Oblicon Case Doctrines

TABLE OF CONTENTS OBLIGATIONS AND CONTRACTS
OBLIGATIONS

GENERAL PROVISIONSErnesto Uypitching, et al. v. Ernesto
Quiamco 10
Lourdes Dela Cruz v. Court of Appeals 10
Department of Health v. HTMC Engineers Co. 10
International Finance Corporation v. Imperial Textile Mills,
Inc. 11
Sebastian Siga-An v. Alicia Villanueva 11
Makati Stock Exchange, Inc., et al. v. Miguel V. Campos,
substituted By Julia Ortigas Vda. De Campos 12
Spouses Patricio and Myrna Bernales v. Heirs Of Julian
Sambaan 12
Vitarich Corporation v. Chona Losin 13
CBK Power Company Limited vs. Commissioner of Internal
Revenue 13
NATURE AND EFFECT OF OBLIGATIONSCortes v. Court of
Appeals 13
Winifreda Ursal v. Court of Appeals, The Rural Bank of
Larena (Siquijor), Inc. and Spouses Jesus Moneset and
Cristita Moneset 14
Prudential Bank v. Chonney Lim 14
YHT Realty Corporation, Erlinda Lainez and Anicia Payam v.
Court of Appeals and Maurice Mcloughlin 14
Schimtz Transport and Brokerage Corporation v. Transport
Venture Inc. 15
Lapreciosisima Cagungun, et. al. v. Planters Development
Bank 15
Radio Communication of the Philippines vs. Alfonso Verchez,
et al. 15
58


Crisostomo Alcaraz v. Court of Appeals 16
Metropolitan Bank and Trust Company vs. Renato D. Cabilzo
16
Ma. Elizabeth Kind and Mary Ann King v. Megaworld
Properties and Holdings, Inc. 16
Autocorp Group v. Intra Strata Assurance Corporation 16
J Plus Asia Development Corporation v. Utility Assurance
Corporation 17
Polo S. Pantaleon v. American Express International, Inc. 18
Sps. Guanio v. Makati Shangri-La Hotel 18
Marques v. Far East Bank 18
Philippine Realty and Holding Corp. v. Ley Const. and Dev.
Corp. 19
Gilat Satellite Networks, Ltd. v. United Coconut Planters Bank
General Insurance Co., Inc. 19
Carlo F. Sunga v.Virjen Shipping Corporation, Nissho
Odyssey Ship Management Pte. Ltd., And/Or Capt. Angel
Zambrano 20
DIFFERENT KINDS OF OBLIGATIONSPURE AND
CONDITIONAL OBLIGATIONSSacobia Hills Development
Corporation vs. Allan Ty 20
Carrascoso v. Court of Appeals 21
Spouses William And Jeanette Yao v. Carlomagno B. Matela
21
Spouses Jaime Benos And Marina Benos v. Spouses
Gregorio Lawilao And Janice Gail Lawilao 21
Darrel Cordero, et al. vs. F.S. Management and Development
Corporation 22
Yamamoto v. Nishino Leather Industries, Inc. 22
Spouses Jose T. Valenzuela and Gloria Valenzuela v.
Kalayaan Development & Industrial Corporation 22
58


Solar Harvest, Inc. v. Davao Corrugated Carton Corporation
23
Republic v. Holy Trinity Realty Development Corporation 24
Subic Bay Metropolitan Authority v. Court of Appeals 24
Sps. Fernando and Lourdes Viloria vs. Continental Airlines,
Inc. 24
JOINT AND SOLIDARY OBLIGATIONSStronghold Insurance
Company, Inc. v. Republic-Asahi Glass Corporation 25
Petron Corporation vs. Sps. Cesar Jovero and Erma F.
Cudilla, et al. 25
Philippine Commercial International Bank v. CA 25
Crystal v. Bank of the Philippine Islands 26
The Heirs of George Y. Poe vs. Malayan Insurance Company,
Inc., 26
Alba v. Yupangco 26
Sps. Rodolfo Berot v. Felipe Siapno 27
Trade and Investment Development Corp. of the Philippines
v. Asia Paces Corp. 27
Olongapo City, V. Subic Water And Sewerage Co., Inc., 27
OBLIGATIONS WITH A PENAL CLAUSE First Fil-Sin Lending
Corporation v. Gloria D. Padillo 28
Filinvest Land, Inc. vs. Hon. Court of Appeals, Philippine
American General Insurance Company and Pacific
Equipment Corporation 28
Development Bank of the Philippines v. Family Foods
Manufacturing Co. Ltd., and Spouses Julianco and Catalina
Centeno 28
Ileana Dr. Macalinao v. Bank of the Philippine Islands 29
EXTINGUISHMENT OF OBLIGATIONSPAYMENT OR
PERFORMANCE Jaime Biana v. George Gimenez 29
G & M (Phil.), Inc. vs. Willie Batomalaque 29
58


Abacus Securities Corporation v. Ruben U. Ampil 30
Almeda v. Bathala Marketing Industries, Inc. 30
ASJ Corporation v. Evangelista 30
Insular Life Assurance Company, Ltd. v. Toyota Bel-Air, Inc.
31
Dao Heng Bank, Inc. (Now Banco De Oro Universal Bank) v.
Laigo 31
Royal Cargo Corporation v. DFS Sports Unlimited, Inc. 32
Allandale Sportsline, Inc. v. The Good Development
Corporation 32
Annabelle Dela Peña and Adrian Villareal v. The Court of
Appeals and Rural Bank of Bolinao, Inc. 32
D.B.T. Mar-Bay Construction, Incorporated v. Ricaredo Panes
et al. 33
Rockville Excel International Exim Corporation v. Spouses
Oligario Culla and Bernardita Miranda 33
Premiere Development Bank v. Central Surety & Insurance
Company, Inc. 33
Cecilleville Realty and Service Corporation v. Acuña 34
DBT Mar-Bay Construction, Inc. vs. Panes 34
Manuel Go Cinco and Araceli S. Go Cinco v. Court Of
Appeals, Ester Servacio and Maasin Traders Lending
Corporation 35
Land Bank of the Philippines vs. Alfredo Ong 35
Republic v. Thi Thu Thuy T. De Guzman 35
Dalton vs. FGR Realty and Development Corp 36
Elizabeth Del Carmen v. Sps. Sabordo 36
Erlinda Gajudo, Fernando Gajudo, Jr., Estelita Gajudo,
Baltazar Gajudo And Danilo Arahan Chua v. Traders Royal
Bank 36
Luzon Development Bank v. Enriquez 37
58


Telengtan Brothers & Sons, Inc. v. United States Lines, Inc.
and the Court of Appeals 37
Simplicio A. Palanca v. Ulyssis Guides 37
LOSS OF THE THING DUE Ayala Construction and
Development Corporation v. Philippine Commercial
International Bank 38
Raymundo S. De Leon vs. Benita T. Ong 38
CONDONATION OR REMISSION OF THE DEBTRuben Reyna
V. COA 38
CONFUSION OR MERGER OF RIGHTS Cecilleville Realty and
Service Corporation vs. Spouses Tito Acuña and Ofelia B.
Acuña 39
Sps. Dominador R. Narvaez and Lilia W. Narvaez vs. Sps.
Rose Ogas Alciso and Antonio Alciso 39
COMPENSATIONMavest (USA) Inc. and Mavest Manila
Liaison Office vs. Sampaguita Garment Corporation 39
Manuel B. Aloria v. Estrellita B. Clemente 40
Premiere Development Bank v. Flores 40
Soriano v. People 40
United Planters Sugar Milling Co., Inc., (UPSUMCO) vs. Court
of Appeals, et al. 41
Lao v. Special Plans, Inc. 41
Traders Royal Bank vs. Norberto Castañares and Milagros
Castañares 42
Cesar V. Areza and Lolita B. Areza v. Express Savings Bank,
Inc. 42
Mondragon Personal Sales, Inc. v. Victoriano S. Sola, Jr. 42
NOVATIONPhilippine Savings Bank v. Sps. Rodelfo Malanac
Jr. 43
Isaisas F. Fabrigas and Marcelina R. Fabrigas v. San
Francisco del Monte, Inc. 43
58


Sps. Francisco and Ruby Reyes v. BPI Family Savings Bank,
Inc., And Magdalena L. Lometillo, in her capacity as Ex-
Officio Provincial Sheriff for Iloilo 44
Gammon Philippines, Inc. v. Metro Rail Transit Development
Corporation 44
Ek Lee Steel Works Corporation v. Manila Castor Oil
Corporation 45
Sueno v. Land Bank of the Philippines 45
S.C. Megaworld Construction And Development Corporation
v. Parado 45
Foundation Specialists, Inc., vs. Betonval Ready Concrete,
Inc. and Stronghold Insurance Co., Inc. 46
Carolina Hernandez-Nievera v. Wilfredo Hernandez 47
Sime Darby Pilipinas, Inc. v. Goodyear Philippines, Inc. 47
Heirs of Servando Franco v. Sps. Gonzales 47
Roberto R. David vs. Eduardo C. David 48
First United Constructors Corporation vs. Bayanihan
Automotiv 48
CONTRACTSGENERAL PROVISIONSAsian Construction and
Development Corporation v. Tulabut 48
Tanay Recreation Center and Development Corp. v. Catalina
Matienzo Fausto and Anunciacion Fausto Pacunayen 49
Litonjua v. Litonjua 49
Bortikey v. AFP Retirement and Separation Benefits System
49
GF Equity, Inc. vs. Arturo Valenzona 50
Sunace International vs. NLRC 51
58


Greater Metropolitan Manila Solid Waste Management
Committee v. Jancom Environmental Corporation 51
Roxas v. Zuzuarregui, Jr. 51
Bonifacio Nakpil v. Manila Towers Development Corp. 52
Xavierville III Homeowners Association, Inc., v. Xavierville Ii
Homeowners Association, Inc., 52
William Golangco Construction Corporation v. Philippine
Commercial International Bank 53
Spouses Anthony and Percita Oco v. Victor Limbaring 53
Rolando Limpo v. Court of Appeals 53
Caltex (Philippines), Inc., v. PNOC Shipping and Transport
Corporation 54
Mr. & Mrs. George R. Tan v. G.V.T Engineering Services,
Acting through its Owner/Manager Gerino V. Tactaquin 54
William Ong Genato vs. Benjamin Bayhon et al. 54
Vicenta Cantemprate et al. vs. CRS Realty Development
Corporation et al. 54
National Power Corporation vs. Premier Shipping Lines, Inc.
55
Patricia Halagueña et al. vs. Philippine Airlines Incorporated
55
Sta. Lucia Realty & Development, Inc. vs. SPOUSES
Francisco & Emelia Buenaventura 55
Sps. Isagani Castro and Diosdada Castro v. Angelina De
Leon Tan, et. al., 56
Narvaez vs. Alciso 56
Herald Black Dacasin vs.Sharon Del Mundo Dacasin 56
PNCC Skyway Traffic Management and Security Division
Workers Organization (PSTMSDWO) vs. PNCC Skyway
Corporation 57
Heirs of Mario Pacres, vs. Heirs of Cecilia Ygoña 57
58


Heirs of Fausto C. Ignacio v. Home Bankers Savings and
Trust Company 57
Spouses Ignacio F. Juico and Alice P. Juico v. China Banking
Corporation 58
Sps. Benjamin Mamaril v. The Boy Scout of the Philippines
58
Star Two (SPV-AMC), Inc. v. Paper City Corporation of the
Philippines 58
Land Bank of the Philippines vs. Heirs of Spouses Jorja
Rigor-Soriano and Magin Soriano 59
Rodolfo G. Cruz and Esperanza Ibias v. Atty. Delfin Gruspe 59
Philippine National Bank vs. Spouses Enrique Manalo and
Rosalinda Jacinto, et al. 59
ESSENTIAL REQUISITES OF CONTRACTSSpouses Azaro M.
Zulueta and Perla Sucayan-Zulueta v. Jose Wong, et al. 59
Paulo Ballesteros v. Rolando Abion 60
Estate of Orlando Llenado et al. vs. Eduardo Llenado et al. 60
CONSENTDandoy v. Tongson 60
Navotas Industrial Corporation V. Cruz, et al. 61
Epifania Dela Cruz, substituted by Laureana V. Alberto v. Sps.
Eduardo C. Sison and Eufemia S. Sison 61
Perpetua vda. de Ape v. Court of Appeals and Genorosa
Cawit Vda. De Lumayno 62
Reynaldo Villanueva vs. Philippine National Bank 62
Gaudencio Valerio et. al v. Vicenta Refresca et. al. 62
Heirs of Cayetano Pangan vs. Spouses Rogelio Perreras and
Priscilla Perreras 62
Cornelia Baladad vs. Sergio A. Rublico and Spouses
Laureano F. Yupano 63
Francisco Landicho et al. vs. Felix Sia 63
XYST Corp. v. DMC Urban Properties Development Inc. 63
58


Gloria Ocampo and Teresita Tan v. Land Bank of the
Philippines et al. 64
Government Service Insurance System vs. Abraham Lopez
64
Sps. Ramon Lequin and Virginia Lequin vs. Sps. Raymundo
Vizconde and Salome Lequin Vizconde 65
Spouses Exequiel Lopez and Eusebia Lopez v. Spouses
Eduardo Lopez and Marcelina Lopez 65
Heirs Of Dr. Mario S. Intac v. Court of Appeals 65
Korean Air Co., Ltd. V. Yuson 66
Doña Rosana Realty and Development Corporation vs.
Molave Development Corporation 66
Jocelyn M. Toledo vs. Marilou M. Hyden 66
ECE Realty and Development Inc. v. Rachel G. Mandap 67
OBJECT OF CONTRACTSAtty. Pedro M. Ferrer vs. Spouses
Alfredo Diaz and Imelda Diaz 67
CAUSE OF CONTRACTS J.L.T. Agro Inc. v. Balansag 68
Alvarez v. PICOP Resources 68
FORM OF CONTRACTSManuel Mallari and Millie Mallari v.
Rebecca Alsol 69
Serafin Naranja et al. vs. Court of Appeals 69
REFORMATION OF INSTRUMENTSBenny Go v. Eliodoro
Bacaron 69
INTERPRETATION OF CONTRACTSHoly Cross of Davao
College, Inc. vs. Holy Cross of Davao Faculty Union – Kampi
70
Agas vs. Sabico 70
Berman Memorial Park, Inc. and Luisa Chong v. Francisco
Cheng 70
Rosalina Tagle v. Court of Appeals, Fast International
Corporation and/or Kuo Tung Yu Huang 71
58


Martha R. Horrigan v. Troika Commercial, Inc. 71
Aurelio P. Alonzo and Teresita A. Sison v. Jaime and Perlita
San Juan 71
Vicente Go v. Pura Kalaw, Inc. 72
Sps. Alvaro v. Sps. Returban 72
Ayala Inc. v. Ray Burton Corp 72
Laureano T. Angeles v. Philippine National Railways (PNR)
And Rodolfo Flores 73
Elenita Ishida and Continent Japan Co., Inc. v. Antusa de
Mesa-Magno, Firmo de Mesa et.al. 73
Heirs of the Deceased Carmen Cruz-Zamora v. Multiwood
International, Inc. 73
Antipolo Properties v. Nuyda 74
Adriatico Consortium, Inc., et al. vs. Land Bank of the
Philippines 74
Manila International Airport Authority v. Avia Filipinas
International, Inc., 74
RESCISSIBLE CONTRACTSOliverio Laperal and Filipinas
Golf & Country Club, Inc. v. Solid Homes, Inc. 75
C-J Yulo & Sons, Inc. v. Roman Catholic Bishop of San Pablo,
Inc. 75
Spouses Felipe and Leticia Cannu v. Spouses Gil And
Fernandina Galang and National Home Mortgage Finance
Corporation 75
Bienvenido M. Casino Jr. v. Court of Appeals 76
Pryce Corporation (Formerly Pryce Properties
Corporation), v. Philippine Amusement And Gaming
Corporation 76
Coastal Pacific Trading Inc., v. Southern Rolling Mills, Co.,
Inc. et al. 77
Pan Pacific Industrial Sales Co., v. Court of Appeals 77
58


Laurencio Ramel, et.al. v. Daniel Aquino and Guadaluper
Abalahin 77
Union Bank of the Philippines v. Sps. Ong 77
Philippine Leisure and Retirement Authority v. Court of
Appeals 78
Uniwide Holdings, Inc. v. Jandecs Transportation Co., Inc. 78
Bonrostro v. Luna 79
Armand O. Raquel-Santos and Annalissa Mallari v. Court of
Appeals and Finvest Securities Co., Inc. 79
Heirs of Sofia Quirong v. Development Bank of the
Philippines 79
“G” Holdings, Inc., v. National Mines and Allied
Workers Union Local 103 (NAMAWU) 80
VOIDABLE CONTRACTSJorge Gonzales v. Climax Mining
Ltd. 80
Felicitas Asycong and Teresa Polan v. Court of Appeals and
Moller Lending Investor 80
Development Bank of the Philippines and Privatization and
Management Office v. CA 80
Barceliza P. Capistrano vs. Darryl Limcuando and Fe S.
Sumiran 81
Hernania “Lani” Lopez vs. Gloria Umale-Cosme 81
First Philippine Holdings Corporation vs. Trans Middle East
(Phils.) Equities, Inc. 82
ECE Realty And Development Inc. v. Rachel G. Mandap 82
UNENFORCEABLE CONTRACTSSpouses Mario and
Elizabeth Torcuator v. Spouses Remigio and Gloria Bernabe
and Spouses Diosdado and Lourdes Salvador 82
Banco Filipino Savings v. Diaz 83
Lina Peñalber vs. Quirino Ramos et al. 83
Orduña, et al. v. Fuentebella, et al. 83
58


Municipality of Hagonoy, Bulacan vs. Dumdum, Jr. 84
Rogelio Dantis, v. Julio Maghinang, Jr. 84
VOID OR INEXISTENTMenchavez vs. Teves 84
Department of Health v. C.V. Canchela & Associates,
Architects (CVCAA), in Association With MCS Engineers Co.,
and A.O. Mansueto IV – Electrical Engineering Services, and
Luis Alina, Sheriff IV, RTC, Manila 85
The Manila Banking Corporation v. Edmundo S. Silverio and
The Court of Appeals, 85
La’o v. Republic of the Philippines and the Government
Service Insurance System 86
Potenciano Ramirez v. Ma. Cecilia Ramirez 86
Joaquin Villegas and Emma M. Villegas v. Rural Bank of
Tanjay Inc. 86
Land Bank of the Philippines v. Eduardo M. Cacayuran 87
Queensland-Tokyo Commodities, Inc. vs. George 87
Anuel O. Fuentes and Leticia L. Fuentes vs. Conrado G. Roca
87
Domingo Gonzalo vs. John Tarnate, Jr. 87

58

CASE DOCTRINES OBLIGATIONS AND CONTRACTS

OBLIGATIONS

CHAPTER 1. GENERAL PROVISIONS

Ernesto Uypitching, et al. v. Ernesto Quiamco
GR No. 146322, December 6, 2006
Corona, J.

ISSUE: Can an obligation to pay damages arise from an abuse of a right which is
exercised to the prejudice or injury of another person as when a corporation seized a
motorcycle with the assistance of policemen without a search warrant or order?

DOCTRINE: A blatant disregard for the lawful procedure for the enforcement of its right,
to the prejudice of respondent violated the law as well as public morals, and
transgressed the proper norms of human relations. Article 19, also known as the
“principle of abuse of right,” prescribes that a person should not use his right unjustly or
contrary to honesty and good faith, otherwise he opens himself to liability. There is an
abuse of right when it is exercised solely to prejudice or injure another. The exercise of
a right must be in accordance with the purpose for which it was established and must
not be excessive or unduly harsh; there must be no intention to harm another.
Otherwise, liability for damages to the injured party will attach.

Lourdes Dela Cruz v. Court of Appeals
G.R No. 139442, December 6, 2006
Velasco, Jr. J.:

ISSUE: Can a person under a contract of lease possess such land by tolerance even
after the expiration of the contract of lease and after a demand to vacate.

DOCTRINE: Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith. Thus, initially petitioner as
lessee is the legal possessor of the subject lot by virtue of a contract of lease. When
fire destroyed her house, the Reyeses considered the lease terminated. It has been
held that a person who occupies the land of another at the latter’s tolerance or
permission, without any contract between them, is necessarily bound by an implied
promise that he will vacate upon demand, failing which a summary action for ejectment
is the proper remedy against them.

Department of Health v. HTMC Engineers Co.
G.R. No. 146120. January 27, 2006
Chico-Nazario, J.

ISSUE: Can a perfected contract be renounced unilaterally?

DOCTRINE: No. A contract properly executed between parties continues to be the law
between said parties and should be complied with in good faith. There being a perfected
contract, DOH cannot revoke or renounce the same without the consent of the
other party. Just as nobody can be forced to enter into a contract, in the same manner,
once a contract is entered into, no party can renounce it unilaterally or without the
consent of the other. It is a general principle of law that no one may be permitted to
change his mind or disavow and go back upon his own acts, or to proceed


contrary thereto, to the prejudice of the other party. As no revision to the
original agreement was ever arrived at, the terms of the original contract shall continue
to govern over both the HTMC and the DOH with respect to the infrastructure projects
as if no amendments were ever initiated. In the absence of a new perfected
contract between HTMC and DOH, both parties shall continue to be bound by the
stipulations of the original contract and all its natural effects.
International Finance Corporation v. Imperial Textile Mills, Inc.
G.R. No. 160324; November 15, 2005
Panganiban, J.:

ISSUES:
1. What is the nature of the contract entered into between the parties denominated as
Guarantee Agreement?
2. Under Suretyship, what are the obligations of the parties under the contract?

DOCTRINES:
1. The terms of a contract govern the rights and obligations of the contracting parties.
When the obligor undertakes to be "jointly and severally" liable, it means that the
obligation is solidary. If solidary liability was instituted to "guarantee" a principal
obligation, the law deems the contract to be one of suretyship.

The creditor in the present Petition was able to show convincingly that, although
denominated as a "Guarantee Agreement," the Contract was actually a surety.
Notwithstanding the use of the words "guarantee" and "guarantor," the subject Contract
was indeed a surety, because its terms were clear and left no doubt as to the intention
of the parties.

The obligations of the guarantors are meticulously expressed in the following provision:

"Section 2.01. The Guarantors jointly and severally, irrevocably, absolutely and
unconditionally guarantee, as primary obligors and not as sureties merely, the
due and punctual payment of the principal of, and interest and commitment
charge on, the Loan, and the principal of, and interest on, the Notes, whether at
stated maturity or upon prematuring, all as set forth in the Loan Agreement and in
the Notes."

The Agreement uses "guarantee" and "guarantors," prompting ITM to base its argument
on those words. This Court is not convinced that the use of the two words limits the
Contract to a mere guaranty. The specific stipulations in the Contract show otherwise.

2. While referring to ITM as a guarantor, the Agreement specifically stated that the
corporation was "jointly and severally" liable. To put emphasis on the nature of that
liability, the Contract further stated that ITM was a primary obligor, not a mere surety.
Those stipulations meant only one thing: that at bottom, and to all legal intents and
purposes, it was a surety.

Indubitably therefore, ITM bound itself to be solidarily liable with PPIC for the latter’s
obligations under the Loan Agreement with IFC. ITM thereby brought itself to the level of
PPIC and could not be deemed merely secondarily liable.

Sebastian Siga-An v. Alicia Villanueva
G.R. No. 173227, January 20, 2009
Chico-Nazario J.:


ISSUE: Whether solutio indebiti applies to situations wherein there was a wrongful
payment of interest?

DOCTRINE: Yes. Under Article 1960 of the Civil Code, if the borrower of loan pays
interest when there has been no stipulation therefor, the provisions of the Civil Code
concerning solutio indebiti shall be applied. Article 2154 of the Civil Code explains the
principle of solutio indebiti. Said provision provides that if something is received when
there is no right to demand it, and it was unduly delivered through mistake, the
obligation to return it arises. In such a case, a creditor-debtor relationship is created
under a quasi-contract whereby the payor becomes the creditor who then has the right
to demand the return of payment made by mistake, and the person who has no right to
receive such payment becomes obligated to return the same. The quasi-contract of
solutio indebiti harks back to the ancient principle that no one shall enrich himself
unjustly at the expense of another. The principle of solutio indebiti applies where (1) a
payment is made when there exists no binding relation between the payor, who has no
duty to pay, and the person who received the payment; and (2) the payment is made
through mistake, and not through liberality or some other cause. We have held that the
principle of solutio indebiti applies in case of erroneous payment of undue interest.

Makati Stock Exchange, Inc., et al. v. Miguel V. Campos, substituted By Julia
Ortigas Vda. De Campos
G.R. No. 138814, April 16, 2009
Chico-Nazario, J.:

ISSUE: Whether the claim of a right or an obligation may be made even without
identifying its source.

DOCTRINE: No. Right and obligation are legal terms with specific legal meaning. A right
is a claim or title to an interest in anything whatsoever that is enforceable by law. An
obligation is defined in the Civil Code as a juridical necessity to give, to do or not to do.
For every right enjoyed by any person, there is a corresponding obligation on the part of
another person to respect such right. Thus, Justice J.B.L. Reyes offers the definition
given by Arias Ramos as a more complete definition:
An obligation is a juridical relation whereby a person (called the creditor)
may demand from another (called the debtor) the observance of a
determinative conduct (the giving, doing or not doing), and in case of
breach, may demand satisfaction from the assets of the latter.

Therefore, an obligation imposed on a person, and the corresponding right granted to
another, must be rooted in at least one of these five sources. The mere assertion of a
right and claim of an obligation in an initiatory pleading, whether a Complaint or Petition,
without identifying the basis or source thereof, is merely a conclusion of fact and law. A
pleading should state the ultimate facts essential to the rights of action or defense
asserted, as distinguished from mere conclusions of fact or conclusions of law. Thus, a
Complaint or Petition filed by a person claiming a right to the Office of the President of
this Republic, but without stating the source of his purported right, cannot be said to
have sufficiently stated a cause of action. Also, a person claiming to be the owner of a
parcel of land cannot merely state that he has a right to the ownership thereof, but must
likewise assert in the Complaint either a mode of acquisition of ownership or at least a
certificate of title in his name.

Spouses Patricio and Myrna Bernales v. Heirs Of Julian Sambaan
G.R. No. 163271, January 15, 2010
Del Castillo, J.:


ISSUE: Whether title to the subject parcel of land was transferred by virtue of a forged
deed of absolute sale allegedly executed by the late Julian and Guillerma Sambaan in
favor of Myrna Bernales and her husband.

DOCTRINE: No. With the presentation of the forged deed, even if accompanied by the
owner’s duplicate certificate of title, the registered owner did not thereby lose his title,
and neither does the assignee in the forged deed acquire any right or title to the said
property. The valid execution of the Deed of Absolute Sale will convey and transfer
ownership in favor of appellants title based on the rule that by the contract of sale one of
the contracting parties obligates himself to transfer ownership of and to deliver a
determinate thing, and the other to pay therefor a sum certain in money or its
equivalent. The fact that the assailed Deed was not signed by Julian and the signatures
of Julian and Guillerma were forged per findings of the NBI Senior Document Examiner,
it can therefore be inferred that the subsequent issuance of Transfer Certificate of Title
No. T-14204 has no basis at all since ownership was not conveyed to appellants by
reason of the forged Deed.

Vitarich Corporation v. Chona Losin
G.R. No. 181560, November 15, 2010
Mendoza, J.:

ISSUE: Whether Vitarich should be held liable for the conduct of its employee, Dericto,
in taking out dressed chickens from the bodega of Vitarich and receiving the same but
charging it as Charge Sales Invoice against its client, Losin.

DOCTRINE: No. Pursuant to Article 2180 of the Civil Code, that vicarious liability
attaches only to an employer when the tortuous conduct of the employee relates to, or
is in the course of, his employment. The question to ask should be whether at the time
of the damage or injury, the employee is engaged in the affairs or concerns of the
employer or, independently, in that of his own? Vitarich incurred no liability when
Directo’s conduct, act or omission went beyond the range of his employment.

