency contract remains and (sic) basically
the same except that the rates of the agency commission were modified". Furthermore, it is clear that BISTRANCO received
material benefits from the contracts of agency of Sanchez, based upon the monthly statements of income of BISTRANCO upon
which the commissions of Sanchez were based A perusal of the Contracts will also show that there is no single provision therein
that can be said as prejudicial or not beneficial to BISTRANCO.
HERNANDEZ V. CA, 160 SCRA 821
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Civil Procedure: Statute of Frauds: Not every agreement affecting land must be put in writing to attain enforceability.—The
respondents’ reliance on the Statute of Frauds to secure a contrary judgment is misplaced. The Statute of Frauds finds no
application to this case. Not every agreement “affecting land” must be put in writing to attain enforceability. Under the Statute of
Frauds, Article 1403(2) (e) of the Civil Code, such formality is only required of contracts involving leases for longer than one
year, or for the sale of real property or of an interest therein. Hernandez’s testimony is thus admissible to establish his agreement
with Fr. Garcia as to the boundary of their estates.
VICTORIA V. CA, 194 SCRA 19
Civil Law; Statute of Frauds; The principle of the Statute of Frauds applies only to executory contracts, not to contracts either
totally or partially performed.—Apparently, the trial court relied on the Statute of Frauds principle which requires “an agreement
for the sale x x x” of real property or an interest therein (Art. 1403(e)) to be in writing. It overlooked the fact that this principle
applies only to executory contracts. As correctly observed by the Court of Appeals: ‘The Statute of Frauds is applicable only to
executory contracts, not to contracts either totally or partially performed. Thus, where a contract of sale is alleged to be
consummated, it matters not that neither the receipt for the consideration nor the sale itself was in writing, because oral evidence
of the alleged consummated sale is not forbidden by the Statute of Frauds and may not be excluded in court. (Iñigo vs. Estate
of Maloto, 21 SCRA (1901) 246)’
MACTAN V. CA, 263 SCRA 736
Evidence; Parol Evidence Rule; Contracts; Pleadings and Practice; A party may present evidence to modify, explain or add to
the terms of a written agreement if he puts in issue in his pleading the failure of the written agreement to express the true intent
of theparties thereto.—Under the parol evidence rule, when the terms of an agreement have been reduced into writing, it is
considered as containing all the terms agreed upon, and there can be, between the parties and their successors-in-interest, no
evidence of such terms other than the contents of the written agreement. However, a party may present evidence to modify,
explain or add to the terms of the written agreement if he puts in issue in his pleading, the failure of the written agreement to
express the true intent of the parties thereto.
Same; Same; Same; Same; Where a parol contemporaneous agreement was the moving cause of the written contract, or where
the parol agreement forms part of the consideration of the written contract, and it appears that the written contract was executed
on the faith of the parol contract or representation, such evidence is admissible.—In the case at bench, the fact which private
respondents seek to establish by parol evidence consists of the agreement or representation made by the NAC that induced
Inez Ouano to execute the deed of sale; that the vendors and their heirs are given the right of repurchase should the government
no longer need the property. Where a parol contemporaneous agreement was the moving cause of the written contract, or where
the parol agreement forms part of the consideration of the written contract, and it appears that the written contract was executed
on the faith of the parol contract or representation, such evidence is admissible. It is recognized that proof is admissible of any
collateral parol agreement that is not inconsistent with the terms of the written contract though it may relate to the same subject
matter. The rule excluding parol evidence to vary or contradict a writing does not extend so far as to preclude the admission of
existing evidence to show prior or contemporaneous collateral parol agreements between the parties, but such evidence may
be received, regardless of whether or not the written agreement contains any reference to such collateral agreement, and
whether the action is at law or in equity.
Same; Same; Same; A protest or objection against the admission of any evidence must be made at that proper time, and if not
so made, it will be understood to have been waived.—More importantly, no objection was made by petitioner when private
respondents introduced evidence to show the right of repurchase granted by the NAC to Inez Ouano. It has been repeatedly laid
down as a rule of evidence that a protest or objection against the admission of any evidence must be made at the proper time,
and if not so made, it will be understood to have been waived.
Same; Same; Same; Statute of Frauds; In the case at bench, the deed of sale and the verbal agreement allowing the right of
repurchase should be considered as an integral whole — the deed of sale is in itself the note or memorandum evidencing the
contract.—Under Art. 1403 of the Civil Code, a contract for the sale of real property shall be unenforceable unless the same or
some note or memorandum thereof be in writing and subscribed by the party charged or his agent. Evidence of the agreement
cannot be received without the writing, or a secondary evidence of its contents. In the case at bench, the deed of sale and the
verbal agreement allowing the right of repurchase should be considered as an integral whole. The deed of sale relied upon by
petitioner is in itself the note or memorandum evidencing the contract. Thus, the requirement of the Statute of Frauds has been
sufficiently complied with.
Same; Same; Same; Same; The Statute of Frauds was enacted for the purpose of preventing fraud — it should not be made
the instrument to further them.—Moreover, the principle of the Statute of Frauds only applies to executory contracts and not to
contracts either partially or totally performed, as in this case, where the sale has been consummated; hence, the same is taken
out of the scope of the Statute of Frauds. As the deed of sale has been consummated, by virtue of which, petitioner accepted
some benefits thereunder, it cannot now deny the existence of the agreement. The Statute of Frauds was enacted for the purpose
of preventing fraud. It should not be made the instrument to further them.
CITY OF CEBU V. HEIRS OF RUBI, 306 SCRA 408
Same; Same; Statute of Frauds; Under the statute of frauds, an agreement for the sale of real property or of an interest thereon
shall be unenforceable “unless the same or some note or memorandum thereof be in writing” and subscribed by the party
charged or his agent; An exchange of written correspondence between the parties may constitute sufficient writing to evidence
the agreement for purposes of complying with the statute of frauds.—As stated, no deed of sale was ever formalized but there
was compliance with the requirements of the statute of frauds. Under this law, an agreement for the sale of real property or of
an interest thereon shall be unenforceable “unless the same or some note or memorandum thereof be in writing” and subscribed
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
by the party charged or his agent. We hold that the exchange of written correspondence between the parties, earlier cited,
constitutes sufficient writing to evidence the agreement for purposes of complying with the statute of frauds.
Article 1405
Art. 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of Article 1403, are ratified by
the failure to object to the presentation of oral evidence to prove the same, or by the acceptance of benefit
under them.
LIMKETKAI V. CA, 250 SCRA 523
Same; Same; Statute of Frauds; The fact that the deed of sale still has to be signed and notarized does not mean that no contract
has already been perfected—the requisite form under Article 1458 of the Civil Code is merely for greater efficacy or convenience
and the failure to comply therewith does not affect the validity and binding effect of the act between the parties.—In the case at
bench, the allegation of NBS that there was no concurrence of the offer and acceptance upon the cause of the contract is belied
by the testimony of the very BPI official with whom the contract was perfected. Aromin and Albano concluded the sale for BPI.
The fact that the deed of sale still had to be signed and notarized does not mean that no contract had already been perfected.
A sale of land is valid regardless of the form it may have been entered into (Claudel vs. Court of Appeals, 199 SCRA 113, 119
[1991]). The requisite form under Article 1458 of the Civil Code is merely for greater efficacy or convenience and the failure to
comply therewith does not affect the validity and binding effect of the act between the parties (Vitug, Compendium of Civil Law
and Jurisprudence, 1993 Revised Edition, p. 552). If the law requires a document or other special form, as in the sale of real
property, the contracting parties may compel each other to observe that form, once the contract has been perfected. Their right
may be exercised simultaneously with action upon the contract (Article 1359, Civil Code).
Same; Same; Same; Cross-examination on the contract is deemed a waiver of the defense of the Statute of Fraud.—In any
event, petitioner cites Abrenica vs. Gonda (34 Phil. 739 [1916]) wherein it was held that contracts infringing the Statute of Frauds
are ratified when the defense fails to object, or asks questions on cross-examination. In the instant case, counsel for respondents
cross-examined petitioner’s witnesses at length on the contract itself, the purchase price, the tender of cash payment, the
authority of Aromin and Revilla, and other details of the litigated contract. Under the Abrenica rule (reiterated in a number of
cases, among them Talosig vs. Vda. De Nieba, 43 SCRA 472 [1972]), even assuming that parol evidence was initially
inadmissible, the same became competent and admissible because of the cross-examination, which elicited evidence proving
the evidence of a perfected contract. The cross-examination on the contract is deemed a waiver of the defense of the Statute of
Frauds (Vitug, Compendium of Civil Law and Jurisprudence, 1993 Revised Edition, supra, p. 563).
Same; Same; Same; An exception to the unenforceability of contracts pursuant to the Statute of Frauds is the existence of a
written note or memorandum evidencing the contract, which memorandum may be found in several writings, not necessarily in
one document.—Moreover, under Article 1403 of the Civil Code, an exception to the unenforceability of contracts pursuant to
the Statute of Frauds is the existence of a written note or memorandum evidencing the contract. The memorandum may be
found in several writings, not necessarily in one document. The memorandum or memoranda is/are written evidence that such
a contract was entered into.
Article 1409
Art. 1409. The following contracts are inexistent and void from the beginning:
(1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order
or public policy;

(2) Those which are absolutely simulated or fictitious; 

(3) Those whose cause or object did not exist at the time of the transaction;

 (4) Those whose object is outside the commerce of men;

(5) Those which contemplate an impossible service; 

(6) Those where the intention of the parties relative to the principal object of the contract cannot
be ascertained;

(7) Those expressly prohibited or declared void by law.
These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived.
RUBIAS V. BATILLER, 51 SCRA 120
Facts:
Domingo D. Rubias, a lawyer, filed a suit to recover the ownership and possession of certain portions of land located in Barrio
General Luna, Barotac Viejo, Iloilo which he bought from his father-in-law, Francisco Militante in 1956 against its present
occupant defendant, Isaias Batiller, who illegally entered said portions of the lot. Before the war with Japan, Francisco Militante
filed with the Court of First Instance of Iloilo an application for the registration of the title of the land. However, the record of the
case was lost before it was heard, so after the war, Francisco Militante filed a petition, wherein petitioner Rubias was the counsel,
to reconstitute the record of the case but it was dismissed. While on appeal, Militante sold the land to Rubias. Respondent, on
the other hand, claims that the land was originally owned and possessed by his great-grandfather, and since succeeding his
father, Batiller has the possession of the land, with actual, open, public, peaceful and continuous possession in the concept of
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an owner, exclusive of any other rights and adverse to all other claimants. Defendant further claimed that the sale of the land to
petitioner was void and invoked Articles 1409 and 1491 of the Civil Code:
Art. 1409. The following contracts are inexistent and void from the beginning:
(7) Those expressly prohibited by law.
'ART. 1491. The following persons cannot acquire any purchase, even at a public auction, either in person of through the
mediation of another:
(5) Justices, judges, prosecuting attorneys, clerks of superior and inferior courts, and other officers and employees
connected with the administration of justice, the property and rights of in litigation or levied upon an execution before
the court within whose jurisdiction or territory they exercise their respective functions; this prohibition includes the
act of acquiring an assignment and shall apply to lawyers, with respect to the property and rights which may be the
object of any litigation in which they may take part by virtue of their profession.'
