Civ Oblicon Digests

CIV LAW REVIEW - OBLICON DIGESTS determining culpability. The terms and conditions surrounding the 1. GENERAL PROVISIONS ON OBLIGATIONS (ARTS. 1156-1162) issuance of the checks are also irrelevant.” 1.4 SOURCES EMMA P. NUGUID V. CLARITA S. NICDAO G.R. No. 150785, September 15, 2006 FACTS:  Accused Clarita S. Nicdao is charged with having committed 14 counts of Violation of BP 22. The criminal complaints allege that sometime in 1996, from April to August thereof, Nicdao and her husband of Vignette Superstore approached Nuguid and asked her if they could borrow money to settle some obligations. Having been convinced by them and because of the close relationship of respondent to petitioner, the latter lent the money. Thus, every month, she was persuaded to release P100k to the accused until the total amount reached P1.15M.  As security, respondent gave petitioner 14 open dated Hermosa Savings Bank checks with the assurance that if the entire amount is not paid within 1 year, petitioner can deposit the checks.  In June 1997, petitioner together with Samson Ching demanded payment of the sums, but respondent refused to acknowledge the indebtedness. Thus, petitioner deposited all the checks in the bank of Samson Ching totaling P1.15M since all the money given by her to respondent came from Samson Ching. The checks were all returned for having been drawn against insufficient funds (DAIF).  A verbal and written demand was made upon respondent, but to no avail. Hence, a complaint for violation of BP 22 was filed against respondent.  MTC found respondent guilty of the charges against her. RTC affirmed. CA reversed the decision of the lower courts and acquitted respondent. ISSUE: WON respondent remains civilly liable for the sum of P1,150,000? HELD: NO. From the standpoint of its effects, a crime has a dual character: (1) as an offense against the State because of the disturbance of the social order and (2) as an offense against the private person injured by the crime unless it involves the crime of treason, rebellion, espionage, contempt and others (wherein no civil liability arises on the part of the offender either because there are no damages to be compensated or there is no private person injured by the crime). What gives rise to the civil liability is really the obligation of everyone to repair or to make whole the damage caused to another by reason of his act or omission, whether done intentionally or negligently and whether or not punishable by law. Extinction of penal action does not carry with it the eradication of civil liability, unless the extinction proceeds from a declaration in the final judgment that the fact from which the civil liability might arise did not exist. On one hand, as regards the criminal aspect of a violation of BP 22, suffice it to say that: “the gravamen of BP 22 is the act of making and issuing a worthless check or one that is dishonored upon its presentment for payment [and] the accused failed to satisfy the amount of the check or make arrangement for its payment within 5 banking days from notice of dishonor. The act is malum prohibitum, pernicious and inimical to public welfare. Laws are created to achieve a goal intended to guide and prevent against an evil or mischief. Why and to whom the check was issued is irrelevant in

On the other hand, the basic principle in civil liability ex delicto is that every person criminally liable is also civilly liable, crime being one of the five sources of obligations under the Civil Code. A person acquitted of a criminal charge, however, is not necessarily civilly free because the quantum of proof required in criminal prosecution (proof beyond reasonable doubt) is greater than that required for civil liability (mere preponderance of evidence). In order to be completely free from civil liability, a person’s acquittal must be based on the fact that he did not commit the offense. If the acquittal is based merely on reasonable doubt, the accused may still be held civilly liable since this does not mean he did not commit the act complained of. It may only be that the facts proved did not constitute the offense charged. Acquittal will not bar a civil action in the following cases: (1) where the acquittal is based on reasonable doubt as only preponderance of evidence is required in civil cases; (2) where the court declared the accused’s liability is not criminal but only civil in nature and (3) where the civil liability does not arise from or is not based upon the criminal act of which the accused was acquitted. In this petition, we find no reason to ascribe any civil liability to respondent. As found by the CA, her supposed civil liability had already been fully satisfied and extinguished by payment. The statements of the appellate court leave no doubt that respondent, who was acquitted from the charges against her, had already been completely relieved of civil liability: Petitioner admitted having received cash payments from petitioner on a daily basis but argues that the same were applied to interest payments only. It however appears that petitioner was charging respondent with an exorbitant rate of interest. In any event, the cash payments made were recorded at the back of the cigarette cartons by petitioner in her own handwriting as testified to by respondent and her employees. Indeed, the daily cash payments reveal that respondent had already paid her obligation to petitioner in the amount of P5.78M and that she stopped making further payments when she realized that she had already paid such amount. Moreover, we find no evidence was presented by the prosecution to prove that there was a stipulation in writing that interest will be paid by respondent on her loan obligations, as required under Article 1956 of the Civil Code. The obligation of respondent has already been extinguished long before the encashment of the subject checks. A check is said to apply for account only when there is still a pre-existing obligation. In the case at bench, the pre-existing obligation was extinguished after full payment was made by respondent.

2. PRESTATIONS (ARTS. 1163-1168) 2.3 CONSEQUENCES OF FAILURE TO COMPLY W/ PRESTATION

BUENAVENTURA ANGELES V. URSULA TORRES CALASANZ G.R. No. L-42283 March 18, 1985 FACTS:

CIV LAW REVIEW - OBLICON DIGESTS  Ursula Torres Calasanz and Tomas Calasanz entered into a contract to sell a piece of land with Buenaventura Angeles and Teofila Juani for the amount of P3,920.00 plus 7% interest per annum. Angeles & Juani made a downpayment of P392.00 upon the execution of the contract. They promised to pay the balance in monthly installments of P 41.20 until fully paid, the installments being due and payable on the 19th day of each month. Angeles & Juani paid the monthly installments until July 1966, when their aggregate payment already amounted to P4,533.38. On numerous occasions, the defendants (Calsanz) accepted and received delayed installment payments from the plaintiffs (Angeles & Juani).  In 1966, the defendants-appellants wrote the plaintiffs a letter requesting the remittance of past due accounts. Defendants cancelled the said contract because the plaintiffs failed to meet subsequent payments. The plaintiffs' letter with their plea for reconsideration of the said cancellation was denied by the defendants  The plaintiffs filed Civil Case to compel the defendants to execute in their favor the final deed of sale alleging inter alia that after computing all subsequent payments for the land in question, they found out that they have already paid the total amount of P4,533.38 including interests, realty taxes and incidental expenses for the registration and transfer of the land.  The defendants alleged that the plaintiffs violated par. 6 of the contract to sell when they failed to pay and/or offer to pay the monthly installments corresponding to the month of August 1966 for more than 5 months, thereby constraining the defendants-appellants to cancel the said contract. ISSUE: WON the contract to sell has been validly cancelled by the defendants? HELD: NO. Article 1191 is explicit. In reciprocal obligations, either party the right to rescind the contract upon the failure of the other to perform the obligation assumed thereunder. Moreover, there is nothing in the law that prohibits the parties from entering into an agreement that violation of the terms of the contract would cause its cancellation even without court intervention. Well settled is, however, the rule that a judicial action for the rescission of a contract is not necessary where the contract provides that it may be revoked and cancelled for violation of any of its terms and conditions. The rule is that it is not always necessary for the injured party to resort to court for rescission of the contract when the contract itself provides that it may be rescinded for violation of its terms and conditions, was qualified by this Court in University of the Philippines v. De los Angeles: “Of course, it must be understood that the act of a party in treating a contract as cancelled or resolved on account of infractions by the other contracting party must be made known to the other and is always provisional, being ever subject to scrutiny and review by the proper court. If the other party denies that rescission is justified, it is free to resort to judicial action in its own behalf, and bring the matter to court. Then, should the court, after due hearing, decide that the resolution of the contract was not warranted, the responsible party will be sentenced to damages; in the contrary case, the resolution will be affirmed, and the consequent indemnity awarded to the party prejudiced. In other words, the party who deems the contract violated may consider it resolved or rescinded, and act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding court that will conclusively and finally settle whether the action taken was or was not correct in law.

The right to rescind the contract for non-performance of one of its stipulations, therefore, 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 breach of the contract adverted to by the defendants is so slight and casual when we consider that apart from the initial downpayment of P392.00 the plaintiffs had already paid the monthly installments for a period of almost 9 years. In other words, in only a short time, the entire obligation would have been paid. To sanction the rescission made by the defendants-appellants will work injustice to the plaintiffs and would unjustly enrich the defendants. We agree with the plaintiffs that when the defendants, instead of availing of their alleged right to rescind, accepted and received delayed payments of installments, though the plaintiffs have been in arrears beyond the grace period mentioned in paragraph 6 of the contract, the defendants waived and are now estopped from exercising their alleged right of rescission. Plaintiffs contend that the contract herein is a contract of adhesion. We agree. The contract to sell entered into by the parties has some characteristics of a contract of adhesion. The defendants drafted and prepared the contract. The plaintiffs, eager to acquire a lot upon which they could build a home, affixed their signatures and assented to the terms and conditions of the contract. They had no opportunity to question nor change any of the terms of the agreement. It was offered to them on a "take it or leave it" basis. While generally, stipulations in a contract come about after deliberate drafting by the parties thereto, there are certain contracts almost all the provisions of which have been drafted only by one party, usually a corporation. Such contracts are called contracts of adhesion, because the only participation of the party is the signing of his signature or his "adhesion" thereto. Insurance contracts, bills of lading, contracts of sale of lots on the installment plan fall into this category. The contract to sell, being a contract of adhesion, must be construed against the party causing it.