CBK Power Company Limited vs. Commissioner of Internal Revenue
G.R. Nos. 198729-30 January 15, 2014
Sereno, C.J.:

ISSUE: Whether the principle of solutio indebiti applies in a claim for the issuance of a
tax credit certificate representing the latter's alleged unutilized input taxes on local
purchases of goods and services attributable to effectively zero-rated sales to National
Power Corporation (NPC) for the second and third quarters of 2005.

DOCTRINE: No. Devoid of merit is the applicability of the principle of solutio indebiti to
the present case. According to this principle, if something is received when there is no
right to demand it, and it was unduly delivered through mistake, the obligation to return
it arises. In that situation, a creditor-debtor relationship is created under a quasi-
contract, whereby the payor becomes the creditor who then has the right to demand the
return of payment made by mistake, and the person who has no right to receive the
payment becomes obligated to return it. The quasi-contract of solutio indebiti is based
on the ancient principle that no one shall enrich oneself unjustly at the expense of
another .There is solutio indebiti when: (1) Payment is made when there exists no
binding relation between the payor, who has no duty to pay, and the person who

received the payment; and (2) Payment is made through mistake, and not through
liberality or some other cause. Though the principle of solutio indebiti may be applicable
to some instances of claims for a refund, the elements thereof are wanting in this case.
First, there exists a binding relation between petitioner and the CIR, the former being a
taxpayer obligated to pay VAT. Second, the payment of input tax was not made through
mistake, since petitioner was legally obligated to pay for that liability. The entitlement to
a refund or credit of excess input tax is solely based on the distinctive nature of the VAT
system. At the time of payment of the input VAT, the amount paid was correct and
proper.

CHAPTER 2. NATURE AND EFFECT OF OBLIGATIONS

Cortes v. Court of Appeals
GR No. 126083. July 12, 2006
Ynares-Santiago, J.

ISSUES: What is the effect if both parties incur in delay in a reciprocal obligation?

DOCTRINE: Considering that both parties were in delay and that their obligation was
reciprocal, performance thereof must be simultaneous. The mutual inaction of Cortes
and the Corporation therefore gave rise to a compensatio morae or default on the part
of both parties because neither has completed their part in their reciprocal obligation.
This mutual delay of the parties cancels out the effects of default such that it is as if no
one is guilty of delay.

Winifreda Ursal v. Court of Appeals, The Rural Bank of Larena (Siquijor), Inc. and
Spouses Jesus Moneset and Cristita Moneset
GR No. 142411. October 14, 2005
Austria-Martinez, J.:

ISSUE: Is the vendor liable for damages in reciprocal obligations?

DOCTRINE: Where the vendee in the contract to sell also took possession of the
property, the subsequent mortgage constituted by the owner over said property in favor
of another person was valid since the vendee retained absolute ownership over the
property. At most, the vendee in the contract to sell was entitled only to damages
pursuant to Art. 1169 of the Civil Code on reciprocal obligations.

Prudential Bank v. Chonney Lim
G.R. No. 136371 November 11, 2005
Tinga, J.:

ISSUE: Whether the failure of the bank’s employees to credit the deposit to
respondent’s savings account constitutes actionable negligence in law.

DOCTRINE: Article 1172 of the Civil Code ordains that responsibility arising from
negligence in the performance of an obligation is demandable. The failure of the bank’s
employees to credit the amount of P34,000.00 to respondent’s savings account,
resulting as it did in the dishonor of respondent’s checks, constitutes actionable
negligence in law.


From another perspective, the negligence of the bank constitutes a breach of duty to its
client. It is worthy of note that the banking industry is impressed with public interest. As
such, it must observe a high degree of diligence and observe lofty standards of integrity
and performance. By the nature of its functions, a bank is under obligation to treat the
accounts of its depositors with meticulous care and always to have in mind the fiduciary
nature of its relationship with them.

YHT Realty Corporation, Erlinda Lainez and Anicia Payam v. Court of Appeals and
Maurice Mcloughlin
G.R. No. 126780. February 17, 2005
Tinga, J.:

ISSUE: When will the hotelkeepers/innkeepers liable for the effects of their guests?

DOCTRINE: Article 2003 is controlling, thus:
Art. 2003. The hotel-keeper cannot free himself from responsibility by
posting notices to the effect that he is not liable for the articles brought by
the guest. Any stipulation between the hotel-keeper and the guest
whereby the responsibility of the former as set forth in Articles 1998 to
2001 is suppressed or diminished shall be void.

Article 2003 was incorporated in the New Civil Code as an expression of public policy
precisely to apply to situations such as that presented in this case. The hotel business
like the common carrier's business is imbued with public interest. Catering to the public,
hotelkeepers are bound to provide not only lodging for hotel guests and security to their
persons and belongings. The twin duty constitutes the essence of the business. The law
in turn does not allow such duty to the public to be negated or diluted by any contrary
stipulation in so-called "undertakings" that ordinarily appear in prepared forms imposed
by hotel keepers on guests for their signature.

In an early case it was ruled that to hold hotelkeepers or innkeeper liable for the effects
of their guests, it is not necessary that they be actually delivered to the innkeepers or
their employees. It is enough that such effects are within the hotel or inn. With greater
reason should the liability of the hotelkeeper be enforced when the missing items are
taken without the guest's knowledge and consent from a safety deposit box provided by
the hotel itself, as in this case.

Schimtz Transport and Brokerage Corporation v. Transport Venture Inc.
G.R. No. 150255, April 22, 2005
Carpio-Morales J:

ISSUE: How must the liability of the common carrier, on one hand, and an independent
contractor, on the other hand, be described?

DOCTRINE: It would be solidary. A contractual obligation can be breached by tort and
when the same act or omission causes the injury, one resulting in culpa contractual and
the other in culpa aquiliana, Article 2194 of the Civil Code can well apply. In fine, a
liability for tort may arise even under a contract, where tort is that which breaches the
contract. Stated differently, when an act which constitutes a breach of contract would
have itself constituted the source of a quasi-delictual liability had no contract existed
between the parties, the contract can be said to have been breached by tort, thereby
allowing the rules on tort to apply.

As for Black Sea, its duty as a common carrier extended only from the time the goods
were surrendered or unconditionally placed in its possession and received for


transportation until they were delivered actually or constructively to consignee Little
Giant.

Parties to a contract of carriage may, however, agree upon a definition of delivery that
extends the services rendered by the carrier. In the case at bar, Bill of Lading No. 2
covering the shipment provides that delivery be made “to the port of discharge or so
near thereto as she may safely get, always afloat.” The delivery of the goods to the
consignee was not from “pier to pier” but from the shipside of “M/V Alexander Saveliev”
and into barges, for which reason the consignee contracted the services of petitioner.
Since Black Sea had constructively delivered the cargoes to Little Giant, through
petitioner, it had discharged its duty. In fine, no liability may thus attach to Black Sea.

Lapreciosisima Cagungun, et. al. v. Planters Development Bank
GR No. 158674. October 17, 2005
Chico-Nazario, J.:

ISSUE: What is the degree of diligence required in the performance of an obligation?

DOCTRINE: The fiduciary nature of banking requires banks to assume a degree of
diligence higher than that of a good father of a family. Article 1172 of the New Civil
Code states that the degree of diligence required of an obligor is that prescribed by law
or contract, and absent such stipulation then the diligence of a family. In every case,
the depositor expects the bank to treat his account with utmost fidelity, whether such
accounts consists only of a few hundred pesos or of millions of pesos.

Radio Communication of the Philippines vs. Alfonso Verchez, et al.
G.R. No. 164349. January 31, 2006
Carpio Morales, J.:

ISSUE: Must a causal connection between the delay of the respondent in the
performance of its duty and the injury suffered by the plaintiffs be proved in culpa
contractual?

DOCTRINE: No. In culpa contractual, the mere proof of the existence of the contract
and the failure of its compliance justify, prima facie, a corresponding right of relief. The
law, recognizing the obligatory force of contracts, will not permit a party to be set free
from liability for any kind of misperformance of the contractual undertaking or a
contravention of the tenor thereof. A breach upon the contract confers upon the injured
party a valid cause for recovering that which may have been lost or suffered.

Crisostomo Alcaraz v. Court of Appeals
G.R. No. 152202. July 28, 2006
Puno, J.:

ISSUE: Is a credit card holder liable to pay the interests and surcharges imposed by the
bank for non-payment of his obligations absent any stipulation for such payment?

DOCTRINE: No. Absence of any proof that the terms and conditions of the credit card
use has been shown to its client, and failure to by respondent to show that an
application form or document prior to the issuance of the credit card has been submitted
or signed by the same, the client should not be condemned to pay the interest and
charges provided under its terms and conditions.


Metropolitan Bank and Trust Company vs. Renato D. Cabilzo
GR No. 154469. December 6, 2006
Chico-Nazario, J:

ISSUE: Can a Banking Institution Who Relied To Another Bank’s indorsement of a
check evade liability by failing to detect alterations made in a check.

DOCTRINE: No. The point is that as a business affected with public interest and
because of the nature of its functions, the bank is under obligation to treat the accounts
of its depositors with meticulous care, always having in mind the fiduciary nature of their
relationship. The appropriate degree of diligence required of a bank must be a high
degree of diligence, if not the utmost diligence. In every case, the depositor expects the
bank to treat his account with the utmost fidelity, whether such account consists only of
a few hundred pesos or of millions.

Ma. Elizabeth Kind and Mary Ann King v. Megaworld Properties and Holdings, Inc.
G.R. No. 162895. August 16, 2006
Quisumbing, J.:

ISSUE: Is refund a remedy in case there is a defect in the object of the obligation?

DOCTRINE: There is nothing on record to show that the original structure was unstable.
One who alleges a fact has the burden of proving it. Aside from the pictures and videos
of the cracked perimeter fence, petitioners did not present any other evidence. These
pictures and videos are insufficient to show that the townhouse’s foundation was
structurally defective. The cracks could be merely superficial. Other than that, the
presumption is that there was no irregularity regarding the approval of the building plan.
Moreover, respondent presented an affidavit of a structural engineer attesting that the
cracks and leaks on the perimeter fence do not affect the structural integrity of the
townhouse. Absent any showing that the townhouse structure was unstable and unsafe
for habitation, petitioners are not entitled to a refund.

Autocorp Group v. Intra Strata Assurance Corporation
G.R. No. 166662, 556 SCRA 250

ISSUES:
1. Is demand necessary to make an obligation become due and demandable?
2. Are defenses against the Bureau of Customs completely available against ISAC,
since the right of the latter to seek indemnity from petitioner depends on the right of
the BOC to proceed against the bonds?

DOCTRINE:
1. Demand, whether judicial or extrajudicial, is not required before an obligation
becomes due and demandable-a demand is only necessary in order to put an
obligor in a due and demandable obligation in delay, which in turn is for the purpose
of making the obligor liable for interests or damages for the period of delay.

2. ISAC’s right to seek indemnity from petitioners does not constitute subrogation
under the Civil Code, considering that there has been no payment yet by ISAC to the
BOC. There are indeed cases in the aforementioned Article 2071 of the Civil Code
wherein the guarantor or surety, even before having paid, may proceed against the
principal debtor, but in all these cases, Article 2071 of the Civil Code merely grants
the guarantor or surety an action “to obtain release from the guaranty, or to demand
a security that shall protect him from any proceedings by the creditor and from the

danger of insolvency of the debtor.” The benefit of subrogation, an extinctive
subjective novation by a change of creditor, which “transfers to the person
subrogated, the credit and all the rights thereto appertaining, either against the
debtor or against third persons,” is granted by the Article 2067 of the Civil Code only
to the “guarantor (or surety) who pays.”

ISAC cannot be said to have stepped into the shoes of the BOC, because the BOC still
retains said rights until it is paid. ISAC’s right to file Civil Case No. 95-1584 is based on
the express provision of the Indemnity Agreements making petitioners liable to ISAC at
the very moment ISAC’s bonds become due and demandable for the liability of
Autocorp Group to the BOC, without need for actual payment by ISAC to the BOC. But
it is still correct to say that all the defenses available to petitioners against the BOC can
likewise be invoked against ISAC because the latter’s contractual right to proceed
against petitioners only arises when the Autocorp Group becomes liable to the BOC for
non-compliance with its undertakings. Indeed, the arguments and evidence petitioners
can present against the BOC to prove that Autocorp Group’s liability to the BOC is not
yet due and demandable would also establish that petitioners’ liability to ISAC under the
Indemnity Agreements has not yet arisen.

J Plus Asia Development Corporation v. Utility Assurance Corporation
G.R. No. 199650, 700 SCRA 134

ISSUE: Can delay take place even if the obligation to perform or complete the project
was not yet demandable because the agreed completion date is yet to come?

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 non-fulfillment of an
obligation with respect to time.

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.

Since the parties contemplated delay in the completion of the entire project as can be
seen in the Construction Agreement, the CA concluded that the failure of the contractor
to catch up with schedule of work activities did not constitute delay giving rise to the
contractor’s liability for damages.

Article 1374 of the Civil Code requires that 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. Here, the work schedule approved by petitioner was intended, not
only to serve as its basis for the payment of monthly progress billings, but also for
evaluation of the progress of work by the contractor. Article 13.01 (g) (iii) of the
Construction Agreement provides that the contractor shall be deemed in default if,
among others, it had delayed without justifiable cause the completion of the project "by
more than thirty (30) calendar days based on official work schedule duly approved by
the OWNER."

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.


Polo S. Pantaleon v. American Express International, Inc.
G.R. No. 174269, May 8, 2009
Tinga, J.:

ISSUE: Whether delay by itself gives rise to moral damages.

DOCTRINE: No. It should be emphasized that the reason why petitioner is entitled to
damages is not simply because respondent incurred delay, but because the delay, for
which culpability lies under Article 1170, led to the particular injuries under Article 2217
of the Civil Code for which moral damages are remunerative. Moral damages do not
avail to soothe the plaints of the simply impatient, so this decision should not be cause
for relief for those who time the length of their credit card transactions with a stopwatch.
The somewhat unusual attending circumstances to the purchase at Coster – that there
was a deadline for the completion of that purchase by petitioner before any delay would
redound to the injury of his several traveling companions – gave rise to the moral shock,
mental anguish, serious anxiety, wounded feelings and social humiliation sustained by
the petitioner, as concluded by the RTC. Those circumstances are fairly unusual, and
should not give rise to a general entitlement for damages under a more mundane set of
facts.

Sps. Guanio v. Makati Shangri-La Hotel
GR No. 190601, February 7, 2011

ISSUE: Whether the doctrine of proximate cause is applicable to a breach of contract.

DOCTRINE: No. The Court finds that since petitioners’ complaint arose from a contract,
the doctrine of proximate cause finds no application to it, the latter applicable only to
actions for quasi-delicts, not in actions involving breach of contract. Breach of contract
is defined as the failure without legal reason to comply with the terms of a contract. The
appellate court, and even the trial court, observed that petitioners were remiss in their
obligation to inform respondent of the change in the expected number of guests.
Petitioners’ failure to discharge such obligation thus excused respondent from liability
for “any damage or inconvenience” occasioned thereby.

What applies in the present case is Article 1170 of the Civil Code which reads:
Art. 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.

In culpa contractual the mere proof of the existence of the contract and the failure of its
compliance justify, prima facie, a corresponding right of relief. The law, recognizing the
obligatory force of contracts, will not permit a party to be set free from liability for any
kind of misperformance of the contractual undertaking or a contravention of the tenor
thereof. A breach upon the contract confers upon the injured party a valid cause for
recovering that which may have been lost or suffered. The remedy serves to preserve
the interests of the promissee that may include his “expectation interest,” which is his
interest in having the benefit of his bargain by being put in as good a position as he
would have been in had the contract been performed, or his “reliance interest,” which
is his interest in being reimbursed for loss caused by reliance on the contract by being
put in as good a position as he would have been in had the contract not been made; or
his “restitution interest,” which is his interest in having restored to him any benefit that
he has conferred on the other party.


Marques v. Far East Bank
G.R. No. 171379; January 10, 2011

ISSUE: Whether FEBTC is estopped from claiming that the insurance premium in the
contract has been paid, making it liable for damages.

DOCTRINE: Yes. In estoppel, a party creating an appearance of fact, which is false, is
bound by that appearance as against another person who acted in good faith on it.
In Santiago Syjuco, Inc. v. Castro, the Court stated that “estoppel may arise from
silence as well as from words.” ‘Estoppel by silence’ arises where a person, who by
force of circumstances is obliged to another to speak, refrains from doing so and
thereby induces the other to believe in the existence of a state of facts in reliance on
which he acts to his prejudice.

As a consequence of its negligence, FEBTC must be held liable for damages pursuant
to Article 1172 in relation to Article 2176 of the Civil Code which states “whoever by act
or omission causes damage to another, there being fault or negligence, is obliged to pay
for the damage done.” Indisputably, had the insurance premium been paid, through the
automatic debit arrangement with FEBTC, Maxilite’s fire loss claim would have been
approved.

Mondragon Leisure and Resorts Corporation v. Court of Appeals et al.
G.R. No. 154188, June 15, 2005
Quisumbing, J.:

ISSUE: In 1997, the Asian Financial crisis occurred. Is this a fortuitous event
contemplated under Article 1174 such that a debtor cannot be held in default under a
loan agreement?

DOCTRINE: No. To exempt the obligor from liability for a breach of an obligation by
reason of a fortuitous event, the following requisites 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 unforeseeable 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. The
following are excepted from the rule: (1) when the law expressly so specifies; (2) when it
is otherwise declared by the parties; and (3) when the nature of the obligation requires
the assumption of risks. Every business venture involves risks. Risks are not
unforeseeable; they are inherent in business. Hence, a corporation that enters into a
loan agreement, being aware of the economic environment at the time it entered into
such agreement, can be declared in default despite events such as the Asian financial
crisis. It is not a fortuitous event so as to exonerate a party from its obligation.

Philippine Realty and Holding Corp. v. Ley Const. and Dev. Corp.
G. R. No. 165548, June 13, 2011

ISSUE: Whether there is a fortuitous event that will exempt the obligor from liability for
the breach of an obligation.

DOCTRINE: Yes. Under Article 1174 of the Civil Code, to exempt the obligor from
liability for a breach of an obligation due to an "act of God" or force majeure, 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 unforeseeable 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. The shortage in supplies and cement may
be characterized as force majeure. In the present case, hardware stores did not have
enough cement available in their supplies or stocks at the time of the construction in the
1990s. Likewise, typhoons, power failures and interruptions of water supply all clearly
fall under force majeure. Since LCDC could not possibly continue constructing the
building under the circumstances prevailing, it cannot be held liable for any delay that
resulted from the causes aforementioned.

Gilat Satellite Networks, Ltd. v. United Coconut Planters Bank General Insurance
Co., Inc.
G.R. No. 189563; April 7, 2014
Sereno, CJ:

ISSUE: Whether the delay started to run from the time it demanded the fulfillment of
respondent’s obligation under the suretyship contract.

DOCTRINE: Yes. As to the issue of when interest must accrue, the Civil Code is explicit
in stating that it accrues from the time judicial or extrajudicial demand is made on the
surety. This ruling is in accordance with the provisions of Article 1169 of the Civil Code
and of the settled rule that where there has been an extra-judicial demand before an
action for performance was filed, interest on the amount due begins to run, not from the
date of the filing of the complaint, but from the date of that extra-judicial demand.60
Considering that respondent failed to pay its obligation on 30 May 2000 in accordance
with the Purchase Agreement, and that the extrajudicial demand of petitioner was sent
on 5 June 2000,61 we agree with the latter that interest must start to run from the time
petitioner sent its first demand letter (5 June 2000), because the obligation was already
due and demandable at that time.

Carlo F. Sunga v.Virjen Shipping Corporation, Nissho Odyssey Ship Management
Pte. Ltd., And/Or Capt. Angel Zambrano
Gr no. 198640; April 23, 2014
Brion, J.:

ISSUE: Whether Sunga’s injury was a result of an accident.

DOCTRINE: Yes. In Jarco Marketing Corporation, et al., v. Court of Appeals, SC ruled
that an accident pertains to an unforeseen event in which no fault or negligence
attaches to the defendant. It is "a fortuitous circumstance, event or happening; an event
happening without any human agency, or if happening wholly or partly through human
agency, an event which under the circumstances is unusual or unexpected by the
person to whom it happens." In the present case, Sunga did not incur the injury while
solely performing his regular duties; an intervening event transpired which brought upon
the injury. To repeat, the two other oilers who were supposed to help carry the weight of
the 200-kilogram globe valve lost their grasp of the globe valve. As a result, Sunga’s
back snapped when the entire weight of the item fell upon him. The sheer weight of the
item is designed not to be carried by just one person, but as was observed, meant to be
undertaken by several men and expectedly greatly overwhelmed the physical limits of
an average person. Notably, this incident cannot be considered as foreseeable, nor can
it be reasonably anticipated. Sunga’s duty as a fitter involved changing the valve, not to
routinely carry a 200-kilogram globe valve singlehandedly. The loss of his fellow
workers’ group was also unforeseen in so far as Sunga was concerned.


CHAPTER 3. DIFFERENT KINDS OF OBLIGATIONS

SECTION 1. PURE AND CONDITIONAL OBLIGATIONS

Sacobia Hills Development Corporation vs. Allan Ty
G.R. No. 165889. September 20, 2005
Ynares-Santiago, J.:

ISSUE: Can a non-existent obligation be the subject of rescission?

DOCTRINE: No. Ty did not pay the full purchase price which is his obligation under the
contract to sell, therefore, it cannot be said that Sacobia breached its obligation. No
obligations arose on its part because respondent’s non-fulfillment of the suspensive
condition rendered the contract to sell ineffective and unperfected. Indeed, there can be
no rescission under Article 1191 of the Civil Code because until the happening of the
condition, i.e. full payment of the contract price, Sacobia’s obligation to deliver the title
and object of the sale is not yet extant. A non-existent obligation cannot be subject of
rescission. Article 1191 speaks of obligations already existing, which may be rescinded
in case one of the obligors fails to comply with what is incumbent upon him.

Carrascoso v. Court of Appeals
G.R. No. 123672. December 14, 2005
Carpio Morales, J.:

ISSUE: May the partially unpaid seller rescind the sale for failure of the buyer to pay the
balance of the purchase price of the property in the manner and within the period
agreed upon?

DOCTRINE: Yes. 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. The right of rescission of a party to an obligation under Article
1191 of the New Civil Code is predicated on a breach of faith by the other party who
violates the reciprocity between them.
A contract of sale is a reciprocal obligation. The seller obligates itself to transfer the
ownership of and deliver a determinate thing, and the buyer obligates itself to pay
therefor a price certain in money or its equivalent The non-payment of the price by the
buyer is a resolutory condition which extinguishes the transaction that for a time existed,
and discharges the obligations created thereunder. Such failure to pay the price in the
manner prescribed by the contract of sale entitles the unpaid seller to sue for collection
or to rescind the contract.

Spouses William And Jeanette Yao v. Carlomagno B. Matela
G.R. No. 167767. August 29, 2006


ISSUE: May a court annul a contract on the ground that its object is a disastrous deal or
an unwise investment? What is the role of the court in determining the liability of the
contracting parties who are both guilty of violating the terms therein?

DOCTRINE: The well-entrenched doctrine is that the law does not relieve a party from
the effects of an unwise, foolish or disastrous contract, entered into with full awareness
of what he was doing and entered into and carried out in good faith. Such a contract
will not be discarded even if there was a mistake of law or fact. Courts have no
jurisdiction to look into the wisdom of the contract entered into by and between the
parties or to render a decision different therefrom. They have no power to relieve parties
from obligation voluntarily assumed, simply because their contracts turned out to be
disastrous deals or unwise investments. However, in situations such as the one
discussed above, where it cannot be conclusively determined which of the parties first
violated the contract, equity calls and justice demands that we apply the solution
provided in Article 1192 of the Civil Code.

Spouses Jaime Benos And Marina Benos v. Spouses Gregorio Lawilao And
Janice Gail Lawilao
G.R. No. 172259, December 5, 2006

ISSUE: In reciprocal obligations in a pacto de retro sale, is the vendee precluded to pay
even after the date agreed upon due to a cross-claim found in the answer?

DOCTRINE: Yes. While the vendors did not rescind the Pacto de Retro Sale through a
notarial act, they nevertheless rescinded the same in their Answer with Counterclaim.
Even a cross-claim found in the Answer could constitute a judicial demand for rescission
that satisfies the requirement of the law. The counterclaim of the vendors in their answer
satisfied the requisites for the judicial rescission of the subject Pacto de Retro Sale

Darrel Cordero, et al. vs. F.S. Management and Development Corporation
G.R. No. 167213. October 31, 2006
Carpio Morales, J.:

ISSUE: May the contract be rescinded in case of failure of a party to comply with its
obligations under a contract, such as the obligation to pay the down payment of the
purchase price in a contract to sell?

DOCTRINE: No. A contract to sell is not a contract of sale. Article 1191 applies only in
reciprocal contracts. A contract to sell is not a reciprocal contract. Under a contract to
sell, the seller retains title to the thing to be sold until the purchaser fully pays the
agreed purchase price. The full payment is a positive suspensive condition, the non-
fulfillment of which is not a breach of contract but merely an event that prevents the
seller from conveying title to the purchaser. The non-payment of the purchase price
renders the contract to sell ineffective and without force and effect. Nevertheless, while
rescission does not apply in this case, petitioners may cancel the contract to sell, their
obligation not having arisen.

Yamamoto v. Nishino Leather Industries, Inc.
G.R. No. 150283, 551 SCRA 447

ISSUE: Will an offer to a stockholder to that he could take out the Machinery in the
corporation if he wanted to so, provided that the value of said machines would be
deducted from his capital contribution, give rise to an obligation to the corporation to
deliver said properties to the prior?

DOCTRINE: Without acceptance, a mere offer produces no obligation. Thus, under
Article 1181 of the Civil Code, "in conditional obligations, the acquisition of rights, as
well as the extinguishment or loss of those already acquired, shall depend upon the
happening of the event which constitutes the condition." In the case at bar, there is no
showing of compliance with the condition for allowing Yamamoto to take the
machineries and equipment, namely, his agreement to the deduction of their value from
his capital contribution due him in the buy-out of his interests in the corporation.
Yamamoto’s allegation that he agreed to the condition remained just that, no proof
thereof having been presented.

The machineries and equipment, which comprised Yamamoto’s investment in NLII, thus
remained part of the capital property of the corporation.

Spouses Jose T. Valenzuela and Gloria Valenzuela v. Kalayaan Development &
Industrial Corporation
G.R. No. 163244, June 22, 2009
Peralta, J.:

ISSUE: Whether there can be a rescission of contract if a positive suspensive condition
under a contract to sell has not been complied with.

DOCTRINE: No. Under a contract to sell, the seller retains title to the thing to be sold
until the purchaser fully pays the agreed purchase price. The full payment is a positive
suspensive condition, the non-fulfillment of which is not a breach of contract, but merely
an event that prevents the seller from conveying title to the purchaser. The non-payment
of the purchase price renders the contract to sell ineffective and without force and effect.

Since the obligation of respondent did not arise because of the failure of petitioners to
fully pay the purchase price, Article 1191 of the Civil Code would have no application.

The non-fulfillment by the respondent of his obligation to pay, which is a suspensive
condition to the obligation of the petitioners to sell and deliver the title to the property,
rendered the contract to sell ineffective and without force and effect. The parties stand
as if the conditional obligation had never existed. Article 1191 of the New Civil Code will
not apply because it presupposes an obligation already extant. There can be no
rescission of an obligation that is still non-existing, the suspensive condition not having
happened.

Solar Harvest, Inc. v. Davao Corrugated Carton Corporation
G.R. No. 176868 July 26, 2010
Nachura, J.:

ISSUE: Whether petitioner failed to establish a cause of action for rescission it being
shown that respondent did not commit any breach of its contractual obligation.

DOCTRINE: Yes, in reciprocal obligations, as in a contract of sale, the general rule is
that no demand is generally necessary because, once a party fulfills his obligation and
the other party does not fulfill his, the latter automatically incurs in delay. But when
different dates for performance of the obligations are fixed the other party would incur in

delay only from the moment the other party demands fulfillment of the former’s
obligation. Evident from the records and even from the allegations in the complaint was
the lack of demand by petitioner upon respondent to fulfill its obligation to manufacture
and deliver the boxes. The Complaint only alleged that petitioner made a “follow-up”
upon respondent, which, however, would not qualify as a demand for the fulfillment of
the obligation. Petitioner’s witness also testified that they made a follow-up of the boxes,
but not a demand. Without a previous demand for the fulfillment of the obligation,
petitioner would not have a cause of action for rescission against respondent as the
latter would not yet be considered in breach of its contractual obligation.