Issue:
Whether or not the contract of sale between petitioner and his father-in-law, Francisco Militante Sr., was void because it was
made when petitioner was the counsel of the latter in the land registration case.
Held:
The contract of sale between petitioner and his father-in-law was void and could produce no legal effect and cannot be ratified.
Rationale:
In Castan’s rationale, fundamental considerations of public policy render void and inexistent such expressly prohibited purchase.
Under Article 1491, paragraphs (4) and (5) of the Civil Code, such prohibited contracts are "inexistent and void from the
beginning." The nullity of such prohibited contracts is definite and permanent and cannot be cured by ratification. The public
interest and public policy remain paramount and do not permit of compromise or ratification.
Meanwhile, the permanent disqualification of public and judicial officers and lawyers grounded on public policy differs from the
first three cases of guardians, agents and administrators (Article 1491, Civil Code), as to whose transactions it had been opined
that they may be "ratified" by means of and in "the form of a new contract, in which cases its validity shall be determined only by
the circumstances at the time the execution of such new contract. The causes of nullity which have ceased to exist cannot impair
the validity of the new contract. Thus, the object which was illegal at the time of the first contract, may have already become
lawful at the time of the ratification or second contract; or the service which was impossible may have become possible; or the
intention which could not be ascertained may have been clarified by the parties. The ratification or second contract would then
be valid from its execution; however, it does not retroact to the date of the first contract. But in the disqualification of public and
judicial officers, even when the private parties seek to ratify the private wrong, such cannot resurrect and validate a relationship,
which continues to be tainted with a public wrong.
JAVIER V. VDA. DE CRUZ, 80 SCRA 343
Contracts; Nullity of; Lack of consent and consideration; Where circumstances indicate that alleged vendor did not voluntarily
affix his thumbmark on the deed of sale and did not receive any consideration for said sale; Case at bar.—Eusebio Cruz could
not talk, was very ill and was about to die when his thumbmark was affixed on the deed of sale. Delfin Cruz did not have any
means of livelihood. He was only the houseboy of Eusebio Cruz. It is obvious that on January 17, 1941 Delfin Cruz could not
have raised the amount of P700.00 as consideration of the land supposedly sold to him by Eusebio Cruz. Although the deed of
sale purports to convey a parcel of land with an area of only 26,577 square meters, defendants, as heirs of Delfin Cruz, claim a
much bigger land containing an area of 182,959 square meters assessed at P4,310.00. The consideration of P700.00 is not only
grossly inadequate but is shocking to the conscience. No sane person would sell the land claimed by the defendants for only
about P40.00 per hectare. In view of the foregoing, this Court finds that Eusebio Cruz did not voluntarily affix his thumbmark on
the deed of sale and did not receive any consideration for said sale.
However, the undisputed facts of record support the evidence of the plaintiff that the deed of sale of the land in question is void
and inexistent for lack of consent and consideration.
It is a fact that on January 17, 1941 when the deed of sale was executed, Eusebio Cruz was almost 100 years old and was in a
weak condition.
Leonardo Valle, son of the notary public, Ciriaco Valle, declared that Eusebio Cruz was already very old and could not answer
the question whether the signature on the deed of sale, Exhibit A, was his signature. The pertinent portion of the testimony of
Leonardo Valle reads:
“Q What did your father do when you arrived at the house of Eusebio Cruz in Calle Javier, Taytay, Rizal?
A My father asked Eusebio Cruz whether the signature affixed in Exhibit A was his signature.
Q From whom did your father ask that question?
A My father asked that question from Eusebio Cruz.
Q What did Eusebio Cruz answer to the question asked by your father if he ever answered anything?
A. Eusebio Cruz could hardly answer because he was already very old.
Q As a matter of fact, did Eusebio Cruz answer your father when your father asked him the question?
A Eusebio Cruz could not answer. He could not understand him.
Q What happened after your father asked Eusebio Cruz and the latter could not answer?
A Delfin Cruz told my father that it was really the signature of Eusebio Cruz so that my father went home to have the document ratified at home.” of a property subject of litigation. The article provides:
Eusebio Cruz could not talk, was very ill and was about to die when his thumbmark was affixed on the deed of sale, Exhibit A.
Delfin Cruz did not have any means of livelihood. He was only the houseboy of Eusebio Cruz.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
It is obvious that on January 17, 1941 Delfin Cruz could not have raised the amount of P700.00 as consideration of the land
supposedly sold to him by Eusebio Cruz.
Although the deed of sale, Exhibit A, purports to convey a parcel of land with an area of only 26,577 square meters, defendants,
as heirs of Delfin Cruz, claim a much bigger land containing an area of 182,959 square meters assessed at P4,310.00.The
consideration of P700.00 is not only grossly inadequate but is shocking to the conscience. No sane person would sell the land
claimed by the defendants for only about P40.00 per hectare.
In view of the foregoing, this Court finds that Eusebio Cruz did not voluntarily affix his thumbmark on the deed of sale, Exhibit A,
and did not receive any consideration for said sale.
MENIL V. CA, 84 SCRA 413
Civil Law; Contracts of sale; Homesteads; Contract of sale of homestead within the 5-year prohibitory period is void and sale
cannot be confirmed nor ratified.—It cannot be claimed that there are two contracts: One which is undisputably null and void,
and another, having been executed after the lapse of the 5-year prohibitory period, which is valid. The second contract of sale
executed on March 3, 1964 is admittedly a Confirmatory deed of sale. Even the petitioners concede this point. Inasmuch as the
contract of sale executed on May 7, 1960 is void for it is expressly prohibited or declared void by law [CA 141, Section 118], it
therefore cannot be confirmed nor ratified.
Same; Same; Same; Simulated contracts; The second contract of sale for the same homestead in favor of the same vendee for
the same price is ample manifestations that the second sale is simulated and that no object or consideration in the second
contract of sale has passed between the parties.—Further, noteworthy is the fact that the second contract of sale over the said
homestead in favor of the same vendee, petitioner Potenciano Menil, is for the same price of P415.00. Clearly, the unvarying
term of the said contract is ample manifestation that the same is simulated and that no object or consideration passed between
the parties to the contract. It is evident from the whole record of the case that the homestead had long been in the possessi on
of the vendees upon the execution of the first contract of sale on May 7, 1960; likewise, the amount of P415.00 had long been
paid to Agueda Garan on that same occasion. We find no evidence to the contrary.
HELD
Contracts are void and inexistent.
It cannot be claimed that there are two contracts: one which is undisputably null and void, and another, having been executed
after the lapse of the 5-year prohibitory period, which is valid. The second contract of sale executed on March 3, 1964 is
admittedly a confirmatory deed of sale. Even the petitioners concede this point. Inasmuch as the contract of sale executed on
May 7, 1960 is void for it is expressly prohibited or declared void by law [CA 141, Section 118], it therefore cannot be confinned
nor ratified.
Further, noteworthy is the fact that the second contract of sale over the said homestead in favor of the same vendee, petitioner
Potenciano Menil, is for the same price of P415.00. Clearly, the unvarying term of the said contract is ample manifestation that
the same is simulated and that no object or consideration passed between the parties to the contract. It is evident from the whole
record of the case that the homestead had long been in the possession of the vendees upon the execution of the first contract
of sale on May 7, 1960; likewise, the amount of P415.00 had long been paid to Agueda Garan on that same occasion. We find
no evidence to the contrary.
With respect to the Resolution of January 16, 1976 of the respondent appellate court, likewise assailed by petitioners, which
granted the motion for reconsideration of the Development Bank of the Philippines and declared the mortgage executed by
Potenciano Menil over the land in favor of said Bank to be valid. We hold that petitioners are liable for the payment of the
agricultural loan obtained by them from the Bank for which the land was mortgaged by them as security.
DIRECTOR OF LANDS V. ABABA, 88 SCRA 513
Facts:
Adverse claimant is Atty. Alberto Fernandez who was previously hired by Maximo Abarquez as counsel in litigation against the
latter’s sister, Agripina Abarquez. The litigation was over two lots in Cebu that Maximo claims he rightfully inherited from his
parents but was fraudulently divested from by his sister when she made him sign a pacto de retro. Litigating as a pauper, Maximo
agreed to reimburse Atty. Fernandez for his services by agreeing to pay him on a contingent basis. This meant that, should
Maximo win the case against his sister, Atty. Fernandez would receive one-half (1/2) of whatever might be recovered in the two
lots that were subject of litigation. After Maximo won the case against his sister, and hence ownership of the two lots, he
inexplicably refused to give Atty. Fernandez his one-half share. Instead, Maximo (petitioner) offered the whole parcels of land to
petitioner-spouses Larrazabal. Upon hearing of this, Atty. Fernandez filed an adverse claim on the property on July 19,1965
with the Register of Deeds of Cebu. On July 25, 1965, Maximo and his wife, Anastacia, despite the adverse claim annotated on
the TCT, conveyed by deed of absolute sale three-fourths of the property to spouses Larrazabal. Petitioner-spouses then
petitioned the CFI of Cebu to remove the adverse claim on the TCT. Such petition was denied, hence the present appeal by
petitioner-spouses to the Supreme Court.
Petitioners contend that a contract for contingent fee violates Article 1491 of the New Civil Code because it involves an
assignment
“Article 1491. The following persons cannot acquire by purchase even at a public or judicial auction, either in person or through
the mediation of another: xxx xxx (5) Justices, judges, prosecuting attorneys, clerks of superior and inferior courts , and other
officers and employees connected with the administration of justice, the property and right in litigation or levied upon an execution
before the court within whose jurisdiction or territory they exercise their respective functions; this prohibition includes the act of
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acquiring by assignment and shall apply to lawyers, with respect to the property and rights which may be the object of any
litigation in which they may take part by virtue of their profession” (italics supplied)
Issue:
Is the contract for a contingent fee prohibited by Article 1491 of the New Civil Code and the Canons of Professional Ethics thus
making the adverse claim of Atty. Fernandez null and void?
Held:
Article 1491 does not apply. A stipulation for payment through contingent fee is valid. For having purchased the property with
the knowledge of the valid adverse claim, petitioner-spouses are in bad faith. Consequently they are estopped from questioning
the validity of the adverse claim. The decision of the lower court denying the petition for the cancellation of the adverse claim is
AFFIRMED.
Rationale:
Article 1491 prohibits only the sale or assignment between lawyer and his client of property which is the subject of litigation. In
other words, for the prohibition to operate, the sale or assignment must take place during the pendency of the litigation involving
the property. A contract for a contingent fee is not covered by Art. 1491 because the transfer or assignment of the property in
litigation takes effect only after the finality of a favorable judgment.