ADELFA S. RIVERA V. FIDELA DEL ROSARIO G.R. No. 144934. January 15, 2004 FACTS:  Respondents Fidela, et al. were the registered owners of a parcel of land. Fidela borrowed P250k from Mariano Rivera and to secure the loan, she and Mariano Rivera agreed to execute a deed of REM and an agreement to sell the land. Mariano went to his lawyer to have 3 documents drafted: the Deed of REM, a Kasunduan (Agreement to Sell), and a Deed of Absolute Sale.  The Kasunduan provided that the children of Mariano Rivera, herein petitioners, would purchase the land for a consideration of P2M, to be paid in 3 installments. It also provided that the Deed of Absolute Sale would be executed only after the 2nd installment is paid and a postdated check for the last installment is deposited with Fidela.  Mariano Rivera then went to his lawyer bringing with him the signed documents. He also brought Fidela and her son Oscar, so that the latter two may sign the mortgage and the

CIV LAW REVIEW - OBLICON DIGESTS Kasunduan there. Although Fidela intended to sign only the Kasunduan and the REM, she inadvertently affixed her signature on all 3 documents. Mariano then gave Fidela the amount for the 1st installment. Later, he also gave Fidela a check for the 2nd installment. Mariano also gave Oscar several amounts upon the latter’s demand for the payment of the balance despite his lack of authority to receive payments under the Kasunduan. Fidela entrusted the owner’s copy of TCT to Mariano to guarantee compliance with the Kasunduan.  When Mariano unreasonably refused to return the TCT, respondents caused the annotation on TCT of an Affidavit of Loss of the owner’s duplicate copy of the title. However, Mariano then registered the Deed of Absolute Sale and got a new TCT.  Respondents then filed a complaint asking that the Kasunduan be rescinded for failure of the Riveras to comply with its conditions, with damages. They also sought the annulment of the Deed of Absolute Sale on the ground of fraud.  Respondents claimed that Fidela never intended to enter into a deed of sale at the time of its execution and that she signed the said deed on the mistaken belief that she was merely signing copies of the Kasunduan. ISSUE: WON the Deed of Absolute Sale is valid and binding? HELD: NO. The deed is void in its entirety. Rescission of reciprocal obligations under Article 1191 of the New Civil Code should be distinguished from rescission of contracts under Article 1383 of the same Code. Both presuppose contracts validly entered into as well as subsisting, and both require mutual restitution when proper, nevertheless they are not entirely identical. While Article 1191 uses the term rescission, the original term used in Article 1124 of the old Civil Code, from which Article 1191 was based, was resolution. Resolution is a principal action that is based on breach of a party, while rescission under Article 1383 is a subsidiary action limited to cases of rescission for lesion under Article 1381 of the New Civil Code. Obviously, the Kasunduan does not fall under any of those situations mentioned in Article 1381. Consequently, Article 1383 is inapplicable. Hence, we rule in favor of the respondents. May the contract entered into between the parties, however, be rescinded based on Article 1191? A careful reading of the Kasunduan reveals that it is in the nature of a contract to sell, as distinguished from a contract of sale. In a contract of sale, the title to the property passes to the vendee upon the delivery of the thing sold; while in a contract to sell, ownership is, by agreement, reserved in the vendor and is not to pass to the vendee until full payment of the purchase price. In a contract to sell, the payment of the purchase price is a positive suspensive condition, the failure of which is not a breach, casual or serious, but a situation that prevents the obligation of the vendor to convey title from acquiring an obligatory force. Respondents in this case bound themselves to deliver a deed of absolute sale and clean title covering Lot No. 1083-C after petitioners have made the second installment. This promise to sell was subject to the fulfillment of the suspensive condition that petitioners pay P750,000 on August 31, 1987, and deposit a postdated check for the third installment of P1M. Petitioners, however, failed to complete payment of the second installment. The non-fulfillment of the condition rendered the contract to sell

ineffective and without force and effect. It must be stressed that the breach contemplated in Article 1191 of the New Civil Code is the obligor’s failure to comply with an obligation already extant, not a failure of a condition to render binding that obligation. Failure to pay, in this instance, is not even a breach but an event that prevents the vendor’s obligation to convey title from acquiring binding force. Hence, the agreement of the parties in the instant case may be set aside, but not because of a breach on the part of petitioners for failure to complete payment of the second installment. Rather, their failure to do so prevented the obligation of respondents to convey title from acquiring an obligatory force. Coming now to the matter of prescription. Contrary to petitioners’ assertion, we find that prescription has not yet set in. Article 1391 states that the action for annulment of void contracts shall be brought within four years. This period shall begin from the time the fraud or mistake is discovered. Here, the fraud was discovered in 1992 and the complaint filed in 1993. Thus, the case is well within the prescriptive period. SPOUSES BARREDO V. SPOUSES LEAÑO [G.R. No. 156627. June 4, 2004] FACTS:  Barredo Spouses bought a house and lot with the proceeds of a P50k loan from the SSS which was payable in 25 years and an P88k loan from the Apex Mortgage and Loans Corporation which was payable in 20 years. To secure the twin loans, they executed a first mortgage over the house and lot in favor of SSS and a second one in favor of Apex.  Barredo Spouses later sold their house and lot to respondents Spouses Leaño by way of a Conditional Deed of Sale with Assumption of Mortgage. The Leaño Spouses would pay the Barredo Spouses P200k, P100k of which would be payable on July 15, 1987, while the balance of P100k would be paid in 10 equal monthly installments after the signing of the contract. The Leaño Spouses would also assume the first and second mortgages and pay the monthly amortizations to SSS and Apex beginning July 1987 until both obligations are fully paid.  In accordance with the agreement, the purchase price of P200k was paid to the Barredo Spouses who turned over the possession of the house and lot in favor of the Leaño Spouses. 2 years later, Barredo Spouses initiated a complaint before the RTC seeking the rescission of the contract on the ground that the Leaño Spouses despite repeated demands failed to pay the mortgage amortizations to the SSS and Apex, causing the Barredo Spouses great and irreparable damage. The Leaño Spouses, however, answered that they were up-to-date with their amortization payments to Apex but were not able to pay the SSS amortizations because their payments were refused upon the instructions of the Barredo Spouses.  Meanwhile, allegedly in order to save their good name, credit standing and reputation, the Barredo Spouses took it upon themselves to settle the mortgage loans and paid the SSS. They also settled the mortgage loan with Apex. They also paid the real estate property taxes for the 1987 up to 1990.  Petitioners argue that the terms of the agreement called for the strict compliance of 2 equally essential and material obligations on the part of the Leaño Spouses, namely, the payment of the P200,000.00 to them and the payment of the mortgage amortizations to the SSS and Apex. Respondents Leaño Spouses, however, contend that they were only obliged to assume the amortization payments of the Barredo Spouses with

CIV LAW REVIEW - OBLICON DIGESTS the SSS and Apex, which they did upon signing the agreement. The contract does not stipulate as a condition the full payment of the SSS and Apex mortgages. ISSUE: WON THE BARREDO SPOUSES MAY RESCIND THE CONTRACT, ON THE GROUND OF NON-FULFILLMENT OF THE PRESTATIONS? HELD: NO. A careful reading of the pertinent provisions of the agreement readily shows that the principal object of the contract was the sale of the Barredo house and lot, for which the Leaño Spouses gave a down payment of P100,000.00 as provided for in par. 1 of the contract, and thereafter ten (10) equal monthly installments amounting to another P100,000.00, as stipulated in par. 2 of the same agreement. The assumption of the mortgages by the Leaño Spouses over the mortgaged property and their payment of amortizations are just collateral matters which are natural consequences of the sale of the said mortgaged property. To include the full payment of the obligations with the SSS and Apex as a condition would be to unnecessarily stretch and put a new meaning to the provisions of the agreement. For, as a general rule, when the terms of an agreement have been reduced to writing, such written agreement is deemed to contain all the terms agreed upon and there can be, between the parties and their successors-in-interest, no evidence of such terms other than the contents of the written agreement. And, it is a familiar doctrine in obligations and contracts that the parties are bound by the stipulations, clauses, terms and conditions they have agreed to, which is the law between them, the only limitation being that these stipulations, clauses, terms and conditions are not contrary to law, morals, public order or public policy. Not being repugnant to any legal proscription, the agreement entered into by the parties must be respected and each is bound to fulfill what has been expressly stipulated therein. But even if we consider the payment of the mortgage amortizations to the SSS and Apex as a condition on which the sale is based on, still rescission would not be available since non-compliance with such condition would just be a minor or casual breach thereof as it does not defeat the very object of the parties in entering into the contract. A cursory reading of the agreement easily reveals that the main consideration of the sale is the payment of P200K to the vendors within the period agreed upon. The assumption of mortgage by the Leaño Spouses is a natural consequence of their buying a mortgaged property. In fact, the Barredo Spouses do not stand to benefit from the payment of the amortizations by the Leaño Spouses directly to the SSS and Apex simply because the Barredo Spouses have already parted with their property, for which they were already fully compensated in the amount of P200K. If the Barredo Spouses were really protective of their reputation and credit standing, they should have sought the consent, or at least notified the SSS and Apex of the assumption by the Leaño Spouses of their indebtedness. Besides, in ordering rescission, the trial court should have likewise ordered the Barredo Spouses to return the P200K they received as purchase price plus interests. Art. 1385 of the Civil Code provides that “[r]escission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest.” The vendor is therefore obliged to return the purchase price paid to him by the buyer if the latter rescinds the sale. Thus, where a contract is rescinded, it is the duty of the court to require both parties to surrender that which they have respectively received and place each other as far as practicable in his original situation.