International Hotel Corporation, v. Francisco Joaquin, Jr. and Rafael Suarez
G.R. No. 158361. April 10, 2013
Bersamin, J.:

ISSUES:
(1) Will the absence of intent on the part of the obligor to pre-empt the fulfillment of the
condition warrant the application of Art. 1186?
(2) Will substantial compliance warrant the application of Art. 1234?

DOCTRINE:
(1) No. This provision refers to the constructive fulfillment of a suspensive
condition, whose application calls for two requisites, namely: (a) the intent of the obligor
to prevent the fulfillment of the condition, and (b) the actual prevention of the fulfillment.
Since the debtor had no intent to prevent the fulfillment of the condition, Art. 1186
cannot be applied.

(2) Generally, yes. Art. 1234 applies only when an obligor admits breaching the
contract after honestly and faithfully performing all the material elements thereof except
for some technical aspects that cause no serious harm to the obligee. However, if
incomplete performance amounts to a material breach of the contract, the same shall no
longer be applicable.

In order that there may be substantial performance of an obligation, there must have
been an attempt in good faith to perform, without any willful or intentional departure
therefrom. The deviation from the obligation must be slight, and the omission or defect
must be technical and unimportant, and must not pervade the whole or be so material
that the object which the parties intended to accomplish in a particular manner is not
attained. The non-performance of a material part of a contract will prevent the
performance from amounting to a substantial compliance.

Conversely, the principle of substantial performance is inappropriate when the
incomplete performance constitutes a material breach of the contract. A contractual
breach is material if it will adversely affect the nature of the obligation that the obligor
promised to deliver, the benefits that the obligee expects to receive after full
compliance, and the extent that the non-performance defeated the purposes of the
contract.

Republic v. Holy Trinity Realty Development Corporation
G.R. No. 172410, 551 SCRA 303

ISSUE: Will the effects of the fulfillment of a condition retroact to the date of the
constitution of the obligation?


DOCTRINE: The effects of a conditional obligation to give, once the condition has been
fulfilled, shall retroact to the day of the constitution of the obligation. Hence, when
HTRDC complied with the given conditions, as determined by the RTC in its Order
dated April 21, 2003, the effects of the constructive delivery retroacted to the actual date
of the deposit of the amount in the expropriation account of DPWH.

Subic Bay Metropolitan Authority v. Court of Appeals
G.R. No. 192885, July 4, 2012.

ISSUE: Whether SBMA is entitled to receive service fees pursuant to the contract
despite failing to render the services required from them?
.
DOCTRINE: No. 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. For one party to demand the performance of the obligation of the
other party, the former must also perform its own obligation. Accordingly, petitioner, not
having provided the services that would require the payment of service fees as
stipulated in the Lease Development Agreement, is not entitled to collect the same.

The records show that petitioner did not actually provide most of the services
enumerated in the Lease and Development Agreement and that the obligation involved
in the agreement was reciprocal in nature; therefore, private respondent's obligation to
pay was dependent upon petitioner's performance of its reciprocal duty to provide the
agreed service, and since petitioner failed to perform its part of the deal, it cannot exact
compliance from private respondent of its duty to pay.

Sps. Fernando and Lourdes Viloria vs. Continental Airlines, Inc.
G.R. No. 188288. January 16, 2012.

ISSUE: Whether annulment in Art 1390 is the same as rescission under Art. 1191.

DOCTRINE: No. Annulment and rescission are two inconsistent remedies. In resolution,
all the elements to make the contract valid are present; in annulment, one of the
essential elements to a formation of a contract, which is consent, is absent. In
resolution, the defect is in the consummation stage of the contract when the parties are
in the process of performing their respective obligations; in annulment, the defect is
already present at the time of the negotiation and perfection stages of the contract.
Accordingly, by pursuing the remedy of rescission under Article 1191, there was implied
admission of the validity of the subject contracts, forfeiting their right to demand their
annulment. A party cannot rely on the contract and claim rights or obligations under it
and at the same time impugn its existence or validity. Indeed, litigants are enjoined from
taking inconsistent positions.

The right to rescind a contract for non-performance of its stipulations is not absolute.
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 violations as would defeat
the very object of the parties in making the agreement. Whether a breach is substantial
is largely determined by the attendant circumstances.

Under Article 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.

SECTION 4. JOINT AND SOLIDARY OBLIGATIONS

Stronghold Insurance Company, Inc. v. Republic-Asahi Glass Corporation
G.R. No. 147561. June 22, 2006
Panganiban, C.J.

ISSUE: Is a surety’s liability under a performance bond automatically extinguished by
the death of the principal?

DOCTRINE: No. A surety company’s liability under the performance bond it issues is
solidary. The death of the principal obligor does not, as a rule, extinguish the obligation
and the solidary nature of that liability. As a general rule, the death of either the creditor
or the debtor does not extinguish the obligation. Obligations are transmissible to the
heirs, except when the transmission is prevented by the law, the stipulations of the
parties, or the nature of the obligation. Only obligations that are personal or are
identified with the persons themselves are extinguished by death.

Section 5 of Rule 86 of the Rules of Court expressly allows the prosecution of money
claims arising from a contract against the estate of a deceased debtor. Evidently, those
claims are not actually extinguished. What is extinguished is only the obligee’s action or
suit filed before the court, which is not then acting as a probate court.

The death of the principal debtor will not work to convert, decrease or nullify the
substantive right of the solidary creditor. Evidently, despite the death of the principal
debtor, [the obligee] may still sue petitioner alone, in accordance with the solidary
nature of the latter’s liability under the performance bond.

Petron Corporation vs. Sps. Cesar Jovero and Erma F. Cudilla, et al.
G.R. No. 151038. January 18, 2012

ISSUE: Whether payment made by one of the solidary debtor is enough to extinguish
the liability of all the co-debtors.

DOCTRINE: According to Article 1217 of the Civil Code, payment made by one of the
solidary debtors extinguishes the obligation. If two or more solidary debtors offer to pay,
the creditor may choose which offer to accept. The debtor who made the payment may
claim from his co-debtors only the share which corresponds to each, with the interest for
the payment already made. If the payment is made before the debt is due however, no
interest for the intervening period may be demanded.

Article 1208 provides for the share of solidary debtors which states that if from the law,
or the nature of the wording of the obligations to which the preceding article refers the
contrary does not appear, the credit of debt shall be presumed to be divided into as
many equal shares as there are creditors or debtors, the credits or debts being
considered distinct from one another, subject to the Rules of Court governing the
multiplicity of suits.

Philippine Commercial International Bank v. CA
G.R. No. 121989. January 31, 2006
Tinga, J.:

ISSUE: In the absence of stipulation, how should the debtor (Atlas) satisfy his
obligation with two solidary creditors (PCIB and MCB)?


DOCTRINE: Article 1208 of the Civil Code mandates the equal sharing of creditors in
the payment of debt in the absence of any law or stipulation to the contrary. Thus, Atlas
may satisfy his obligation by giving the payment to the two solidary creditors, as joint
payees. Whatever share a solidary debtor failed to receive is an internal matter to be
resolved by the solidary debtors themselves.

Crystal v. Bank of the Philippine Islands
G.R. No. 172428, 572 SCRA 697

ISSUE: Does a party who bind himself solidarily as ‘guarantor’ only become secondarily
liable to the creditor?

DOCTRINE: A solidary obligation is one in which each of the debtors is liable for the
entire obligation, and each of the creditors is entitled to demand the satisfaction of the
whole obligation from any or all of the debtors. A liability is solidary “only when the
obligation expressly so states, when the law so provides or when the nature of the
obligation so requires.” Thus, when the obligor undertakes to be “jointly and severally”
liable, it means that the obligation is solidary, such as in this case.

If solidary liabilities were instituted to “guarantee” a principal obligation, the law deems
the contract to be one of suretyship; the surety is directly and equally bound with the
principal.

The Heirs of George Y. Poe vs. Malayan Insurance Company, Inc.,
G.R. No. 156302, April 7, 2009
Chico-Nazario, J.:

ISSUE: Whether a solidary obligation must be expressly stated to hold a party liable for
the obligation.

DOCTRINE: 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. In a joint obligation, each obligor answers only for a part of the whole liability
and to each obligee belongs only a part of the correlative rights. Well-entrenched is the
rule that solidary obligation cannot lightly be inferred. There is solidary liability only
when the obligation expressly so states, when the law so provides or when the nature of
the obligation so requires.

Alba v. Yupangco
G.R. No. 188233
Carpio Morales, J:

ISSUE: Whether the respondent has solidary liability with obligor-corporation despite
the decision of the Labor Arbiter being silent as to the matter.

DOCTRINE: No, there is solidary liability only when the obligation expressly so states,
when the law so provides, or when the nature of the obligation so requires. MAM Realty
Development Corporation v. NLRC on solidary liability of corporate officers in labor
disputes, enlightens: A corporation being a juridical entity, may act only through its
directors, officers and employees. Obligations incurred by them, acting as such
corporate agents are not theirs but the direct accountabilities of the corporation they
represent. True solidary liabilities may at times be incurred but only when exceptional
circumstances warrant such as, generally, in the following cases: 1.When directors and
trustees or, in appropriate cases, the officers of a corporation:(a) vote for or assent to


patently unlawful acts of the corporation;(b)act in bad faith or with gross negligence in
directing the corporate affairs.

Asset Builders Corporation v. Stronghold Insurance Company, Incorporated  
G.R. No. 187116, October 18, 2010 
Mendoza, J.:

ISSUE: Whether a guarantor who binds himself to the creditor to fulfill the obligation of
the principal debtor in case the latter should fail to do so is a solidary debtor?

DOCTRINE: Yes, if a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case
the contract is called a suretyship. As provided in Article 2047, the surety undertakes
to be bound solidarily with the principal obligor. That undertaking makes a surety
agreement an ancillary contract as it presupposes the existence of a principal contract.
Although the contract of a surety is in essence secondary only to a valid principal
obligation, the surety becomes liable for the debt or duty of another although it
possesses no direct or personal interest over the obligations nor does it receive any
benefit therefrom.

Sps. Rodolfo Berot v. Felipe Siapno
G. R. No. 188944; July 9, 2014

ISSUE: Whether the mortgage may be considered solidary despite the absence of
express terms making the obligation solidary.

DOCTRINE: No. Under Article 1207 of the Civil Code of the Philippines, the general rule
is that when there is a concurrence of two or more debtors under a single obligation, the
obligation is presumed to be joint. The law further provides that to consider the
obligation as solidary in nature, it must expressly be stated as such, or the law or the
nature of the obligation itself must require solidarity. Upon examination of the contents
of the real estate mortgage, the Court found no indication in the plain wordings of the
instrument that the debtors had expressly intended to make their obligation to
respondent solidary in nature. Absent from the mortgage are the express and
indubitable terms characterizing the obligation as solidary. Respondent was not able to
prove by a preponderance of evidence that petitioners' obligation to him was solidary.
Hence, applicable to this case is the presumption under the law that the nature of the
obligation herein can only be considered as joint. It is incumbent upon the party alleging
otherwise to prove with a preponderance of evidence that petitioners' obligation under
the loan contract is indeed solidary in character.

Trade and Investment Development Corp. of the Philippines v. Asia Paces Corp.
G.R. No. 187403, February 12, 2014
Perlas-Bernabe, J.

ISSUE: Will an extension of payment granted to a third party extinguish the suretyship
in which one the parties is also a principal debtor to said third party?

DOCTRINE: No. 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 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.


Article 2079 of the Civil Code refers to a payment extension granted by the creditor to
the principal debtor without the consent of the guarantor or surety. It will not apply in
cases where the suretyship was entered to insure a debt transaction distinct and
separate from the transaction upon which the extension for payment was made. The
two sets of transactions should be treated separately and distinctly from one another
following the civil law principle of relativity of contracts "which provides that contracts
can only bind the parties who entered into it, and it cannot favor or prejudice a third
person, even if he is aware of such contract and has acted with knowledge thereof.

Olongapo City, V. Subic Water And Sewerage Co., Inc.,
G.R. No. 171626, August 06, 2014

ISSUE: Can the Subic Water, who was not a party in the case, still be subjected to a
writ of execution, since it was identified as OCWD’s co-maker and successor-in-interest
in the compromise agreement?

DOCTRINE: No. Solidary liability must be expressly stated; it is not presumed. Art. 1207
of the Civil Code provides, “There is a solidary liability only when the obligation
expressly so states, or when the law or the nature of the obligation requires solidarity.”
 
In Palmares v. Court of Appeals, the Court did not hesitate to rule that although a party
to a promissory note was only labeled as a co-maker, his liability was that of a surety,
since the instrument expressly provided for his joint and several liability with the
principal.
 
The law explicitly states that solidary liability is not presumed and must be expressly
provided for. Not being a surety, Subic Water is not an insurer of OCWD’s obligations
under the compromise agreement. At best, Subic Water was merely a guarantor
against whom petitioner can claim, provided it was first shown that: a) petitioner had
already proceeded after the properties of OCWD, the principal debtor; b) and despite
this, the obligation under the compromise agreement, remains to be not fully satisfied.

SECTION 6. OBLIGATIONS WITH A PENAL CLAUSE

First Fil-Sin Lending Corporation v. Gloria D. Padillo
G.R. No. 160533. January 12, 2005

ISSUE: Whether the penalty charges of 1% per day of delay is unconscionable.

DOCTRINE: As regards the penalty charges, the Court agrees with the Court of
Appeals in ruling that the 1% penalty per day of delay is highly unconscionable.
Applying Article 1229 of the Civil Code, courts shall equitably reduce the penalty when
the principal obligation has been partly or irregularly complied with, or if it is iniquitous or
unconscionable.

Filinvest Land, Inc. vs. Hon. Court of Appeals, Philippine American General
Insurance Company and Pacific Equipment Corporation
G.R. No. 138980. September 20, 2005
Chico-Nazario, J.:

ISSUE: Is there a difference between penalty and liquidated damages in cases where
there has been partial or irregular compliance?

DOCTRINE: None. Courts may equitably reduce a stipulated penalty in the contract in
two instances: (1) if the principal obligation has been partly or irregularly complied; and
(2) even if there has been no compliance if the penalty is iniquitous or unconscionable
in accordance with Article 1229 of the Civil Code. In cases where there has been partial
or irregular compliance, as in this case, there will be no substantial difference between a
penalty and liquidated damages insofar as legal results are concerned and that either
may be recovered without the necessity of proving actual damages and both may be
reduced when proper.

Development Bank of the Philippines v. Family Foods Manufacturing Co. Ltd., and
Spouses Julianco and Catalina Centeno
G.R. No. 180458; July 30, 2009
Nachura, J.:

ISSUE: Whether the stipulated penalty charge of 8% per annum and interest rates of
18% and 22% per annum are unreasonable, iniquitous and unconscionable.

DOCTRINE: No. Respondents’ own evidence shows that they agreed on the stipulated
interest rates of 18% and 22%, and on the penalty charge of 8%, in each promissory
note. It is a basic principle in civil law that parties are bound by the stipulations in the
contracts voluntarily entered into by them. Parties are free to stipulate terms and
conditions that they deem convenient, provided these are not contrary to law, morals,
good customs, public order, or public policy. There is nothing in the records, and in fact,
there is no allegation, showing that respondents were victims of fraud when they signed
the promissory notes. Neither is there a showing that in their contractual relations with
DBP, respondents were at a disadvantage on account of their moral dependence,
mental weakness, tender age or other handicap, which would entitle them to the vigilant
protection of the courts as mandated by Article 24 of the Civil Code.

Ileana Dr. Macalinao v. Bank of the Philippine Islands
G.R. No. 175490, September 17, 2009
Velasco, Jr., J.:

ISSUE: Whether the reduction of interest rate should be upheld since the stipulated rate
of interest was unconscionable and iniquitous, and thus illegal.

DOCTRINE: Yes. 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. It was 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. 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.


CHAPTER 4. EXTINGUISHMENT OF OBLIGATIONS

SECTION 1. PAYMENT OR PERFORMANCE
A. APPLICATION OF PAYMENTS
B. PAYMENT BY CESSION
C. TENDER OF PAYMENT AND CONSIGNATION

Jaime Biana v. George Gimenez
G.R. No. 132768. September 9, 2005
Garcia, J.:

ISSUE: May redemption be made through tender of postdated checks?

DOCTRINE: Yes. A check may be used for the exercise of the right of redemption, the
same being a right and not an obligation. The tender of a check is sufficient to compel
redemption but it is not in itself a payment that relieves the redemptioner from his
liability to pay the redemption price. Art. 1249 may not be applied.

G & M (Phil.), Inc. vs. Willie Batomalaque
G.R. No. 151849 June 23, 2005
Carpio Morales, J.

ISSUE: Who has the burden of showing with legal certainty that the obligation has been
discharged by payment?

DOCTRINE: Debtor. It is settled that as a general rule, a party who alleges payment as
a defense has the burden of proving it. On repeated occasions, this Court ruled that the
debtor has the burden of showing with legal certainty that the obligation has been
discharged by payment. To discharge means to extinguish an obligation, and in contract
law discharge occurs either when the parties have performed their obligations in the
contract, or when an event the conduct of the parties, or the operation of law releases
the parties from performing. Thus, a party who alleges that an obligation has been
extinguished must prove facts or acts giving rise to the extinction.

The fact of underpayment does not shift the burden of evidence to the plaintiff-herein
respondent because partial payment does not extinguish the obligation. Only when the
debtor introduces evidence that the obligation has been extinguished does the burden
of evidence shift to the creditor who is then under a duty of producing evidence to show
why payment does not extinguish the obligation.

Abacus Securities Corporation v. Ruben U. Ampil
Gr. No. 160016. February 27, 2006
Panganiban, CJ.:

ISSUE: What is the duty of the principal for the advance payments made by the broker
in accordance with the former’s instructions?

DOCTRINE: Under Article 1236 of the Civil Code, he can demand from the principal
what he has paid, except that if he paid without the knowledge or against the will of the
debtor, he can recover only insofar as the payment has been beneficial to the debtor.


Almeda v. Bathala Marketing Industries, Inc.
G.R. No. 150806, 542 SCRA 470

ISSUE: Can the continuous erosion of the value of the Philippines peso for three to four
years amount to extra-ordinary inflation as contemplated by Article 1250 of the Civil
Code?

DOCTRINE: The erosion of the value of the Philippine peso in the past three or four
decades, starting in the mid-sixties, is characteristic of most currencies-while the
Supreme Court may take judicial notice of the decline in the purchasing power of the
Philippine currency in the span of time, such downward trend of the peso cannot be
considered as the extraordinary phenomenon contemplated by Article 1250 of the Civil
Code; Absent an official pronouncement or declaration by competent authorities of the
existence of extraordinary inflation during a given period, the effects of extraordinary
inflation are not to be applied.

ASJ Corporation v. Evangelista
G.R. No. 158086, 545 SCRA 300

ISSUE: Was ASJ’s retention of the goods to be delivered on account of Evangelista’s
failure to pay the full amount plus service fees unjustified?

DOCTRINE: To begin with, ASJ’s obligation to deliver the chicks and by-products
corresponds to three dates: the date of hatching, the delivery/pick-up date and the date
of respondents’ payment. On several setting reports, respondents made delays on their
payments, but petitioners tolerated such delay. When Evangelista’s accounts
accumulated because of their successive failure to pay on several setting reports,
petitioners opted to demand the full settlement of respondents’ accounts as a condition
precedent to the delivery. However, Evangelista was unable to fully settle their
accounts.

Evangelista’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. More so, 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.

Furthermore, it was Evangelista who violated the very essence of reciprocity in
contracts, consequently giving rise to ASJ’s 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.

Insular Life Assurance Company, Ltd. v. Toyota Bel-Air, Inc.
G.R. No. 137884, 550 SCRA 70

ISSUES:
1. Is possession of the property a sufficient justification to grant the motion to consign
the rents due?
2. Will a party’s non-compliance to some of the suspensive conditions in an agreement
result to extinguishment of the obligation of the other party?


DOCTRINES:
1. Consignation is the act of depositing the thing due with the court or judicial
authorities whenever the creditor cannot accept or refuses to accept payment and it
generally requires a prior tender of payment. In order that consignation may be
effective, the debtor must show that: (1) there was a debt due; (2) the consignation
of the obligation was made because the creditor to whom tender of payment had
been made refused to accept it or was absent or incapacitated, or because several
persons claimed to be entitled to receive the amount due, or because the title to the
obligation was lost; (3) previous notice of the consignation was given to the person
interested in the performance of the obligation; (4) the amount due was placed at the
disposal of the court; and (5) after the consignation had been made, the person
interested was notified thereof. Failure in any of these requirements is enough
ground to render a consignation ineffective.

In the present case, Toyota failed to allege (2) and (3) above, much less prove that any
of the requirements was present. The mere fact that Toyota had been in possession of
the property since July 3, 1998, is not a sufficient justification to grant the motion to
consign the rents due.

2. 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, and if the suspensive condition does not take place, the parties would stand
as if the conditional obligation has never existed. Since Toyota was unable to comply
with the last two conditions of the agreement, which were suspensive conditions,
Insular Life cannot be compelled to comply with its obligation to end the present
litigation. No right in favor of Toyota arose and no obligation on the part of Insular
Life was created.

Dao Heng Bank, Inc. (Now Banco De Oro Universal Bank) v. Laigo
G.R. No. 173856, 571 SCRA 434

ISSUE: Is a separate written contract necessary to make a dacion en pago binding
upon the parties?

DOCTRINE: Dacion en pago as a mode of extinguishing an existing obligation and
partakes of the nature of sale whereby property is alienated to the creditor in
satisfaction of a debt in money.

Dacion en pago is an objective novation of the obligation, hence, common consent of
the parties is required in order to extinguish the obligation. Being likened to that of a
contract of sale, dacion en pago is governed by the law on sales. The partial execution
of a contract of sale takes the transaction out of the provisions of the Statute of Frauds
so long as the essential requisites of consent of the contracting parties, object and
cause of the obligation concur and are clearly established to be present.

Royal Cargo Corporation v. DFS Sports Unlimited, Inc.
G.R. No. 158621, 573 SCRA 414

ISSUE: To whom does the burden of evidence lie in order to prove that payment has
been made?


DOCTRINE: As to the first issue raised, the settled rule is that one who pleads payment
has the burden of proving it. Even where the creditor alleges non-payment, the general
rule is that the onus rests on the debtor to prove payment, rather than on the creditor to
prove non-payment. The debtor has the burden of showing with legal certainty that the
obligation has been discharged by payment. Where the debtor introduces some
evidence of payment, the burden of going forward with the evidence – as distinct from
the general burden of proof – shifts to the creditor, who is then under a duty of
producing some evidence to show non-payment.

Since respondent claims that it had already paid petitioner for the services rendered by
the latter, it follows that the former carries the burden of proving such payment.

Allandale Sportsline, Inc. v. The Good Development Corporation
G.R. No. 164521, 574 SCRA 625

ISSUE: Is tender of payment alone and the other party’s refusal to accept the same
sufficient to discharge the other from their obligation?

DOCTRINE: Tender of payment, without more, produces no effect-it must be followed
by a valid consignation in order to produce the effect of payment and extinguish an
obligation.

Consignation has the following mandatory requirements: (1) there was a debt due; (2)
the consignation of the obligation had been made because the creditor to whom tender
of payment was made refused to accept it, or because he was absent or incapacitated,
or because several persons claim to be entitled to receive the amount due, or because
the title to the obligation has been lost; (3) previous notice of the consignation had been
given to the person interested in the performance of the obligation; (4) the amount due
was placed at the disposal of the court; and (5) after the consignation had been made,
the person interested was notified thereof.

Petitioners did not allege or prove that after their tender of payment was refused by
respondents, they attempted or pursued consignation of the payment with the proper
court. Their tender of payment not having been followed by a valid consignation, it
produced no effect whatsoever, least of all the extinguishment of the loan obligation.
Therefore, the first issue of the validity or invalidity of their tender of payment is
completely moot and academic, for either way the discussion will go, it will lead to no
other conclusion but that, without an accompanying valid consignation, the tender of
payment did not result in the payment and extinguishment of the loan obligation. The
Court cannot take cognizance of such a purely hypothetical issue.

Annabelle Dela Peña and Adrian Villareal v. The Court of Appeals and Rural Bank
of Bolinao, Inc.
G.R. No. 177828, February 13, 2009
Nachura, J.:

ISSUE: Whether the burden of proving the fact of payment lies on the person alleging it.

DOCTRINE: Yes. Jurisprudence is replete with rulings that in civil cases, the party who
alleges a fact has the burden of proving it. Burden of proof is the duty of a party to
present evidence of the facts in issue necessary to prove the truth of his claim or
defense by the amount of evidence required by law. Thus, a party who pleads payment
as a defense has the burden of proving that such payment has, in fact, been made.
When the plaintiff alleges nonpayment, still, the general rule is that the burden rests on
the defendant to prove payment, rather than on the plaintiff to prove nonpayment.


D.B.T. Mar-Bay Construction, Incorporated v. Ricaredo Panes et al.
G.R. No. 167232, July 31, 2009
Nachura, J.

ISSUE: Whether an innocent purchaser for value and good faith which, through a
dacion en pago, acquire ownership over the property.

DOCTRINE: Yes. DBT is an innocent purchaser for value and good faith which, through
a dacion en pago duly entered into with B.C. Regalado, acquired ownership over the
subject property, and whose rights must be protected under Section 32 of P.D. No.
1529.

Dacion en pago is the delivery and transmission of ownership of a thing by the debtor to
the creditor as an accepted equivalent of the performance of the obligation. It is a
special mode of payment where the debtor offers another thing to the creditor, who
accepts it as an equivalent of the payment of an outstanding debt. 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.

It must also be noted that portions of the subject property had already been sold to third
persons who, like DBT, are innocent purchasers in good faith and for value, relying on
the certificates of title shown to them, and who had no knowledge of any defect in the
title of the vendor, or of facts sufficient to induce a reasonably prudent man to inquire
into the status of the subject property.

Rockville Excel International Exim Corporation v. Spouses Oligario Culla and
Bernardita Miranda
G.R. No. 155716, October 2, 2009
Brion, J.

ISSUE: Whether the grant of extensions of the time to pay the loan belied the
contention that they had intended a dacion en pago.

DOCTRINE: Yes. Dacion en pago is the delivery and transmission of ownership of a
thing by the debtor to the creditor as an accepted equivalent of the performance of an
existing obligation. It is a special mode of payment where the debtor offers another thing
to the creditor who accepts it as equivalent to the payment of an outstanding debt. For
dacion en pago to exist, the following elements must concur: (a) existence of a money
obligation; (b) the alienation to the creditor of a property by the debtor with the consent
of the former; and (c) satisfaction of the money obligation of the debtor.

If the parties had truly intended a dacion en pago transaction to extinguish the Sps.
Culla’s P2,000,000.00 loan and Oligario had sold the property in payment for this debt,
it made no sense for him to continue to ask for extensions of the time to pay the loan.
More importantly, Rockville would not have granted the requested extensions to Oligario
if payment through a dacion en pago had taken place. That Rockville granted the
extensions simply belied its contention that they had intended a dacion en pago.

Thus, we agree with the factual findings of the RTC and the CA that no agreement of
sale was perfected between Rockville and the Sps. Culla. On the contrary, what they
denominated as a Deed of Absolute Sale was in fact an equitable mortgage.

Premiere Development Bank v. Central Surety & Insurance Company, Inc.
G.R. No. 176246, February 13, 2009
Nachura, J.:

ISSUE: Whether the debtor may choose among his obligations in which he may apply
his payment and whether such right may be waived in favor of the creditor.

DOCTRINE: Yes. The debtor’s right to apply payment is not mandatory. This is clear
from the use of the word "may" rather than the word "shall" in the provision which reads:
"He who has various debts of the same kind in favor of one and the same creditor, may
declare at the time of making the payment, to which of the same must be applied."