Petitioners invoke Canon 10 of the Canons of Professional Ethics which prohibits a lawyer from purchasing any interest in the
subject matter of the litigation which he is conducting. Canon 13, however, allows for a reasonable contingent fee but should
always be subject to the supervision of a court. Only if it is shown that the contract for a contingent fee was obtained by any
undue influence or fraud of the attorney over his client will the court protect the aggrieved party. In this case, there is no iota of
proof to show that Atty. Fernandez had exerted any undue influence or fraud over his client, Maximo Abarquez, and the
compensation of one-half of the lots in question is not excessive nor unconscionable considering the contingent nature of the
attorney’s fees. Thus, Atty. Fernandez’ claim should be respected. Indeed he has a better right than petitioner-spouses.
Additionally, the Court quoted Justice Malcolm who wrote on contingent fees:
“x x x the system of contingent compensation has the merit of affording to certain classes of persons the opportunity to procure
the prosecution of their claims which otherwise would be beyond their means. In many cases in the United States and the
Philippines, the contingent fee is socially necessary”
TONGOY V. CA, 123 SCRA 99
Contracts; Nature of a simulated contract.—The characteristic of simulation is the fact that the apparent contract is not really
desired nor intended to produce legal effects nor in any way alter the juridical situation of the parties. Thus, where a person, in
order to place his property beyond the reach of his creditors, simulates a transfer of it to another, he does not really intend to
divest himself of his title and control of the property; hence, the deed of transfer is but a sham. This characteristic of simulation
was defined by this Court in the case of Rodriguez vs. Rodriguez, No. L-23002, July 31, 1967, 20 SCRA 908.
Same; Nature of a contract void ab initio.—A void or inexistent contract is one which has no force and effect from the very
beginning, as if it had never been entered into, and which cannot be validated either by time or by ratification (p. 592, Civil Code
of the Philippines, Vol. IV, Tolentino, 1973 Ed.).
Same; Same.—A void contract produces no effect whatsoever either against or in favor of anyone; hence, it does not create,
modify or extinguish the juridical relation to which it refers (p. 594, Tolentino, supra).
Same; Characteristics of a void ab initio contract.—The following are the most fundamental characteristics of void or inexistent
contracts: 1) As a general rule, they produce no legal effects whatsoever in accordance with the principle “quod nullum est
nullum producit effectum.” 2) They are not susceptible of ratification. 3) The right to set up the defense of inexistence or absolute
nullity cannot be waived or renounced. 4) The action or defense for the declaration of their inexistence or absolute nullity is
imprescriptible. 5) The inexistence or absolute nullity of a contract cannot be invoked by a person whose interests are not directly
affected (p. 444, Comments and Jurisprudence on Obligations and Contracts. Jurado, 1969 Ed.; italics supplied).
Same; Actions; Prescription; The right of action against a simulated, void ab initio contract does not prescribe.—Considering the
law and jurisprudence on simulated or fictitious contracts as aforestated, the within action for reconveyance instituted by herein
respondents which is anchored on the said simulated deeds of transfer cannot and should not be barred by prescription. No
amount of time could accord validity or efficacy to such fictitious transactions, the defect of which is permanent.
Same; Trust; A contract of transfer of property that is void ab initio and fictitious does not create an implied trust.—There is no
implied trust that was generated by the simulated transfers; because being fictitious or simulated, the transfers were null and
void ab initio—from the very beginning—and thus vested no rights whatsoever in favor of Luis Tongoy or his heirs. That which
is inexistent cannot give life to anything at all.
Trust; Prescription; Land Registration; Where ownership of land was transferred fictitiously to avoid a foreclosure of mortgage,
the 10-year prescriptive period (in implied trusts) should be counted not from the registration of the simulated sale, but from the
recording of the release of the mortgage.—Considering that the implied trust resulted from the simulated sales which were made
for the purpose of enabling the transferee, Luis D. Tongoy, to save the properties from foreclosure for the benefit of the co-
owners, it would not do to apply the theory of constructive notice resulting from the registration in the trustee’s name. Hence, the
ten-year prescriptive period should not be counted from the date of registration in the name of the trustee, as contemplated in
the earlier case of Juan vs. Zuniga (4 SCRA 1221). Rather, it should be counted from the date of recording of the release of
mortgage in the Registry of Deeds, on which date—May 5, 1958—the cestui que trust were charged with the knowledge of the
settlement of the mortgage obligation, the attainment of the purpose for which the trust was constituted.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
Same; Same; Case at bar.—Consequently, petitioner Francisco A. Tongoy as successor-in-interest and/or administrator of the
estate of the late Luis D. Tongoy, is under obligation to return the shares of his co-heirs and co-owners in the subject properties
and, until it is done, to render an accounting of the fruits thereof from the time that the obligation to make a return arose, which
in this case should be May 5, 1958, the date of registration of the document of release of mortgage.
Same; Prescription begins to run when there is failure to return the property in question.—When the mortgages were constituted,
respondents Cresenciano Tongoy and Norberto Tongoy were still minors, while respondent Amado Tongoy became of age on
August 19, 1931, and Ricardo Tongoy attained majority age on August 12, 1935. Still, considering that such transfer of the
properties in the name of Luis D. Tongoy was made in pursuance of the master plan to save them from foreclosure, the said
respondents were precluded from doing anything to assert their rights. It was only upon failure of the herein petitioner, as
administrator and/or successor-in-interest of Luis D. Tongoy, to return the properties that the prescriptive period should begin to
run. As above demonstrated, the prescriptive period is ten years from the date of recording on May 5, 1958 of the release of
mortgage in the Registry of Deeds.
LITA ENTERPRISES V. IAC, 129 SCRA 79
Civil Law; Transportation; Contracts; Illegal Contracts; „Kabit system‰, concept of; „Kabit system‰, contrary to public policy
and void and inexistent; Court cannot allow either of the parties to enforce an illegal contract but leaves them both where it finds
them. ·Unquestionably, the parties herein operated under an arrangement, commonly known as the „kabit system‰, whereby a
person who has been granted a certificate of convenience allows another person who owns motor vehicles to operate under
such franchise for a fee. A certificate of public convenience is a special privilege conferred by the government. Abuse of this
privilege by the grantees thereof cannot be countenanced. The „kabit system‰ has been identified as one of the root causes of
the prevalence of graft and corruption in the government transportation offices. In the words of Chief Justice Makalintal, „this is
a pernicious system that cannot be too severely condemned. It constitutes an imposition upon the good faith of the
government.‰ Although not outrightly penalized as a criminal offense, the „kabit system‰ is invariably recognized as b eing
contrary to public policy and, therefore, void and inexistent under Article 1409 of the Civil Code. It is a fundamental principle that
the court will not aid either party to enforce an illegal contract, but will leave them both where it finds them. Upon this premise, it
was flagrant error on the part of both the trial and appellate courts to have accorded the parties relief from their predicament.
Article 1412 of the Civil Code denies them such aid.
Same; Same; Same; Same; Same; Parties who entered into an illegal contract cannot seek relief from the courts and each must
bear the consequences of his acts.·„Ex pacto illicito non oritur actio‰ [No action arises out of an illicit bargain] is the time-
honored maxim that must be applied to the parties in the case at bar. Having entered into an illegal contract, neither can seek
relief from the courts, and each must bear the consequences of his acts.
Same; Same; Same; Same; Defect of inexistence of contract permanent and incurable.·The defect of inexistence of a contract
is permanent and incurable, and cannot be cured by ratification or by prescription. As this Court said in Eugenio v. Perdido, „the
mere lapse of time cannot give efficacy to contracts that are null and void.‰
Same; Same; Same; In pari delicto rule, applicable in case at bar where parties entered into an illegal contract like the „Kabit
system.‰·The principle of in pari delicto is well known not only in this jurisdiction but also in the United States where common
law prevails. Under American jurisdiction, the doctrine is stated thus: „The proposition is universal that no action arises, in equity
or at law, from an illegal contract; no suit can be maintained for its specific performance, or to recover the property agreed to be
sold or delivered, or damages for its violation. The rule has sometimes been laid down as though it was equally universal, that
where the parties are in pari delicto, no affirmative relief of any kind will be given to one against the other.‰ Although certain
exceptions to the rule are provided by law, We see no cogent reason why the full force of the rule should not be applied in the
instant case.
ARSENAL V. IAC, 143 SCRA 40
Public Lands; Contracts; Sale; A sale of homestead land within the prohibited period is void. A 3rd person affected by a void
contract may set up its nullity.—Being void, the foregoing principles and rulings are applicable. Thus, it was erroneous for the
trial court to declare that the benefit of the prohibition in the Public Land Act “does not inure to any third party.” Such a sweeping
declaration does not find support in the law or in precedents. A third person who is directly affected by a void contract may set
up its nullity. In this case, it is precisely the petitioners’ interest in the disputed land which is in question.
Same; Same; Same; A sale of homestead land within the prohibited period cannot be confirmed or ratified later It remains void.—
As to whether or not the execution by the respondents Palaos and Suralta of another instrument in 1973 cured the defects in
their previous contract, we reiterate the rule that an alienation or sale of a homestead executed within the five-year prohibitory
period is void and cannot be confirmed or ratified. This Court has on several occasions ruled on the nature of a confirmatory
sale and the public policy which proscribes it.
Same; Same; Same; That the petitioners were in bad faith when they purchased the entire lot 81 instead of excluding the portion
sold earlier to Suralta by the homesteader is amply supported by the evidence.—In this case, there is substantial evidence to
sustain the verdict of bad faith. We find several significant findings of facts made by the courts below, which were not disputed
by the petitioners, crucial to its affirmance. First of all, we agree with the lower court that it is unusual for the petitioners, who
have been occupying the disputed land for four years with respondent Suralta to believe, without first verifying the fact, that the
latter was a mere mortgagee of the portion of land he occupies. Second, it is unlikely that the entire 8.7879 hectares of land was
sold to them for only P800.00 in 1967 considering that in 1957, a four-hectare portion of the same was sold to the respondent
Suralta for P819.00. The increased value of real properties through the years and the disparity of the land area show a price for
the land too inadequate for a sale allegedly done in good faith and for value.
Same; Same; Same; Same.— Third, contrary to the usual conduct of good faith purchasers for value, the petitioners actively
encouraged the respondent Suralta to believe that they were co-owners of the land. There was no dispute that the petitioners.
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Without informing the respondent Suralta of their title to the land, kept the latter in peaceful possession of the land he occupies
and received annual real estate tax contributions from him. It was only in 1973 when the respondent Suralta discovered the
petitioners’ title to the land and insisted on a settlement of the adverse claim that the petitioners registered their deed of sale and
secured a transfer certificate of title in their favor.
Same; Same; Same; Equity; Equitable reasons will not control a settled rule of law or public policy, such as sale of a homestead
within the prohibited period—At first blush, the equities of the case seem to lean in favor of the respondent Suralta who, since
1957, has been in possession of the land which was almost acquired in an underhanded manner by the petitioners. We cannot,
however, gloss over the fact that the respondent Suralta was himself guilty of transgressing the law by entering, in 1957, into a
transaction clearly prohibited by law. It is a long standing principle that equity follows the law. Courts exercising equity jurisdiction
are bound by rules of law and have no arbitrary discretion to disregard them. Equitable reasons will not control against any well-
settled rule of law or public policy (McCurdy v. County of Shiawassee, 118 N.W. 625). Thus, equity cannot give validity to a void
contract. If, on the basis of equity, we uphold the respondent Suralta’s claim over the land which is anchored on the contracts
previously executed we would in effect foe giving life to a void contract.