GENEROSO V. VILLANUEVA V. STATE OF GERARDO L. GONZAGA [G.R. No. 157318, August 09, 2006] FACTS:  Petitioners Generoso and Raul Villanueva bought parcels of land from the estate of Gonzaga (through its judicial adminsitratrix). The lots were then mortgaged with the PNB. In their agreement, the parties stipulated that the estate of Gonzaga would cause the release of the lots from PNB at the earliest possible time; that the Villanuevas will pay P100k upon signing the agreement, P191k on Jan 1990, then P194k upon the approval by the PNB of the release of the lots. It was also stipulated that upon payment of 60% of the purchase price, the Villanuevas may start to introduce improvements in the area if they so desire. Lastly, they agreed that upon the release by PNB of the lots, the Estate of Gonzaga shall immediately execute a Deed of Sale in favor of the Villanuevas.  As stipulated in the agreement, petitioners introduced improvements after paying 60% of the total purchase price. Petitioners then requested permission from respondent Administratrix to use the premises for the next milling season. Respondent refused on the ground that petitioners cannot use the premises until full payment of the purchase price. Petitioners informed respondent that their immediate use of the premises was absolutely necessary and that any delay will cause them substantial damages. Respondent remained firm in her refusal, and demanded that petitioners stop using the lots as a transloading station to service the Victorias Milling Company unless they pay the full purchase price. In a letter-reply, petitioners assured respondent of their readiness to pay the balance but reminded respondent of her obligation to redeem the lots from mortgage with the PNB. Petitioners gave respondent 10 days within which to do so.  Respondent Administratrix wrote petitioners informing them that the PNB had agreed to release the lots from mortgage. She demanded payment of the balance of the purchase price.  Petitioners demanded that respondent show the clean titles to the lots first before they pay the balance of the purchase price.  Respondent Administratrix then executed a Deed of Rescission rescinding the MOA on two grounds: (1) petitioners failed to pay the balance of the purchase price despite notice of the lots’ release from mortgage, and (2) petitioners violated the MOA by using the lots as a transloading station without permission from the respondents.  Petitioners then filed a complaint against respondents for breach of contract, specific performance and damages before the RTC. Petitioners alleged that respondents delayed performance of their obligation by unreasonably failing to secure the release of the lots from mortgage with the PNB. ISSUE: WON respondents failed to comply with their reciprocal obligation of securing the release of the lots from the PNB mortgage? HELD: YES, rescission was invalid. CA erred in ruling that respondents had already fulfilled their obligation to cause the release of the lots from the PNB at the time they demanded payment of the balance of the purchase price. A reading of PNB’s letter of approval clearly shows that the approval was conditional. 3 conditions were laid down by the bank before the lots could be finally released from mortgage. It was

CIV LAW REVIEW - OBLICON DIGESTS therefore premature for respondents to demand payment of the balance of the purchase price from the petitioners and, failing in that, to “rescind” the MOA. Moreover, there is no legal basis for the rescission. The remedy of rescission under Art. 1191 is predicated on a breach of faith by the other party that violates the reciprocity between them. We have held in numerous cases that the remedy does not apply to contracts to sell. In a contract to sell, title remains with the vendor and does not pass on to the vendee until the purchase price is paid in full. Thus, in a contract to sell, the payment of the purchase price is a positive suspensive condition. Failure to pay the price agreed upon is not a mere breach, casual or serious, but a situation that prevents the obligation of the vendor to convey title from acquiring an obligatory force. This is entirely different from the situation in a contract of sale, where non-payment of the price is a negative resolutory condition. The effects in law are not identical. In a contract of sale, the vendor has lost ownership of the thing sold and cannot recover it, unless the contract of sale is rescinded and set aside. In a contract to sell, however, the vendor remains the owner for as long as the vendee has not complied fully with the condition of paying the purchase price. If the vendor should eject the vendee for failure to meet the condition precedent, he is enforcing the contract and not rescinding it. Article 1592 speaks of non-payment of the purchase price as a resolutory condition. It does not apply to a contract to sell. As to Article 1191, it is subordinated to the provisions of Article 1592 when applied to sales of immovable property. Neither provision is applicable [to a contract to sell]. The MOA between petitioners and respondents is a conditional contract to sell. Ownership over the lots is not to pass to the petitioners until full payment of the purchase price. Petitioners’ obligation to pay, in turn, is conditioned upon the release of the lots from mortgage with the PNB to be secured by the respondents. Although there was no express provision regarding reserved ownership until full payment of the purchase price, the intent of the parties in this regard is evident from the provision that a deed of absolute sale shall be executed only when the lots have been released from mortgage and the balance paid by petitioners. Since ownership has not been transferred, no further legal action need have been taken by the respondents, except an action to recover possession in case petitioners refuse to voluntarily surrender the lots. The records show that the lots were finally released from mortgage in July 1991. Petitioners have always expressed readiness to pay the balance of the purchase price once that is achieved. Hence, petitioners should be allowed to pay the balance now, if they so desire, since it is established that respondents’ demand for them to pay in April 1991 was premature. However, petitioners may not demand production by the respondents of the titles to the lots as a condition for their payment. It was not required under the MOA.

3. BREACH (ARTS/ 1169-1174) 3.1.2 CULPA

RADIO COMM. OF THE PHILS., INC. (RCPI). V. CA & LORETO DIONELA G.R. No. L-44748 August 29, 1986 FACTS:  The basis of the complaint against the defendant corporation is a telegram sent through its Manila Office to the

offended party, Loreto Dionela, reading as follows: SA IYO WALANG PAKINABANG DUMATING KA DIYAN-WALAKANG PADALA DITO KAHIT BULBUL MO  Loreto Dionela alleges that the defamatory words on the telegram sent to him not only wounded his feelings but also caused him undue embarrassment and affected adversely his business as well because other people have come to know of said defamatory words. Defendant corporation as a defense, alleges that the additional words in Tagalog was a private joke between the sending and receiving operators and that they were not addressed to or intended for plaintiff and therefore did not form part of the telegram and that the Tagalog words are not defamatory. The telegram sent through its facilities was received in its station at Legaspi City. Nobody other than the operator manned the teletype machine which automatically receives telegrams being transmitted. The said telegram was detached from the machine and placed inside a sealed envelope and delivered to plaintiff, obviously as is. The additional words in Tagalog were never noticed and were included in the telegram when delivered.  RTC ruled in favor of Dionela, holding that the additional Tagalog words are libelous. It ruled that there was sufficient publication because the office file of the defendant containing copies of telegrams received are open and held together only by a metal fastener. Moreover, they are open to view and inspection by third parties. RTC also held that the defendant is sued directly not as an employer. The business of the defendant is to transmit telegrams. It will open the door to frauds and allow the defendant to act with impunity if it can escape liability by the simple expedient of showing that its employees acted beyond the scope of their assigned tasks. ISSUE: WON Petitioner-employer should answer directly and primarily for the civil liability arising from the criminal act of its employee. HELD: YES. The action for damages was filed in the lower court directly against respondent corporation not as an employer subsidiarily liable under the provisions of Article 1161 of the New Civil Code in relation to Art. 103 of the Revised Penal Code. The cause of action of the private respondent is based on Arts. 19 and 20 of the New Civil Code, as well as on respondent's breach of contract thru the negligence of its own employees. Petitioner is a domestic corporation engaged in the business of receiving and transmitting messages. Everytime a person transmits a message through the facilities of the petitioner, a contract is entered into. Upon receipt of the rate or fee fixed, the petitioner undertakes to transmit the message accurately. There is no question that in the case at bar, libelous matters were included in the message transmitted, without the consent or knowledge of the sender. There is a clear case of breach of contract by the petitioner in adding extraneous and libelous matters in the message sent to the private respondent. As a corporation, the petitioner can act only through its employees. Hence the acts of its employees in receiving and transmitting messages are the acts of the petitioner. To hold that the petitioner is not liable directly for the acts of its employees in the pursuit of petitioner's business is to deprive the general public availing of the services of the petitioner of an effective and adequate remedy. In most cases, negligence must be proved in order that plaintiff may recover. However, since negligence may be hard to substantiate in some cases, we may apply the doctrine of RES IPSA LOQUITUR (the thing speaks for itself), by considering the presence of facts or circumstances surrounding the injury.