Indeed, the debtor’s right to apply payment has been considered merely directory, and
not mandatory, following this Court’s earlier pronouncement that "the ordinary
acceptation of the terms ‘may’ and ‘shall’ may be resorted to as guides in ascertaining
the mandatory or directory character of statutory provisions."

Article 1252 gives the right to the debtor to choose to which of several obligations to
apply a particular payment that he tenders to the creditor. But likewise granted in the
same provision is the right of the creditor to apply such payment in case the debtor fails
to direct its application. This is obvious in Art. 1252, par. 2, viz.: "If the debtor accepts
from the creditor a receipt in which an application of payment is made, the former
cannot complain of the same." It is the directory nature of this right and the subsidiary
right of the creditor to apply payments when the debtor does not elect to do so that
make this right, like any other right, waivable.

A debtor, in making a voluntary payment, may at the time of payment direct an
application of it to whatever account he chooses, unless he has assigned or waived that
right. If the debtor does not do so, the right passes to the creditor, who may make such
application as he chooses. But if neither party has exercised its option, the court will
apply the payment according to the justice and equity of the case, taking into
consideration all its circumstances. Verily, the debtor’s right to apply payment can be
waived and even granted to the creditor if the debtor so agrees.

Cecilleville Realty and Service Corporation v. Acuña
G.R. No. 162074; July 13, 2009
Carpio, J.

ISSUE: Whether Cecilleville Realty and Service Corporation is entitled to
reimbursement from the Acuña spouses

DOCTRINE: Yes Cecilleville paid the debt of the Acuña spouses to Prudential as an
interested third party. The second paragraph of Article 1236 of the Civil Code reads:
Whoever pays for another may demand from the debtor what he has paid, except that if
he paid without the knowledge or against the will of the debtor, he can recover only
insofar as the payment has been beneficial to the debtor. Even if the Acuña spouses
insist that Cecilleville’s payment to Prudential was without their knowledge or against
their will, Article 1302(3) of the Civil Code states that Cecilleville still has a right to
reimbursement, thus: When, even without the knowledge of the debtor, a person
interested in the fulfillment of the obligation pays, without prejudice to the effects of
confusion as to the latter’s share.

DBT Mar-Bay Construction, Inc. vs. Panes
G.R. No. 167232; July 31, 2009


Nachura, J.

ISSUE: Whether DBT, as an innocent purchaser for value and good faith which, through
a dacion en pago duly entered into with B.C. Regalado, acquired ownership over the
subject property.

DOCTRINE: Yes. Dacion en pago is the delivery and transmission of ownership of a
thing by the debtor to the creditor as an accepted equivalent of the performance of the
obligation. It is a special mode of payment where the debtor offers another thing to the
creditor, who accepts it as an equivalent of the payment of an outstanding debt. 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.

It must also be noted that portions of the subject property had already been sold to third
persons who, like DBT, are innocent purchasers in good faith and for value, relying on
the certificates of title shown to them, and who had no knowledge of any defect in the
title of the vendor, or of facts sufficient to induce a reasonably prudent man to inquire
into the status of the subject property. To disregard these circumstances simply on the
basis of alleged continuous and adverse possession of respondents would not only be
inimical to the rights of the aforementioned titleholders, but would ultimately wreak
havoc on the stability of the Torrens system of registration.

Manuel Go Cinco and Araceli S. Go Cinco v. Court Of Appeals, Ester Servacio
and Maasin Traders Lending Corporation
G.R. No. 151903, October 9, 2009
Brion, J.:

ISSE: Whether unjust refusal of creditor to accept payment is equivalent to payment.

DOCTRINE: No. 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.

Tender of payment, as defined in Far East Bank and Trust Company v. Diaz Realty, Inc.,
is the definitive act of offering the creditor what is due him or her, together with the
demand that the creditor accept the same. When a creditor refuses the debtor’s tender
of payment, the law allows the consignation of the thing or the sum due. Tender and
consignation have the effect of payment, as by consignation, the thing due is deposited
and placed at the disposal of the judicial authorities for the creditor to collect.

Land Bank of the Philippines vs. Alfredo Ong
G.R. No. 190755November 24, 2010
Velasco, Jr., J.:

ISSUE: Whether Art. 1236 makes a creditor (Land Bank) bound to accept payment from
a third person having no interest in the fulfillment of the obligation and Whether a third
person (Alfredo) may demand from the debtor (Spouses Sy) what he has paid.

DOCTRINE: No. Land Bank was not bound to accept Alfredo’s payment, since as far as
the former was concerned, he did not have an interest in the payment of the loan of the
Spouses Sy.


No. Alfredo was not making payment to fulfill the obligation of the Spouses Sy. Alfredo,
as a third person, did not, therefore, have an interest in the fulfillment of the obligation of
the Spouses Sy, since his interest hinged on Land Bank’s approval of his application,
which was denied. As Alfredo made the payment for his own interest and not on behalf
of the Spouses Sy, recourse is not against the latter. He, thus, made payment not as a
debtor but as a prospective mortgagor. And as Alfredo was not paying for another, he
cannot demand from the debtors, the Spouses Sy, what he has paid.

Republic v. Thi Thu Thuy T. De Guzman
G.R. No. 175021; June 15, 2011

ISSUE: Is the payment made to a person other than the creditor extinguishes the
obligation?

DOCTRINE: No. In general, a payment in order to be effective to discharge an
obligation, must be made to the proper person. 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 respondent was able
to establish that the LBP check was not received by her or by her authorized personnel.

Dalton vs. FGR Realty and Development Corp
G.R. No. 172577; January 19, 2011

ISSUE: Whether the consignation made by the plaintiff-appellant was void for failure to
give notice to the defendants-appellees of her intention to so consign her rental
payments.

DOCTRINE: NO. Compliance with the requisites of a valid consignation is mandatory.
Failure to comply strictly with any of the requisites will render the consignation void.
Substantial compliance is not enough. The requisites of a valid consignation: (1) a debt
due; (2) the creditor to whom tender of payment was made refused without just cause to
accept the payment, or the creditor was absent, unknown or incapacitated, or several
persons claimed the same right to collect, or the title of the obligation was lost; (3) the
person interested in the performance of the obligation was given notice before
consignation was made; (4) the amount was placed at the disposal of the court; and (5)
the person interested in the performance of the obligation was given notice after the
consignation was made. The consignation having been made, the interested parties
shall also be notified thereof.

The giving of notice to the persons interested in the performance of the obligation is
mandatory. Failure to notify the persons interested in the performance of the obligation
will render the consignation void. In Ramos v. Sarao, the Court held that, "All
interested parties are to be notified of the consignation. Compliance with [this
requisite] is mandatory.

Elizabeth Del Carmen v. Sps. Sabordo
G.R. No. 181723, August 11, 2014

ISSUE: Whether the judicial deposit or consignation of the money was valid and binding
to the parties and produced the effect of payment of the purchase price of the subject
lots.

DOCTRINE: NO. 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. It should be distinguished from
tender of payment which is the manifestation by the debtor to the creditor of his desire
to comply with his obligation, with the offer of immediate performance. Tender is the
antecedent of consignation, that is, an act preparatory to the consignation, which is the
principal, and from which are derived the immediate consequences which the debtor
desires or seeks to obtain. Tender of payment may be extrajudicial, while consignation
is necessarily judicial, and the priority of the first is the attempt to make a private
settlement before proceeding to the solemnities of consignation. Tender and
consignation, where validly made, produces the effect of payment and extinguishes the
obligation.

It is settled that compliance with the requisites of a valid consignation is mandatory.
Failure to comply strictly with any of the requisites will render the consignation void. One
of these requisites is a valid prior tender of payment.

Erlinda Gajudo, Fernando Gajudo, Jr., Estelita Gajudo, Baltazar Gajudo And
Danilo Arahan Chua v. Traders Royal Bank
G.R. No. 151098. March 21, 2006
Panganiban, C.J.:

ISSUE: What is a means of proving a firm commitment to pay the redemption price on a
fixed period, which is essential in conventional redemption?

DOCTRINE: Other than the Interbank check marked "for deposit" by respondent bank,
no other evidence was presented to establish that petitioners had offered to pay the
alleged redemption price of P40,135.53 on a fixed date. For that matter, petitioners have
not shown that they tendered payment of the balance and/or consigned the payment to
the court, in order to fulfill their part of the purported agreement. These remedies are
available to an aggrieved debtor under Article 1256 of the Civil Code, when the creditor
unjustly refuses to accept the payment of an obligation.

Luzon Development Bank v. Enriquez
G.R. No. 168646; January 12, 2011

ISSUE: Whether the dacion en pago extinguished the loan obligation, such that DELTA
has no more obligations to the BANK.

DOCTRINE: The contractual intention determines whether the property subject of the
dation will be considered as the full equivalent of the debt and will therefore serve as full
satisfaction for the debt. "The dation in payment extinguishes the obligation to the extent
of the value of the thing delivered, either as agreed upon by the parties or as may be
proved, unless the parties by agreement, express or implied, or by their silence,
consider the thing as equivalent to the obligation, in which case the obligation is totally
extinguished."

Telengtan Brothers & Sons, Inc. v. United States Lines, Inc. and the Court of
Appeals
Gr. No. 132284. February 28, 2006
Garcia, J.:


ISSUE: When can there be extraordinary inflation or deflation of the currency stipulated
so as to justify the application of payment under Article 1250?

DOCTRINE: 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.

Even if the price index of goods and services may have risen during the intervening
period, this increase, without more, cannot be considered as resulting to "extraordinary
inflation" as to justify the application of Article 1250. The erosion of the value of the
Philippine peso in the past three or four decades, starting in the mid-sixties, is, as the
Court observed in Singson vs. Caltex (Phil), Inc., characteristics of most currencies. And
while the Court may take judicial notice of the decline in the purchasing power of the
Philippine currency in that span of time, such downward trend of the peso cannot be
considered as the extraordinary phenomenon contemplated by Article 1250 of the Civil
Code. Furthermore, absent an official pronouncement or declaration by competent
authorities of the existence of extraordinary inflation during a given period, as here, the
effects of extraordinary inflation, if that be the case, are not to be applied.

Extraordinary inflation can never be assumed; he who alleges the existence of such
phenomenon must prove the same.

Simplicio A. Palanca v. Ulyssis Guides
G.R. No. 146365. February 28, 2005
Tinga, J.:

ISSUE: What is the effect of acceptance of payment without qualification on the part of
the creditor?

DOCTRINE: Art. 1235 of the Civil Code provides that “When the obligee accepts the
performance, knowing its incompleteness or irregularity, and without expressing any
protest or objection, the obligation is deemed fully complied with.” Thus, when petitioner
accepted respondent’s installment payments despite the alleged charges incurred by
the latter, and without any showing that he protested the irregularity of such payment,
nor demanded the payment of the alleged charges, respondent’s liability, if any for said
charges, is deemed fully satisfied.

SECTION 2. LOSS OF THE THING DUE

Ayala Construction and Development Corporation v. Philippine Commercial
International Bank
G.R. No. 153827. April 25, 2006.
Garcia, J.:

ISSUE: In an obligation to give will a party be released from its obligation when the
prestation becomes legally of physically impossible?


DOCTRINE: No. 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.

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 simple possession, or in order to return it to
its owner.

Raymundo S. De Leon vs. Benita T. Ong
G.R. No. 170405, February 2, 2010
Corona, J.:

ISSUE: Whether the respondent a purchaser in good faith.

DOCTRINE: YES. Article 1266 of the Civil Code provides: Article 1266. The debtor in
obligations to do shall be released when the prestation become legally or physically
impossible without the fault of the obligor.

Since respondent’s obligation to assume petitioner’s outstanding balance with RSLAI
became impossible without her fault, she was released from the said obligation.
Moreover, because petitioner himself willfully prevented the condition vis-à-vis the
payment of the remainder of the purchase price, the said condition is considered fulfilled
pursuant to Article 1186 of the Civil Code. For purposes, therefore, of determining
whether respondent was a purchaser in good faith, she is deemed to have fully
complied with the condition of the payment of the remainder of the purchase price.

SECTION 3. CONDONATION OR REMISSION OF THE DEBT

Ruben Reyna V. COA
G.R. No. 167219; February 8, 2011

ISSUE: Whether the writing off of a loan is considered as condonation which releases a
debt by the creditor.

DOCTRINE: NO. This Court rules that writing-off a loan does not equate to a
condonation or release of a debt by the creditor. Write-off is not one of the legal grounds
for extinguishing an obligation under the Civil Code. It is not a compromise of liability.
Neither is it a condonation, since in condonation gratuity on the part of the obligee and
acceptance by the obligor are required. In making the write-off, only the creditor takes
action by removing the uncollectible account from its books even without the approval or
participation of the debtor.
SECTION 4. CONFUSION OR MERGER OF RIGHTS

Cecilleville Realty and Service Corporation vs. Spouses Tito Acuña and Ofelia B.
Acuña

G.R. No. 162074, July 13, 2009
Carpio, J.

ISSUE: Whether a third-party accommodation mortgagor in a real estate mortgage who
paid the mortgaged debt in favor of the principal mortgagor without his knowledge has
the right to reimburse from the latter.

DOCTRINE: Yes. When, even without the knowledge of the debtor, a person interested
in the fulfillment of the obligation pays, without prejudice to the effects of confusion as to
the latter’s share.

Cecilleville clearly has an interest in the fulfillment of the obligation because it owns the
properties mortgaged to secure the Acuña spouses’ loan. When an interested party
pays the obligation, he is subrogated in the rights of the creditor. Because of its
payment of the Acuña spouses’ loan, Cecilleville actually steps into the shoes of
Prudential and becomes entitled, not only to recover what it has paid, but also to
exercise all the rights which Prudential could have exercised. There is, in such cases,
not a real extinguishment of the obligation, but a change in the active subject.

Sps. Dominador R. Narvaez and Lilia W. Narvaez vs. Sps. Rose Ogas Alciso and
Antonio Alciso
G.R. No. 165907, July 27, 2009
Carpio, J.

ISSUE: Whether there could be a stipulation in favor of a third person.

DOCTRINE: Yes. In Limitless Potentials, Inc. v. Quilala, the Court laid down the
requisites of a stipulation pour autrui: (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 an
incidental benefit; (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.

All the requisites are present in the instant case: (1) there is a stipulation in favor of
Alciso; (2) the stipulation is a part, not the whole, of the contract; (3) Bate and the
Spouses Narvaez clearly and deliberately conferred a favor to Alciso; (4) the favor is
unconditional and uncompensated; (5) Alciso communicated her acceptance of the
favor before its revocation — she demanded that a stipulation be included in the 14
August 1981 Deed of Sale of Realty allowing her to repurchase the property from the
Spouses Narvaez, and she informed the Spouses Narvaez that she wanted to
repurchase the property; and (6) Bate and the Spouses Narvaez did not represent, and
were not authorized by, Alciso.

SECTION 5. COMPENSATION

Mavest (USA) Inc. and Mavest Manila Liaison Office vs. Sampaguita Garment
Corporation
G.R. No. 127454. September 21, 2005
Garcia, J.:

ISSUE: In compensation, do the rights of creditors or obligations of debtors need to
spring from one and the same contract?


DOCTRINE: No. For compensation to validly take place, the governing Civil Code
provisions require the concurrence of well-defined conditions. At its minimum,
compensation presupposes two persons who, in their own right and as principals, are
mutually indebted to each other respecting equally demandable and liquidated
obligations over any of which no retention or controversy commenced and
communicated in due time to the debtor exists. But while compensation, be it legal or
conventional, requires the confluence in the parties of the characters of mutual debtors
and creditors, their rights as such creditors, or their obligations as such debtors, need
not spring from one and the same contract or transaction.

Manuel B. Aloria v. Estrellita B. Clemente
G.R. No. 165644 . February 28, 2006
Carpio Morales, J.:

ISSUE: Can there be compensation for the amount of expenses due to a possessor in
bad faith as against the rentals due from him to the lawful possessor?

DOCTRINE: Yes. The amount of reimbursable or refundable expenses due to a
possessor in bad faith under Articles 443 and 546 can be compensated under Article
1278 which reads: Compensation shall take place when two persons, in their own right,
are creditors and debtors of each other.
Premiere Development Bank v. Flores
G.R. No. 175339, 574 SCRA 66

ISSUE: Must the principles of compensation or set-off be applied in a case where there
is foreclosure of mortgaged property since foreclosure does not preclude the creditor
from filing an action to recover any deficiency from respondent corporations’ loan?

DOCTRINE: The Court cannot give due course to Premiere Development Bank’s claim
of compensation or set-off on account of the pending Civil Case No. MC03-2202 before
the RTC of Mandaluyong City. For compensation to apply, among other requisites, the
two debts must be liquidated and demandable already.

A distinction must be made between a debt and a mere claim. A debt is an amount
actually ascertained. It is a claim which has been formally passed upon by the courts or
quasi-judicial bodies to which it can in law be submitted and has been declared to be a
debt. A claim, on the other hand, is a debt in embryo. It is mere evidence of a debt and
must pass thru the process prescribed by law before it develops into what is properly
called a debt. Absent, however, any such categorical admission by an obligor or final
adjudication, no legal compensation or off-set can take place. Unless admitted by a
debtor himself, the conclusion that he is in truth indebted to another cannot be definitely
and finally pronounced, no matter how convinced he may be from the examination of
the pertinent records of the validity of that conclusion the indebtedness must be one that
is admitted by the alleged debtor or pronounced by final judgment of a competent court.
At best, what Premiere Development Bank has against respondent corporations is just a
claim, not a debt. At worst, it is a speculative claim.

Soriano v. People
G.R. No. 181692, 703 SCRA 536

ISSUE: Can there be compensation for debt comprising of the debtor’s harvest?

DOCTRINE: Compensation is a mode of extinguishing to the concurrent amount, the
debts of persons who in their own right are creditors and debtors of each other.


Article 1279 of the Civil Code provides for the requisites for compensation to take effect:

(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.

Harvest due to petitioner as provided in the contract of loan, the same cannot be
considered in the legal compensation of the debts of the parties since it does not consist
in a sum of money, said share being in the form of harvests.

United Planters Sugar Milling Co., Inc., (UPSUMCO) vs. Court of Appeals, et al.
G.R. No. 126890, April 2, 2009
Tinga, J.:

ISSUE: Whether the absence of a mutual creditor-debtor relation between the parties
prevents them from extinguishing their obligations through compensation.

DOCTRINE: No. It might seem that APT has no right to set-off payments with
UPSUMCO for under Article 1279 (1), it is necessary for compensation that the obligors
"be bound principally, and that he be at the same time a principal creditor of the other."
There is, concededly, no mutual creditor-debtor relation between APT and UPSUMCO.
However, we recognize the concept of conventional compensation, defined as occurring
"when the parties agree to compensate their mutual obligations even if some requisite is
lacking, such as that provided in Article 1282." It is intended to eliminate or overcome
obstacles which prevent ipso jure extinguishment of their obligations. 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. The only
requisites of conventional compensation are (1) that each of the parties can dispose of
the credit he seeks to compensate, and (2) that they agree to the mutual extinguishment
of their credits.

The right of PNB to set-off payments from UPSUMCO arose out of conventional
compensation rather than legal compensation, even though all of the requisites for legal
compensation were present as between those two parties. The determinative factor is
the mutual agreement between PNB and UPSUMCO to set-off payments. Even without
an express agreement stipulating compensation, PNB and UPSUMCO would have
been entitled to set-off of payments, as the legal requisites for compensation under
Article 1279 were present.

As soon as PNB assigned its credit to APT, the mutual creditor-debtor relation between
PNB and UPSUMCO ceased to exist. However, PNB and UPSUMCO had agreed to a
conventional compensation, a relationship which does not require the presence of all
the requisites under Article 1279. And PNB too had assigned all its rights as creditor to
APT, including its rights under conventional compensation. The absence of the mutual
creditor-debtor relation between the new creditor APT and UPSUMCO cannot negate
the conventional compensation. Accordingly, APT, as the assignee of credit of PNB, had
the right to set-off the outstanding obligations of UPSUMCO on the basis of
conventional compensation before the condonation took effect on 3 September 1987.


Lao v. Special Plans, Inc.
G.R. No. 164791
Del Castillo, J.

ISSUE: Whether legal compensation shall take place where the parties are mutual
creditors and debtors of each other?

DOCTRINE: No, Article 1279 of the New Civil Code provides that compensation shall
take place when two persons, in their own right, are creditors and debtors of each other.
In order for compensation to be proper, it is necessary that:
1. Each one of the obligors be bound principally and that he be at the same time a
2. 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. The two debts are due:
4. The debts are liquidated and demandable;
5. Over neither of them be any retention or controversy, commenced by third parties
and communicated in due time to the debtor.
Petitioners failed to properly discharge their burden to show that the debts are liquidated
and demandable. Consequently, legal compensation is inapplicable.

Traders Royal Bank vs. Norberto Castañares and Milagros Castañares
G.R. No. 172020 December 6, 2010
Villarama, Jr., J.:

ISSUE: Whether petitioner has a right by way of set-off the telegraphic transfer in the
sum of $4,220.00 against the unpaid loan account of private respondents, both being
bound as principals and debtors of each other, the debts consisting of a sum of money
and due, liquidated and demandable, and are not claimed by a third person.

DOCTRINE: Yes. Agreements for compensation of debts or any obligations when the
parties are mutually creditors and debtors are allowed under Art. 1282 of the Civil Code
even though not all the legal requisites for legal compensation are present. Voluntary or
conventional compensation is not limited to obligations which are not yet due. The only
requirements for conventional compensation are (1) that each of the parties can fully
dispose of the credit he seeks to compensate, and (2) that they agree to the
extinguishment of their mutual credits. Consequently, no error was committed by the
trial court in holding that petitioner validly applied, by way of compensation, the
$4,220.00 telegraphic transfer remitted by respondents’ foreign client through the
petitioner.

Cesar V. Areza and Lolita B. Areza v. Express Savings Bank, Inc.
G.R. No. 176697, September 10, 2014

ISSUE: Whether the Bank can set-off the amount it paid to Equitable-PCI Bank with
petitioner’s savings account.

DOCTRINE: No. Under Art. 1278 of the New Civil Code, compensation shall take place
when two persons, in their own right, are creditors and debtors of each other. And the
requisites for legal compensation are:
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

(2)That both debts consist in a sum of money, or if the things due are consumable, they
(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

It is well-settled that the relationship of the depositors and the Bank or similar institution
is that of creditor-debtor. Article 1980 of the New Civil Code provides that fixed, savings
and current deposits of money in banks and similar institutions shall be governed by the
provisions concerning simple loans. The bank is the debtor and the depositor is the
creditor. The depositor lends the bank money and the bank agrees to pay the depositor
on demand. The savings deposit agreement between the bank and the depositor is the
contract that determines the rights and obligations of the parties.33cralawred

Mondragon Personal Sales, Inc. v. Victoriano S. Sola, Jr.
G.R. No. 174882. January 21, 2013
Peralta, J.:

ISSUE: Is petitioner's act of withholding respondent's service fees and thereafter
applying them as partial payment to the obligation of respondent's wife with petitioner
unlawful?

DOCTRINE: No. 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
(2) That both debts consist in a sum of money, or if the things due are consumable, they
(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

SECTION 6. NOVATION

Philippine Savings Bank v. Sps. Rodelfo Malanac Jr.
G.R. No. 145441, April 26, 2005
Ynares-Santiago J:

ISSUE: Is moral damages proper in case a bank misrepresents that they would accept
a request of a party and then does an act that is legal under the circumstances?


DOCTRINE: Yes. While the bank had the legal basis to withhold the release of the
mortgaged properties, nevertheless, it was not forthright and was lacking in candor in
dealing with Mañalac. In accepting the PCIB Check, the bank knew fully well that the
payment was conditioned on its commitment to release the specified properties. At the
first instance, the bank should not have accepted the check or returned the same had it
intended beforehand not to honor the request of Mañalac. In accepting the check and
applying the proceeds thereof to the loan accounts of Mañalac and Galicia, the former
were led to believe that the bank was favorably acting on their request. In justifying the
award of moral damages, the Court of Appeals correctly observed that “there is the
unjustified refusal of the appellant bank to make a definite commitment while profiting
from the proceeds of the check by applying it to the principal and the interest of the
Galicias and plaintiff-appellants.”

Isaisas F. Fabrigas and Marcelina R. Fabrigas v. San Francisco del Monte, Inc.
G.R. No. 152346. November 25, 2005
Tinga, J.:

ISSUE: Is there a novation when at first, there is a contract to sell which was rescinded
but subsequently a second contract to sell was created to replace the first contract?

DOCTRINE: Novation, in its broad concept, may either be extinctive or modificatory. It is
extinctive when an old obligation is terminated by the creation of a new obligation that
takes the place of the former; it is merely modificatory when the old obligation subsists
to the extent it remains compatible with the amendatory agreement. 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 concerned to a new contract; (3) the extinguishment of
the old obligation; and (4) the birth of a valid new obligation.

Notwithstanding the improper rescission, the facts of the case show that Contract to Sell
No. 2482-V was subsequently novated by Contract to Sell No. 2491-V. The execution
of Contract to Sell No. 2491-V accompanied an upward change in the contract price,
which constitutes a change in the object or principal conditions of the contract. In
entering into Contract to Sell No. 2491-V, the parties were impelled by causes different
from those obtaining under Contract to Sell No. 2482-V. On the part of petitioners, they
agreed to the terms and conditions of Contract to Sell No. 2491-Vnot only to acquire
ownership over the subject property but also to avoid the consequences of their default
under Contract No. 2482-V. On Del Monte’s end, the upward change in price was the
consideration for entering into Contract to Sell No. 2491-V.

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, or that the old and the new
obligations be on every point incompatible with each other. The test of incompatibility is
Whether the two obligations can stand together, each one having its independent
existence. If they cannot, they are incompatible and the latter obligation novates the
first. The execution of Contract to Sell No. 2491-V created new obligations in lieu of
those under Contract to Sell No. 2482-V, which are already considered extinguished
upon the execution of the second contract. The two contracts do not have independent
existence for to hold otherwise would present an absurd situation where the parties
would be liable under each contract having only one subject matter.


Sps. Francisco and Ruby Reyes v. BPI Family Savings Bank, Inc., And Magdalena
L. Lometillo, in her capacity as Ex-Officio Provincial Sheriff for Iloilo
G.R. Nos. 149840-41. March 31, 2006
Corona, J.:

ISSUE: Does novation result when the creditor reconstructs the loan and changes it
terms and the debtor issues a promissory note for the same?

DOCTRINE: No there is no novation. Novation is the extinguishment of an obligation by
the substitution or change of the obligation by a subsequent one which terminates the
first, either by changing the object or principal conditions, or by substituting the person
of the debtor, or subrogating a third person in the rights of the creditor.

The cancellation of the old obligation by the new one is a necessary element of novation
which may be effected either expressly or impliedly. While there is really no hard and
fast rule to determine what might constitute sufficient change resulting in novation, the
touchstone, however, is irreconcilable incompatibility between the old and the new
obligations. The novation of a contract cannot be presumed. In the absence of an
express agreement, novation takes place only when the old and the new obligations are
incompatible on every point.

Gammon Philippines, Inc. v. Metro Rail Transit Development Corporation
G.R. No. 144792. January 31, 2006
Tinga, J.

ISSUE: Is there a novation when a subsequent agreement is entered into by the parties
changing the agreed price in the previous contract?

DOCTRINE: No. Novation cannot be presumed. The animus novandi, whether partial or
total, must appear by the express agreement of the parties, or by their acts that are too
clear and unequivocal to be mistaken. Thus, in order than an obligation may be
extinguished by another which substitutes the same, it is imperative that it be so
declared in unequivocal terms, or that the old and the new obligations be on every point
incompatible with each other.

Ek Lee Steel Works Corporation v. Manila Castor Oil Corporation
G.R. No. 119033, 557 SCRA 339

ISSUES:
1. Does an agreement setting forth a new period for the completion of an already
delayed obligation amount to novation of the previous obligation?
2. Does failure of one party to comply with his part in a reciprocal obligation amount to
delay?