Same; Same; Same; Land Registration; Where homestead was sold within the prohibited period, the original grantee shall be
entitled to issuance of the title thereon back to his name without prejudice to the Government filing an action for reversion.—
There is another observation worthy of consideration. This Court has ruled in a number of cases that the reversion of a public
land grant to the government is effected only at the instance of the Government itself (Gacayan v. Leano, 121 SCRA 260;
Gonzalo Puyat & Sons, Inc. v. De las Ama and Aliño, 74 Phil. 3), The reversion contemplated in the Public Land Act is not
automatic. The Government has to take action to cancel the patent and the certificate of title in order that the land involved may
be reverted to it (Villacorta v. Ulanday, 73 Phil. 655). Considering that this is an ordinary civil action in which the Government
has not been included as a party and in view of the settled jurisprudence, we rule against the automatic reversion of the land in
question to the State.
Same; Same; Same; Same; Same.—We see, however, a distinguishing factor in this case that sets it apart from the above
cases. The original owners in this case, the respondent Palaos and his wife, have never disaffirmed the contracts executed
between them and the respondent Suralta. More than that, they expressly sustained the title of the latter in court and failed to
show any interest in recovering the land, Nonetheless, we apply our earlier rulings because we believe that as in pari delicto
may not be invoked to defeat the policy of the State neither may the doctrine of estoppel give a validating effect to a void contract.
Indeed, it is generally considered that as between parties to a contract, validity cannot be given to it by estoppel if it is prohibited
by law or is against public policy (19 Am. Jur. 802). It is not within the competence of any citizen to barter away what public
policy by law seeks to preserve (Gonzalo Puyat & Sons, Inc. v. De los Amas and Aliño, supra). Of course, this pronouncement
covers only the previous transactions between the respondents. We cannot pass upon any new contract, between the same
parties involving the same land if this is their clear intention. Any new transaction, however, would be subject to whatever steps
the Government may take for the reversion of the property to it.
MANOTOK REALTY V. IAC, 149 SCRA 372
Civil Law; Sales; Sale of the paraphernal property of the deceased wife by the husband who was neither an owner nor
administrator of the property at the time of sale is void ab initio; Sale which is void cannot be subject of ratification by the company
or the probate court.—We are, therefore, led to the inevitable conclusion that the sale between Don Vicente Legarda and the
private respondent is void ab initio, the former being neither an owner nor administrator of the subject property. Such being the
case, the sale cannot be the subject of the ratification by the Philippine Trust Company or the probate court.
Same; Same; Same; Rule of procedure on how a property in custodia legis can be disposed of by sale: Failure of private
respondent to comply with such rule to protect his interests or to pay the balance of the installments to the court appointed
administrator, is fatal to his cause.—After the appointment of Don Vicente Legarda as administrator of the estate of Dona Clara
Tambunting, he should have applied before the probate court for authority to sell the disputed property in favor of the private
respondent. If the probate court approved the request, then Don Vicente Legarda would have been able to execute a valid deed
of sale in favor of the respondent. Unfortunately, there was no effort on the part of t he administra tor to comply with the above-
quoted rule of procedure nor on that of the respondent to protect his interests or to pay the balance of the installments to the
court appointed administrator.
PORTUGAL V. IAC, 159 SCRA 178
Civil Law; Contracts; Property; Sale; Where the contract of sale is vitiated by the total absence of a valid cause or consideration,
the contract is void or inexistent; Deed of sale is void ab initio or inexistent not merely voidable.—More than these, the alleged
contract of sale is vitiated by the total absence of a valid cause or consideration. The petitioners in their complaint, assert that
they, particularly Cornelia, never knew of the existence of the questioned deed of sale. They claim that they came to know of
the supposed sale only after the private respondent, upon their repeated entreaties to produce and return the owner’s duplicate
copy of the transfer certificate of title covering the two parcels of land, showed to them the controversial deed. And their claim
was immeasurably bolstered when the private respondent’s co defendant below, his brother Emiliano Portugal, who was
allegedly his co-vendee in the transaction, disclaimed any knowledge or participation therein. If this is so, and this is not
contradicted by the decisions of the courts below, the inevitable implication of the allegations is that contrary to the recitals found
in the assailed deed, no consideration was ever paid at all by the private respondent. Applying the provisions of Articles 1350,
1352, and 1409 of the new Civil Code in relation to the indispensable requisite of a valid cause or consideration in any contract,
and what constitutes a void or inexistent contract, we rule that the disputed deed of sale is void ab initio or inexistent, not merely
voidable.
Same; Same; Same; Same; Prescription; An action or defense for the declaration of the inexistence of a contract does not
prescribe.—And it is provided in Article 1410 of the Civil Code, that "(T)he action or defense for the declaration of the existence
of a contract does not prescribe.”
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
Same; Same; Same; Same; Same; The action for reconveyance of a parcel of land based on an implied or constructive trust in
case at bar is seasonably filed, as the action prescribes in 10 years from date of registration of the deed or the date of the
issuance of the certificate of title over the property.—But even if the action of the petitioners is for reconveyance of the parcel of
land based on an implied or constructive trust, still it has been seasonably filed. For as heretofore stated, it is now settled that
actions of this nature prescribe in ten years, the point of reference being the date of registration of the deed or the date of the
issuance of the certificate of title over the property.
BOARD OF LIQUIDATORS V. ROXAS, 179 SCRA 809
Civil Law; Sales; Assignment; Land Titles; Petitioner having acquired the property by assignment from its owner in consideration
of her subscription to shares of capital stocks, she is the titled and absolute owner of the property.—Since it is not disputed that
petitioner PDCI is the titled owner of Lot No. 3247 having acquired the same by assignment from its owner Maria Roxas Lisao
for and in consideration of her subscription to shares of capital stocks in the PDCI, petitioner PDCI is therefore the absolute
owner of the property. And even if, as claimed by respondent Jose Roxas, Maria Roxas Lisao had subsequently executed a
quitclaim, deed and donation of said property in favor of her brothers and sisters who in turn allegedly verbally sold the same to
respondent, such subsequent disposition is of no legal effect whatsoever inasmuch as Maria has no more right or title whatever
over the property in question to convey to her brothers and sisters including respondent Jose Roxas.
Same; Same; Same; Same; Prescription or laches; Even if the respondent has been in actual possession of the property for
more than 10 years, the registered title of petitioner over the property cannot be lost by prescription or laches.—And even if it
may be true that respondent Jose Roxas had been in actual possession of the property in question for more than ten (10) years,
the registered title of the petitioner PDCI over the property cannot be lost by prescription or laches as respondent claims.
Same; Same; Same; Same; Property acquired by respondent in bad faith as the property had been assigned; Assignment was
duly registered and annotated on the title, and is notice to the whole world.—On the contrary, what is obvious is that respondent
Roxas was in bad faith when he allegedly acquired said property as he knew and should have known that as early as 1940 the
same had already been assigned by his sister Maria Roxas Lisao to PDCI. The assignment was duly registered and annotated
on the Original Certificate of Title of Maria on the basis of which Transfer Certificate of Title was issued in the name of PDCI.
Such annotation and issuance of title is notice to the whole world including respondent.
Same; Same; Same; Same; Assignment of the property was not a mere assignment in trust but an assignment of the entire
property in consideration of the shares of stocks.—The contention of the respondent that the assignment to petitioner PDCI was
only an assignment in trust so that his sister Maria still remained to be the owner of the same property, the title being hel d in
trust by petitioner PDCI, is untenable. On the contrary, what appears from the record is that the assignment was not a mere
assignment in trust but an assignment of the entire property in consideration of the shares of stocks that Maria acquired from
the PDCI.
Same; Same; Same; Same; Quitclaim, deed and donation are null and void as the property can no longer be conveyed.—Thus,
since what appears to have been conveyed by Maria to her brothers and sisters was no longer her property, the quitclaim, deed
and donation that she executed are null and void. As a matter of fact even prior to said conveyance, the property had been
mortgaged by PDCI to the NFPC who is certainly a mortgagee in good faith.
Same; Same; Same; Same; Statute of Frauds; Alleged verbal sale of the property is null and void; Sale of land, which is verbal,
is not a valid sale and not enforceable under the Statute of Frauds.—Furthermore, the alleged verbal sale executed by the
donees brothers and sisters of Maria Roxas Lisao in favor of respondent Jose Roxas is also null and void not only because they
had no title to convey but also because the sale of the land, which is verbal, and the presentation of which was timely objected
to, are not enforceable under the statute of frauds. It is not a valid sale, and is inadmissible in evidence.
Same; Same; Same; Same; Property registered to respondent in bad faith.—Note must be taken of paragraph 4 of the quitclaim,
deed and donation allegedly executed by Maria, wherein it is stated “that Maria Roxas Lisao desires to donate the land or its
equivalent share of stocks that the PDCI may issue in acceptance thereof x x x,” Obviously, private respondent knew of the
transfer of the said lot to PDCI in consideration of its shares of stocks. The quitclaim, deed and donation was executed only in
1952 long after the property was assigned to PDCI. Said document was not even registered in the office of the Register of Deeds.
The Court of Appeals, therefore, erred in considering PDCI to have registered the property in its name in bad faith.
FIESTAN V. CA, 185 SCRA 751
Same; Same; Same; Prohibition mandated by par (2) of Article 1491 in relation to Article 1409 of the Civil Code does not apply
where the sale of the property in dispute was made under a special power inserted in or attached to the real estate mortgage
pursuant to Act No. 3135 as amended.—The prohibition mandated by par. (2) of Articles 1491 in relation to Article 1409 of the
Civil Code does not apply in the instant case where the sale of the property in dispute was made under a special power inserted
in or attached to the real estate mortgage pursuant to Act No. 3135, as amended. It is a familiar rule of statutory construction
that, as between a specific statute and general statute, the former must prevail since it evinces the legislative intent more clearly
than a general statute does. The Civil Code (R.A. 386) is of general character while Act No. 3135, as amended, is a special
enactment and therefore the latter must prevail.
Same; Same; Same; Same; Section 5 of Act No. 3135, as amended, is an exception to the general rule that a mortgagee or
trustee in a mortgage or deed of trust which contains a power of sale on default may not become the purchaser at a sale which
he himself makes under the power.—In other words, Section 5 of Act No. 3135, as amended, creates and is designed to create
an exception to the general rule that a mortgagee or trustee in a mortgage or deed of trust which contains a power of sale on
default may not become the purchaser, either directly or through the agency of a third person, at a sale which he himself makes
under the power. Under such an exception, the title of the mortgagee-creditor over the property cannot be impeached or defeated
on the ground that the mortgagee cannot be a purchaser at his own sale.
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OUANO V. CA, 188 SCRA 799
Criminal Law; Machinations in public auctions under Art. 185 of the RPC; Causing another bidder to stay away from the auction
in order to cause reduction of the price of the property auctioned.—These acts constitute a crime, as the Trial Court has stressed.