CIV LAW REVIEW - OBLICON DIGESTS

JUAN J. SYQUIA V. C.A. & MANILA MEMORIAL PARK CEMETERY, INC. G.R. No. 98695 January 27, 1993 FACTS:  Pursuant to a Deed of Sale and an Interment Order executed between plaintiff and defendant, Juan J. Syquia (father of deceased Vicente Syquia) authorized and instructed defendant to inter the remains of the deceased in the Manila Memorial Park Cemetery conformably and in accordance with defendant's interment procedures.  After a few months, preparatory to transferring the said remains to a newly purchased family plot also at the Manila Memorial Park Cemetery, the concrete vault encasing the coffin of the deceased was removed from its niche underground with the assistance of certain employees of defendant. As the concrete vault was being raised to the surface, plaintiffs discovered that the concrete vault had a hole approximately 3 inches in diameter near the bottom of one of the walls closing out the width of the vault on one end and that for a certain length of time, water drained out of the hole.  Pursuant to an authority granted by the MTC, plaintiffs, with the assistance of licensed morticians and certain personnel of defendant, caused the opening of the concrete vault. Upon opening the vault, the following became apparent: (a) the interior walls of the concrete vault showed evidence of total flooding; (b) the coffin was entirely damaged by water, filth and silt causing the wooden parts to warp and separate and to crack the viewing glass panel located directly above the head and torso of the deceased; (c) the entire lining of the coffin, the clothing of the deceased, and the exposed parts of the deceased's remains were damaged and soiled by the action of the water and silt and were also coated with filth.  Plaintiffs filed a case for damages, based on the alleged unlawful and malicious breach by the defendant of its obligation to deliver a defect-free concrete vault designed to protect the remains of the deceased and the coffin against the elements which resulted in the desecration of deceased's grave and in the alternative, because of defendant-appellee's gross negligence conformably to Article 2176 of the New Civil Code in failing to seal the concrete vault. ISSUE: WON DEFENDANT IS LIABLE FOR QUASI-DELICT? HELD: NO, there was no fault or negligence on the part of the defendant that would render him liable for quasi-delict. Although a pre-existing contractual relation between the parties does not preclude the existence of a culpa aquiliana, we find no reason to disregard the respondent's Court finding that there was no negligence. In this case, it has been established that the Syquias and the Manila Memorial Park Cemetery, Inc., entered into a contract entitled "Deed of Sale and Certificate of Perpetual Care." That agreement governed the relations of the parties and defined their respective rights and obligations. Hence, had there been actual negligence on the part of the Manila Memorial Park Cemetery, Inc., it would be held liable not for a quasi-delict or culpa aquiliana, but for culpa contractual as provided by Article 1170 of the Civil Code. The Manila Memorial Park Cemetery, Inc. bound itself to provide the concrete box to be sent in the interment. Rule 17 of the Rules and Regulations of private respondent provides that: Rule 17. Every earth interment shall be made enclosed in a concrete box, or in an outer wall of stone, brick or concrete, the actual installment of which

shall be made by the employees of the Association. Pursuant to this above-mentioned Rule, a concrete vault was provided the day before the interment, and was, on the same day, installed by private respondent's employees in the grave which was dug earlier. After the burial, the vault was covered by a cement lid. Petitioners however claim that private respondent breached its contract with them as the latter held out in the brochure it distributed that the lot may hold a single or double internment underground, in a sealed concrete vault. Petitioners claim that the vault provided by private respondent was not sealed, that is, not waterproof. Consequently, water seeped through the cement enclosure and damaged everything inside it. We do not agree. There was no stipulation in the Deed of Sale and Certificate of Perpetual Care and in the Rules and Regulations of the Manila Memorial Park Cemetery, Inc. that the vault would be waterproof. Private respondent's witness, Mr. Dexter Heuschkel, explained that the term "sealed" meant "closed." Moreover, it is also quite clear that "sealed" cannot be equated with "waterproof". Well settled is the rule that when the terms of the contract are clear and leave no doubt as to the intention of the contracting parties, then the literal meaning of the stipulation shall control. Contracts should be interpreted according to their literal meaning and should not be interpreted beyond their obvious intendment. We hold, therefore, that private respondent did not breach the tenor of its obligation to the Syquias. While this may be so, can private respondent be liable for culpa aquiliana for boring the hole on the vault? It cannot be denied that the hole made possible the entry of more water and soil than was natural had there been no hole. The law defines negligence as the "omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of the place." In the absence of stipulation or legal provision providing the contrary, the diligence to be observed in the performance of the obligation is that which is expected of a good father of a family. FAR EAST BANK AND TRUST COMPANY V. C.A. & LUIS A. LUNA G.R. No. 108164 February 23, 1995 FACTS:  Private respondent Luis A. Luna applied for, and was accorded, a FAREASTCARD issued by petitioner FEBTC. Upon his request, the bank also issued a supplemental card to private respondent Clarita S. Luna. Later, Clarita lost her credit card. FEBTC was informed. In order to replace the lost card, Clarita submitted an affidavit of loss. In cases of this nature, the bank's internal security procedures and policy would be to record the lost card, along with the principal card, as a "Hot Card" or "Cancelled Card" in its master file.  Luis then tendered a despedida lunch for a close friend, a Filipino-American, and another guest at the Bahia Rooftop Restaurant of the Hotel Intercontinental Manila. To pay for the lunch, Luis presented his fareastcard to the attending waiter who promptly had it verified through a telephone call to the bank's Credit Card Department. Since the card was not honored, Luis was forced to pay in cash the bill amounting to P588.13. Naturally, Luis felt embarrassed by this incident.  Private respondent Luis Luna, through counsel, demanded from FEBTC the payment of damages. Adrian V. Festejo, a vice-president of the bank, expressed the bank's apologies to Luis, admitting that: “An investigation of your case revealed that FAREASTCARD failed to inform you about its security policy. Furthermore, an overzealous employee of the Bank's

CIV LAW REVIEW - OBLICON DIGESTS Credit Card Department did not consider the possibility that it may have been you who was presenting the card at that time (for which reason, the unfortunate incident occurred).”  Luna then filed a case for damages in the RTC, which rendered a decision against FEBTC, and awarded moral damages. ISSUE: WON FEBTC IS LIABLE FOR QUASI-DELICT? HELD: NO. In culpa contractual, moral damages may be recovered where the defendant is shown to have acted in bad faith or with malice in the breach of the contract. Bad faith, in the context of Article 2220, includes gross, but not simple, negligence. Exceptionally, in a contract of carriage, moral damages are also allowed in case of death of a passenger attributable to the fault (which is presumed) of the common carrier. Concededly, the bank was remiss in indeed neglecting to personally inform Luis of his own card's cancellation. Nothing in the findings of the trial court and the appellate court, however, can sufficiently indicate any deliberate intent on the part of FEBTC to cause harm to private respondents. Neither could FEBTC's negligence in failing to give personal notice to Luis be considered so gross as to amount to malice or bad faith. Malice or bad faith implies a conscious and intentional design to do a wrongful act for a dishonest purpose or moral obliquity; it is different from the negative idea of negligence in that malice or bad faith contemplates a state of mind affirmatively operating with furtive design or ill will. We are not unaware of the previous rulings of this Court, sanctioning the application of Article 21, in relation to Article 2217 and Article 2219 7 of the Civil Code to a contractual breach similar to the case at bench. Article 21 of the Code, it should be observed, contemplates a conscious act to cause harm. Thus, even if we are to assume that the provision could properly relate to a breach of contract, its application can be warranted only when the defendant's disregard of his contractual obligation is so deliberate as to approximate a degree of misconduct certainly no less worse than fraud or bad faith. Most importantly, Article 21 is a mere declaration of a general principle in human relations that clearly must, in any case, give way to the specific provision of Article 2220 of the Civil Code authorizing the grant of moral damages in culpa contractual solely when the breach is due to fraud or bad faith. Justice Jose B.L. Reyes, in his ponencia in Fores vs. Miranda, explained: ”Moral damages are not recoverable in damage actions predicated on a breach of the contract of transportation, in view of Articles 2219 and 2220 of the new Civil Code. By contrasting the provisions of these two articles it immediately becomes apparent that: (a) In case of breach of contract (including one of transportation) proof of bad faith or fraud (dolus), i.e., wanton or deliberately injurious conduct, is essential to justify an award of moral damages; and (b) That a breach of contract can not be considered included in the descriptive term "analogous cases" used in Art. 2219; not only because Art. 2220 specifically provides for the damages that are caused contractual breach, but because the definition of quasi-delict in Art. 2176 of the Code expressly excludes the cases where there is a "preexisitng contractual relations between the parties." The distinction between fraud, bad faith or malice in the sense of deliberate or wanton wrong doing and negligence (as mere

carelessness) is too fundamental in our law to be ignored (Arts. 1170-1172); their consequences being clearly differentiated by the Code. It is to be presumed, in the absence of statutory provision to the contrary, that this difference was in the mind of the lawmakers when in Art. 2220 they limited recovery of moral damages to breaches of contract in bad faith. It is true that negligence may be occasionally so gross as to amount to malice; but the fact must be shown in evidence, and a carrier's bad faith is not to be lightly inferred from a mere finding that the contract was breached through negligence of the carrier's employees. The Court has not in the process overlooked another rule that a quasi-delict can be the cause for breaching a contract that might thereby permit the application of applicable principles on tort even where there is a pre-existing contract between the plaintiff and the defendant. This doctrine, unfortunately, cannot improve private respondents' case for it can aptly govern only where the act or omission complained of would constitute an actionable tort independently of the contract. The test (whether a quasi-delict can be deemed to underlie the breach of a contract) can be stated thusly: Where, without a pre-existing contract between two parties, an act or omission can nonetheless amount to an actionable tort by itself, the fact that the parties are contractually bound is no bar to the application of quasi-delict provisions to the case. Here, private respondents' damage claim is predicated solely on their contractual relationship; without such agreement, the act or omission complained of cannot by itself be held to stand as a separate cause of action or as an independent actionable tort. 3.1.3 MORA / DEFAULT A. BY THE OBLIGOR / DEBTOR