DOCTRINE:
1. The Court finds no novation of the previous agreements between the parties. On the
contrary, it expressly recognized the parties’ reciprocal obligations. Thus, while the
16 May 1988 letter did not extinguish the parties’ obligations under their previous
contracts, it however modified the manner of payment from the system of progress
billings to a specific schedule of payments
2. Petitioner failed to comply with its undertaking to complete the whole project on 15
June 1988. Consequently, respondent’s obligation to pay the P200,000 did not
arise. Respondent could not be considered in delay when it failed to pay petitioner

at that time. According to the last paragraph of Article 1169 of the Civil Code, “[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. From the
moment one of the parties fulfills his obligation, delay by the other begins.

Sueno v. Land Bank of the Philippines
G.R. No. 174711, 565 SCRA 611

ISSUE: Is there a valid novation entered by parties for the extension of the redemption
period?

DOCTRINE: The elements of novation clearly do not exist in the instant case. While it
is true that there is a previous valid obligation (i.e., the obligation of LBP to honor
Sueno’s right to redeem the subject property within a period of one year), such
obligation expired at the same time as the redemption period on 6 March 2001. There
is, however, no clear agreement between the parties to a new contract, again imposing
upon LBP the obligation of honoring Sueno’s right to redeem the subject properties
within an extended period of six months. Without a new contract, the old contract
cannot be considered extinguished.

The condition of LBP for the extension of the redemption period for the subject
properties was plain and simple, that Sueno pay an initial amount of P115,000.00 for the
extension of the redemption period. Sueno tendered a check for P50,000.00 in partial
payment of the amount demanded by LBP. By accepting the check payment, LBP
merely accepted partial compliance of Sueno with its demand, but it does not mean that
LBP had conceded to the extension of the redemption period for such reduced amount.
In fact, LBP promptly sent Sueno a letter dated 6 March 2001, which was duly received
by the latter, explicitly and consistently requiring payment of the full amount of
P115,000.00 for the extension of the redemption period. It is without doubt that LBP
was still expecting Sueno to pay the balance of P65,000.00. Hence, not until full
payment of the amount it demanded, for LBP had not yet agreed to extend the period
for redemption of the subject properties.

The consent of LBP to an extension of the period to redeem is subject to the suspensive
condition that Sueno shall pay the initial amount of P115,000.00 in full. With Sueno’s
failure to remit the balance of P65,000.00 to LBP, then there is non-perfection of a new
contract.

Novation is never presumed, and the animus novandi, whether totally or partially, must
appear by express agreement of the parties, or by their acts that are too clear and
unmistakable.

S.C. Megaworld Construction And Development Corporation v. Parado
G.R. No. 183804, 705 SCRA 584

ISSUE: Can there be a valid novation even without the consent of the creditor?

DOCTRINE: Novation is a mode of extinguishing an obligation by changing its objects
or principal obligations, by substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor. It is "the substitution of a new
contract, debt, or obligation for an existing one between the same or different parties."
Article 1293 of the Civil Code defines novation as 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 rights mentioned in Articles 1236 and 1237.


Thus, in order to change the person of the debtor, the former debtor must be expressly
released from the obligation, and the third person or new debtor must assume the
former’s place in the contractual relation. Article 1293 speaks of substitution of the
debtor, which may either be in the form of expromision or delegacion, as seems to be
the case here. In both cases, the old debtor must be released from the obligation,
otherwise, there is no valid novation.

In general, there are two modes of substituting the person of the debtor: (1) expromision
and (2) delegacion. In expromision, the initiative for the change does not come from—
and may even be made without the knowledge of—the debtor, since it consists of a third
person’s assumption of the obligation. As such, it logically requires the consent of the
third person and the creditor. In delegacion, the debtor offers, and the creditor accepts,
a third person who consents to the substitution and assumes the obligation; thus, the
consent of these three persons are necessary. Both modes of substitution by the debtor
require the consent of the creditor.

Foundation Specialists, Inc., vs. Betonval Ready Concrete, Inc. and Stronghold
Insurance Co., Inc.
G.R. No. 170674 August 24, 2009
Corona, J.

ISSUE: Whether extinctive novation can be presumed.

DOCTRINE: No. Novation is one of the modes of extinguishing an obligation.21 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 extinctive or modificatory, much being dependent on the nature of the change
and the intention of the parties. Extinctive novation is never presumed; there must be an
express intention to novate; in cases where it is implied, the acts of the parties must
clearly demonstrate their intent to dissolve the old obligation as the moving
consideration for the emergence of the new one. Implied novation 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.

There can be no other conclusion but that Betonval had reduced the imposable interest
rate from 30% to 24% p.a. and this reduced interest rate was accepted, albeit impliedly,
by FSI when it proposed a new schedule of payments and, in fact, actually made
payments to Betonval with 24% p.a. interest. By its own actions, therefore, FSI is
estopped from questioning the imposable rate of interest.

Salazar v. J.Y. Brothers Marketing Corporation 
G.R. No. 171998, October 20, 2010 
Peralta, J.:

ISSUE: Whether acceptance of a new check in replacement of the previous one is a
novation?

DOCTRINE: No, the obligation to pay a sum of money is not novated by an instrument
that expressly recognizes the old, changes only the terms of payment, adds other


obligations not incompatible with the old ones or the new contract merely supplements
the old one. In the instant case, there was no express agreement that BA Finance's
acceptance of the SBTC check will discharge Nyco from liability. Neither is there
incompatibility because both checks were given precisely to terminate a single
obligation arising from Nyco's sale of credit to BA Finance. As novation speaks of two
distinct obligations, such is inapplicable to this case.

Lourdes Azarcon vs. People of the Philippines and Marcos Gonzales
G.R. No. 185906. June 29, 2010
Carpio Morales, J.:

ISSUE: Whether petitioner’s obligations under the various checks had been released,
superseded and novated by her husband’s assumption of her liabilities?

DOCTRINE: No. The novation which petitioner suggests as having taken place,
whereby Manuel was supposed to assume her obligations as debtor, is neither express
nor implied. There is no showing of Marcosa explicitly agreeing to such a substitution,
nor of any act of her from which an inference may be drawn that she had agreed to
absolve petitioner from her financial obligations and to instead hold Manuel fully
accountable.

Carolina Hernandez-Nievera v. Wilfredo Hernandez
GR No. 171165; February 14, 2011

ISSUE: Whether the Memorandum of Agreement to deliver option money and agree to
a more flexible term by agreeing instead to receive shares of stock resulted to novation
of PMRDC’s integral obligations.

DOCTRINE: Yes. 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 the two obligations
can stand together, each one having its independent existence. If they cannot, they are
incompatible, and the latter obligation novates the first.

Sime Darby Pilipinas, Inc. v. Goodyear Philippines, Inc.
GR No. 182148; June 8, 2011

ISSUE: Whether the lessee can assign the lease without the consent of the lessor.

DOCTRINE: NO. In an assignment of a lease, there is a novation by the substitution of
the person of one of the parties – the lessee. The personality of the lessee, who
dissociates from the lease, disappears. Thereafter, a new juridical relation arises
between the two persons who remain – the lessor and the assignee who is converted
into the new lessee. The objective of the law in prohibiting the assignment of the lease
without the lessor’s consent is to protect the owner or lessor of the leased property.

Broadly, a novation may either be extinctive or modificatory. It is extinctive when an old
obligation is terminated by the creation of a new obligation that takes the place of the
former; it is merely modificatory when the old obligation subsists to the extent it remains
compatible with the amendatory agreement. 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).


Heirs of Servando Franco v. Sps. Gonzales
G.R. 159709; June 27, 2012

ISSUE: Whether irreconcilable incompatibility between the old and the new obligation
is essential for a valid novation to be effected.

DOCTRINE: YES. For a valid novation to take place, there must be, therefore: (a) a
previous valid obligation; (b) an agreement of the parties to make a new contract; (c) an
extinguishment of the old contract; and (d) a valid new contract. In short, the new
obligation extinguishes the prior agreement only when the substitution is unequivocally
declared, or the old and the new obligations are incompatible on every point. A
compromise of a final judgment operates as a novation of the judgment obligation upon
compliance with either of these two conditions.A novation arises when there is a
substitution of an obligation by a subsequent one that extinguishes the first, either by
changing the object or the principal conditions, or by substituting the person of the
debtor, or by subrogating a third person in the rights of the creditor.

Roberto R. David vs. Eduardo C. David
G.R. No. 162365 January 15, 2014
Bersamin, J.

ISSUE: Whether there was novation of the Deed of Sale with assumption of mortgage
when the parties executed a memorandum of Agreement for the sale of the subject
house and lot and, thereafter sold the said property to third persons.

DOCTRINE: No. The issue of novation involves a question of fact, as it necessarily
requires the factual determination of the existence of the various requisites of novation,
namely: (a) there must be a previous valid obligation; (b) the parties concerned must
agree to a new contract; (c) the old contract must be extinguished; and (d) there must
be a valid new contract. With both the RTC and the CA concluding that the MOA was
consistent with the deed of sale, novation whereby the deed of sale was extinguished
did not occur.

First United Constructors Corporation vs. Bayanihan Automotiv
G.R. No. 164985 January 15, 2014
Bersamin, J.

ISSUE: Whether legal compensation was proper in the case when the petitioners’
expenses for the repair of the dump truck being already established and determined
with certainty by the lower courts.

DOCTRINE: Yes. A debt is liquidated when its existence and amount are determined.
Accordingly, an unliquidated claim set up as a counterclaim by a defendant can be set
off against the plaintiff’s claim from the moment it is liquidated by judgment. Article 1290
of the Civil Code provides that when all the requisites mentioned in Article 1279 of the
Civil Code are present, compensation takes effect by operation of law, and extinguishes
both debts to the concurrent amount. With petitioners’ expenses for the repair of the
dump truck being already established and determined with certainty by the lower courts,
it follows that legal compensation could take place because all the requirements were
present.

CONTRACTS

CHAPTER 1. GENERAL PROVISIONS

Asian Construction and Development Corporation v. Tulabut
G.R. No. 161904. April 26, 2005
Callejo, Sr., J.

ISSUE: May the principle of estoppel be applied in determining whether the obligation
contemplated in the contract had already been completed?

DOCTRINE: Yes. The application of the principle of estoppel is proper and timely in
heading off plaintiff’s shrewd efforts at renouncing his previous acts to the prejudice of
parties who had dealt with him honestly and in good faith t is provided, as one of the
conclusive presumptions under Rule 131, Section 3(a), of the Rules of Court that,
“Whenever a party has, by his own declaration, act or omission, intentionally and
deliberately led another to believe a particular thing to be true, and to act upon such
belief, he cannot, in any litigation arising out of such declaration, act or omission, be
permitted to falsify it.” Hence, when the appellant corporation manifested its approval in
the purchase orders and progress billings it cannot, thereafter, refute such act or renege
on the effects of the same to the prejudice of the appellee who merely relied on it.

The terms and conditions of the contract between the petitioner and the respondent
unequivocally expressed in the purchase orders and progress billings must govern the
contractual relation of the parties, for these serve as the terms of the agreement, which
are binding and conclusive between them. When the words of the contract are clear
and readily understandable, there is no room for construction. The contract is the law
between the parties.

Tanay Recreation Center and Development Corp. v. Catalina Matienzo Fausto and
Anunciacion Fausto Pacunayen
GR No. 140182. April 12, 2005

ISSUE: Is the rule of transmissibility of rights and obligations applicable in a lease
contract entered into by the decedent?

DOCTRINE: A lease contract is not essentially personal in character. Applying Article
1311 of the New Civil Code, the rights and obligations are transmissible to the heirs.
The general rule is that heirs are bound by contracts entered into by their predecessors-
in-interest except when the rights and obligations arising therefrom are not transmissible
by: (1) their nature; (2) stipulation; or (3) provision of law. Whatever rights and
obligations the decedent had over the property, including his obligation under the lease
contract, were transmitted to his heirs by way of succession, a mode of acquiring the
property, rights and obligation of the decedent to the extent of the value of the
inheritance of the heirs.

Litonjua v. Litonjua
G.R. Nos. 166299-300. December 13, 2005
Garcia, J.:

ISSUE: Can an actionable document create a demandable right in favor of a person
who filed a suit for specific performance and accounting in a joint venture/partnership
arrangement (innominate contract)?


DOCTRINE: No. A complaint for delivery and accounting of partnership property based
on such void or legally non-existent actionable document is dismissible for failure to
state of action. Whether the actionable document creates a partnership, joint venture, or
whatever, is a legal matter. What us determinative for purposes of sufficiency of one’s
allegations, is whether the actionable document bears out an actionable contract – be it
a partnership a joint venture or whatever or some innominate contract (Article 1307,
New Civil Code). It may be noted that one kind of innominate contract is what is known
as du utfacias (I give that you may do).

Bortikey v. AFP Retirement and Separation Benefits System
G.R. No. 146708. December 13, 2005
Corona, J.:

ISSUE: Given a statement in a contract to sell that, “In case of failure on the part of the
BUYER to pay the amortization due on the specified maturity date, the Buyer shall be
given a seven-day grace period xxx. However, in the event that the BUYER fails to pay
within the seven-day grace period, he shall be charged a penalty of 24% per annum to
be reckoned from the first day of default”, may the buyer say that the 24% annual
interest stipulated in the contract was contrary to law and public morals?

DOCTRINE: No. Basic is the principle that contracting parties may establish such
stipulations, clauses, terms and conditions as they may deem convenient, provided
these are not contrary to law, morals, good customs, public order or public policy (Article
1306, New Civil Code). Obligations arising from contracts have the force of law between
the contracting parties and should be complied with in good faith (Article 1159, New
Civil Code).Petitioner was free to decide on the manner of payment, either in cash or
installment. Since he opted to purchase the land on installment basis, he consented to
the imposition of interest on the contract price. He cannot now unilaterally withdraw from
it by disavowing the obligation created by the stipulation in the contract. Therefore, the
stipulated 24% annual interest on the price of the parcel of land purchased by petitioner
from respondent on installment basis is hereby declared valid and binding.

GF Equity, Inc. vs. Arturo Valenzona
G.R. No. 156841 June 30, 2005
Carpio-Morales, J.

ISSUE: What is the principle of mutuality of contracts?

DOCTRINE: Mutuality is one of the characteristics of a contract, its validity or
performance or compliance of which cannot be left to the will of only one of the
parties. This is enshrined in Article 1308 of the New Civil Code, which states “The
contract must bind both contracting parties; its validity or compliance cannot be left to
the will of one of them.” The stated legal provision is a virtual reproduction of Article
1256 of the old Civil Code but it was so phrased as to emphasize the principle that the
contract must bind both parties. This, of course is based firstly, on the principle that
obligations arising from contracts have the force of law between the contracting parties
and secondly, that there must be mutuality between the parties based on their essential
equality to which is repugnant to have one party bound by the contract leaving the other
free therefrom. Its ultimate purpose is to render void a contract containing a condition,
which makes its fulfillment dependent exclusively upon the uncontrolled will of one of
the contracting parties.

The ultimate purpose of the mutuality principle is thus to nullify a contract containing a
condition which makes its fulfillment or pre-termination dependent

exclusively upon the uncontrolled will of one of the contracting parties. Not all contracts
though which vest to one party their determination of validity or compliance or the right
to terminate the same are void for being violative of the mutuality principle.
Jurisprudence is replete with instances of cases where this Court upheld the legality of
contracts, which left their fulfillment or implementation to the will of either of the parties.
In these cases, however, there was a finding of the presence of essential equality of the
parties to the contracts, thus preventing the perpetration of injustice on the weaker
party.

G.R. No. 140182. April 12, 2005



GR No. 140182. April 12, 2005



Sunace International vs. NLRC
G.R. No. 161757. January 25, 2006
Carpio Morales, J.

ISSUE: Can an employment contract extension bind a company who has not consented
thereto?

DOCTRINE: No. There being no substantial proof that Sunace knew of and consented
to be bound under the 2-year employment contract extension, it cannot be said to be
privy thereto. As such, it and its “owner” cannot be held solidarily liable for any of


Divina’s claims arising from the 2-year employment extension. Art. 1311 provides that
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.

Greater Metropolitan Manila Solid Waste Management Committee v. Jancom
Environmental Corporation
GR No. 163663. June 30, 2006
Carpio Morales, J.:

ISSUE: Can a party revoke a perfected contract without the consent of the other?

DOCTRINE: No. From the moment of perfection, the parties are bound not only to the
fulfillment of what has been expressly stipulated but also to all the consequences which,
according to their nature, may be in keeping with good faith, usage, and law. The
contract has the force of law between the parties and they are expected to abide in
good faith by their respective contractual commitments, not weasel out of them. Just as
nobody can be forced to enter into a contract, in the same manner, once a contract is
entered into, no party can renounce it unilaterally or without the consent of the other.

Roxas v. Zuzuarregui, Jr.
G.R. No. 152072, January 31, 2006
Chico-Nazario, J.:

ISSUE: In the contract, the petitioners offered to be the legal representatives of the
petitioner in the expropriation proceeding. In return, contingency fees shall be paid. Is
there a valid and binding contract between the parties?

DOCTRINE: Under Article 1318 of the Civil Code, there are three essential requisites
which must concur in order to give rise to a binding contract: (1) consent of the
contracting parties; (2) object certain which is the subject matter of the contract; and (3)
cause of the obligation which is established.

All these requisites were present in the execution of the Letter-Agreement.

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 Zuzuarreguis, in entering into
the Letter-Agreement, fully gave their consent thereto. In fact, it was them (the
Zuzuarreguis) who sent the said letter to Attys. Roxas and Pastor, for the purpose of
confirming all the matters which they had agreed upon previously. There is absolutely
no evidence to show that anybody was forced into entering into the Letter-Agreement.
Verily, its existence, due execution and contents were admitted by the Zuzuarreguis
themselves.

The second requisite is the object certain. The objects in this case are twofold. One is
the money that will go to the Zuzuarreguis (P17.00 per square meter), and two, the
money that will go to Attys. Roxas and Pastor (any and all amount in excess of P17.00
per square meter). There was certainty as to the amount that will go to the
Zuzuarreguis, and there was likewise certainty as to what amount will go to Attys. Roxas
and Pastor.

The cause is the legal service that was provided by Attys. Roxas and Pastor. In general,
cause is the why of the contract or the essential reason which moves the contracting
parties to enter into the contract.


Bonifacio Nakpil v. Manila Towers Development Corp.
GR No. 160867. September 20, 2006
Callejo, Sr., J.:

ISSUE: What is a breach of contract? What is the extent of liability of an obligor who
performed a breach of contract?

DOCTRINE: Breach of contract is the failure without legal reason to comply with the
terms of a contract. It is also defined as the failure, without legal excuse, to perform any
promise which forms the whole or part of the contract. There is no factual and legal
basis for any award for damages to respondent.

In contracts, the obligor who acted in good faith is liable for damages that are the
material and probable consequence of the breach of the obligation and which the
parties have foreseen or could have reasonably foreseen at the time the obligation was
contracted. In case of fraud, bad faith, malice or wanton attitude, he shall be responsible
for all damages which may be reasonably attributed to the non-performance of the
obligation.

Xavierville III Homeowners Association, Inc., v. Xavierville Ii Homeowners
Association, Inc.,
G.R. No. 170092. December 6, 2006
Carpio Morales, J.:

ISSUE: What is the legal effect of entering into a compromise agreement?

DOCTRINE: Under Article 1306 of the Civil Code, 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. Thus, a compromise agreement whereby the parties make reciprocal
concessions to resolve their differences to thereby put an end to litigation is binding on
the contracting parties and is expressly acknowledged as a juridical agreement between
them. To have the force of res judicata, however, the compromise agreement must be
approved by final order of the court.

William Golangco Construction Corporation v. Philippine Commercial
International Bank
G.R. No. 142830. March 24, 2006
Corona, J.:

ISSUE: Is the construction company liable for defects that occurred after the lapse of
the one-year defects liability period stipulated in the contract?

DOCTRINE: No, the construction company is not liable for defects that occurred after
the lapse of the one-year defects liability period stipulated in the contract. The
autonomous nature of contracts is enunciated in Article 1306 of the Civil Code.
Obligations arising from contracts have the force of law between the parties and should
be complied with in good faith. In characterizing the contract as having the force of law
between the parties, the law stresses the obligatory nature of a binding and valid
agreement.

The provision in the construction contract providing for a defects liability period was not
shown as contrary to law, morals, good customs, pubic order or public policy. By the
nature of the obligation in such contract, the provision limiting liability for defects and
fixing specific guaranty periods was not only fair and equitable; it was also necessary.
The Court cannot countenance an interpretation that undermines a contractual
stipulation freely and validly agreed upon. The courts will not relieve a party from the
effects of an unwise or unfavorable contract freely entered into.

Spouses Anthony and Percita Oco v. Victor Limbaring
G.R. No. 161298. January 31, 2006
Panganiban, C.J.:

ISSUE: Can a person who did not take part in a contract show that he has a real
interest affected by its performance or annulment?

DOCTRINE: Yes. As a rule, the parties to a contract are the real parties in interest in an
action upon it. Only the contracting parties are bound by the stipulations in the
contract; they are the ones who would benefit from and could violate it. Thus, one who
is not a party to a contract, and for whose benefit it was not expressly made, cannot
maintain an action on it. One cannot do so, even if the contract performed by the
contracting parties would incidentally inure to one’s benefit.

As an exception, parties who have not taken part in a contract may show that they have
a real interest affected by its performance or annulment. In other words, those who are
not principally or subsidiarily obligated in a contract, in which they had no intervention,
may show their detriment that could result from it. Contracts pour autrui are covered by
this exception. In this latter instance, the law requires that the “contracting parties must
have clearly and deliberately conferred a favor upon a third person.” A “mere incidental
benefit is not enough.”

Rolando Limpo v. Court of Appeals
G.R. No. 144732, February 13, 2006
Azcuna, J.:

ISSUE: Whether a Compromise Agreement binds a person who did not take part in its
execution.

DOCTRINE: No. It is settled that a compromise agreement cannot bind persons who
are not parties to it.3This rule is based on Article 1311(1) of the Civil Code which
provides that "contracts take effect only between the parties, their assigns and heirs x x
x." The sound reason for the exclusion of non-parties to an agreement is the absence of
a vinculum or juridical tie which is the efficient cause for the establishment of an
obligation. In the Compromise Agreement that was presented to the trial court, there is
no question that only the spouses Uy and the Bank were parties. Limpo did not
participate in its execution and there was no reference to him in any of its provisions. He
cannot be bound by the Compromise Agreement.

Caltex (Philippines), Inc., v. PNOC Shipping and Transport Corporation
G.R. No. 150711. August 10, 2006
Carpio, J.:


ISSUE: May a creditor file a case for rescission or execution against a third party who
has assumed the obligations of the debtor?

DOCTRINE: Article 1313 of the Civil Code provides that “[c]reditors are protected in
cases of contracts intended to defraud them.” Further, Article 1381 of the Civil Code
provides that contracts entered into in fraud of creditors may be rescinded when the
creditors cannot in any manner collect the claims due them. Article 1381 applies to
contracts where the creditors are not parties, for such contracts are usually made
without their knowledge. Thus, a creditor who is not a party to a contract can sue to
rescind the contract to prevent fraud upon him. Or, the same creditor can instead
choose to enforce the contract if a specific provision in the contract allows him to collect
his claim, and thus protect him from fraud.

Mr. & Mrs. George R. Tan v. G.V.T Engineering Services, Acting through its Owner/
Manager Gerino V. Tactaquin
G.R. No. 153057. August 7, 2006

ISSUE: May an obligor be held liable for damages in case of breach of contract?

DOCTRINE: Article 1313 of the Civil Code provides that “creditors are protected in
cases of contracts intended to defraud them.” Further, Article 1381 of the Civil Code
provides that contracts entered into in fraud of creditors may be rescinded when the
creditors cannot in any manner collect the claims due them. Article 1381 applies to
contracts where the creditors are not parties, for such contracts are usually made
without their knowledge. Thus, a creditor who is not a party to a contract can sue to
rescind the contract to prevent fraud upon him. Or, the same creditor can instead
choose to enforce the contract if a specific provision in the contract allows him to collect
his claim, and thus protect him from fraud.

William Ong Genato vs. Benjamin Bayhon et al.
G.R. No. 171035 August 24, 2009
Puno, C.J.:

ISSUE: Whether a party’s contractual rights and obligation are transmissible to the
successors.

DOCTRINE: Yes. The rule is a consequence of the progressive "depersonalization" of
patrimonial rights and duties that, as observed by Victorio Polacco, has characterized
the history of these institutions. From the Roman concept of a relation from person to
person, the obligation has evolved into a relation from patrimony to patrimony, with the
persons occupying only a representative position, barring those rare cases where the
obligation is strictly personal, i.e., is contracted intuitu personae, in consideration of its
performance by a specific person and by no other. The transition is marked by the
disappearance of the imprisonment for debt.

The loan in this case was contracted by respondent. He died while the case was
pending before the Court of Appeals. While he may no longer be compelled to pay the
loan, the debt subsists against his estate. No property or portion of the inheritance may
be transmitted to his heirs unless the debt has first been satisfied.

Vicenta Cantemprate et al. vs. CRS Realty Development Corporation et al.
G.R. No. 171399, May 8, 2009
Tinga, J.:


ISSUE: Whether rescission of a contract gives rise to mutual restitution.

DOCTRINE: Rescission creates the obligation to return the object of the contract. It can
be carried out only when the one who demands rescission can return whatever he may
be obliged to restore. Rescission abrogates the contract from its inception and requires
a mutual restitution of the benefits received.

National Power Corporation vs. Premier Shipping Lines, Inc.
G.R No. 179103; September 17, 2009

ISSUE: Whether the terms contained in the contract are the law between the parties.

DOCTRINE: Yes. It is basic that a contract is the law between the parties, and the
stipulations therein -- provided that they are not contrary to law, morals, good customs,
public order or public policy -- shall be binding as between the parties. In contractual
relations, the law allows the parties much leeway and considers their agreement to be
the law between them. This is because "courts cannot follow one every step of his life
and extricate him from bad bargains x xx relieve him from one-sided contracts, or annul
the effects of foolish acts. The Courts are obliged to give effect to the agreement and
enforce the contract to the letter.

In the case at bar, the parties entered into a contract for the hauling and delivery of
wood poles. By reason of a change in one of the delivery points, they executed a
supplemental contract that embodied said change. The terms and conditions were clear.
In both contracts, the parties voluntarily and freely affixed their signatures thereto
without objection. Thus, the terms contained therein are the law between them.

Patricia Halagueña et al. vs. Philippine Airlines Incorporated
G.R. No. 172013. October 2, 2009
Ynares-Santiago, J.,

ISSUE: Whether the principle of autonomy of contracts is absolute.

DOCTRINE: No. The principle of party autonomy in contracts is not, however, an
absolute principle. The rule in Article 1306, of our Civil Code is that the contracting
parties may establish such stipulations as they may deem convenient, “provided they
are not contrary to law, morals, good customs, public order or public policy.” Thus,
counter-balancing the principle of autonomy of contracting parties is the equally general
rule that provisions of applicable law, especially provisions relating to matters affected
with public policy, are deemed written into the contract. Put a little differently, the
governing principle is that parties may not contract away applicable provisions of law
especially peremptory provisions dealing with matters heavily impressed with public
interest. The law relating to labor and employment is clearly such an area and parties
are not at liberty to insulate themselves and their relationships from the impact of labor
laws and regulations by simply contracting with each other.

Sta. Lucia Realty & Development, Inc. vs. SPOUSES Francisco & Emelia
Buenaventura
G.R. No. 177113. October 2, 2009
Ynares-Santiago, J.

ISSUE: Whether rights and obligations arising from a contract may be transmitted.

DOCTRINE: Yes. Article 1311 of the New Civil Code states that, “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.” In this case, the rights and obligations between
petitioner and Alfonso are transmissible. There was no mention of a contractual
stipulation or provision of law that makes the rights and obligations under the original
sales contract for Lot 3, Block 4, Phase II intransmissible. Hence, Alfonso can transfer
her ownership over the said lot to respondents and petitioner is bound to honor its
corresponding obligations to the transferee or new lot owner in its subdivision project.

Having transferred all rights and obligations over Lot 3, Block 4, and Phase II to
respondents, Alfonso could no longer be considered as an indispensable party. Contrary
to petitioner’s claim, Alfonso no longer has an interest on the subject matter or the
present controversy, having already sold her rights and interests on Lot 3, Block 4,
Phase II to herein respondents.