Ouano and Echavez had promised to share in the property in question as a consideration for Ouano's refraining from taking part
in the public auction, and they had attempted to cause and in fact succeeded in causing another bidder to stay away from the
auction in order to cause reduction of the price of the property auctioned. In so doing, they committed the felony of machinations
in public auctions defined and penalized in Article 185 of the Revised Penal Code, supra.
Same; Same; Contracts; In pari delicto principle applicable in the case at bar; Inexistent and void contracts cannot be ratified.—
That both Ouano and Echavez did these acts is a matter of record, as is the fact that thereby only one bid—that of Echavez—
was entered for the land in consequence of which Echavez eventually acquired it. The agreement therefore being criminal in
character, the parties not only have no action against each other but are both liable to prosecution and the things and price of
their agreement subject to disposal according to the provisions of the criminal code. This, in accordance with the so-called pari
delicto principle set out in the Civil Code. Article 1409 of said Code declares as "inexistent and void from the beginning" those
contracts, among others, "whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy,"
or "expressly prohibited x x by law." Such contracts "cannot be ratified;" "the right to set up the defense of illegality (cannot) be
waived;" and, Article 1410 adds, the "action or defense for the declaration of the inexistence x x (thereof) does not prescribe."
Same; Same; Same; Same; Forfeiture of the proceeds of the crime and the instruments or tools with which it was committed;
Disposition of the land involved.—The dismissal of Ouano's action by both the Trial Court and the Court of Appeals was thus
correct, being plainly in accord with the Civil Code provisions just referred to. Article 1411 also dictates the proper disposition
of the land involved, i.e., "the forfeiture of the proceeds of the crime and the instruments or tools with which it was committed,"
as mandated by the provisions of Article 45 of the Revised Penal Code, this being obviously the provision "of the Penal Code
relative to the disposal of effects or instruments of a crime" that Article 1411 makes "applicable to the things or the price of the
contract."
DBP V. CA, 249 SCRA 331
Civil Law; Contracts; If both parties have no fault or are not guilty, the restoration of what was given by each of them to the other
is consequently in order.—The Court of Appeals, after an extensive discussion, found that there had been no bad faith on the
part of either party, and this remains uncontroverted as a fact in the case at bar. Correspondingly, respondent court correctly
applied the rule that if both parties have no fault or are not guilty, the restoration of what was given by each of them to the other
is consequently in order. This is because the declaration of nullity of a contract which is void ab initio operates to restore things
to the state and condition in which they were found before the execution thereof.
Same; Same; Purchaser is entitled to recover the money paid by him where the contract is set aside by reason of the mutual
material mistake of the parties as to the identity or quantity of the land sold.—Therefore, the purchaser is entitled to recover the
money paid by him where the contract is set aside by reason of the mutual material mistake of the parties as to the identity or
quantity of the land sold. And where a purchaser recovers the purchase money from a vendor who fails or refuses to deliver the
title, he is entitled as a general rule to interest on the money paid from the time of payment.
Same; Same; The contract of loan executed between the parties is entirely different and discrete from the deed of sale they
entered into.—In its legal context, the contract of loan executed between the parties is entirely different and discrete from the
deed of sale they entered into. The annulment of the sale will not have an effect on the existence and demandability of the loan.
One who has received money as a loan is bound to pay to the creditor an equal amount of the same kind and quality.
Same; Same; Fact that the annulment of the sale will also result in the invalidity of the mortgage does not have an effect on the
validity and efficacy of the principal obligation.—The fact that the annulment of the sale will also result in the invalidity of the
mortgage does not have an effect on the validity and efficacy of the principal obligation, for even an obligation that is unsupported
by any security of the debtor may also be enforced by means of an ordinary action. Where a mortgage is not valid, as where it
is executed by one who is not the owner of the property, or the consideration of the contract is simulated or false, the principal
obligation which it guarantees is not thereby rendered null and void. That obligation matures and becomes demandable in
accordance with the stipulations pertaining to it.
LA’O V. REPUBLIC, 479 SCRA 439 [2006]
DOCTRINE
The Anti-Graft and Corrupt Practices Act expressly declares null and void a contract which is grossly disadvantageous to the
government. It is null and void from the beginning.
I. FACTS:
GSIS is the registered owner of 3 parcels of land in Ermita with an area of around 821 m2, a 5-storey building and improvements.
GSIS and the RP, through the Office of the Government Corporate Counsel (OGCC), entered into 2 contracts:
1. A "lease-purchase" agreement on June 22, 1978 where GSIS agreed to transfer the property to the OGCC for P1.5
million, payable in equal yearly amortization-lease rentals of P100,000 for a period of 15 years.
On December 22, 1980, petitioner offered to purchase the property.
2. On May 10, 1982, GSIS and petitioner executed a second "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.
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
Under this second contract, GSIS obligated itself to construct for the OGCC a 3-storey building on the Manila Bay
reclaimed area OR to make available another property acceptable to the OGCC, to be conveyed to the RP under the
same or mutually acceptable terms 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.
Pres. Marcos and the Board of Trustees of GSIS approved the contract by signing their signatures on the same.
In 1989, after the overthrow of Marcos (in 1986), respondents filed before the RTC of Manila a complaint against petitioner
alleging that:
Upon petitioner’s behest and representations, then Pres. Marcos directed the transfer of the property to petitioner. By reason of
insidious machinations, the RP, through the OGCC, was forced, intimidated and coerced to execute a waiver of its rights and
interests to the property, and the BOT of the GSIS was likewise constrained to approve the offer of petitioner and to execute the
2nd Lease-Purchase Agreement.
The 2nd Lease-Purchase Agreement is burdensome and grossly disadvantageous to the RP. Notwithstanding that the property
was already valued then at or about P10,000,000.00, they were sold for only P2,000,000.00, and, worse yet, payable on a fifteen-
year installment basis. Furthermore, the agreement obligated the GSIS to provide an office and parking space equivalent to a
3-storey office building at its new building in the Manila Bay Area or some other acquired properties to house its offices. The
value of this obligation of the GSIS to the Republic, at the moment is worth at least (P20,000,000.00).
Since the terms of [the] second agreement are manifestly and grossly disadvantageous to the government the contract is contrary
to law, being violative of RA 3019, and the public officers responsible thereof are liable under Section 3(g) of [RA 3019].
Considering that the cause or consideration of the second contract is contrary to law, the same is void (Art. 1352, Civil Code).
Also, it was contended that the 2nd agreement was not yet approved by the president; yet was taken possession of and leased
to 3rd parties with rent and profits obtained.
Considering the 2nd lease agreement to be void, petitioner should pay for the office space he had been occupying and to account
for and to return to the Republic, though the OGCC, all moneys he unjustly received, including those received from such tenant-
lessees as rentals, with interest at the legal rate until fully paid. Nullification of the contract was sought.
RTC ruled in favor of respondents and declared the 2nd lease-purchase agreement null and void. It also ordered the forfeiture
in favor of respondents of the purchase price paid by petitioner to GSIS as well as the rentals received by petitioner. The CA
affirmed.
II. ISSUE:
WON the 2nd contract valid as claimed by petitioner, or null and void as decided by the RTC and affirmed by the CA
III. HELD:
YES, Null and void. Decision affirmed.
IV. RATIO:
The second contract was null and void ab initio for being in contravention of Section 3(e) and (g) of RA 3019, otherwise known
as the "Anti-Graft and Corrupt Practices Act". Both the trial and appellate courts found that the second contract gave petitioner
unwarranted benefits and was grossly disadvantageous to the government. Under Article 1409(7) of the Civil Code, the contract
was null and void from the beginning.
The Agreement between [petitioner] and the GSIS which is the subject of the instant case had in fact transferred the
economic benefits which the Republic used to enjoy to [petitioner]. At the end of [15] years, [petitioner] shall become the
absolute owner of the subject property upon full payment of the [15] yearly amortizations. At bottom, however, is the fact that, at
least for the first [five] years of the [Agreement], [petitioner] shall not be shelling out of his own pocket the yearly amortization
since the same shall be covered by the annual rental coming from the OGCC and the other tenants thereof. In the meantime,
the Republic, thru the OGCC, shall not only be appropriating additional funds for its annual rental but worse, it was stripped of
the opportunity to become the absolute owner of the subject property. Add to this the difference between consideration and the
market value of the property (approx. 5-8 million).
On this respect, [respondents’] assertion that the subject Agreement is at the behest of [petitioner] and is grossly
disadvantageous to the Republic had become self-evident. Some economic implications: the Republic would need to
appropriate additional funds to pay for its rentals and abandon the chance of becoming the owner of the subject
property which it uses for governmental purposes and the fact that the subject property was negotiated by the government
via a losing proposition.
BORROMEO V. MINA, 697 SCRA 516 [2013]
Civil Law; Contracts; Void Contracts; A void contract is equivalent to nothing; it produces no civil effect; and it does not create,
modify or extinguish a juridical relation.—In consequence, petitioner cannot assert any right over the subject landholding, such
as his present claim for landholding exemption, because his title springs from a null and void source. A void contract is equivalent
to nothing; it produces no civil effect; and it does not create, modify or extinguish a juridical relation. Hence, notwithstanding the
erroneous identification of the subject landholding by the MARO as owned by Cipriano Borromeo, the fact remains that petitioner
had no right to file a petition for landholding exemption since the sale of the said property to him by Garcia in 1982 is null and
void. Proceeding from this, the finding that petitioner’s total agricultural landholdings is way below the retention limits set forth
by law thus, becomes irrelevant to his claim for landholding exemption precisely because he has no right over the aforementioned
landholding.
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 CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE
Agrarian Reform; Presidential Decree No. 27; P.D. No. 27 prohibits the transfer of ownership over tenanted rice and/or corn
lands after October 21, 1972 except only in favor of the actual tenant-tillers thereon.—PD 27 prohibits the transfer of ownership
over tenanted rice and/or corn lands after October 21, 1972 except only in favor of the actual tenant-tillers thereon. As held
in the case of Sta. Monica Industrial and Development Corporation v. DAR Regional Director for Region III, 555 SCRA 97 (2008)
citing Heirs of Batongbacal v. CA, 389 SCRA 517 (389). x x x P.D. No. 27, as amended, forbids the transfer or alienation of
covered agricultural lands after October 21, 1972 except to the tenant-beneficiary. x x x. In Heirs of Batongbacal v. Court
of Appeals, 389 SCRA 517 (2002), involving the similar issue of sale of a covered agricultural land under P.D. No. 27, this Court
held: Clearly, therefore, Philbanking committed breach of obligation as an agricultural lessor. As the records show, private
respondent was not informed about the sale between Philbanking and petitioner, and neither was he privy to the transfer of
ownership from Juana Luciano to Philbanking. As an agricultural lessee, the law gives him the right to be informed about matters
affecting the land he tills, without need for him to inquire about it. x x x x In other words, transfer of ownership over tenanted
rice and/or corn lands after October 21, 1972 is allowed only in favor of the actual tenant-tillers thereon. Hence, the sale
executed by Philbanking on January 11, 1985 in favor of petitioner was in violation of the aforequoted provision of P.D. 27 and
its implementing guidelines, and must thus be declared null and void.