BRICKTOWN DEVELOPMENT CORP. V. AMOR TIERRA DEV’T CORP. G.R. No. 112182 December 12, 1994 FACTS:  Bricktown Dev’t Corp. executed 2 Contracts to Sell in favor of Amor Tierra Dev’t Corp. covering 96 residential lots in Parañaque. The total price of P21M was stipulated to be paid in 3 installments and the balance of P11.5M to be paid by means of an assumption of Bricktown's mortgage liability to Philippine Savings Bank or, alternatively, to be made payable in cash.  Later, the parties executed a Supplemental Agreement providing that private respondent would additionally pay to Bricktown the amounts representing interest on the balance of downpayments and the interest paid by Bricktown to PSB in updating the bank loan.  Private respondent was only able to pay petitioner corporation the sum of P1.3M. In the meanwhile, however, the parties continued to negotiate for a possible modification of their agreement, although nothing conclusive would appear to have ultimately been arrived at.  Finally, Bricktown, sent private respondent a "Notice of Cancellation of Contract" on account of the latter's continued failure to pay the installment due 30 June 1981 and the interest on the unpaid balance of the stipulated initial payment. Bricktown advised Amor Tierra, however, that Amor Tierra still had the right to pay its arrearages within 30 days from receipt of the notice "otherwise the actual cancellation of the contract would take place."  Several months later, Amor Tierra, through counsel, demanded the refund of it's various payments to Bricktown, with interest within fifteen days from receipt of said letter, or, in

CIV LAW REVIEW - OBLICON DIGESTS lieu of a cash payment, to assign to private respondent an equivalent number of unencumbered lots at the same price fixed in the contracts. The demand, not having been heeded, Amor Tierra commenced an action against Bricktown.  RTC declared the K to sell and the supplemental agreement rescinded, and ordered Bricktown to return to Amor Tierra the amounts the latter have paid, with interest. CA affirmed. ISSUE: WON THE K TO SELL WERE VALIDLY RESCINDED? HELD: YES, Bricktown acted well within its right, in accordance with the agreement. Admittedly, the terms of payment agreed upon by the parties were not met by Amor Tierra. Of a total selling price of P21M, Amor Tierra was only able to remit the sum of P1.3M which was even short of the stipulated initial payment of P2.2M. No additional payments, it would seem, were made. A notice of cancellation was ultimately made months after the lapse of the contracted grace period. Paragraph 15 of the Contracts to Sell provided thusly: “Should the PURCHASER fail to pay when due any of the installments mentioned in stipulation No. 1 above, the OWNER shall grant the purchaser a sixty (60)-day grace period within which to pay the amount/s due, and should the PURCHASER still fail to pay the due amount/s within the 60-day grace period, the PURCHASER shall have the right to ex-parte cancel or rescind this contract, provided, however, that the actual cancellation or rescission shall take effect only after the lapse of thirty (30) days from the date of receipt by the PURCHASER of the notice of cancellation of this contract or the demand for its rescission by a notarial act, and thereafter, the OWNER shall have the right to resell the lot/s subject hereof to another buyer and all payments made, together with all improvements introduced on the aforementioned lot/s shall be forfeited in favor of the OWNER as liquidated damages, and in this connection, the PURCHASER obligates itself to peacefully vacate the aforesaid lot/s without necessity of notice or demand by the OWNER.” A grace period is a right, not an obligation, of the debtor. When unconditionally conferred, such as in this case, the grace period is effective without further need of demand either calling for the payment of the obligation or for honoring the right. The grace period must not be likened to an obligation, the non-payment of which, under Article 1169 of the Civil Code, would generally still require judicial or extrajudicial demand before "default" can be said to arise. Verily, in the case at bench, the sixty-day grace period under the terms of the contracts to sell became ipso facto operative from the moment the due payments were not met at their stated maturities. On this score, the provisions of Article 1169 of the Civil Code would find no relevance whatsoever. The cancellation of the contracts to sell by petitioner corporation accords with the contractual covenants of the parties, and such cancellation must be respected. It may be noteworthy to add that in a contract to sell, the non-payment of the purchase price (which is normally the condition for the final sale) can prevent the obligation to convey title from acquiring any obligatory force. The forfeiture of the payments thus far remitted under the cancelled contracts in question, given the factual findings of both the trial court and the appellate court, must be viewed differently. Petitioners do not deny the fact that there has indeed been a constant dialogue between the parties during the period of their juridical relation.

In fine, while we must conclude that petitioner corporation still acted within its legal right to declare the contracts to sell rescinded or cancelled, considering, nevertheless, the peculiar circumstances found to be extant by the trial court, confirmed by the Court of Appeals, it would be unconscionable, in our view, to likewise sanction the forfeiture by petitioner corporation of payments made to it by private respondent. Indeed, in the opening statement of this ponencia, we have intimated that the relationship between parties in any contract must always be characterized and punctuated by good faith and fair dealing. Judging from what the courts below have said, petitioners did fall well behind that standard. We do not find it equitable, however, to adjudge any interest payment by petitioners on the amount to be thus refunded, computed from judicial demand, for, indeed, private respondent should not be allowed to totally free itself from its own breach. BERLIN TAGUBA V. MARIA PERALTA VDA. DE DE LEON G.R. No. L-59980 October 23, 1984 FACTS:  Berlin Taguba married to Sebastiana Domingo (petitioner) is the owner of a residential lot in Isabela. Spouses Pedro Asuncion and Marita Lungab, (also petitioners) and herein private respondent Maria Peralta Vda. de De Leon, were separately occupying portions of the aforementioned lot as lessees.  Berlin Taguba sold a portion of the said lot to private respondent Maria Peralta Vda de De Leon. The portion sold comprises the area occupied by the Asuncions and private respondent Vda de De Leon. The deed evidencing said sale was denominated as "Deed of Conditional Sale," which stipulated that a downpayment shall be made upon signing of the contract, then P1k a month installments shall be made. It also provided that if the vendee fails to pay the whole balance by December 1972, she shall be given 6 months extension period but with legal interest, after which the vendor may increase the purchase price.  De Leon alleges that she had already paid the sum of P12,500 and had tendered payment of the balance of P5,500 to complete the stipulated purchase price of P18k to petitioner within the grace period but the latter refused to receive payment. Private respondent then instituted a complaint for Specific Performance with Preliminary Mandatory Injunction with Damages against Spouses Berlin Taguba and Sebastiana Domingo.  Spouses Taguba admitted the sale of the property, but claimed that private respondent failed to comply with her obligation under the Deed of Conditional Sale despite the several extensions granted her, by reason of which petitioner was compelled but with the express knowledge and consent and even upon the proposal of private respondent, to negotiate the sale of a portion of the property sold, to the Spouses Asuncion who were actually in possession thereof. ISSUE: WON THE DEED OF CONDITIONAL SALE WAS VALIDLY RESCINDED? HELD: NO. The contract of sale between petitioner and private respondent was absolute in nature. Despite the denomination of the deed as a "Deed of Conditional Sale" a reading of the conditions therein set forth reveals the contrary. Nowhere in the said contract in question could we find a proviso or stipulation to the effect that title to the property sold is reserved in the vendor until full payment of the purchase price. There is also no stipulation giving the vendor the

CIV LAW REVIEW - OBLICON DIGESTS right to unilaterally rescind the contract the moment the vendee fails to pay within a fixed period. Indeed, a reading of the contract in its entirety would show that the only right of petitioner Taguba as vendor was to collect interest at the legal rate if private respondent fails to pay the full purchase price, and to increase the price if vendee still fails to pay within the six months grace period. Considering, therefore, the nature of the transaction between petitioner Taguba and private respondent, which We affirm and sustain to be a contract of sale, absolute in nature, the applicable provision is Article 1592 of the New Civil Code. In the case at bar, it is undisputed that petitioner Taguba never notified private respondent by notarial act that he was rescinding the contract, and neither had he filed a suit in court to rescind the sale. Finally, it has been ruled that "where time is not of the essence of the agreement, a slight delay on the part of one party in the performance of his obligation is not a sufficient ground for the rescission of the agreement. Considering that in the instant case, private respondent had already actually paid the sum of P12,500.00 of the total stipulated purchase price of P18,000.00 and had tendered payment of the balance of P5,500.00 within the grace period of six months from December 31, 1972, equity and justice mandate that she be given additional period within which to complete payment of the purchase price. AQUILINA P. MARIN V. JUDGE MIDPANTAO L. ADIL G.R. No. L-49018 & L-47986, July 16, 1984 FACTS:  Brothers Manuel & Ariston Armada and Aquiline Marin are first cousins. The Armadas in 1963 expected to inherit some lots in General Santos City from their uncle, Proceso Pacificar, who died in 1954. Marin, who resided in Cotabato, had hereditary rights in the estates of her parents, the deceased spouses, Francisco and Monica Provido, of Janiuay Iloilo, who died in 1938 and 1960, respectively. Manuel P. Armada resided in Janiuay.  In a document entitled “Deed of Exchange with Quitclaim,” Marin assigned to the Armada brothers her hereditary share in the testate estate of her deceased mother, Monica Pacificar Vda. de Provido, in Iloilo, in exchange for the land of the Armadas located in Cotabato. The exchange would be rescindible when it is definitely ascertained that the parties have respectively no right to the properties sought to be exchanged. The exchange did not mean that the parties were definitely entitled to the properties being exchanged but it was executed "in anticipation of a declaration of said right".  When the deed of exchange was executed, the estate of Proceso Pacificar, in which the Armadas expected to inherit a part, had been adjudicated to Soledad Pronido- Elevencionado a sister of Mrs. Marin and a first cousin also of the Armadas. Soledad claimed to be the sole heir of Proceso. So, the Armadas and the other heirs had to sue Soledad.  The protracted litigation ended in a compromise in 1976 when the Armadas were awarded Lots 906-A-2 and 906-A-3, located in Barrio lagao, General Santos City; Marin never possessed these two lots. They were supposed to be exchange for her proindiviso share in her parents' estate in Janiuay.  Five years after the deed was executed, Marin agreed to convey to her sister, Aurora Provido-Collado, her interest in 2 lots in January in payment of her obligation amounting to P1,700. Then, in the extra-judicial partition of her parents' estate, Marin’s share was formally adjudicated to Aurora. It was