Sps. Isagani Castro and Diosdada Castro v. Angelina De Leon Tan, et. al.,
G.R. No. 168940; November 24, 2009
Del Castillo, J.

ISSUE: Whether freedom of contract is absolute.

DOCTRINE: No. Freedom of contract is not absolute. The same is understood to be
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." To reiterate, we fully agree
with the Court of Appeals in holding that 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.

Narvaez vs. Alciso
G.R. No. 165907; July 27, 2009
Carpio, J.

ISSUE: Whether the spouses Narvaez were right in claiming that Alciso did not
communicate her acceptance of the favor contained in the stipulation pour autrui, thus,
she could not repurchase the property.

DOCTRINE: No. Article 1311, paragraph 2, of the Civil Code states the rule on
stipulations pour autrui: 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. All the requisites are present in the instant case: (1) there is a
stipulation in favor of Alciso; (2) the stipulation is a part, not the whole, of the contract;
(3) Bate and the Spouses Narvaez clearly and deliberately conferred a favor to Alciso;
(4) the favor is unconditional and uncompensated; (5) Alciso communicated her
acceptance of the favor before its revocation — she demanded that a stipulation be
included in the 14 August 1981 Deed of Sale of Realty allowing her to repurchase the
property from the Spouses Narvaez, and she informed the Spouses Narvaez that she
wanted to repurchase the property; and (6) Bate and the Spouses Narvaez did not
represent, and were not authorized by, Alciso.


The RTC stated that: Rose Alciso communicated her acceptance of such favorable
stipulation when she went to see defendant Lillia [sic] Narvaez in their house.

Herald Black Dacasin vs.Sharon Del Mundo Dacasin
G.R. No. 168785, February 05, 2010
Carpio, J.:

ISSUE: Whether the Agreement, the object of which was to establish a post-divorce
joint custody regime between respondent and petitioner over their child under seven
years old contravenes Philippine law.

DOCTRINE: YES. In this jurisdiction, parties to a contract are free to stipulate the terms
of agreement subject to the minimum ban on stipulations contrary to law, morals, good
customs, public order, or public policy. Otherwise, the contract is denied legal existence,
deemed “inexistent and void from the beginning.”

PNCC Skyway Traffic Management and Security Division Workers Organization
(PSTMSDWO) vs. PNCC Skyway Corporation
G.R. No. 171231, February 17, 2010
Peralta, J.

ISSUE: Whether the rule that a contract freely entered into between the parties should
be respected since a contract is the law between the parties is absolute.

DOCTRINE: No. There are certain exceptions to the rule, specifically Article 1306 of the
Civil Code, which provides: “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.”

Moreover, the relations between capital and labor are not merely contractual. "They are
so impressed with public interest that labor contracts must yield to the common good."
The supremacy of the law over contracts is explained by the fact that labor contracts are
not ordinary contracts; they are imbued with public interest and therefore are subject to
the police power of the state. However, it should not be taken to mean that provisions
agreed upon in the CBA are absolutely beyond the ambit of judicial review and
nullification. If the provisions in the CBA run contrary to law, public morals, or public
policy, such provisions may very well be voided.

Heirs of Mario Pacres, vs. Heirs of Cecilia Ygoña
G.R. No. 174719. May 5, 2010.
Del Castillo, J.:

ISSUE: Whether third parties may sue for the enforcement of the supposed obligations
arising from said contracts pursuant to stipulation pour autri.

DOCTRINE: NO. Under Article 1311 of the Civil Code, contracts take effect only
between the parties, their assigns and heirs (subject to exceptions not applicable here).
Thus, only a party to the contract can maintain an action to enforce the obligations
arising under said contract. It is true that third parties may seek enforcement of a
contract under the second paragraph of Article 1311, which provides that “if a contract
should contain some stipulation in favor of a third person, he may demand its
fulfillment.” This refers to stipulations pour autrui, or stipulations for the benefit of third
parties. However, the written contracts of sale in this case contain no such stipulation in
favor of the petitioners.


Heirs of Fausto C. Ignacio v. Home Bankers Savings and Trust Company
G.R. No. 177783. January 23, 2013
Villarama Jr., J.

ISSUE: When is a contract deemed perfected?

DOCTRINE: Contracts that are consensual in nature, like a contract of sale, are
perfected upon mere meeting of the minds. Once there is concurrence between the
offer and the acceptance upon the subject matter, consideration, and terms of payment,
a contract is produced. The offer must be certain. To convert the offer into a contract,
the acceptance must be absolute and must not qualify the terms of the offer; it must be
plain, unequivocal, unconditional, and without variance of any sort from the proposal. A
qualified acceptance, or one that involves a new proposal, constitutes a counter-offer
and is a rejection of the original offer. Consequently, when something is desired which is
not exactly what is proposed in the offer, such acceptance is not sufficient to generate
consent because any modification or variation from the terms of the offer annuls the
offer.

Spouses Ignacio F. Juico and Alice P. Juico v. China Banking Corporation
G.R. No. 187678. April 10, 2013
Villarama, Jr., J.:

ISSUE: Whether the interest rates imposed by virtue of escalation clause in the
promissory notes upon them by respondent violate the principle of mutuality of
contracts?

DIOCTRINE: Escalation clauses refer to stipulations allowing an increase in the interest
rate agreed upon by the contracting parties. This Court has long recognized that there is
nothing inherently wrong with escalation clauses which are valid stipulations in
commercial contracts to maintain fiscal stability and to retain the value of money in long
term contracts. Hence, such stipulations are not void per se.

Nevertheless, an escalation clause "which grants the creditor an unbridled right to
adjust the interest independently and upwardly, completely depriving the debtor of the
right to assent to an important modification in the agreement" is void. A stipulation of
such nature violates the principle of mutuality of contracts. Thus, this Court has
previously nullified the unilateral determination and imposition by creditor banks of
increases in the rate of interest provided in loan contracts.
There is no indication that petitioners were coerced into agreeing with the foregoing
provisions of the promissory notes. In fact, petitioner Ignacio, a physician engaged in
the medical supply business, admitted having understood his obligations before signing
them. At no time did petitioners protest the new rates imposed on their loan even when
their property was foreclosed by respondent.

This notwithstanding, we hold that the escalation clause is still void because it grants
respondent the power to impose an increased rate of interest without a written notice to
petitioners and their written consent. Respondent’s monthly telephone calls to
petitioners advising them of the prevailing interest rates would not suffice. A detailed
billing statement based on the new imposed interest with corresponding computation of
the total debt should have been provided by the respondent to enable petitioners to

make an informed decision. An appropriate form must also be signed by the petitioners
to indicate their conformity to the new rates. Compliance with these requisites is
essential to preserve the mutuality of contracts. For indeed, one-sided impositions do
not have the force of law between the parties, because such impositions are not based
on the parties’ essential equality.

Sps. Benjamin Mamaril v. The Boy Scout of the Philippines
G.R. No. 179382. January 14, 2013
Perlas-Bernabe, J.

ISSUE: When can a third person benefit from a stipulation pour autrui?

DOCTRINE: 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.22 However, none of the foregoing elements obtains in this case.

Star Two (SPV-AMC), Inc. v. Paper City Corporation of the Philippines
GR No. 169211. March 6, 2013
Perez, J.

ISSUE: Whether the machineries should be included in the foreclosure of the real
estate mortgage?

DOCTRINE: Yes. Repeatedly, the parties stipulated that the properties mortgaged by
Paper City to RCBC are various parcels of land including the buildings and existing
improvements thereon as well as the machineries and equipment, which as stated in
the granting clause of the original mortgage, are "more particularly described and listed
that is to say, the real and personal properties listed in Annexes 'A' and 'B' . . . of which
the [Paper City] is the lawful and registered owner." Significantly, Annexes "A" and "B"
are itemized listings of the buildings, machineries and equipment typed single spaced in
twenty-seven pages of the document made part of the records. As held in Gateway
Electronics Corp. v. Land Bank of the Philippines, the rule in this jurisdiction is that the
contracting parties may establish any agreement, term, and condition they may deem
advisable, provided they are not contrary to law, morals or public policy. The right to
enter into lawful contracts constitutes one of the liberties guaranteed by the
Constitution.

Land Bank of the Philippines vs. Heirs of Spouses Jorja Rigor-Soriano and Magin
Soriano
G.R. No. 178312. January 30, 2013
Bersamin, J:

ISSUE: When is a compromise valid?

DOCTRINE: The validity of a compromise is dependent upon its compliance with the
requisites and principles of contracts dictated by law. Also, the terms and conditions of a
compromise must not be contrary to law, morals, good customs, public policy and public
order.

Rodolfo G. Cruz and Esperanza Ibias v. Atty. Delfin Gruspe
GR No. 191431. March 13, 2013

Brion, J.

ISSUE: Is a joint affidavit considered a contract and binding upon the parties?

DOCTRINE: Yes. 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.

Philippine National Bank vs. Spouses Enrique Manalo and Rosalinda Jacinto, et
al.
G.R. No. 174433; February 24, 2014
Bersamin, J.

ISSUE: Whether the credit agreement which stipulated that the loan would be subjected
to interest at a rate "determined by the Bank to be its prime rate plus applicable spread,
prevailing at the current month" contravened the principle of mutuality of contracts.

DOCTRINE: Yes. The unilateral determination and imposition of the increased rates is
violative of the principle of mutuality of contracts under Article 1308 of the Civil Code,
which provides that ‘[t]he contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.’ A perusal of the Promissory Note
will readily show that the increase or decrease of interest rates hinges solely on the
discretion of petitioner. It does not require the conformity of the maker before a new
interest rate could be enforced. Any contract which appears to be heavily weighed in
favor of one of the parties so as to lead to an unconscionable result, thus partaking of
the nature of a contract of adhesion, is void. Any stipulation regarding the validity or
compliance of the contract left solely to the will of one of the parties is likewise invalid.

CHAPTER 2. ESSENTIAL REQUISITES OF CONTRACTS

Spouses Azaro M. Zulueta and Perla Sucayan-Zulueta v. Jose Wong, et al.
G.R. No. 153514, June 8, 2005
Callejo, Sr., J.:

ISSUE: What is the distinction between failure to pay the consideration and lack of
consideration? What is the status of a deed of sale where the purchase price has been
paid but in fact has never been paid?

DOCTRINE: Failure to pay the consideration results in a right to demand the fulfillment
or cancellation of the obligation under an existing contract, while lack of consideration
prevents the existence of a valid contract. Where there was no price or consideration
for the sale and in fact had not received any consideration for the said sale, it is null and
void ab initio for lack of consideration.


Paulo Ballesteros v. Rolando Abion
G.R. No. 143361. February 9, 2006
Corona, J.:

ISSUE: May a contract, the object of which was already transferred to a third person at
the time it was entered, be validated and remain enforceable if one of the party thereto
has no knowledge of the fact of its transfer?

DOCTRINE: No. Under Arts. 1318 and 1409 (3) of the Civil Code, contracts the cause
or object of which did not exist at the time of the transaction are inexistent and void ab
initio.
The good faith of a party in entering into a contract is immaterial in determining whether
it is valid or not. Good faith, not being an essential element of a contract, has no bearing
on its validity. No amount of good faith can validate an agreement which is otherwise
void. A contract which the law denounces as void is necessarily no contract at all and no
effort or act of the parties to create one can bring about a change in its legal status.

Estate of Orlando Llenado et al. vs. Eduardo Llenado et al.
G.R. No. 145736. March 4, 2009.
Ynares-Santiago, J.

ISSUE: Whether the heirs are bound by the contracts entered into by their
predecessors in interest.

DOCTRINE: Yes. Under Article 1311 of the Civil Code, the heirs are bound by the
contracts entered into by their predecessors-in-interest except when the rights and
obligations therein are not transmissible by their nature, by stipulation or by provision of
law. A contract of lease is, therefore, generally transmissible to the heirs of the lessor or
lessee. It involves a property right and, as such, the death of a party does not excuse
non-performance of the contract. The rights and obligations pass to the heirs of the
deceased and the heir of the deceased lessor is bound to respect the period of the
lease. The same principle applies to the option to renew the lease. As a general rule,
covenants to renew a lease are not personal but will run with the land. Consequently,
the successors-in-interest of the lessee are entitled to the benefits, while that of the
lessor are burdened with the duties and obligations, which said covenants conferred
and imposed on the original parties.

SECTION 1. CONSENT

Dandoy v. Tongson
G.R. No. 144652 December 16, 2005
Austria-Martinez, J.

ISSUE: May a contract to transfer rights be null and void for failure to obtain the consent
of the government?

DOCTRINE: Yes. Section 29 of the Commonwealth Act 141 or the Public Land Act
provides in part: “After the cultivation of the land has been begun, the purchaser, with
the approval of the Secretary of Agriculture and Commerce, may convey or encumber
his rights to any person, corporation, or association legally qualified under this Act to
purchase agricultural public lands, provided such conveyance or encumbrance does not
affect any right or interest of the Government in the land: And provided, further, That the
transferor is not delinquent in the payment of any installment due and payable. Any sale

and encumbrance made without the previous approval of the Secretary of Agriculture
and Commerce shall be null and void and shall produce the effect of annulling the
acquisition and reverting the property and all rights thereto to the State, and all
payments on the purchase price theretofore made to the Government shall be forfeited.

Said provision contemplates a sale and encumbrance that a purchaser may desire to
make during the pendency of his application and before his compliance with the
requirements of the law. The reason for the prior approval is obvious. Since the
application is still pending consideration and the rights of the applicant have not yet
been determined, he cannot make any transfer that may affect the land without the
approval of the Government. Such approval is necessary to protect the interest of the
Government. Thus, the law allows an applicant after the cultivation of the land has been
begun to convey or encumber his rights to any person provided such conveyance or
encumbrance does not affect any right or interest of the Government on the land. And to
safeguard such right or interest previous approval of the Secretary is required.

Given that the "Transfer of Sales Rights" from which respondents base their capacity to
enter into the contracts is null and void, respondents have no legal justification
whatsoever to enter into these agricultural leasehold contracts, thus rendering the
contracts invalid.

Navotas Industrial Corporation V. Cruz, et al.
G.R. No. 159212. September 12, 2005
Callejo, Sr., J.:

ISSUE: Is there a valid option contract in a lease agreement providing for an option to
buy property but without stating the period for its exercise?

DOCTRINE: No. An option contract is a preparatory contract in which one party grants
to the other, for a fixed period and under specified conditions, the power to decide
Whether to enter into a principal contract.

Epifania Dela Cruz, substituted by Laureana V. Alberto v. Sps. Eduardo C. Sison
and Eufemia S. Sison
G.R. No. 163770. February 17, 2005

ISSUE: Whether the person assailing that either he is unable to read, or the contract is
in a language not understood by him or that there has been fraud or mistake in the
contract executed must prove the facts claimed by him in determining whether Article
1332 applies – the person asserting the contract has fulfilled his duty to explain the
terms of the contract to the other party?

DOCTRINE: 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.

The contradictory statements do not establish the fact that Epifania was unable to read
and understand the English language. There being no evidence adduced to support her
bare allegations, thus, Epifania failed to satisfactorily establish her inability to read and
understand the English language. It is well settled that a party who alleges a fact has
the burden of proving it. Consequently, the provisions of Article 1332 does not apply.


Perpetua vda. de Ape v. Court of Appeals and Genorosa Cawit Vda. De Lumayno
GR No. 133638. April 15, 2005
Chico-Nazario, J.:

ISSUE: Whether a person enforcing a contract of sale has the burden of proving that
the terms of the agreement were fully explained to the other party, who was an illiterate?

DOCTRINE: As a general rule, he who alleges fraud or mistake in a transaction must
substantiate his allegation as the presumption is that a person takes ordinary care for
his concerns and that private dealings have been entered into fairly and regularly. The
exception to this rule is provided for under Article 1332 of the Civil Code which provides
that “[w]hen 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.

Reynaldo Villanueva vs. Philippine National Bank
G.R. No. 154493. December 6, 2006

ISSUE: What is the effect of making a qualified acceptance of an offer?

DOCTRINE: A qualified acceptance, or one that involves a new proposal, constitutes a
counter-offer and a rejection of the original offer (Art. 1319, id.). Consequently, when
something is desired which is not exactly what is proposed in the offer, such acceptance
is not sufficient to generate consent because any modification or variation from the
terms of the offer annuls the offer.

Gaudencio Valerio et. al v. Vicenta Refresca et. al.
G.R. No. 163687. March 28, 2006
Puno, J.:

ISSUE: Whether a Deed of Sale with no monetary consideration involved may be
considered as an absolutely simulated or fictitious contract which produces no legal
effect.

DOCTRINE: Article 1345 of the Civil Code provides that the simulation of a contract
may either be absolute or relative. 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.

Heirs of Cayetano Pangan vs. Spouses Rogelio Perreras and Priscilla Perreras
G.R. No. 157374 August 27, 2009
Brion, J.


ISSUE: Whether there was a perfected contract of sale of one of the co-owners of his
share despite the no consent of the other owners to such sale.

DOCTRINE: Yes. There was a perfected contract between the parties since all the
essential requisites of a contract were present.

Article 1318 of the Civil Code declares that no contract exists unless the following
requisites concur: (1) consent of the contracting parties; (2) object certain which is the
subject matter of the contract; and (3) cause of the obligation established. Since the
object of the parties’ agreement involves properties co-owned by Consuelo and her
children, the petitioners-heirs insist that their approval of the sale initiated by their
mother, Consuelo, was essential to its perfection. Accordingly, their refusal amounted to
the absence of the required element of consent.

That a thing is sold without the consent of all the co-owners does not invalidate the sale
or render it void. Article 493 of the Civil Code8 recognizes the absolute right of a co-
owner to freely dispose of his pro indiviso share as well as the fruits and other benefits
arising from that share, independently of the other co-owners. Thus, when Consuelo
agreed to sell to the respondents the subject properties, what she in fact sold was her
undivided interest that, as quantified by the RTC, consisted of one-half interest,
representing her conjugal share, and one-sixth interest, representing her hereditary
share.

Cornelia Baladad vs. Sergio A. Rublico and Spouses Laureano F. Yupano
G.R. No. 160743 August 4, 2009
Nachura, J.

ISSUE: Whether a contract of absolute sale in an Extrajudicial Settlement of Estate with
Absolute Sale executed by parties through their attorney-in-fact was valid.

DOCTRINE: Yes. While contained in one document, the two are severable and each
can stand on its own. Hence, for its validity, each must comply with the requisites
prescribed in Article 1318 of the Civil Code, namely (1) consent of the contracting
parties; (2) object certain, which is the subject matter of the contract; and (3) cause of
the obligation which is established.

And, most important of all is the fact that the subject deed is, on its face, unambiguous.
When the terms of a contract are lawful, clear and unambiguous, facial challenge
cannot be allowed. We should not go beyond the provisions of a clear and
unambiguous contract to determine the intent of the parties thereto, because we will run
the risk of substituting our own interpretation for the true intent of the parties.

It is immaterial that Cornelia’s signature does not appear on the Extrajudicial Settlement
of Estate with Absolute Sale. A contract of sale is perfected the moment there is a
meeting of the minds upon the thing which is the object of the contract and upon the
price.29 The fact that it was Cornelia herself who brought Atty. Francisco to Corazon’s
house to notarize the deed shows that she had previously given her consent to the sale
of the two lots in her favor. Her subsequent act of exercising dominion over the subject
properties further strengthens this assumption.

Francisco Landicho et al. vs. Felix Sia
G.R. No. 169472. January 20, 2009.
Puno C.J.:

ISSUE: Whether old age and illiteracy incapacitates a person to execute a contract.


DOCTRINE: No. The petitioners also failed to support their claim that the Aragons took
advantage of Francisco’s old age and illiteracy and employed fraudulent schemes in
order to deceive him into signing the Kasulatan. It has been held that “[a] person is not
incapacitated to contract merely because of advanced years or by reason of physical
infirmities. It is only when such age or infirmities impair the mental faculties to such
extent as to prevent one from properly, intelligently, and fairly protecting her property
rights, is she considered incapacitated.”

XYST Corp. v. DMC Urban Properties Development Inc.
G.R. No. 171968; July 31, 2009
Quisumbing, J.

ISSUE: Whether there exists a perfected contract of sale between the parties despite
the terms, conditions and amendments which the offeror tried to impose upon the other.

DOCTRINE: No. By introducing amendments to the contract, XYST presented a
counter-offer to which DMC did not agree. Clearly, there was only an offer and a
counter-offer that did not sum up to any final arrangement containing the elements of a
contract. No meeting of the minds was established. The rule on the concurrence of the
offer and its acceptance did not apply because other matters or details–in addition to
the subject matter and the consideration–would still be stipulated and agreed upon by
the parties. Therefore, since the element of consent is absent, there is no contract to
speak of. Where the parties merely exchanged offers and counter-offers, no agreement
or contract is perfected.

Gloria Ocampo and Teresita Tan v. Land Bank of the Philippines et al.
G.R. No. 164968; July 3, 2009
Peralta, J.

ISSUE: Whether the deceit employed must be serious.

DOCTRINE: Yes. Verily, fraud refers to all kinds of deception -- whether through
insidious machination, manipulation, concealment or misrepresentation -- that would
lead an ordinarily prudent person into error after taking the circumstances into account.
The deceit employed must be serious. It must be sufficient to impress or lead an
ordinarily prudent person into error, taking into account the circumstances of each case.
Unfortunately, Ocampo was unable to establish clearly and precisely how the Land
Bank committed the alleged fraud. She failed to convince Us that she was deceived,
through misrepresentations and/or insidious actions, into signing a blank form for use as
security to her previous loan.

Granting, for the sake of argument, that appellant bank did not apprise the appellees of
the real nature of the real estate mortgage, such stratagem, deceit or
misrepresentations employed by defendant bank are facts constitutive of fraud which is
defined in Article 1338 of the Civil Code as that insidious 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. 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. It must be remembered that an action to declare a contract null and
void on the ground of fraud must be instituted within four years from the date of
discovery of fraud. In this case, it is presumed that the appellees must have discovered
the alleged fraud since 1991 at the time when the real estate mortgage was registered

with the Register of Deeds of Lingayen, Pangasinan. The appellees cannot now feign
ignorance about the execution of the real estate mortgage.

Government Service Insurance System vs. Abraham Lopez
G.R. No. 165568; July 13, 2009
Carpio, J.:

ISSUE: Whether when there is merely an offer by one party without acceptance by the
other, there is no contract of sale.

DOCTRINE: Yes. In the present case, the parties never got past the negotiation stage.
Nothing shows that the parties had agreed on any final arrangement containing the
essential elements of a contract of sale, namely, (1) consent or the meeting of the minds
of the parties; (2) object or subject matter of the contract ; and (3) price or consideration
of the sale. The 2 August 1988 letter of the GSIS cannot be classified as a perfected
contract of sale which binds the parties. The letter was in reply to Lopez’s offer to
repurchase the property. Both the trial and appellate courts found that Lopez’s offer to
repurchase the property was subject to the approval of the Board of Trustees of the
GSIS, as explicitly stated in the 2 August 1988 GSIS’ letter. No such approval appears
in the records. When there is merely an offer by one party without acceptance by the
other, there is no contract of sale. Since there was no acceptance by GSIS, which can
validly act only through its Board of Trustees, of Lopez’s offer to repurchase the
property, there was no perfected contract of sale.

Sps. Ramon Lequin and Virginia Lequin vs. Sps. Raymundo Vizconde and
Salome Lequin Vizconde
G.R. No. 177710. October 12, 2009
Velasco, Jr., J.:

ISSUE: Whether when consent is given through fraud would make the contract
voidable.

DOCTRINE: Yes. Article (Art.) 1330 of the Civil Code provides that when consent is
given through fraud, the contract is voidable.

Tolentino defines fraud as “every kind of deception whether in the form of insidious
machinations, manipulations, concealments or misrepresentations, for the purpose of
leading another party into error and thus execute a particular act.” Fraud has a
“determining influence” on the consent of the prejudiced party, as he is misled by a false
appearance of facts, thereby producing error on his part in deciding Whether to agree to
the offer.

One form of fraud is misrepresentation through insidious words or machinations. Under
Art. 1338 of the Civil Code, 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. Insidious words or
machinations constituting deceit are those that ensnare, entrap, trick, or mislead the
other party who was induced to give consent which he or she would not otherwise have
given.

Deceit is also present when one party, by means of concealing or omitting to state
material facts, with intent to deceive, obtains consent of the other party without which,
consent could not have been given. Art. 1339 of the Civil Code is explicit that failure to

disclose facts when there is a duty to reveal them, as when the parties are bound by
confidential relations, constitutes fraud.

Spouses Exequiel Lopez and Eusebia Lopez v. Spouses Eduardo Lopez and
Marcelina Lopez
G.R. No. 161925; November 25, 2009
Nachura, J.

ISSUE: Whether 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.

DOCTRINE: Yes. Simulation takes place when the parties do not really want the
contract they have executed to produce the legal effects expressed by its wordings.
Article 1345 of the Civil Code provides that the simulation of a contract may either be
absolute or relative. 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.

Heirs Of Dr. Mario S. Intac v. Court of Appeals
G.R. No. 173211; October 11, 2012

ISSUE: Whether the deed of sale executed by Ireneo and Salvacion was absolutely
simulated for lack of consideration and cause and, therefore, void.

DOCTRINE: NO. Article 1345 provides that 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.

While Article 1346 states that 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. If the parties state a false cause in the contract to
conceal their real agreement, the contract is only 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. 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."

Korean Air Co., Ltd. V. Yuson
G.R. No. 170369


Carpio, J.

ISSUE: Whether the offer of MNLSM Management is equivalent to an offering of said
early retirement program to its staff was certain.

DOCTRINE: No, the offer must be definite, complete and intentional. There is an ‘offer’
in the context of Article 1319 only if the contract can come into existence by the mere
acceptance of the offeree, without any further act on the part of the offeror. Hence, the
‘offer’ must be definite, complete and intentional. In the present case, the offer is not
certain since (1) the 21 August 2001 memorandum clearly states that, “MNLSM
Management, on its discretion, is hereby offering the said early retirement program to its
staff.

Doña Rosana Realty and Development Corporation vs. Molave Development
Corporation
G.R. No. 180523; March 26, 2010
Abad, J.

ISSUE: Whether consent of the buyer is vitiated when the President of buyer-
corporation executed a document acknowledging the receipt of PhP 1.3 million as
consideration for the cancellation of its contract to sell by reason of the actuation of the
seller’s lawyer that the check would not be released without such document.

DOCTRINE: No, the President of buyer-corporation asserted that she signed the above
receipt because seller’s lawyer would not have released the check to her. But this is not
a valid ground for claiming that consent is vitiated. If she did not want to agree to the
cancellation, she had no business signing the receipt and accepting the check. She
could very well have stood her ground and pressed for complete performance of the
contract to sell. Having received the P1.3 million, the buyer-corporation’s remaining
remedy was to pursue a claim for the balance of P1 million that it paid the seller upon
the execution of the contract to sell.

Jocelyn M. Toledo vs. Marilou M. Hyden
G.R. No. 172139 December 8, 2010
Del Castillo, J.:

ISSUE: Whether the "Acknowledgment of Debt" is an inexistent contract rendering it
void from the very beginning pursuant to Article 1409 of the New Civil Code.

DOCTRINE: No, the "Acknowledgment of Debt" is valid and binding contract. Even if
there was indeed such threat made by Marilou, the same is not considered as that kind
of threat that would vitiate consent. Article 1335 of the New Civil Code is very specific
on this matter. It provides: " Art. 1335. There is violence when in order to wrest consent,
serious or irresistible force is employed. x xxx A threat to enforce one’s claim through
competent authority, if the claim is just or legal, does not vitiate consent.

Here, it is uncontested that petitioner had in fact signed the "Acknowledgment of Debt"
in April 1998 and two of her subordinates served as witnesses to its execution, knowing
fully well the nature of the contract she was entering into. Next, petitioner issued five
checks in favor of respondent representing renewal payment of her loans amounting to
P290,000.00. In June 1998, she asked to recall Check No. 0010761 in the amount of
P30,000.00 and replaced the same with six checks, in staggered amounts. All these are
indicia that Jocelyn treated the "Acknowledgment of Debt" as a valid and binding
contract.