RECIO V. HEIRS OF ALTAMIRANO, GR 182349, 24 JULY 2013
Civil Law; Sales; Contract of Sale; A valid contract of sale requires: (a) a meeting of minds of the parties to transfer ownership
of the thing sold in exchange for a price; (b) the subject matter, which must be a possible thing; and (c) the price certain in money
or its equivalent.―A valid contract of sale requires: (a) a meeting of minds of the parties to transfer ownership of the thing sold
in exchange for a price; (b) the subject matter, which must be a possible thing; and (c) the price certain in money or its equivalent.
In the instant case, all these elements are present. The records disclose that the Altamiranos were the ones who offered to sell
the property to Nena but the transaction did not push through due to the fault of the respondents. Thereafter, the petitioner
renewed Nena’s option to purchase the property to which Alejandro, as the representative of the Altamiranos verbally agreed.
The determinate subject matter is Lot No. 3, which is covered under TCT No. T-102563 and located at No. 39 10 de Julio Street
(now Esteban Mayo Street), Lipa City, Batangas. The price agreed for the sale of the property was Five Hundred Thousand
Pesos (P500,000.00). It cannot be denied that the oral contract of sale entered into between the petitioner and Alejandro was
valid.
Article 1410
Art. 1410. The action or defense for the declaration of the inexistence of a contract does not prescribe.
YANAS V. ACAYLAR, 136 SCRA 52
Civil Law; Sales; Badges of fraud and fictitiousness; Case at bar.·We hold that the sale was fictitious and fraudulent. Among the
badges of fraud and fictitiousness taken collectively are the following: (1) the fact that the sale is in English, the alleged vendor
being illiterate; (2) the fact that his wife did not join in the sale and that her name is indicated in the deed as „Maria S. Yanas‰
when the truth is that her correct name is Maria Aglimot Yanas; (3) the obvious inadequacy of P200 as price for a 13-hectare
land (P15.40 a hectare); (4) the notarization of the sale on the day following the alleged thumbmarking of the document; (5) the
failure to state the boundaries of the lot sold; (6) the fact that the governor approved it more than two years after the all eged
sale; (7) its registration more than three years later, and (8) the fact that the Acaylars were able to occupy only four hectares out
of the 13 hectares and were eventually forcibly ousted therefrom by the children and agents of the vendor. It was not a fair and
regular transaction done in the ordinary course of business.
Same; Same; Patent contradictions in the testimonies of the principal witnesses of the buyers fatal to their alleged ownership of
the land.·The grave flaws in the evidence for defendants Acaylar are the patent contradictions in the testimonies of Antonio L.
Acaylar and lawyer Hamoy, their principal witnesses on the validity of the sale. Acaylar testified that he signed the deed of sale
and that one Tupas was an instrumental witness (12-13 tsn May 4, 1970). The truth is that Acaylar never signed the deed and
Tupas was not a witness. The instrumental witnesses were Hamoy and Paulino Empeynado. Hamoy at first testified on
November 20, 1968 that on August 7, 1950 he was a witness in the deed of sale (Exh. 2 and 6) executed by Yanas who had
requested him to look for a buyer of his lot (122-124 tsn). That means that Hamoy met Yanas in August, 1950. More than a year
later, or on June 22, 1970, Hamoy, testifying as a rebuttal witness for Acaylar, declared on direct and cross-examination that he
last saw Yanas in 1946 (103-106). He absurdly stated that his name appears as an instrumental witness in the deed of sale but
he testified; „That is my name but I did not sign that‰ (107)
Same; Same; Contracts; Action or defense for the declaration of inexistence of a contract does not prescribe.·The fact that the
alleged sale took place in 1950 and the action to have it declared void or inexistent was filed in 1963 is immaterial. The action
or defense for the declaration of the inexistence of a contract does not prescribe (Art. 1410, Civil Code).
Article 1411
Art. 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. (1305)
BARSOBIA V. CUENCO, 113 SCRA 547
DOCTRINE
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
Civil Law; Sales; Sale of land to a Chinese citizen in 1936 renders sale inexistent and void from the beginning; Reason.—There
should be no question that the sale of the land in question in 1936 by Epifania to Ong King Po was inexistent and void from the
beginning (Art. 1409 [7], Civil Code) because it was a contract executed against the mandatory provision of the 1935 Constitution,
which is an expression of public policy to conserve lands for the Filipinos.
Same; Same; Same; Exception is, where land previously sold by the Filipino citizen to the Chinese, a disqualified vendee, was
latersold by the Chinese to a qualified person, a naturalized Filipino citizen, Reason.—But the factual set-up has changed. The
litigated property is now in the hands of a naturalized Filipino. It is no longer owned by a disqualified vendee. Respondent, as a
naturalized citizen, was constitutionally qualified to own the subject property. There would be no more public policy to be served
in allowing petitioner Epifania to recover the land as it is already in the hands of a qualified person.
Same; Same; Laches; Filipino landowner barred from asserting claim of ownership over the land for inexcusable neglect, despite
absence of rights of ownership of Chinese to transmit the property.—While, strictly speaking, Ong King Po, private respondent’s
vendor, had no rights of ownership to transmit, it is likewise inescapable that petitioner Epifania had slept on her rights for 26
years from 1936 to 1962. By her long inaction or inexcusable neglect, she should be held barred from asserting her claim to the
litigated property (Sotto vs. Teves, 86 SCRA 157 [1978]).
FACTS & HELD
A parcel of coconut land was sold by its Filipino owner, petitioner Epifania, to a Chinese, Ong King Po, and by the latter to a
naturalized Filipino, respondent herein. In the meantime, the Filipino owner had unilaterally repudiated the sale she had made
to the Chinese and had resold the property to another Filipino. The basic issue is: Who is the rightful owner of the property?
There should be no question that the sale of the land in question in 1936 by Epifania to Ong King Po was inexistent and void
from the beginning (Art. 1409 [7], Civil Code)6 because it was a contract executed against the mandatory provision of the 1935
Constitution, which is an expression of public policy to conserve lands for the Filipinos. Said provision reads:
“Save in cases of hereditary succession, no private agricultural land shall be transferred or assigned except to individuals,
corporations, or associations, qualified to acquire or hold lands of the public domain.”7
The litigated property is now in the hands of a naturalized Filipino. It is no longer owned by a disqualified vendee. Respondent,
as a naturalized citizen, was constitutionally qualified to own the subject property. There would be no more public policy to be
served in allowing petitioner Epifania to recover the land as it is already in the hands of a qualified person.
While, strictly speaking, Ong King Po, private respondent’s vendor, had no rights of ownership to transmit, it is likewise
inescapable that petitioner Epifania had slept on her rights for 26 years from 1936 to 1962. By her long inaction or inexcusable
neglect, she should be held barred from asserting her claim to the litigated property (Sotto vs. Teves, 86 SCRA 157 11978]).
GODINEZ V. FONG, 120 SCRA 223
Land Registration; Property; Sales; Contracts; A parcel of land sold to a Chinese citizen which the latter subsequently sold to a
Filipino Citizen can no longer be recovered by the vendor.—The meaning of the above provision was fully discussed in Krivenko
v. Register of Deeds of Manila (79 Phil. 461) which also detailed the evolution of the provision in the public land laws, Act No.
2874 and Commonwealth Act No. 141. The Krivenko ruling that “under the Constitution aliens may not acquire private or
agricultural lands, including residential lands” is a declaration of an imperative constitutional policy. Consequently, prescription
may never be invoked to defend that which the Constitution prohibits. However, we see no necessity from the facts of this case
to pass upon the nature of the contract of sale executed by Jose Godinez and Fong Pak Luen—whether void ab initio, illegal per
se, or merely prohibited.** It is enough to stress that insofar as the vendee is concerned, prescription is unavailing. But neither
can the vendor or his heirs rely on an argument based on imprescriptibility because the land sold in 1941 is now in the hands of
a Filipino citizen against whom the constitutional prescription was never intended to apply. The lower court erred in treating the
case as one involving simply the application of the statute of limitations.
Same; Same; Same; Same; Same.—From the fact that prescription may not be used to defend a contract which the Constitution
prohibits, it does not necessarily follow that the appellants may be allowed to recover the property sold to an alien. As earlier
mentioned, Fong Pak Luen, the disqualified alien vendee later sold the same property to Trinidad S. Navata, a Filipino citizen
qualified to acquire real property.
YAP V. GRAGEDA, 121 SCRA 244
Civil Law; Sales; Constitutional Law; Sale of a residential lot to a Chinese national who had been a naturalized Filipino citizen
for 15 years at time of sale, valid; Ban on aliens from acquiring agricultural and urban lands under the 1935 Constitution, not
applicable; Reason; Case at bar.—The rulings in Vasquez v. Li Seng Giap et al. (96 Phil. 447) and Sarosa Vda. de Bersabia v.
Cuenco (113 SCRA 547) sustain the petitioner’s contentions. We stated in Sarosa Vda. de Bersabia: “There should be no
question that the sale of the land in question in 1936 by Epifania to Ong King Po was inexistent and void from the beginning (Art.
1409 [7], Civil Code) because it was a contract executed against the mandatory provision of the 1935 Constitution, which is an
expression of public policy to conserve lands for the Filipinos. x x x “But the factual set-up has changed. The litigated property
is now in the hands of a naturalized Filipino. It is no longer-owned by a disqualified vendee. Respondent, as a naturalized citizen,
was constitutionally qualified to own the subject property. There would be no more public policy to be served in allowing petitioner
Epifania to recover the land as it is already in the hands of a qualified person. Applying by analogy the ruling of this Court in
Vasquez vs. Giap and Li Seng Giap & Sons: “ ‘x x x if the ban on aliens from acquiring not only agricultural but also urban lands,
as construed by this Court in the Krivenko case, is to preserve the nation’s lands for future generations of Filipinos, that aim or
purpose would not be thwarted but achieved by making lawful the acquisition of real estate by aliens who became Filipino
Citizens by naturalization.’ ”
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 CIVIL LAW REVIEW II (OBLIGATIONS AND CONTRACTS) | ATTY. R.F. BALANE
PINEDA V. DE LA RAMA, 121 SCRA 671
Same; Same; Same; Civil Law; Obligations; Promissory note void ab initio where consideration for the note is to influence public
officers in the performance of their duties.—Whether or not the supposed cash advances reached their destination is of no
moment. The consideration for the promissory note—to influence public officers in the performance of their duties—is contrary
to law and public policy. The promissory note is void ab initio and no cause of action for the collection cases can arise from it.
Mercantile Law; Negotiable Instruments Law; Presumption that a negotiable instrument is issued for a valuable consideration
only prima facie.—The Court of Appeals’ reliance on the above provision is misplaced. The presumption that a negotiable
instrument is issued for a valuable consideration is only prima facie. It can be rebutted by proof to the contrary. (Bank of the
Philippine Islands v. Laguna Coconut Oil Co. et al., 48 Phil. 5).