stated therein that Marin "has waived, renounced and quitclaimed her share" in favor of Aurora. As already stated, that share was supposed to be exchanged for the two lots in General Santos City which the Armadas received in 1976 after a pestiferous litigation. Hence, the Armadas filed the instant rescissory action against Mrs. Marin. ISSUE: WON THE DEED OF EXCHANGE WAS VALID AND BINDING? HELD: NO. It is evident from the deed of exchange that the intention of the parties relative to the lots, which are the objects of the exchange, cannot be definitely ascertained. We hold that this circumstance renders the exchange void or inexistent (Art. 1378, 2nd par. and Art. 1409[6], Civil Code). It is provided in paragraph 7 that the deed should not be construed as an acknowledgment by the Armadas and Mrs. Marin that they are entitled to the properties involved therein and that it was executed "in anticipation of a declaration of" their rights to the properties. Then, it is stipulated in paragraph 8 that the parties should take possession and make use of the properties involved in the deed. The two provisions are irreconcilable because paragraph contemplates that the properties are still to be awarded or adjudicated to the parties whereas paragraph 8 envisages a situation where the parties have already control and possession thereof. It should be noted that in Marin's answer with affirmative defense she avers therein that her 1968 agreement with her sister means that she would convey her properties to Aurora when the Armadas should be "adjudged to be without rights or interests to any properties in General Santos City." Such a qualifications is not found in her agreement with her sister. The instant rescissory action may be treated as an action to declare void the deed of exchange. The action to declare the inexistence of a contract does not prescribe (Art. 1410, Civil Code). The properties covered by the deed should have been specified and described. A perusal of the deed gives the impression that it involves many properties. In reality, it refers only to 8,124 square meters of land, which the Armadas would inherit from their uncle in General Santos City, and to the 9,000 square meters representing the proindiviso share of Mrs. Marin in her parents' estate. As we have seen, Mrs. Marin rendered impossible the performance of her obligation under the deed. Because of that impossibility, the Armadas could rescind extrajudicially the deed of exchange (Art. 1191 Civil Code). If Mrs. Marin should sue the Armadas, her action would be barred under the rule of exceptio non adimpleti contractus (plaintiff is not entitled to sue because he has not performed his part of the agreement).

3.1.3 MORA / DEFAULT B. BY THE OBLIGEE / CREDITOR

LUISA F. MCLAUGHLIN V. C.A. & RAMON FLORES G.R. No. L-57552 October 10, 1986 FACTS:  Petitioner Luisa F. McLaughlin and private respondent Ramon Flores entered into a contract of conditional sale of real property. The deed of conditional sale fixed the total purchase price of P140k payable as follows: a) P26k upon the execution

CIV LAW REVIEW - OBLICON DIGESTS of the deed; and b) the balance of P113k to be paid not later than May 1977. The parties also agreed that the balance shall bear interest at the rate of 1% per month to commence from December 1976, until the full purchase price was paid.  In 1979, petitioner filed a complaint for the rescission of the deed of conditional sale due to the failure of private respondent to pay the balance due on May 31, 1977. Later, the parties submitted a Compromise Agreement on the basis of which the court rendered a decision. In said compromise agreement, private respondent acknowledged his indebtedness to petitioner under the deed of conditional sale in the amount of P119k, and the parties agreed that said amount would be payable as follows: a) P50k upon signing of the agreement; and b) the balance of P69k in two equal installments on June 1980 and December 1980. As agreed upon, private respondent paid P50k upon the signing of the agreement and in addition he also paid an "escalation cost" of P25k.  Under paragraph 3 of the Compromise Agreement, private respondent agreed to pay P1k monthly rental beginning December 1979 until the obligation is duly paid, for the use of the property subject matter of the deed of conditional sale.  Paragraphs 6 and 7 of the Compromise Agreement further state: “That the parties are agreed that in the event the defendant (private respondent) fails to comply with his obligations herein provided, the plaintiff (petitioner) will be entitled to the issuance of a writ of execution rescinding the Deed of Conditional Sale of Real Property. In such eventuality, defendant (private respondent) hereby waives his right to appeal to (from) the Order of Rescission and the Writ of Execution which the Court shall render in accordance with the stipulations herein provided for. Xxx That in the event of execution all payments made by defendant (private respondent) will be forfeited in favor of the plaintiff (petitioner) as liquidated damages.”  In October 1980, petitioner wrote to private respondent demanding that the latter pay the balance of P69k. This demand included not only the installment due on June 1980 but also the installment due on December 1980.  Private respondent then sent a letter to petitioner signifying his willingness and intention to pay the full balance of P69k, and at the same time demanding to see the certificate of title of the property and the tax payment receipts.  Private respondent holds that on the first working day of said month, he tendered payment to petitioner but this was refused acceptance by petitioner. Petitioner filed a Motion for Writ of Execution alleging that private respondent failed to pay the installment due on June 1980 and that since June 1980 he had failed to pay the monthly rental of P1k.  RTC granted the motion for writ of execution. It denied the motion for reconsideration in an order dated November 21, 1980 and issued the writ of execution on November 25, 1980. In an order dated November 27, 1980, the trial court granted petitioner's ex-parte motion for clarification of the order of execution rescinding the deed of conditional sale of real property. ISSUE: WON THE CA ERRED IN DECLARING THE COMPROMISE AGREEMENT RESCINDED? HELD: NO. The general rule is that rescission will not be permitted for a slight or casual breach of the contract, but only for such breaches as are substantial and fundamental as to defeat the object of the parties in making the agreement. In the case at bar, despite Flores' failure to make the payment which was due on June 1980, McLaughlin waived whatever right she had under the

compromise agreement to demand rescission. It is significant to note that on November 17, 1980, or just 17 days after October 31, 1980, the deadline set by McLaughlin, Flores tendered the certified manager's check. Considering that Flores had already paid P101,550.00 under the contract to sell, excluding the monthly rentals paid, certainly it would be the height of inequity to have this amount forfeited in favor McLaughlin. Under the questioned orders, McLaughlin would get back the property and still keep P101,550.00. Moreover, section 4 of Republic Act No. 6552 (Maceda Law) provides as follows: “In case where less than two years of installments were paid, the seller shall give the buyer a grace period of not less than sixty days from the date the installment became due. If the buyer fails to pay the installments due at the expiration of the grace period, the seller may cancel the contract after thirty days from receipt by the buyer of the notice of the cancellation or the demand for rescission of the contract by a notarial act.” Section 7 of said law provides as follows: “Any stipulation in any contract hereafter entered into contrary to the provisions of Sections 3, 4, 5 and 6, shall be null and void. “ The spirit of these provisions further supports the decision of the appellate court. Assuming that under the terms of said agreement the December 31, 1980 installment was due and payable when on October 15, 1980, petitioner demanded payment of the balance of P69,059.71 on or before October 31, 1980, petitioner could cancel the contract after thirty days from receipt by private respondent of the notice of cancellation. Considering petitioner's motion for execution filed on November 7, 1980 as a notice of cancellation, petitioner could cancel the contract of conditional sale after thirty days from receipt by private respondent of said motion. The tender made by private respondent of a certified bank manager's check payable to petitioner was a valid tender of payment. Moreover, Section 49, Rule 130 of the Revised Rules of Court provides that: “An offer in writing to pay a particular sum of money or to deliver a written instrument or specific property is, if rejected, equivalent to the actual production and tender of the money, instrument, or property.“ However, although private respondent had made a valid tender of payment which preserved his rights as a vendee in the contract of conditional sale of real property, he did not follow it with a consignation or deposit of the sum due with the court. In one case, it was held: “True that consignation of the redemption price is not necessary in order that the vendor may compel the vendee to allow the repurchase within the time provided by law or by contract. We have held that in such cases a mere tender of payment is enough, if made on time, as a basis for action against the vendee to compel him to resell. But that tender does not in itself relieve the vendor from his obligation to pay the price when redemption is allowed by the court. In other words, tender of payment is sufficient to compel redemption but is not in itself a payment that relieves the vendor from his liability to pay the redemption price." In compliance with a resolution issued by the lower court, both parties submitted their respective manifestations which confirm that the Manager's Check in question was subsequently withdrawn and replaced by cash, but the cash was not deposited with the court. According to Article 1256 of the Civil Code of the Philippines, if the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor shall be released from responsibility by the consignation of the thing or sum due, and that

CIV LAW REVIEW - OBLICON DIGESTS consignation alone shall produce the same effect in the five cases enumerated therein; Article 1257 provides that in order that the consignation of the thing (or sum) due may release the obligor, it must first be announced to the persons interested in the fulfillment of the obligation; and Article 1258 provides that consignation shall be made by depositing the thing (or sum) due at the disposal of the judicial authority and that the interested parties shall also be notified thereof. Tender of payment must be distinguished from consignation. 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. In the case at bar, although as above stated private respondent had preserved his rights as a vendee in the contract of conditional sale of real property by a timely valid tender of payment of the balance of his obligation which was not accepted by petitioner, he remains liable for the payment of his obligation because of his failure to deposit the amount due with the court.