ECE Realty and Development Inc. v. Rachel G. Mandap
G.R. No. 196182, September 01, 2014

ISSUE: Whether fraud attended the perfection of the contract which should be a ground
to invalidate the contract.

DOCTRINE: YES. Article 1338 of the Civil Code provides that “[t]here 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.” In
addition, under Article 1390 of the same Code, a contract is voidable or annullable
“where the consent is vitiated by mistake, violence, intimidation, undue influence or
fraud.”

Jurisprudence has shown that in order to constitute fraud that provides basis to annul
contracts, it must fulfill two conditions. First, the fraud must be dolo causante or it must
be fraud in obtaining the consent of the party. This is referred to as causal fraud. The
deceit must be serious. Second, the fraud must be proven by clear and convincing
evidence and not merely by a preponderance thereof. insofar as the present case is
concerned, the Court agrees that the misrepresentation made by petitioner in its
advertisements does not constitute causal fraud which would have been a valid basis in
annulling the Contract to Sell between petitioner and respondent.

SECTION 2. OBJECT OF CONTRACTS

Atty. Pedro M. Ferrer vs. Spouses Alfredo Diaz and Imelda Diaz
G.R. No. 165300. April 23, 2010
Del Castillo, J.:

ISSUE: Whether a waiver of hereditary rights in favor of another executed by a future
heir while the parents are still living valid.

DOCTRINE: No. Pursuant to the second paragraph of Article 1347 of the Civil Code, no
contract may be entered into upon a future inheritance except in cases expressly
authorized by law. For the inheritance to be considered “future,” the succession must
not have been opened at the time of the contract. A contract may be classified as a
contract upon future inheritance, prohibited under the second paragraph of Article 1347,
where the following requisites concur: (1) That the succession has not yet been opened;
(2) That the object of the contract forms part of the inheritance; and, (3) That the
promissor has, with respect to the object, an expectancy of a right which is purely
hereditary in nature.

SECTION 3. CAUSE OF CONTRACTS

J.L.T. Agro Inc. v. Balansag
G.R. No. 141882. March 11, 2005
Tinga, J.:


ISSUE: What will be the effect on the contract if it was entered into without cause or
with unlawful cause?

DOCTRINE: Article 1318 of the New Civil Code enumerates the requisites of a valid
contract, namely: (1) consent of the contracting parties; (2) object certain which is the
subject matter of the contract; and (3) Cause of the obligation which is established.

Thus, Article 1352 declares that contracts without cause, or with unlawful cause
produce no effect whatsoever. Those contracts lack an essential element and they are
not only voidable but void or inexistent pursuant to Article 1409, paragraph (2). The
absence of the usual recital of consideration in a transaction which normally should be
supported by a consideration such as the assignment made by Don Julian of all
nineteen (19) lots he still had at the time, coupled with the fact that the assignee is a
corporation of which Don Julian himself was also the President and Director, forecloses
the application of the presumption of existence of consideration established by law.

Alvarez v. PICOP Resources
G.R. No. 162243 December 3, 2009

ISSUE: Whether 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.

DOCTRINE: Yes. According to Article 1350 of the Civil Code, "(i)n onerous contracts the
cause is understood to be, for each contracting party, the prestation or promise of a
thing or service by the other." Private investments for one’s businesses, while indeed
eventually beneficial to the country and deserving to be given incentives, are still
principally and predominantly for the benefit of the investors. Thus, the "mutual" contract
considerations by both parties to this alleged contract would be both for the benefit of
one of the parties thereto, BBLCI, which is not obligated by the 1969 Document to
surrender a share in its proceeds any more than it is already required by its TLA and by
the tax laws.

PICOP’s argument that its investments can be considered as contract consideration
derogates the rule that "a license or a permit is not a contract between the sovereignty
and the licensee or permittee, and is not a property in the constitutional sense, as to
which the constitutional proscription against the impairment of contracts may extend."
All licensees obviously put up investments, whether they are as small as a tricycle unit
or as big as those put up by multi-billion-peso corporations. To construe these
investments as contract considerations would be to abandon the foregoing rule, which
would mean that the State would be bound to all licensees, and lose its power to revoke
or amend these licenses when public interest so dictates.

The power to issue licenses springs from the State’s police power, known as "the most
essential, insistent and least limitable of powers, extending as it does to all the great
public needs." Businesses affecting the public interest, such as the operation of public
utilities and those involving the exploitation of natural resources, are mandated by law to
acquire licenses. This is so in order that the State can regulate their operations and
thereby protect the public interest. Thus, while these licenses come in the form of
"agreements," e.g., "Timber License Agreements," they cannot be considered contracts
under the non-impairment clause.


CHAPTER 3. FORM OF CONTRACTS

Manuel Mallari and Millie Mallari v. Rebecca Alsol
G.R. No. 150866. March 6, 2006
Carpio, J.:

ISSUE: Will a defect in the notarization of a private document nullify the transaction of
the parties indicated therein?

DOCTRINE: Notarization converts a private document into a public document. However,
the non-appearance of the parties before the notary public who notarized the document
does not necessarily nullify nor render the parties’ transaction void ab initio.

Serafin Naranja et al. vs. Court of Appeals
G.R. No. 160132. April 17, 2009.
Nachura J.:

ISSUE: Whether a contract of sale should follow a particular form.

DOCTRINE: No. The Court does not agree with petitioners’ contention that a deed of
sale must contain a technical description of the subject property in order to be valid.
Petitioners anchor their theory on Section 127 of Act No. 496, which provides a sample
form of a deed of sale that includes, in particular, a technical description of the subject
property. To be valid, a contract of sale need not contain a technical description of the
subject property. Contracts of sale of real property have no prescribed form for their
validity; they follow the general rule on contracts that they may be entered into in
whatever form, provided all the essential requisites for their validity are present. The
requisites of a valid contract of sale under Article 1458 of the Civil Code are: (1) consent
or meeting of the minds; (2) determinate subject matter; and (3) price certain in money
or its equivalent.

CHAPTER 4. REFORMATION OF INSTRUMENTS

Benny Go v. Eliodoro Bacaron
GR No. 159048. October 11, 2005
Panganiban, J.:

ISSUE: What is the proper remedy of the parties when they failed to express their true
intentions in the contract?

DOCTRINE: Ultimately, it is the intention of the parties that determines whether a
contract is one of sale or of mortgage. In the present case, one of the parties to the
contract raises as an issue the fact that their true intention or agreement is not reflected
in the instrument. Under Article 1605 of the New Civil Code, the supposed vendor may
ask for the reformation of the instrument, should the case be among those mentioned in
Articles 1602 and 1604. Because respondent has more than sufficiently established
that the assailed Contract is in fact an equitable mortgage rather than an absolute sale,
he is allowed to avail himself of the remedy of reformation of contracts as provided in
Article 1359 of the New Civil Code.


CHAPTER 5. INTERPRETATION OF CONTRACTS

Holy Cross of Davao College, Inc. vs. Holy Cross of Davao Faculty Union – Kampi
G.R. No. 156098 June 27, 2005
Sandoval-Gutierrez, J.

ISSUE: How are non-ambiguous contracts to be interpreted?

DOCTRINE: Contracts, which are not ambiguous are to be interpreted according to
their literal meaning and not beyond their obvious intendment. When the provisions of a
CBA state that academic teaching personnel as recipient of a scholarship grant are
entitled to a leave of absence with a grant-in-aid equivalent to their monthly salary and
allowance, provided such grant is to promote their professional growth or to enhance
their studies in institutions of higher learning. Such provisions need no interpretation for
they are clear.

In Mactan Workers Union vs. Aboitiz, the court held that "the terms and conditions of a
collective bargaining contract constitute the law between the parties. Those who are
entitled to its benefits can invoke its provisions. In the event that an obligation therein
imposed is not fulfilled, the aggrieved party has the right to go to court for redress."

Agas vs. Sabico
G.R. No. 156447. April 26, 2005
Callejo, Sr., J.

ISSUE: May the Court declare a deed of sale to be a deed of absolute mortgage, taking
into consideration the circumstances attendant in a certain case?

DOCTRINE: Yes. In determining the nature of a contract, courts are not bound by the
title or name given by the parties. The decisive factor in evaluating such agreement is
the intention of the parties, as shown not necessarily by the terminology used in the
contract but by their conduct, words, actions and deeds prior to, during and immediately
after executing the agreement. As such, therefore, documentary and parol evidence
may be submitted and admitted to prove such intention. If both parties offer a conflicting
interpretation of a contract or several contracts, then judicial determination of the
intention of the parties’ intention is inevitable.

A contract may be embodied in two or more separate writings, in which event the
writings should be read and interpreted together in such a way as to eliminate seeming
inconsistencies and render the parties’ intention effectual. In construing a written
contract, the reason behind and the circumstances surrounding its execution are of
paramount importance to place the interpreter in the situation occupied by the parties
concerned at the time the writing was executed. Construction of the terms of a contract,
which would amount to impairment or loss of right, is not favored. Conservation and
preservation, not waiver, abandonment or forfeiture of a right, is the rule. In case of
doubts in contracts, the same should be settled in favor of the greatest reciprocity of
interests. Moreover, such doubts must be resolved against the person who drafted the
deed and who is responsible for the ambiguities in the deed.


Further, the notary public who notarized the said deed merely asked the respondent if
the latter knew the contents of the deed of absolute sale, and the respondent
purportedly replied in the affirmative. The notary public never even bothered to explain
to the respondent the nature and the rights and obligations of the parties under the
deed, as mandated by Article 1332 of the New Civil Code

Berman Memorial Park, Inc. and Luisa Chong v. Francisco Cheng
G.R. No. 154630. May 6, 2005
Callejo, Sr., J.:

ISSUE: Do the stipulations embodied in an agreement reflect the true agreement of the
parties?

DOCTRINE: Yes. Article 1370 of the New Civil Code provides that if the terms of a
contract are clear and leave no doubt upon the intention of the contracting parties, the
literal meaning of its stipulation shall control. No amount of extrinsic aids are required
and no further extraneous sources are necessary in order to ascertain the parties’
intent, determinable as it is, from the contract itself. The records are clear that the
respondent understood the nature of the contract he entered into.

If, indeed, the agreement were not the true intention of the parties, the party should file
a corresponding action for reformation of the contract.

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.

Rosalina Tagle v. Court of Appeals, Fast International Corporation and/or Kuo
Tung Yu Huang
G. R. No. 148235. August 11, 2005
Carpio Morales, J.:

ISSUE: Can a widow who filed a claim for death benefits be entitled to the additional
labor insurance she is entitled to as provided for in her deceased husband’s
employment contract on compensation and benefits which explicitly states that “Benefits
. . . include compensation for . . . death in accordance with social insurance laws and
other pertinent provisions of the Taiwan Labor Law. . . Additional Labor Insurance shall
be provided to the Fisherman with a limit of NT$300,000.00 per person (or its
equivalent) for accident insurance covering fisherman regardless of whether accident
occurs within and/or beyond work hours”?

DOCTRINE: No. Death is defined as “loss of life resulting from injury or sickness.
Death could be a result of accident, but accident does not necessarily result to death.
Compensation benefits for illness, death, accident which does not result to death, and
partial or total disability are treated separately and differently in the 3-paragraph
provision of Article II, Section 10 of the employment contract. The said provision in the
employment contract being clear and unambiguous, its literal meaning controls (Article
1370, New Civil Code). To uphold petitioner’s claim for additional insurance for accident,
assuming that one for the purpose was secured, after receiving insurance benefits
for death arising from accident, would violate the clear provision of Article II, Section 10
of the employment contract, the law between the parties. And it would trifle with the


Release, Waiver and Quitclaim, another contract between the parties, barring petitioner
from claiming other or additional benefits arising from petitioner’s husband’s death-basis
of the release of the insurance proceeds to her.

Martha R. Horrigan v. Troika Commercial, Inc.
G.R. No. 148411. November 29, 2005
Sandoval-Gutierrez, J.:

ISSUE: Who bears the responsibility for causing obscurities in a contract?

DOCTRINE: The party who draws up the contract, in which obscure words or phrases
appear, bears the responsibility for causing the ambiguity or obscurity, and hence, these
must be construed against him. In this case, it was petitioner’s spouse who prepared
the sub-lease contract in question. Consequently, the ambiguity must be construed
against herein petitioner as she is presumed to have

Aurelio P. Alonzo and Teresita A. Sison v. Jaime and Perlita San Juan
G.R. No. 137549. February 11, 2005
Chico-Nazario, J.:

ISSUE: How conflicting stipulations in a compromise agreement must be interpreted?

DOCTRINE: Article 1374 of the Civil Code requires that 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.

In this case, we find it was error on the part of the trial court to have interpreted the
compromise agreement in the manner it has done so.

Applying the rule that the various stipulations of a contract should be taken together, the
trial court should have interpreted paragraph 10, in relation to paragraphs 11 and 12. If
we were to follow the interpretation of the trial court, the respondents would only have to
default in the payment of their obligation and the contract would be rendered null and
void to their benefit and advantage leaving the petitioners without any recourse at all.
This surely was not what was envisioned when the parties entered into the compromise.
The Court itself would not have approved the same for being contrary to law, morals
and public policy. Certainly, to sustain the interpretation of the trial court would be to
sanction an absurdity as it would go against the very rationale of entering into a
Compromise Agreement, i.e., to put an end to litigation. If we were to follow the
argument of the trial court to its logical conclusion, then it would mean that the parties
would have to go back to square one and re-litigate what they had already put to rest
when they entered into the subject Compromise Agreement

Vicente Go v. Pura Kalaw, Inc.
G.R. No. 131408. July 31, 2006
Sandoval-Gutierrez, J.

ISSUE: How should agreements in a contract be interpreted?

DOCTRINE: Article 1370 of the Civil Code governs the interpretation of the terms of
agreement in a written contract. Simply put, the literal meaning of the stipulations shall
control the intention of the parties, to be deciphered not from the unilateral post
facto assertions of one of the parties, but from the language used in the contract. The
language is to be understood literally, just as it so appears in the contract.


Sps. Alvaro v. Sps. Returban
G.R. No. 166183. January 20, 2006

ISSUE: Is the nomenclature used by the parties decisive in the interpretation of a
contract?

DOCTRINE: No. The nomenclature used by the contracting parties to describe a
contract does not determine its nature. The decisive factor is the intention of the parties
to the contract – as shown by their conduct, words, actions and deeds – prior to, during
and after executing the agreement.

Ayala Inc. v. Ray Burton Corp
GR No. 163075. January 23, 2006.
Sandoval-Gutierrez, J.:

ISSUE: Is the name given by the parties to a contract conclusive?

DOCTRINE: No. The real nature of a contract may be determined from the express
terms of the written agreement and from the contemporaneous and subsequent acts of
the contracting parties. 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 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. The denomination or title
given by the parties in their contract is not conclusive of the nature of its contents.

San Diego v. Evangelista
G.R. No. 163680. January 24, 2006
Carpio Morales, J.

ISSUE: What is the effect if the terms of the contract are clear?

DOCTRINE: Paragraph No. 1 of the contract relied upon by petitioner is clearly
worded. It provides that “an agricultural leasehold relation iscreatedon a farm lot which
is a portion of a parcel of land” covered by a transfer certificate of title consisting of
three hectares, clearly referring to respondent’s father’s TCT No. 98.728 (M) containing
three hectares. Art. 1370 of the New Civil Code which provides that if the terms of the
contract are clear and leave no doubt upon the intention of the contracting parties, the
literal meaning of its stipulations shall control.

Laureano T. Angeles v. Philippine National Railways (PNR) And Rodolfo Flores
G.R. No. 150128. August 31, 2006
Garcia, J.:

ISSUE: What is the probative value of the acts of a contracting party if there is doubt as
to the language used in the contract or as to the intention of such party in entering into
the said contract?

DOCTRINE: Article 1374 of the Civil Code provides that the various stipulations of a
contract shall be read and interpreted together, attributing to the doubtful ones that
sense which may result from all of them taken jointly. In fine, the real intention of the
parties is primarily to be determined from the language used and gathered from the
whole instrument.


Article 1371 of the Civil Code provides that to judge the intention of the contracting
parties, their contemporaneous and subsequent acts shall be principally considered. In
other words, in case of doubt, resort may be made to the situation, surroundings, and
relations of the parties.

Elenita Ishida and Continent Japan Co., Inc. v. Antusa de Mesa-Magno, Firmo de
Mesa et.al.
G. R. No. 136260. July 28, 2006
Garcia, J.:

ISSUE: Is a declaration of nullity of a contract warranted where the parties executed an
addendum to a Deed of Sale with Mortgage excluding certain properties within the area
of the real properties subject of the sale?

DOCTRINE: To warrant a declaration of nullity of the contract, the doubts or
obscurities must be cast upon the principal object of the contract (which in this case are
three parcels of land) in such a way that the true intention of the parties cannot be
known. (Par. 2, Art. 1378 of the Civil Code)

Such confusion merely led to the failure of the parties to express in the contract the true
intention of their agreement, the proper remedy of which is reformation of the contact
under Chapter 4, Title 2, Book IV (Obligations and Contracts) of the Civil Code.

Heirs of the Deceased Carmen Cruz-Zamora v. Multiwood International, Inc.
G.R. No. 146428. January 19, 2009.
Leonardo-De Castro, J.:

ISSUE: Whether clear and explicit terms in contracts warrant court interpretation.

DOCTRINE: No. When the terms of the agreement are clear and explicit, such that they
do not justify an attempt to read into them any alleged intention of the parties, the terms
are to be understood literally just as they appear on the face of the contract. It is only in
instances when the language of a contract is ambiguous or obscure that courts ought to
apply certain established rules of construction in order to ascertain the supposed intent
of the parties. However, these rules will not be used to make a new contract for the
parties or to rewrite the old one, even if the contract is inequitable or harsh. They are
applied by the court merely to resolve doubts and ambiguities within the framework of
the agreement.

Antipolo Properties v. Nuyda
G.R. No. 171832; October 12, 2009

ISSUE: Whether contemporaneous and subsequent acts shall be principally considered
in knowing the intention of the contracting parties.

DOCTRINE: Yes. Petitioner moreover unequivocally obligated itself to extend the said
benefits to respondent. Rudimentary is the principle that a contract is the law between
the contracting parties. Further, when the language of the contract is clear and plain or
readily understandable by any ordinary reader, there is absolutely no room for
interpretation or construction and the literal meaning of its stipulations shall control. The
Court then fully agrees with the CA’s declaration that the contract "leaves no other
recourse for the courts than to enforce the contractual stipulations therein, in the exact
manner agreed upon and written.

Adriatico Consortium, Inc., et al. vs. Land Bank of the Philippines

G.R. No. 187838; December 23, 2009
Velasco, Jr., J.

ISSUE: Whether the literal meaning of a contract’s stipulations shall control if the terms
are clear and leave no doubt upon the intention of the contracting parties.

DOCTRINE: Yes. The cardinal rule in the interpretation of contracts is embodied in the
first paragraph of Article 1370 of the Civil Code: “[i]f 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.”

In the case at bar, the word “action” should be defined according to its plain and
ordinary meaning, i.e., as the process of doing something; conduct or behavior; a thing
done. It is not limited to actions before a court or a judicial proceeding. Therefore, the
only logical conclusion that can be derived from the use of the word “action” in Sec. 5 of
the agreement is that the parties intentionally used it in its plain and ordinary sense and
did not limit it to mean any specific legal term. Moreover, a compromise agreement
compromises not only those objects definitely stated in it, but also those, which by
necessary implication, should be deemed to have been included in it. Ergo, the term
“action” includes the sale of the receivables as a necessary implication. Furthermore,
Sec. 5 of the Partial Compromise Agreement speaks of cooperation between the parties
to determine the person or persons ultimately liable. It states, “x x x until it is finally
adjudged and determined who are the parties liable thereto; toward this end, the parties
herein agree to cooperate with each other in order for respondent Land Bank of the
Philippines to recover the same as against the person/s liable thereon.”

In other words, the parties agreed to cooperate and collaborate with each other in order
to determine the person or persons who are ultimately liable. By selling the receivables,
Land Bank did not cooperate with petitioners.

Manila International Airport Authority v. Avia Filipinas International, Inc.,
G.R. No. 180168; February 27 2012

ISSUE: Whether the stipulations of the contract, in case of doubt, should be read in its
entirety?

DOCTRINE: Yes. Article 1374 of the Civil Code clearly provides that “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.” Indeed, in construing a
contract, the provisions thereof should not be read in isolation, but in relation to each
other and in their entirety so as to render them effective, having in mind the intention of
the parties and the purpose to be achieved.7 In other words, the stipulations in a
contract and other contract documents should be interpreted together with the end in
view of giving effect to all.

CHAPTER 6. RESCISSIBLE CONTRACTS

Oliverio Laperal and Filipinas Golf & Country Club, Inc. v. Solid Homes, Inc.
G.R. No. 130913. June 21, 2005
Garcia, J.:


ISSUE: Is mutual restitution under Article 1385 proper where one party successfully
rescinds a contract under Article 1191?

DOCTRINE: Yes. The right to rescind under Article 1191 of the Civil Code carries with it
the corresponding obligation for restitution. It is not correct to say that mutual restitution
under Article 1385 applies only if the rescission is made under the instances
enumerated in Article 1381. Mutual restitution is required in cases involving rescission
under Article 1191. Rescission creates the obligation to return the object of the contract.
It is so required to bring back the parties to their original situation prior to the inception
of the contract.

C-J Yulo & Sons, Inc. v. Roman Catholic Bishop of San Pablo, Inc.
G.R. No. 133705. March 31, 2005
Garcia, J.:

ISSUE: What should be the nature of the breach of contract before a rescission may be
allowed?

DOCTRINE: The violations of the conditions of the donation committed by the donee
were merely casual breaches of the conditions of the donation and did not detract from
the purpose by which the donation was made, i.e., for the establishment of a home for
the aged and the infirm. In order for a contract which imposes a reciprocal obligation,
which is the onerous donation in this case wherein the donor is obligated to donate a
41,117 square meter property in Canlubang, Calamba, Laguna on which property the
donee is obligated to establish a home for the aged and the infirm (Exhibit C), may be
rescinded per Article 1191 of the New Civil Code, the breach of the conditions thereof
must be substantial as to defeat the purpose for which the contract was perfected The
right to rescind the contract for non-performance of one of its stipulations is not
absolute.

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.

Spouses Felipe and Leticia Cannu v. Spouses Gil And Fernandina Galang and
National Home Mortgage Finance Corporation
G.R. No. 139523. May 26, 2005
Chico-Nazario, J.:

ISSUE: Does failure to pay the balance of the purchase price constitute a substantial
breach of the obligation?

DOCTRINE: Yes. Settled is the rule that rescission or, more accurately, resolution, of a
party to an obligation under Article 1191 is predicated on a breach of faith by the other
party that violates the reciprocity between them. Rescission will not be permitted for a
slight or casual breach of the contract. Rescission may be had only for such breaches
that are substantial and fundamental as to defeat the object of the parties in making the
agreement. The question of whether a breach of contract is substantial depends upon
the attending circumstances and not merely on the percentage of the amount not paid.

Bienvenido M. Casino Jr. v. Court of Appeals
G.R. No. 133803. September 16, 2005
Garcia, J.:


ISSUE: May a party who deems the contract violated consider it resolved or rescinded,
and act accordingly, without previous court action?

HELD: Yes but he proceeds at his own risk. 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.

Pryce Corporation (Formerly Pryce Properties Corporation), v. Philippine
Amusement And Gaming Corporation
G.R. No. 157480. May 6, 2005
Panganiban, J.:

ISSUE: Is there a difference between the terms “termination” and “rescission”?

DOCTRINE: Yes. The term “rescission” is found in 1) Article 1191 of the Civil Code, the
general provision on rescission of reciprocal obligations; 2) Article 1659, which
authorizes rescission as an alternative remedy, insofar as the rights and obligations of
the lessor and the lessee in contracts of lease are concerned; and 3) Article 1380 with
regard to the rescission of contracts.

There is a distinction in law between cancellation of a contract and its rescission. To
rescind is to declare a contract void in its inception and to put an end to it as though it
never were. It is not merely to terminate it and release parties from further obligations to
each other but to abrogate it from the beginning and restore the parties to relative
positions which they would have occupied had no contract ever been made.

Rescission has likewise been defined as the “unmaking of a contract, or its undoing
from the beginning, and not merely its termination.” Rescission may be effected by both
parties by mutual agreement; or unilaterally by one of them declaring a rescission of
contract without the consent of the other, if a legally sufficient ground exists or if a
decree of rescission is applied for before the courts. On the other
hand, termination refers to an “end in time or existence; a close, cessation or
conclusion.” With respect to a lease or contract, it means an ending, usually before the
end of the anticipated term of such lease or contract, that may be effected by mutual
agreement or by one party exercising one of its remedies as a consequence of the
default of the other.

Thus, mutual restitution is required in a rescission (or resolution), in order to bring back
the parties to their original situation prior to the inception of the contract.

In contrast, the parties in a case of termination are not restored to their original situation;
neither is the contract treated as if it never existed. Prior to its termination, the parties
are obliged to comply with their contractual obligations. Only after the contract has been
cancelled will they be released from their obligations.

Coastal Pacific Trading Inc., v. Southern Rolling Mills, Co., Inc. et al.


G.R. No. 118692. July 28, 2006
Panganiban, CJ:

ISSUE: Whether respondent consortium banks disposed of VISCO’s assets in fraud of
the creditors?

DOCTRINE: Yes. Director owe loyalty and fidelity to the corporation they serve and to
its creditors. When these directors sit on the board as representatives of shareholders
who are also major creditors, they cannot be allowed to use their offices to secure
undue advantage for those shareholders, in fraud of other creditors who do not have
similar representation in the board of directors.

Pan Pacific Industrial Sales Co., v. Court of Appeals
G.R. No. 125283. February 10, 2006
Tinga, J:

ISSUE: Whether rescission can be availed of when one party denies the existence of a
contract.

DOCTRINE: A non-existent contract need not be cancelled. In asking for "rescission,"
under Article 1191 of the Civil Code provides that the "power to rescind," really means to
resolve or cancel, is implied in reciprocal obligations "in case one of the obligors should
not comply with what is incumbent upon him." When a party asks for the resolution or
cancellation of a contract it is implied that he recognizes its existence.

Laurencio Ramel, et.al. v. Daniel Aquino and Guadaluper Abalahin
G.R. No. 133208. July 31, 2006
Puno, J.:

ISSUE: When a party fails to pay the mortgage obligation, is the other party entitled to a
rescission of the contract?

DOCTRINE: Violation of an agreement gives entitles the other party to rescind the
contract under Art. 1191 of the Civil Code. Non-payment of the mortgage obligation
assumed by petitioners in this case constitute substantial, not merely casual and slight
breach, that entitles the respondents to rescind the contract.

Union Bank of the Philippines v. Sps. Ong
G.R. No. 152347. June 21, 2006
Garcia, J.:

ISSUE: Does mere fact of injury to the creditor mean that a contract is rescissible for
having been entered into to defraud the creditor?

DOCTRINE: No. Contracts in fraud of creditors are those executed with the intention to
prejudice the rights of creditors. They should not be confused with those entered into
without such mal-intent, even if, as a direct consequence thereof, the creditor may
suffer some damage. In determining whether a certain conveying contract is fraudulent,
what comes to mind first is the question of whether the conveyance was a bona
fide transaction or a trick and contrivance to defeat creditors. To creditors seeking
contract rescission on the ground of fraudulent conveyance rest the onus of proving by
competent evidence the existence of such fraudulent intent on the part of the debtor,
albeit they may fall back on the disputable presumptions, if proper, established under
Article 1387 of the Code.


The existence of fraud or the intent to defraud creditors cannot plausibly be presumed
from the fact that the price paid for a piece of real estate is perceived to be slightly
lower, if that really be the case, than its market value. To be sure, it is logical, even
expected, for contracting minds, each having an interest to protect, to negotiate on the
price and other conditions before closing a sale of a valuable piece of land. The
negotiating areas could cover various items. The purchase price, while undeniably an
important consideration, is doubtless only one of them.