Same; Same; Promissory notes; Grant of loan by a lawyer to a moneyed client without security and interest for the loan and
whom he had known only for 3 months, not believed; Case at bar.—We agree with the trial court which believed Pineda. It is
indeed unusual for a lawyer to lend money to his client whom he had known for only three months, with no security for the loan
and no interest. Dela Rama testified that he did not even know what Pineda was going to do with the money he borrowed from
him. The petitioner had just purchased a hacienda in Mindoro for P210,000.00, owned sugar and rice lands in Tarlac of around
800 hectares, and had P60,000.00 deposits in three banks when he executed the note. It is more logical to believe that Pineda
would not borrow P5,000.00 and P4,300.00 five days apart from a man whom he calls a “fixer” and whom he had known for only
three months.
YU BUN GUAN V. ONG, 367 SCRA 559
DOCTRINE
The principle of in pari delicto provides that when two parties are equally at fault, the law leaves them as they are and denies
recovery by either one of them. The principle applies to cases where the nullity arises from the illegality of the consideration or
the purpose of the contract. However, this principle does not apply with respect to inexistent and void contracts.
FACTS:
Parties are husband (Guan) and wife (Ong), having been married according to Chinese rites on April 30, 1961. They lived
together until Ong and her children were abandoned by Guan on August 26, 1992, because of the latter's 'incurable promiscuity,
volcanic temper and other vicious vices'.
Ong purchased on March 20, 1968, out of her personal funds, a parcel of land, then referred to as the Rizal property, from
Aurora Seneris.
Before their separation in 1992, Ong 'reluctantly agreed' to Guan’s 'importunings' that she execute a Deed of Sale of the Rizal
property in his favor, but on the promise that he would construct a commercial building for the benefit of the children. He
suggested that the Rizal property should be in his name alone so that she would not be involved in any obligation. The
consideration for the 'simulated sale' was that, after its execution in which he would represent himself as single, a Deed of
Absolute Sale would be executed in favor of the three (3) children and that he would pay the Allied Bank, Inc. the loan he
obtained.
Because of the 'glib assurances' of Guan, Ong executed a Deed of Absolute Sale in 1992, but then he did not pay the
consideration of P200,000.00, supposedly the 'ostensible' valuable consideration. On the contrary, she paid for the capital gains
tax and all the other assessments even amounting to not less than P60,000.00, out of her personal funds.
Because of the sale, a new title was issued in his name, but to 'insure' that he would comply with his commitment, she did not
deliver the owner's copy of the title to him.
Because of the refusal of Guan to perform his promise, and also because he insisted on delivering to him the owner's copy of
the title the Rizal property, in addition to threats and physical violence, she decided executing an Affidavit of Adverse Claim.
Also to avoid burdening the JP Rizal property with an additional loan amount, she wrote the Allied Bank, Inc. on August 25,
1992, withdrawing her authority for Guan to apply for additional loans.
Guan, on the other hand, filed with the RTC, Makati, a 'Petition for Replacement' of an owner's duplicate title. Attached to the
Petition was the Affidavit of Loss in which he falsely made it appear that the owner's copy of the title was lost or misplaced, and
that was granted by the court in an Order, following which a new owner's copy of the title was issued to him.
Upon discovery of the 'fraudulent steps' taken by Guan, Ong immediately executed an Affidavit of Adverse Claim. She precisely
asked the court that the sale of the Rizal property be declared as null and void; for the title to be cancelled; payment of actual,
moral and exemplary damages; and attorney's fees.
Guan argued that that his wife could not have purchased the property because she had no financial capacity to do so; on the
other hand, he was financially capable although he was financially capable although he was disqualified to acquire the property
by reason of his nationality. Ong was in pari delicto being privy to the simulated sale.
After examining the evidence adduced by both parties, the RTC found that the JP Rizal property was the paraphernal property
of the respondent. The trial court further held that the in pari delicto rule found in Articles 1411 and 1412 of the Civil Code was
not applicable to the present case, because it would apply only to existing contracts with an illegal cause or object, not to
simulated or fictitious contracts or to those that were inexistent due to lack of an essential requisite such as cause or
consideration.8 It likewise voided the Deed of Absolute Sale of the Rizal property for having been simulated and executed during
the marriage of the parties.9
ISSUE:
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
Whether or not the '[in] pari delicto' rule applies to the sale of the subject property?
HELD:
NO.
The principle of in pari delicto provides that when two parties are equally at fault, the law leaves them as they are and
denies recovery by either one of them. However, this principle does not apply with respect to inexistent and void
contracts. Said this Court in Modina v. Court of Appeals:21
"The principle of in pari delicto non oritur actio denies all recovery to the guilty parties inter se. It applies
to cases where the nullity arises from the illegality of the consideration or the purpose of the contract.
When two persons are equally at fault, the law does not relieve them. The exception to this general rule is
when the principle is invoked with respect to inexistent contracts."
Article 1412
Art. 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 his promise. (1306)
LIGUEZ V. CA, 102 PHIL. 577
The doctrine of in pari delicto applies only where the fault on both sides is more or less equivalent (Bough v. Cantiveros, 40 Phil.
209). It does not, therefore, apply where one party is literate or intelligent and the other is not (Mangayao v. Lasur, L-19252, May
29, 1964) or where one party was a man who was advanced in years and mature experience and the other was a minor of 16
years who was not fully aware of the terms of the agreement she had entered into (Liguez v. Court of Appeals, 102 Phil. 577).
"PARI DELICTO;" PARTIES TO ILLEGAL CONTRACT BARRED FROM PLEADING ILLEGALITY OF BARGAIN.—The rule that
parties to an illegal contract, if equally guilty, will not be aided by the law but will both be left where it finds them, has been
interpreted by this Court as barring the party from pleading the illegality of the bargain either as a cause of action or as a defense.
The Court of Appeals rejected the appellant's claim on the basis of the well-known rule "in pari delicto non oritur actio" as
embodied in Article 1306 of the Code of 1889 (reproduced in Article 1412 of the new Civil Code). In our opinion, the Court of
Appeals erred in applying to the present case the pari delicto rule. First, because it can not be said that both parties here had
equal guilt when we consider that as against the deceased Salvador P. Lopez, who was a man advanced in years and mature
experience, the appellant was a mere minor, 16 years of age, when the donation was made; that there is no finding made by the
Court of Appeals that she was fully aware of the terms of the bargain entered into by and between Lopez and her parents; that
her acceptance in the deed of donation (which was authorized by Article 626 of the old Civil Code) did not necessarily imply
knowledge of conditions and terms not set forth therein; and that the substance of the testimony of the instrumental witnesses
is that it was the appellant's parents who insisted on the donation before allowing her to live with Lopez. These facts are more
suggestive of seduction than of immoral bargaining on the part of appellant. It must not be forgotten that illegality is not presumed,
but must be duly and adequately proved.
In the second place, the rule that parties to an illegal contract, if equally guilty, will not be aided by the law but will both be left
where it finds them, has been interpreted by this Court as barring the party from pleading the illegality of the bargain either as a
cause of action or as a defense. Memo auditor propriam turpitudinem allegans.
DONATION; CAUSE OR CONSIDERATION; LIBERALITY OF DONOR WHEN DEEMED "CAUSA".—Under Article 1274, of the
Civil Code of 1889, liberality of the donor is deemed causa only in those contracts that are of "pure" beneficence; that is to say,
contracts designed solely and exclusively to procure the welfare of the beneficiary, without any intent of producing any
satisfaction for the donor; contracts, in other words, in which the idea of self-interest is totally absent on the part of the transferor.
For this very reason, the same Article 1274 provides that in remuneratory contracts, the consideration is the service or benefit
for which the remuneration is given; causa is not liberality in these cases because the contract or conveyance is not made out
of pure beneficence, but "solvendi animo".
In the present case, it is scarcely disputable that Lopez would not have conveyed the property in question had he known that
appellant would refuse to cohabit with him; so that the cohabitation was an implied condition to the donation, and being unlawful,
necessarily tainted the donation itself.
The appellant seeks recovery of the disputed land on the strength of a donation regular on its face. To defeat its effect, the
appellees must plead and prove that the same is illegal. But such plea on the part of the Lopez heirs is not receivable, since
Lopez himself, if living, would be barred from setting up that plea; and his heirs, as his privies and successors in interest, can
have no better rights than Lopez himself.
Appellees, as successors of the late donor, being thus precluded from pleading the defense of immorality or illegal causa of the
donation, the total or partial ineffectiveness of the same must be decided by different legal principles. In this regard, the Court of
Appeals correctly held that Lopez could not donate the entirety of the property in litigation, to the prejudice of his wife Maria Ngo,
because said property was conjugal in character, and the right of the husband to donate community property is strictly limited
by law (Civil Code of 1889, Arts. 1409, 1415, 1413; Baello vs. Villanueva, 54 Phil. 213).
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The text of the articles makes it plain that the donation made by the husband in contravention of law is not void in its entirety,
but only in so far as it prejudices the interest of the wife. In this regard, as Manresa points out (Commentaries, 5th Ed., pp. 650-
651, 652-653), the law makes no distinction between gratuitous transfers and conveyances for a consideration.
PHILBANKING V. LUI SHE, 21 SCRA 52
CASTRO, J. (Majority)
Civil law; Contracts; Resolutory condition; Art. 1308, Civil Code.—Article 1308 of the Civil Code creates no impediment to the
insertion in a contract for personal services of a resolutory condition permitting the cancellation of the contract by one of the
parties. Such a stipulation does not make either the validity or the fulfillment of the contract dependent upon the will of the party
to whom is conceded the privilege of cancellation; for where the contracting parties have agreed that such option shall exist, the
exercise of the option is as much in the fulfillment of the contract as any other act which may have been the subject of the
agreement. Indeed, the cancellation of a contract in accordance with conditions agreed upon beforehand is fulfillment.
Same; Lease contract; Validity of provision for rescission therein.—A provision in a lease contract that the lessee, at any time
before he erected any building on the land may rescind the lease can hardly be regarded as a violation of Article 1308 of the
Civil Code.
Same; Consideration; Consideration need not pass at time of execution of contract.—The consideration need not pass from one
party to the other at the time a contract is executed because the promise of one is the consideration for the other.
Same; Validity of lease or option to buy real estate to an alien.—A lease to an alien for a reasonable period is valid. So is an
option giving an alien the right to buy real property on condition that he is granted Philippine citizenship. Aliens are not completely
excluded by the Constitution from the use of lands for residential purposes. Since their residence in the Philippines is temporary,
they may be granted temporary rights such as a lease contract which is not forbidden by the Constitution. Should they desire to
remain here forever and share our fortune and misfortune, Filipino citizenship is not impossible to acquire.
Same; Same; When invalid.—If an alien is given not only a lease of, but also an option to buy, a piece of land, by virtue of which
the Filipino owner cannot sell or otherwise dispose of his property, this to last for 50 years, then it becomes clear that the
arrangement is a virtual transfer of ownership whereby the owner divests himself in stages not only of the right to enjoy the land
(jus possidendi, jus utendi, jus fruendi, and jus abutendi), but also of the right to dispose of it (jus disponendi)—rights the sum
total of which make up ownership It is just as if today the possession is transferred, tomorrow the use, the next day the disposition,
and so on, until ultimately all the rights of which ownership is made up are consolidated in an alien. If this can be done, then the
constitutional ban against alien landholding in the Philippines, as announced in Krivenko vs. Register of Deeds (79 Phil. 461) is
indeed in grave peril.