3.1.3 BY MORA / DEFAULT C. COMPENSATIO MORAE

ELNORA R. CORTES V. C.A. & F. S. MGT AND DEV’T CORP. [G.R. No. 121772. January 13, 2003] FACTS:  The controversy stemmed from a civil case for specific performance with damages filed by F.S. Management and Development Corporation (FSMDC) against spouses Edmundo and Elnora Cortes involving the sale of the parcel of land owned by the said spouses. Spouses Cortes retained the professional services of Atty. Felix Moya. However, they did not agree on the amount of compensation for the services to be rendered by Atty. Moya.  Before a full-blown trial could be had, defendants spouses Cortes and plaintiff FSMDC decided to enter into a compromise agreement. Defendants spouses received from plaintiff FSMDC, three checks totaling P2.7M. Thereafter, Atty. Moya filed an “Urgent Motion to Fix Attorney’s Fees, Etc.” praying that he be paid a sum equivalent to 35% of the amount received by the defendants spouses which the latter opposed contending that the amount Atty. Moya seeks to recover is utterly excessive and is not commensurate to the nature, extent and quality of the services he had rendered.  Later, the Cortes spouses and Atty. Moya settled their differences by agreeing in open court that the former will pay the latter the amount of P100k as his attorney’s fees. About six months after the compromise, Atty. Moya filed an Ex-Parte Manifestation praying that his Motion to Fix Attorney’s Fees be resolved on the basis of the agreement of the parties “in chambers”.  The Cortes spouses filed their Comment claiming: (1) That they agreed to the settlement of P100,000k attorney’s fees expecting that the checks paid by FSMDC will be good but it turned out that they were all dishonored, and no compromise agreement was pushed through; (2) That defendants are willing

to pay Atty. Moya as additional compensation for his services only in the amount of P50k subject to the condition that same shall be paid after the case is terminated in their favor and/or the property involved is sold; and (3) That defendants shall compensate Atty. Moya said amount in addition to what they have paid before.” The trial court issued an Order directing the spouses to pay Atty. Moya the sum of P100,000.00 as and by way of attorney’s fees. ISSUE: WON THE P100K AWARD ATTORNEY’S FEES WAS PROPER? HELD: NO. The reasonableness of the amount of attorney’s fees awarded to private respondent should be properly gauged on the basis of the long-standing rule of quantum meruit, meaning, “as much as he deserves”. Where a lawyer is employed without agreement as to the amount to be paid for his services, the courts shall fix the amount on quantum meruit basis. In such a case, he would be entitled to receive what he merits for his services. In this respect, Section 24, Rule 138 of the Rules of Court provides: “Sec. 24. Compensation of attorneys, agreement as to fees. - An attorney shall be entitled to have and recover from his client no more than a reasonable compensation for his services, with a view to the importance of the subject matter of the controversy, the extent of the services rendered, and the professional standing of the attorney. x x x” In addition, the following circumstances, codified in Rule 20.1, Canon 20 of the Code of Professional Responsibility, serves as a guideline in fixing a reasonable compensation for services rendered by a lawyer on the basis of quantum meruit: a) The time spent and the extent of the services rendered or required; b) The novelty and difficulty of the questions involved; c) The importance of the subject matter; d) The skill demanded; e) The probability of losing other employment as a result of acceptance of the proffered case; f) The customary charges for similar services and the schedule of fees of the IBP chapter to which he belongs; g) The amount involved in the controversy and the benefits resulting to the client from the services; h) The contingency or certainty of compensation; i) The character of the employment, whether occasional or established; and j) The professional standing of the lawyer.” In the present case, aside from invoking his professional standing, private respondent claims that he was the one responsible in forging the initial compromise agreement wherein FSMDC agreed to pay P2.7M. The fact remains, however, that such agreement was not consummated because the checks given by FSMDC were all dishonored. It was not the private respondent who was responsible in bringing into fruition the subsequent compromise agreement between petitioners and FSMDC. Nonetheless, it is undisputed that private respondent has rendered services as counsel for the petitioners. He prepared petitioners’ Answer and Pre- Trial Brief, appeared at the Pre-Trial Conference,

CIV LAW REVIEW - OBLICON DIGESTS attended a hearing held on July 13, 1990, cross-examined the witness of FSMDC, and was present in the conference at the Manila Hotel between the parties and their respective counsels. All these services were rendered in the years 1990 and 1991 where the value of a peso is higher. Thus, we find the sum of P100,000.00 awarded to private respondent as his attorney’s fees to be disproportionate to the services rendered by him to petitioners.The amount of P50,000.00 as compensation for the services rendered by Atty. Moya is just and reasonable. Besides, the imposition of legal interest on the amount payable to private respondent is unwarranted. Article 2209 of the Civil Code invoked by Atty. Moya and cited by the appellate court, finds no application in the present case. It is a provision of law governing ordinary obligations and contracts. Contracts for attorney’s services in this jurisdiction stand upon an entirely different footing from contracts for the payment of compensation for any other services. We have held that lawyering is not a moneymaking venture and lawyers are not merchants. Thus, a lawyer’s compensation for professional services rendered are subject to the supervision of the court, not just to guarantee that the fees he charges and receives remain reasonable and commensurate with the services rendered, but also to maintain the dignity and integrity of the legal profession to which he belongs. SPOUSES WILLIAM AND JEANETTE YAO V. CARLOMAGNO B. MATELA, [G.R. NO. 167767 & 167799, AUGUST 29, 2006] FACTS:  Spouses Yao contracted the services of Matela, a licensed architect, to manage and supervise the construction of a two-unit townhouse at a total cost of P5M. The construction started in the first week of April 1997 and was completed in April 1998, with additional works costing P300K. Matela alleged that the spouses Yao paid him the amount of P4.6M, thereby leaving a balance of P741k. When his demand for payment went unheeded, Matela filed a complaint for sum of money with the RTC.  In their answer, the spouses Yao denied that the project was completed in April 1998. Instead, they alleged that Matela abandoned the project without notice. They claimed that they paid Matela the sum of P4.7M which should be considered as sufficient payment considering that Matela used sub-standard materials causing damage to the project which needed a substantial amount of money to repair.  RTC rendered judgment in favor of Matela, based on documents issued by the Building Official of Makati City. The Court of Appeals affirmed the decision of the lower court but modified the amount of actual damages to P391k.  Thereafter, another case was filed by Matela, regarding the collection of the P300k additional construction cost. ISSUE: WON MATELA MAY COLLECT ACTUAL DAMAGES AND THE ADDITIONAL CONSTRUCTION COST? HELD: NO, BOTH PARTIES ARE GUILTY OF BREACH. Reciprocal obligations are those which are created or established at the same time, out of the same cause, and which result in mutual relationships of creditor and debtor between the parties. These obligations are conditional in the sense that the fulfillment of an obligation by one party depends upon the fulfillment of the obligation by the other. In reciprocal obligations, the general rule is that fulfillment by both parties should be simultaneous or at the same time.

The rule then is that in reciprocal obligations, one party incurs in delay from the moment the other party fulfills his obligation, while he himself does not comply or is not ready to comply in a proper manner with what is incumbent upon him. If neither party complies or is ready to comply with what is incumbent upon him, the default of one compensates for the default of the other. In such case, there can be no legal delay. Both the trial court and the Court of Appeals found that Matela’s “delivery” of the project constitutes a faithful discharge of his duties. We find otherwise. Our evaluation of the records reveal that Matela failed to comply with his obligation to construct the townhouses based on the agreed specifications. As such, he cannot be discharged from his obligations by mere delivery of the same to the spouses Yao. The agreed construction cost of the project was P5M, however, the amounts reflected in the Building Permit, the Certificate of Completion and the Certificate of Occupancy are far less. In the Building Permit, the total cost was pegged at P2.1M; in the Certificate of Completion, the actual cost of construction was P2.3M; while in the Certificate of Occupancy the cost of the project as built was declared at P2.31M. Considering the discrepancies, the conclusiveness of the said documents fall when arrayed against the pieces of evidence introduced by the spouses Yao. However, we find that the spouses Yao likewise failed to comply with their undertakings. As alleged by Matela, the spouses Yao made periodic payments to him based on progress billings. However, the spouses Yao refused to pay the balance of the agreed construction cost despite demands. The spouses Yao justified their non-payment by arguing that Matela abandoned the project and that there were defects in its construction. Evidently, both parties in this case breached their respective obligations. 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. 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: “Art. 1192. In case both parties have committed a breach of the obligation, the liability of the first infractor shall be equitably tempered by the courts. If it cannot be determined which of the parties first violated the contract, the same shall be deemed extinguished, and each shall bear his own damages.” In the instant case, the losses to be incurred by the parties will come, as far as Matela is concerned, in the form of the alleged unpaid balance of the construction cost that he is seeking to collect from the spouses Yao. For the latter, the lossesthat they will bear is the cost of repairing the defects in the project. We consider the amount of P4,699,610.93 which Matela has already received from the spouses Yao, as sufficient payment for his services and the materials used in the project.