It may be stressed that, when the validity of sales contract is in issue, two veritable
presumptions are relevant: first, that there was sufficient consideration of the contract;
and, second, 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 which the party disputing such presumptive validity has
the burden of overcoming.

Parenthetically, the rescissory action to set aside contracts in fraud of creditors is accion
pauliana, essentially a subsidiary remedy accorded under Article 1383 of the Civil Code
which the party suffering damage can avail of only when he has no other legal means to
obtain reparation for the same. In net effect, the provision applies only when the creditor
cannot recover in any other manner what is due him.

For a contract to be rescinded for being in fraud of creditors, both contracting parties
must be shown to have acted maliciously so as to prejudice the creditors who were
prevented from collecting their claims.

Philippine Leisure and Retirement Authority v. Court of Appeals
G.R. No. 156303, 541 SCRA 85

ISSUE: May a party be allowed to unilaterally rescind a contract absent any provision in
the contract providing for a right to rescind?

DOCTRINE: 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.

Therefore, even if a provision providing for a right to rescind is not in agreement, a party
may still rescind a contract should one obligor fail to comply with its obligations.

Uniwide Holdings, Inc. v. Jandecs Transportation Co., Inc.
G.R. No. 168522, 541 SCRA 158

ISSUE: Does mere failure of a party in a reciprocal obligation to deliver his end of the
contract warrant the other party to rescind the contract even if the latter has already
delivered his part of said obligation?

DOCTRINE: The right of rescission is implied in every reciprocal obligation where one
party fails to perform what is incumbent upon him while the other is willing and ready to
comply. Certainly, petitioner's failure to deliver the units on the commencement date of

the lease on October 1, 1997 gave respondent the right to rescind the contract after the
latter had already paid the contract price in full.

Furthermore, respondent's right to rescind the contract cannot be prevented by the fact
that petitioner had the option to substitute the stalls. Even if petitioner had that option, it
did not, however, mean that it could insist on the continuance of the contract by forcing
respondent to accept the substitution. Neither did it mean that its previous default had
been obliterated completely by the exercise of that option.

Bonrostro v. Luna
G.R. No. 172346, 702 SCRA 1

ISSUE: Whether the failure of spouses Bonrostro to pay the installments of
P300,000.00 on April 30, 1993 and P330,000.00 on July 31, 1993 is a substantial
breach of their obligation under the contract as to warrant the rescission of the same.

DOCTRINE: The defendants’ delay in the payment of the two installments is not so
substantial as to warrant rescission of contract. Although, the defendant failed to pay the
two installments in due time, she was able to communicate with the plaintiffs through
letters requesting for an extension of two months within which to pay the installments. In
fact, on November 24, 1993 defendant informed Atty. Arlene Carbon that she was ready
to pay the installments and the money is ready for pick-up. However, plaintiff did not
bother to get or pick-up the money without any valid reason. It would be very prejudicial
on the part of the defendant if the contract to sell be rescinded considering that she
made a downpayment of P200,000.00 and made partial amortization to the Bliss
Development Corporation. In fact, the defendant testified that she is willing and ready to
pay the balance including the interest on November 24, 1993.

The Court is of the opinion that the delay in the payment of the balance of the purchase
price of the house and lot is not so substantial as to warrant the rescission of the
contract to sell. The question of whether a breach of contract is substantial depends
upon the attendant circumstance.

Armand O. Raquel-Santos and Annalissa Mallari v. Court of Appeals and Finvest
Securities Co., Inc.
G.R. No. 174986 July 7, 2009
Nachura, J.:

ISSUE: Whether rescission of a contract gives rise to mutual restitution.

DOCTRINE: Yes. Rescission creates the obligation to return the object of the contract.
To rescind is to declare a contract void at its inception and to put an end to it as though
it never was. Rescission does not merely terminate the contract and release the parties
from further obligations to each other, but abrogates it from the beginning and restores
the parties to their relative positions as if no contract has been made.

Heirs of Sofia Quirong v. Development Bank of the Philippines
G.R. No. 173441 December 3, 2009
Abad, J.

ISSUE: Whether the action to claim rescission must be commenced within four years.

DOCTRINE: Yes. The next question that needs to be resolved is the applicable period
of prescription. The DBP claims that it should be four years as provided under Article

1389 of the Civil Code.16 Article 1389 provides that "the action to claim rescission must
be commenced within four years." The Quirong heirs, on the other hand, claim that it
should be 10 years as provided under Article 1144 which states that actions "upon a
written contract" must be brought "within 10 years from the date the right of action
accrues."

Now, was the action of the Quirong heirs "for rescission" or "upon a written contract"?
There is no question that their action was for rescission, since their complaint in Civil
Case CV-98-02399-D asked for the rescission of the contract of sale between Sofia
Quirong, their predecessor, and the DBP and the reimbursement of the price of
P78,000.00 that Sofia Quirong paid the bank plus damages. The prescriptive period for
rescission is four years.

Here, the Quirong heirs alleged in their complaint that they were entitled to the
rescission of the contract of sale of the lot between the DBP and Sofia Quirong because
the decision in Civil Case D-7159 deprived her heirs of nearly the whole of that lot. But
what was the status of that contract at the time of the filing of the action for rescission?
Apparently, that contract of sale had already been fully performed when Sofia Quirong
paid the full price for the lot and when, in exchange, the DBP executed the deed of
absolute sale in her favor. There was a turnover of control of the property from DBP to
Sofia Quirong since she assumed under their contract, "the ejectment of squatters and/
or occupants" on the lot, at her own expense.

“G” Holdings, Inc., v. National Mines and Allied Workers Union Local 103
(NAMAWU)
G.R. No. 160236; October 16, 2009
Nachura, J.:

ISSUE: Whether there is presumption of fraud in an involuntary alienation

DOCTRINE: No. We also cannot agree that the presumption of fraud in Article 1387 of
the Civil Code relative to property conveyances, when there was already a judgment
rendered or a writ of attachment issued, authorizes piercing the veil of corporate identity
in this case. We find that Article 1387 finds less application to an involuntary alienation
such as the foreclosure of mortgage made before any final judgment of a court. We
thus hold that when the alienation is involuntary, and the foreclosure is not fraudulent
because the mortgage deed has been previously executed in accordance with
formalities of law, and the foreclosure is resorted to in order to liquidate a bona
fide debt, it is not the alienation by onerous title contemplated in Article 1387 of the Civil
Code wherein fraud is presumed.

CHAPTER 7. VOIDABLE CONTRACTS

Jorge Gonzales v. Climax Mining Ltd.
G.R. No. 161957. February 28, 2005
Tinga, J.:

ISSUE: Who determines the validity of contracts?

DOCTRINE: The question if whether a contract is void or voidable contracts is a judicial
question. It may, in some instances, involve questions of fact especially with regard to
the determination of the circumstances of the execution of the contracts. But the


resolution of the validity or voidness of the contracts remains a legal or judicial question
as it requires the exercise of judicial function. It requires the ascertainment of what laws
are applicable to the dispute, the interpretation and application of those laws, and the
rendering of a judgment based thereon. It is essentially judicial.

Felicitas Asycong and Teresa Polan v. Court of Appeals and Moller Lending
Investor
GR No. 153758. February 22, 2006
Carpio, J.:

ISSUE: What is the effect of a voidable contract where the consent is vitiated by
intimidation?

DOCTRINE: Contracts where the consent is vitiated by mistake, violence, intimidation,
undue influence or fraud are voidable. These contracts are binding, unless they are
annulled by a proper action in court. They are susceptible of ratification.

Development Bank of the Philippines and Privatization and Management Office v.
CA
G.R. No. 138703. June 30, 2006
Azcuna, J.:

ISSUE: What is “undue influence”? When may it be considered to exist? Can the fact
that a party had no “choice” but to sign a contract may be interpreted that the other
party exerted undue influence.

DOCTRINE: There is undue influence when a person takes improper advantage of his
power over the will of another, depriving the latter f reasonable freedom of choice. The
following circumstances shall be considered: the confidential, family, spiritual and other
relations between the parties or the fact that the person alleged to have been unduly
influenced was suffering from mental weakness, or was ignorant or in financial distress.

For undue influence to be present, the influence exerted must have so overpowered or
subjugated the mind of a contracting party as to destroy the latter’s free agency, making
such party express the will of another rather than its own. The alleged lingering financial
woes of a debtor per se cannot be equated with the presence of undue influence.

Yes. The law grants an aggrieved party the right to obtain the annulment of a contract
on account of factors such as mistake, violence, intimidation, undue influence and fraud
which vitiate consent. However, the fact that respondents were “forced” to sign the
promissory notes and mortgage contracts in order to have respondents’ original loans
restructured and to prevent the foreclosure of their properties does not amount to
vitiated consent. The financial condition of respondents may have motivated them to
contract with DBP, but undue influence cannot be attributed to DBP simply because the
latter had lent money. While respondents were purportedly financially distressed, there
is no clear showing that those acting on their behalf had been deprived of their free
agency when they executed the promissory notes representing respondents’ refinanced
obligations to DBP.

Barceliza P. Capistrano vs. Darryl Limcuando and Fe S. Sumiran
G.R. No. 152413 February 13, 2009
Leonardo-De Castro, J.

ISSUE: Whether the person who caused fraud can annul the contract.


DOCTRINE: No. We simply cannot uphold petitioner’s contention that the deed of sale
she executed in favor of respondents should be declared null and void on the basis of
the previous deed of sale with right of repurchase petitioner executed in favor the
spouses Zuasola and Subida. Ostensibly, when petitioner sold the subject property to
herein respondents, she no longer had any right to do so for having previously sold the
same property to other vendees. However, it is elementary that he who comes to court
must do so with clean hands. Being the vendor in both sales, petitioner knew perfectly
well that when she offered the subject property for sale to respondents she had already
previously sold it to the spouses Zuasola and Subida. It is undeniable then that
petitioner fraudulently obtained the consent of respondents in the execution of the
assailed deed of sale. She even admits her conviction of the crime of estafa for the
deception she perpetrated on respondents by virtue of the double sale.

Certainly, petitioner’s action for annulment of the subject deed should be dismissed
based on Article 1397 of the Civil Code which provides that the person who employed
fraud cannot base his action for the annulment of contracts upon such flaw of the
contract, thus:
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 fraud, or caused mistake base their action upon
these flaws of the contract.

One who has caused the ground to annul a contract such as fraud is precluded from
seeking the annulment of the said contract.

Hernania “Lani” Lopez vs. Gloria Umale-Cosme
G.R. No. 171891. February 24, 2009.
Puno, C.J.:

ISSUE: Whether the oral agreement has force and effect of law between the parties as
in the case of a contract.

DOCTRINE: It is well-settled that where a contract of lease is verbal and on a monthly
basis, the lease is one with a definite period which expires after the last day of any
given thirty-day period. In the recent case of Wee v. De Castro, 562 SCRA 695 (2008),
where the lease contract between the parties did not stipulate a fixed period.

First Philippine Holdings Corporation vs. Trans Middle East (Phils.) Equities, Inc.
G.R. No. 179505; December 4, 2009

ISSUE: Whether contracts where consent is given through fraud are void.

DOCTRINE: No. These circumstances surrounding the questioned transaction fit in with
what Article 1390 of the Civil Code contemplates as voidable contracts, viz: Art. 1390.
The following contracts are voidable or annullable, even though there may have been
no damage to the contracting parties: xxxx (2) Those where the consent is vitiated by
mistake, violence, intimidation, undue influence, or fraud. Thus, contracts where
consent is given through fraud, are voidable or annullable. These are not void ab initio
since voidable or annullable contracts are existent, valid, and binding, although they can
be annulled because of want of capacity or the vitiated consent of one of the parties.
However, before such annulment, they are considered effective and obligatory between
parties.


ECE Realty And Development Inc. v. Rachel G. Mandap
G.R. No. 196182, September 01, 2014

ISSUE: Whether the false representations made were ratified by the signature of the
respondent.

DOCTRINE: Yes. Respondent's act of affixing her signature to the said Contract, after
having acquired knowledge of the property's actual location, can be construed as an
implied ratification thereof. Ratification of a voidable contract under Article 1393 of the
Civil Code may be effected expressly or tacitly. It is understood that there is a tacit
ratification if, with knowledge of the reason which renders the contract voidable and
such reason having ceased, the person who has a right to invoke it should execute an
act which necessarily implies an intention to waive his right.

CHAPTER 8. UNENFORCEABLE CONTRACTS

Spouses Mario and Elizabeth Torcuator v. Spouses Remigio and Gloria Bernabe
and Spouses Diosdado and Lourdes Salvador
G.R. No. 134219. June 08, 2005
Tinga, J.:

ISSUE: What is the purpose of the Statute of Frauds?

Doctrine: The term "Statute of Frauds" is descriptive of statutes which require certain
classes of contracts, such as agreements for the sale of real property, to be in writing. It
does not deprive the parties the right to contract with respect to the matters therein
involved, but merely regulates the formalities of the contract necessary to render it
enforceable. The purpose of the statute is to prevent fraud and perjury in the
enforcement of obligations depending for their evidence on the unassisted memory of
witnesses by requiring certain enumerated contracts and transactions to be evidenced
by a writing signed by the party to be charged. The written note or memorandum, as
contemplated by Article 1403 of the Civil Code, should embody the essentials of the
contract.

Banco Filipino Savings v. Diaz
G.R. No. 153134. June 27, 2006
Callejo, Sr., J.:

ISSUE: Can the obligor(s) withdraw the amount previously consigned with the regional
trial court after a higher court (court of appeals) has declared the consignment as
invalid?

DOCTRINE: Yes. Before the consignation has been accepted by the creditor or
judicially declared as properly made, the debtor is still the owner of the thing or amount
deposited, and, therefore, the other parties liable for the obligation have no right to
oppose his withdrawal of such thing or amount. The debtor merely uses his right, and
unless the law expressly limits that use of his right, it cannot be prevented by the


objections of anyone. Our law grants to the debtor the right to withdraw, without any
limitation, and we should not read a non-existing limitation into the law. Although the
other parties liable for the obligation would have been benefited if the consignation had
been allowed to become effective, before that moment they have not acquired such an
interest as would give them a right to oppose the exercise of the right of the debtor to
withdraw the consignation.

Thus, under Article 1260 of the Civil Code, the debtor may withdraw, as a matter of
right, the thing or amount deposited on consignation in the following instances:
(1) Before the creditor has accepted the consignation; or
(2) Before a judicial declaration that the consignation has been properly made.

Lina Peñalber vs. Quirino Ramos et al.
G.R. No. 178645. January 30, 2009.
Chico-Nazario J.:

ISSUE: Whether statute of frauds deprive the parties of the right to contract with respect
to the matters therein involved.

DOCTRINE: We subscribe to the ruling of the RTC in its Order dated 17 July 2000 that
said spouses were deemed to have waived their objection to the parol evidence as they
failed to timely object when petitioner testified on the said verbal agreement. The
requirement in Article 1443 that the express trust concerning an immovable or an
interest therein be in writing is merely for purposes of proof, not for the validity of the
trust agreement. Therefore, the said article is in the nature of a statute of frauds. The
term statute of frauds is descriptive of statutes which require certain classes of contracts
to be in writing. The statute does not deprive the parties of the right to contract with
respect to the matters therein involved, but merely regulates the formalities of the
contract necessary to render it enforceable. The effect of non-compliance is simply that
no action can be proved unless the requirement is complied with. Oral evidence of the
contract will be excluded upon timely objection. But if the parties to the action, during
the trial, make no objection to the admissibility of the oral evidence to support the
contract covered by the statute, and thereby permit such contract to be proved orally, it
will be just as binding upon the parties as if it had been reduced to writing.

Orduña, et al. v. Fuentebella, et al.
G.R. No. 176841 June 29, 2010
Velasco, Jr., J.

ISSUE: Whether the Statute of Frauds is inapplicable to partially executed contracts.

DOCTRINE: Yes. Statute of Frauds expressed in Article 1403, par. (2),of the Civil Code
applies only to executory contracts, i.e., those where no performance has yet been
made. Stated a bit differently, the legal consequence of non-compliance with the Statute
does not come into play where the contract in question is completed, executed,
or partially consummated. The Statute of Frauds, in context, provides that a contract for
the sale of real property or of an interest therein shall be unenforceable unless the sale
or some note or memorandum thereof is in writing and subscribed by the party or his
agent. However, where the verbal contract of sale has been partially executed through
the partial payments made by one party duly received by the vendor, as in the present
case, the contract is taken out of the scope of the Statute.

Municipality of Hagonoy, Bulacan vs. Dumdum, Jr.
G.R. No. 168289; March 22, 2010
Peralta, J.


ISSUE: Whether the court can declare a reciprocal contract unenforceable under the
Statute of Frauds if there is an allegation where one of the parties performed his
obligation?

DOCTRINE: No, it has been obligee's consistent stand, since the inception of the
instant case that she has entered into a contract with the obligors. As far as she is
concerned, she has already performed her part of the obligation under the agreement
by undertaking the delivery of the 21 motor vehicles contracted for by the obligor in the
name of petitioner municipality. This claim is well substantiated — at least for the initial
purpose of setting out a valid cause of action against the obligors — by copies of the
bills of lading attached to the complaint, naming petitioner municipality as consignee of
the shipment. Obligors have not at any time expressly denied this allegation and, hence,
the same is binding on the trial court for the purpose of ruling on the motion to dismiss.
In other words, since there exists an indication by way of allegation that there has been
performance of the obligation on the part of the obligee, the case is excluded from the
coverage of the rule on dismissals based on unenforceability under the statute of
frauds, and either party may then enforce its claims against the other.

Rogelio Dantis, v. Julio Maghinang, Jr.
G.R. No. 191696. April 10, 2013
Mendoza, J.:

ISSUE: Is the Statute of Frauds applicable in the absence of a perfected contract?

DOCTRINE: No. The application of the Statute of Frauds presupposes the existence of
a perfected contract. In the absence thereof, there is no basis for the application of the
Statute of Frauds.

CHAPTER 9. VOID OR INEXISTENT CONTRACTS

Menchavez vs. Teves
G.R. No. 153201. January 26, 2005
Panganiban, J.

ISSUES:
1. May parties to a void contract be declared to be in pari delicto by the Court?
2. May parties to a void contract be entitled to damages?

DOCTRINE:
1. Yes. Void are all contracts in which the cause, object or purpose is contrary to law,
public order or public policy. It is deemed legally nonexistent and produces no legal
effect. As a general rule, courts leave parties to such a contract as they are,
because they are in pari delicto or equally at fault. Neither party is entitled to legal
protection. To this rule, however, there are exceptions that permit the return of that
which may have been given under a void contract. One of the exceptions is found in
Article 1412 of the Civil Code.

In this case, the defendants ought to have known that they cannot lease what does not
belong to them for as a matter of fact, they themselves are still applying for a lease of
the subject fishpond (which, under the 1987 Constitution, belongs to the State) under
litigation from the government. On the other hand, Teves, being fully aware that

defendants were not yet the owners, had assumed the risks and under the principle
of “VOLENTI NON FIT INJURIA NEQUES DOLUS” - He who voluntarily assumes a risk,
does not suffer damages thereby. As a consequence, when plaintiff leased the fishpond
area from defendants- who were mere holders or possessors thereof, he took the risk
that it may turn out later that his application for lease may not be approved. “IN PARI
DELICTO NON ORITOR ACTIO” (Where both are at fault, no one can found a claim).

2. No. Article 1412 of the Civil Code merely allows innocent parties to recover what
they have given without any obligation to comply with their prestation. No damages
may be recovered on the basis of a void contract; being nonexistent, the agreement
produces no juridical tie between the parties involved. Since there is no contract,
the injured party may only recover through other sources of obligations such as a
law or a quasi-contract.

Department of Health v. C.V. Canchela & Associates, Architects (CVCAA), in
Association With MCS Engineers Co., and A.O. Mansueto IV – Electrical
Engineering Services, and Luis Alina, Sheriff IV, RTC, Manila
G.R. Nos. 151373-74. November 17, 2005
Carpio-Morales, J.:

ISSUE: Is the Sole Arbitrator’s Decision may nullified on the light that it did not comply
with requirements of the law?

DOCTRINE: An inquiry into the fundamental issue of nullity of the Agreements is then
warranted to determine if petitioner duly observed the constitutional prescription for the
prevention and disallowance of irregular, unnecessary, excessive, extravagant, or
unconscionable expenditures, or uses of public funds and properties.

The Agreements, it bears noting, expressly stated that payments arising therefrom shall
be "subject to the usual accounting and auditing rules and regulations. Being
government contracts, they are governed and regulated by special laws, failure to
comply with which renders them void.

The illegality of the subject Agreements proceeds, it bears emphasis, from an express
declaration or prohibition by law, not from any intrinsic illegality. As such, the
Agreements are not illegal per se and the party claiming thereunder may recover what
had been paid or delivered.

The Manila Banking Corporation v. Edmundo S. Silverio and The Court of
Appeals,
G.R. No. 132887. August 11, 2005
Chico-Nazario, J.:

ISSUE: Is the contract void if badges of fraud and simulation permeate the whole
transaction?

DOCTRINE: Yes. An absolutely simulated contract, under Article 1346 of the Civil Code,
is void. It takes place when the parties do not intend to be bound at all. The
characteristic of simulation is the fact that the apparent contract is not really desired or
intended to produce legal effects or 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. Lacking, therefore, in a fictitious and simulated contract is consent which is
essential to a valid and enforceable contract.


Such failure is a clear badge of simulation that renders the whole transaction void
pursuant to Article 1409 of the Civil Code. When a contract is void, the right to set-up its
nullity or non-existence is available to third persons whose interests are directly affected
thereby.

The remedy of accion pauliana is available when the subject matter is a conveyance,
otherwise valid¸ undertaken in fraud of creditors. Such a contract is governed by the
rules on rescission which prescribe, under Art. 1383 of the Civil Code, that such action
can be instituted only when the party suffering damage has no other legal means to
obtain reparation for the same.
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; it produces no effect whatsoever either
against or in favor of anyone. Rescissible contracts, on the other hand, are not void ab
initio, and the principle, “quod nullum est nullum producit effectum,” in void and
inexistent contracts is inapplicable. Until set aside in an appropriate action, rescissible
contracts are respected as being legally valid, binding and in force.

Absolute simulation implies that there is no existing contract, no real act executed; while
fraudulent alienation means that there is a true and existing transfer or contract. The
former can be attacked by any creditor, including one subsequent to the contract; while
the latter can be assailed only by the creditors before the alienation. In absolute
simulation, the insolvency of the debtor making the simulated transfer is not a
prerequisite to the nullity of the contract; while in fraudulent alienation, the action to
rescind, or accion pauliana, requires that the creditor cannot recover in any other
manner what is due him. Finally, the action to declare a contract absolutely simulated
does not prescribe (Articles 1409 and 1410); while the accion pauliana to rescind a
fraudulent alienation prescribes in four years (Article 1389).

La’o v. Republic of the Philippines and the Government Service Insurance System
GR No. 166183. January 23, 2006
Corona, J.:

ISSUE: Is a contract entered into in violation of the Anti-Graft and Corrupt Practices act
void?

DOCTRINE: Yes. Art. 1409 of the Civil Code provides, among others, that those
expressly prohibited or declared void by law are inexistent and void from the beginning.
The foregoing clearly shows that the second contract caused undue injury to the
government, gave petitioner unwarranted benefits and was grossly disadvantageous to
the government. The act of entering into the contract was a corrupt practice and was
therefore unlawful. It was a contract expressly prohibited by RA 3019. As a result, it was
null and void from the beginning under Art. 1409(7) of the Civil Code.

Potenciano Ramirez v. Ma. Cecilia Ramirez
G.R. No. 165088. March 17, 2006
Azcuna, J.:

ISSUE: What is the difference between Article 1411 and Article 1412 with respect to the
in pari delicto rule?

DOCTRINE: Article 1412 of the Civil Code refers to a situation where the cause of the
contract is unlawful or forbidden but does not constitute a violation of the criminal laws.
Under Article 1411, it must be shown that the nullity of the contract proceeds from an
illegal cause or object, and the act of executing said contract constitutes a criminal

offense. Object and cause are two separate elements of a donation and the illegality of
either element gives rise to the application of the doctrine of pari delicto. Object is the
subject matter of the donation, while cause is the essential reason which moves the
parties to enter into the transaction.

Joaquin Villegas and Emma M. Villegas v. Rural Bank of Tanjay Inc.
G.R. No. 161407; June 5, 2009
Nachura, J.

ISSUE: Whether parties who are in pari delicto can obtain relief from the court.

DOCTRINE: Even assuming both parties were guilty of the violation, it does not always
follow that both parties, being in pari delicto, should be left where they are. We
recognized as an exception a situation when courts must interfere and grant relief to
one of the parties because public policy requires their intervention, even if it will result in
a benefit derived by a plaintiff who is in equal guilt with defendant.

Land Bank of the Philippines v. Eduardo M. Cacayuran
G.R. No. 191667. April 17, 2013
Perlas-Bernabe J.

ISSUE: May a public plaza be the subject of a private redevelopment plan?

DOCTRINE: Article 1409(1) of the Civil Code provides that a contract whose purpose is
contrary to law, morals, good customs, public order or public policy is considered void
and as such, creates no rights or obligations or any juridical relations. Consequently,
given the unlawful purpose behind the Subject Loans which is to fund the
commercialization of the Agoo Plaza pursuant to the Redevelopment Plan, they are
considered as ultra vires in the primary sense thus, rendering them void and in effect,
non-binding on the Municipality.

Queensland-Tokyo Commodities, Inc. vs. George
G.R. No. 172727; September 8, 2010
Nachura, J.

ISSUE: Whether respondent may recover in a void contract.

DOCTRINE: Yes, it is settled that a void contract is equivalent to nothing; it produces no
civil effect. It does not create, modify, or extinguish a juridical relation. Parties to a void
agreement cannot expect the aid of the law; the courts leave them as they are, because
they are deemed in pari delicto or in equal fault. This rule, however, is not absolute.
Article 1412 of the Civil Code provides an exception, and permits the return of that
which may have been given under a void contract. The evidence on record established
that petitioners indeed permitted an unlicensed trader and salesman, like Mendoza, to
handle respondent’s account. On the other hand, the record is bereft of proof that
respondent had knowledge that the person handling his account was not a licensed
trader. Respondent can, therefore, recover the amount he had given under the contract.

Anuel O. Fuentes and Leticia L. Fuentes vs. Conrado G. Roca
G.R. No. 178902. April 21, 2010
Abad J.

ISSUE: Whether the action for the declaration of nullity of the sale to the spouses
already prescribed.

DOCTRINE: NO. Under the provisions of the Civil Code governing contracts, a void or
inexistent contract has no force and effect from the very beginning. And this rule applies
to contracts that are declared void by positive provision of law, as in the case of a sale
of conjugal property without the other spouse’s written consent. A void contract is
equivalent to nothing and is absolutely wanting in civil effects. It cannot be validated
either by ratification or prescription. But, although a void contract has no legal effects
even if no action is taken to set it aside, when any of its terms have been performed, an
action to declare its inexistence is necessary to allow restitution of what has been given
under it. This action, according to Article 1410 of the Civil Code does not prescribe.

Domingo Gonzalo vs. John Tarnate, Jr.
G.R. No. 160600; January 15, 2014
Bersamin, J.

ISSUE: Whether the respondent may recover even though both parties are in pari
delicto.

DOCTRINE: Yes. According to Article 1412 (1) of the Civil Code, the guilty parties to an
illegal contract cannot recover from one another and are not entitled to an affirmative
relief because they are in pari delicto or in equal fault. The doctrine of in pari delicto is a
universal doctrine that holds 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 the money agreed to be paid, or damages for
its violation; and where the parties are in pari delicto, no affirmative relief of any kind will
be given to one against the other.

Nonetheless, the application of the doctrine of in pari delicto is not always rigid. An
accepted exception arises when its application contravenes well-established public
policy. In this jurisdiction, public policy has been defined as "that principle of the law
which holds that no subject or citizen can lawfully do that which has a tendency to be
injurious to the public or against the public good."

Oblicon Case Doctrines

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Oblicon Case Doctrines

Uploaded by

Copyright:

Available Formats

TABLE OF CONTENTS OBLIGATIONS AND CONTRACTS

You might also like