Same; Same; Same; Remedy of parties; Exception to pari delicto doctrine.—It does not follow that because the parties are in
pari delicto they will be left where they are without relief. Article 1416 of the Civil Code provides as an exception to the rule of in
pari delicto that “when the agreement is not illegal per se but is merely prohibited, and the prohibition by law is designed for the
protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he had paid or delivered.’
Same; Same; Same; Same; Sec. 5, Art. XIII of the Constitution is an expression of public policy.—The constitutional provision
that “save in cases of hereditary succession, no private agricultural land shall be transferred or assigned except to individuals,
corporations, or associations qualified to acquire or hold lands of the public domain in the Philippines” is an expression of public
policy to conserve lands for the Filipinos.
FERNANDO, J., concurring:
Civil law; Contracts; Sale of real estate to aliens; Pari delicto rule in previous cases expresses extreme view.—The statement
that the sales entered into prior to the Krivenko decision were at that time already vitiated by a guilty knowledge of the parties
may be too extreme a view. It appears to ignore a postulate of a constitutional system, wherein the words of the Constitution
acquire meaning through Supreme Court adjudication.
Same; Alien vendee is incapacitated to acquire or hold real estate since Nov. 15, 1935; Remedy of vendor.—Alien-vendee is
incapacitated or disqualified to acquire and hold real estate. That incapacity and that disqualification should date from the
adoption of the Constitution on November 15, 1935. Alienvendee, therefore, cannot be allowed to continue owning and exercising
acts of ownership over said property, when it is clearly included within the constitutional prohibition. Alienvendee should thus be
made to restore the property with its fruits and rents to Filipino-vendor, its previous owner, if it could be shown that, in the utmost
good faith, he transferred his title over the same to alien-vendee, upon restitution of the purchase price, of course.
AVILA V. CA, 145 SCRA 541
Civil Law; Property; Sale at public auction, Where the property was purchased atpublic auction; the sale is void as thepurchase
was prohibited under the Revised Administrative Code.—While it is true that Marciana Avila, their mother and predecessor-in-
interest, purchased the questioned property at a public auction conducted by the government; paid the purchase price; and was
issued a final bill of sale after the expiration of the redemption period, it is however, undisputed that such purchase was prohibited
under Section 579 of the Revised Administrative Code, as amended. x x x Thus, the sale to her of Lot 594 is void.
Same; Same; Same; Contracts; Void contract is inexistent from the beginning and cannot be ratified and the right to set up the
defense ofits illegality is not waived—On the other hand, under Article 1409 of the Civil Code, a void contract is inexistent from
the beginning. It cannot be ratified neither can the right to set up the defense of its illegality be waived. (Arsenal, et al. vs. The
Intermediate Appellate Court, etal, G.R. No. 66696, July14,1986).
Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
2014A
Same; Same; Same; Same; A party to an illegal transaction cannot recover what she has given by reason ofthe contract orask
forfulfillment of what has been promised her.—Moreover, Marciana Avila was a party to an illegal transaction, and therefore,
under Art. 1412 of the Civil Code, she cannot recover what she has given by reason of the contract or ask f or the fulfillment of
what has been promised her.
TEJA MARKETING V. IAC, 148 SCRA 347
Civil Law; Contracts; Maxim that no action arises out of illicit bargain; A party having entered into an illegal contract, neither of
the parties can seek relief from the courts, and each must bear the consequences of his acts.—" 'Ex pacto illicito' non oritur actio'
(No action arises out of illicit bargain) is the time-honored maxim that must be applied to the parties in the case at bar. Having
entered into an illegal contract, neither can seek relief from the courts, and each must bear the consequences of his acts." (Lita
Enterprises vs. IAC, 129 SCRA 81.)
Same; Same; Common Carriers; Kabit system, concept of; Kabit system, one of the root causes of the prevalence of graft and
corruption in government transportation offices.—Unquestionably, the parties herein operated under an arrangement, commonly
known as the "kabit system" whereby a person who has been granted a certificate of public convenience allows another person
who owns motor vehicles to operate under such franchise for a fee. A certificate of public convenience is a special privilege
conferred by the government. Abuse of this privilege by the grantees thereof cannot be countenanced. The "kabit system" has
been identified as one of the root causes of the prevalence of graf t and corruption in the government transportation offices.
Same; Same; Same; Same; Kabit system, although not outrightly penalized as a criminal offense, is contrary to public policy,
and is void and inexistent; Principle that the court will not aid either party to enforce an illegal contract.—Although not outrightly
penalized as a criminal offense, the kabit system is invariably recognized as being contrary to public policy and, therefore, void
and inexistent under Article 1409 of the Civil Code. It is a fundamental principle that the court will not aid either party to enforce
an illegal contract, but will leave both where it finds them. Upon this premise it would be error to accord the parties relief from
their predicament. Article 1412 of the Civil Code denies them such aid.
Same; Same; Same; Same; Defect of inexistence of a contract is permanent and cannot be cured by ratification or by
prescription.—The defect of inexistence of a contract is permanent and cannot be cured by ratification or by prescription. The
mere lapse of time cannot give efficacy to contracts that are null and void.
PNB V. DE LOS REYES, 179 SCRA 619
Public Lands; Redemption; Under the Public Land Act, the mortgagor has five (5) years from date of conveyance within which
to redeem the property; no offer to redeem or tender of payment necessary for preservation of such right to repurchase.·Petitioner
accedes to the redemption by respondents of the two (2) parcels covered by free patent titles, pursuant to the provisions of the
Public Land Act, the period of five (5) years after the grant of the patents not having expired. This is correct since pursuant to
Section 119 of Commonwealth Act No. 141, the Public Land Act which is the applicable law in this case, the mortgagor had five
(5) years from the date of conveyance within which to redeem the property. It is not even necessary for the preservation of such
right to repurchase to make an offer to redeem, or tender payment of the purchase price within said period of five (5) years. The
filing of an action to redeem within that period is equivalent of a formal offer to redeem. There is not even a need for the
consignation of the redemption price.
Same; Same; Civil Law; Mortgage; Indivisibility of Mortgage; Doctrine of indivisibility, not applicable once the mortgage is
extinguished by a complete foreclosure thereof.·That the situation obtaining in the case at bar is not within the purview of the
aforesaid rule on indivisibility is obvious since the aggregate number of the lots which comprise the collaterals for the mortgage
had already been foreclosed and sold at public auction. There is no partial payment nor partial extinguishment of the obligation
to speak of. The aforesaid doctrine, which is actually intended for the protection of the mortgagee, specifically refers to the
release of the mortgage which secures the satisfaction of the indebtedness and naturally presupposes that the mortgage is
existing. Once the mortgage is extinguished by a complete foreclosure thereof, said doctrine of indivisibility ceases to apply
since, with the full payment of the debt, there is nothing more to secure.
Same; Same; Same; Contracts; In Pari Delicto; Doctrine of in pari delicto not applicable when the contract is merely prohibited
by law not illegal per se, and the prohibition is designed for the protection of the rights of the party seeking to recover.·While the
law bars recovery in a case where the object of the contract is contrary to law and one or both parties acted in bad faith, we
cannot here apply the doctrine of in pari delicto which admits of an exception, namely, that when the contract is merely prohibited
by law, not illegal per se, and the prohibition is designed for the protection of the party seeking to recover, he is entitled to the
relief prayed for whenever public policy is enhanced thereby. Under the Public Land Act, the prohibition to alienate is predicated
on the fundamental policy of the State to preserve and keep in the family of the homesteader that portion of public land which
the State has gratuitously given to him, and recovery is allowed even where the land acquired under the Public Land Act was
sold and not merely encumbered, within the prohibited period. This is without prejudice to such appropriate action as the
Government may take should it find that violations of the public land laws were committed or involved in said transaction and
sanctions are in order.
Article 1413
Art. 1413. Interest paid in excess of the interest allowed by the usury laws may be recovered by the debtor,
with interest thereon from the date of the payment.
BRIONES V. CAMMAYO, 41 SCRA 404
Usury; Loan with usurious interest; Loan valid but usurious interest void; Right of creditor to recover his capital.·To discourage
stipulations on usurious interest, said stipulations are treated as wholly void, so that the loan becomes without stipulation as to
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payment of interest. It should not, however, be interpreted to mean forfeiture even of the principal, for this would unjustly enrich
the borrower at the expense of the lender. Furthermore, penal sanctions are available against a usurious lender, as a further
deterrence to usury. The principal debt remaining without stipulation for payment of interest can thus be recovered by judicial
action.

Same; Same; Divisibility of the contract.·A contract of loan with usurious interest consists of principal and accessory stipulations;
the principal one is to pay the debt; the accessory stipulation is to pay interest thereon. And said two stipulations are divisible in
the sense that the former can still stand without the latter. In simple loan with stipulation of usurious interest, the prestation of
the debtor to pay the principal debt, which is the cause of the contract, is not illegal. The illegality lies only as to the prestation to
pay the stipulated interest; hence, being separable, the latter only should be deemed void, since it is the only one that is illegal.

Same; Right of the creditor to recover interest on the principal loan at the legal rate.·The debt earns interest from the date of
demand (in this case from the filing of the complaint). Such interest is not due to stipulation, for there was none, the same being
void. Rather it is due to the general provision of law that in obligations to pay money, where the debtor incurs in delay, he has to
pay interest by way of damages (Art. 2209, Civil Code).

BARREDO, J., concurring·

Same; Article 1957 of the Civil Code; Effect of.·While it is true that Article 1957 of the Civil Code declares that all usurious
contracts and stipulations are void, this is nothing new, for such has been the law even under the Usury Law before the Civil
Code went into effect, and, moreover, it is evident that the Civil Code itself yields to the Usury Law when it comes to the question
of how much of the loan and interests paid by the borrower may be recovered by him, and the Usury Law is clear that he may
recover only all the interests, including, of course, the legal part thereof, with legal interest from the date of judicial demand,
without maintaining that he can also recover the principal he has already paid to the lender.

CASTRO,FERNANDO, and CONCEPCION, JJ., dissenting ·

Same; Same; Loan and usurious interest void.·In a contract which is tainted with usury, that is, with a stipulation (whether written
or unwritten) to pay usurious interest, the prestation to pay such interest is an integral part of the cause of the contract. It is also
the controlling cause, for a usurer lends his money not just to have it returned but indeed to acquire inordinate gain. Article 1957
of the Civil Code which declares the contract itself·not merely the stipulation to pay usurious interest·void, necessarily regards
the prestation to pay such usurious interest as an integral part of the cause, making it illegal.

Based on Compiled digests of 2011A, 2012D, Mark Calida doctrines and 2014A class notes. Updated digests by Abu, Almadro, Barron, Cabile, Carpena, Chan, Lacanlalay, Panganiban, Peñamante.
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