3. BREACH 3.1.4 EFFECT ON PERSONS SUBSIDIARILY LIABLE

CIV LAW REVIEW - OBLICON DIGESTS PHIL. EXPORT AND FOREIGN LOAN GUARANTEE CORP. V. V.P. EUSEBIO CONSTRUCTION, INC. [G.R. No. 140047. July 13, 2004] FACTS:  The State Organization of Buildings (SOB) under the Government of Iraq awarded the construction of a Medical Center in Baghdad to Ajyal Trading, 3-Plex International, Inc., and VPECI, which are Filipino contractors. The Iraq Government required the contractors to submit a performance bond and an advance payment bond. To comply with these requirements, 3-Plex and VPECI applied for the issuance of a guarantee with petitioner Philguarantee.  Letters of guarantee were issued by Philguarantee to the Rafidain Bank of Baghdad, but they were not accepted by SOB. SOB required a letter-guarantee from Rafidain Bank, the government bank of Iraq. Rafidain Bank then issued a performance bond in favor of SOB on the condition that another foreign bank, not Philguarantee, would issue a counterguarantee to cover its exposure. Al Ahli Bank of Kuwait was, therefore, engaged to provide a counter-guarantee to Rafidain Bank, but it required a similar counter-guarantee in its favor from Philguarantee.  Philguarantee then issued in favor of Al Ahli Bank Letters of Guarantee for the Performance Bond Guarantee and the Advance Payment Guarantee. These letters of guarantee were secured by (1) a Deed of Undertaking executed by respondents VPECI, Spouses Vicente P. Eusebio and Soledad C. Eusebio, 3Plex, and Spouses Eduardo E. Santos and Iluminada Santos [herein respondents]; and (2) a surety bond issued by respondent First Integrated Bonding and Insurance Company, Inc. (FIBICI).  The construction, which was supposed to start on June 1981, commenced only on the last week of August 1981. Because of this delay and the slow progress of the construction work due to some setbacks and difficulties, the Project was not completed on schedule.  Al Ahli Bank of Kuwait demanded full payment of its performance bond counter-guarantee. Philguarantee received a telex message from Al Ahli Bank stating that it had already paid to Rafidain Bank the sum under its letter of guarantee, and demanding reimbursement by Philguarantee.  VPECI requested the Central Bank to hold in abeyance the payment by the petitioner but the Central Bank authorized the remittance for its account of the amount to Al Ahli Bank. Philguarantee thus paid the amount to Al Ahli Bank.  Philguarantee then sent to repondents separate letters demanding full payment of the amount plus accruing interest, penalty charges, and 10% attorney’s fees pursuant to their joint and solidary obligations under the deed of undertaking and surety bond. When the respondents failed to pay, the petitioner filed a civil case for collection of a sum of money. ISSUE: WON Philguarantee is entitled to reimbursement of what it paid under Letter of Guarantee it issued to Al Ahli Bank of Kuwait based on the deed of undertaking and surety bond from the respondents? HELD: NO. The Court of Appeals and the trial court were correct in ruling that the petitioner is a guarantor and not a surety. That the guarantee issued by the petitioner is unconditional and irrevocable does not make the petitioner a surety. As a guaranty, it is still characterized by its subsidiary and conditional quality because it does not take effect until the fulfillment of the condition, namely, that the principal obligor should fail in his obligation at the time and

in the form he bound himself. In other words, an unconditional guarantee is still subject to the condition that the principal debtor should default in his obligation first before resort to the guarantor could be had. A conditional guaranty, as opposed to an unconditional guaranty, is one which depends upon some extraneous event, beyond the mere default of the principal, and generally upon notice of default and reasonable diligence in exhausting proper remedies against the principal. It appearing that Letter of Guarantee merely stated that in the event of default by respondent VPECI the petitioner shall pay, the obligation assumed by the petitioner was simply that of an unconditional guaranty, not conditional guaranty. But as earlier ruled the fact that petitioner’s guaranty is unconditional does not make it a surety. Besides, surety is never presumed. It is only when the guarantor binds himself solidarily with the principal debtor that the contract becomes one of suretyship. The issue of whether respondent VPECI defaulted in its obligations may be determined by the laws of Iraq. However, since that foreign law was not properly pleaded or proved, the presumption of identity or similarity, otherwise known as the processual presumption, comes into play. Our law, specifically Article 1169, last paragraph, of the Civil Code, provides: “In reciprocal obligations, neither party incurs in delay if the other party does not comply or is not ready to comply in a proper manner with what is incumbent upon him.” Default or mora on the part of the debtor is delay in fulfillment of the prestation by reason of a cause imputable to the former. It is the non-fulfillment of an obligation with respect to time. It is undisputed that only 51.7% of the total work had been accomplished. As found by both the Court of Appeals and the trial court, the delay or the non-completion of the Project was caused by factors not imputable to the respondent contractor. It was rather due mainly to the persistent violations by SOB of the terms and conditions of the contract, particularly its failure to pay 75% of the accomplished work in US Dollars. Indeed, where one of the parties to a contract does not perform in a proper manner the prestation which he is bound to perform under the contract, he is not entitled to demand the performance of the other party. A party does not incur in delay if the other party fails to perform the obligation incumbent upon him. In order that the debtor may be in default it is necessary that the following requisites be present: (1) that the obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the performance because it must appear that the tolerance or benevolence of the creditor must have ended. As stated earlier, SOB cannot yet demand complete performance from VPECI because it has not yet itself performed its obligation in a proper manner, particularly the payment of the 75% of the cost of the Project in US Dollars. VPECI cannot yet be said to have incurred in delay. Even assuming that there was delay and that the delay was attributable to VPECI, still the effects of that delay ceased upon the renunciation by the creditor, SOB, which could be implied when the latter granted several extensions of time to the former. Besides, no demand has yet been made by SOB against the respondent contractor. Demand is generally necessary even if a period has been fixed in the obligation. And default generally begins from the moment the creditor demands judicially or extra-judicially the performance of the obligation. Without such demand, the effects of default will not arise.

CIV LAW REVIEW - OBLICON DIGESTS Moreover, the petitioner as a guarantor is entitled to the benefit of excussion, that is, it cannot be compelled to pay the creditor SOB unless the property of the debtor VPECI has been exhausted and all legal remedies against the said debtor have been resorted to by the creditor. It could also set up compensation as regards what the creditor SOB may owe the principal debtor VPECI. In this case, however, the petitioner has clearly waived these rights and remedies by making the payment of an obligation that was yet to be shown to be rightfully due the creditor and demandable of the principal debtor. As found by the Court of Appeals, the petitioner fully knew that the joint venture contractor had collectibles from SOB which could be set off with the amount covered by the performance guarantee. Since the petitioner was aware of the contractor’s outstanding receivables from SOB, it should have set up compensation as was proposed in its project situationer. As a rule, a guarantor who pays for a debtor should be indemnified by the latter and would be legally subrogated to the rights which the creditor has against the debtor. However, a person who makes payment without the knowledge or against the will of the debtor has the right to recover only insofar as the payment has been beneficial to the debtor. If the obligation was subject to defenses on the part of the debtor, the same defenses which could have been set up against the creditor can be set up against the paying guarantor. It is clear that the payment made by the petitioner guarantor did not in any way benefit the principal debtor, given the project status and the conditions obtaining at the Project site at that time. Moreover, the respondent contractor was found to have valid defenses against SOB, which are fully supported by evidence and which have been meritoriously set up against the paying guarantor, the petitioner in this case. And even if the deed of undertaking and the surety bond secured petitioner’s guaranty, the petitioner is precluded from enforcing the same by reason of the petitioner’s undue payment on the guaranty. Rights under the deed of undertaking and the surety bond do not arise because these contracts depend on the validity of the enforcement of the guaranty. The petitioner guarantor should have waited for the natural course of guaranty: the debtor VPECI should have, in the first place, defaulted in its obligation and that the creditor SOB should have first made a demand from the principal debtor. It is only when the debtor does not or cannot pay, in whole or in part, that the guarantor should pay. When the petitioner guarantor in this case paid against the will of the debtor VPECI, the debtor VPECI may set up against it defenses available against the creditor SOB at the time of payment. This is the hard lesson that the petitioner must learn.

3.2 FORTUITOUS EVENTS

ROBERTO JUNTILLA V. CLEMENTE FONTANAR G.R. No. L-45637 May 31, 1985 FACTS:  Plaintiff was a passenger of the public utility jeepney on the course of the trip from Danao City to Cebu City. The jeepney was driven by defendant Berfol Camoro. It was registered under the franchise of defendant Clemente Fontanar but was actually owned by defendant Fernando Banzon.

 When the jeepney reached Mandaue City, the right rear tire exploded causing the vehicle to turn turtle. In the process, the plaintiff who was sitting at the front seat was thrown out of the vehicle. Upon landing on the ground, the plaintiff momentarily lost consciousness. When he came to his senses, he found that he had a lacerated wound on his right palm. Aside from this, he suffered injuries on his left arm, right thigh and on his back. Because of his shock and injuries, he went back to Danao City but on the way, he discovered that his "Omega" wrist watch was lost. Upon his arrival in Danao City, he immediately entered the Danao City Hospital to attend to his injuries, and also requested his father-in-law to proceed immediately to the place of the accident and look for the watch. In spite of the efforts of his father-in-law, the wrist watch, which he bought for P 852.70 could no longer be found. He later filed a civil case for breach of contract with damages against Clemente Fontanar, Fernando Banzon and Berfol Camoro.  The respondents filed their answer, alleging inter alia that the accident that caused losses to the petitioner was beyond the control of the respondents taking into account that the tire that exploded was newly bought and was only slightly used at the time it blew up. ISSUE: WON RESPONDENTS’ LIABILITY IS NEGATED BY THE HAPPENING OF A FORTUITOUS EVENT? HELD: NO, the tire blowout was NOT a fortuitous event. The CFI relied on the ruling of the CA in Rodriguez v. Red Line Transportation Co., where the CA ruled that: “A tire blow-out does not constitute negligence unless the tire was already old and should not have been used at all. Indeed, this would be a clear case of fortuitous event.” The foregoing conclusions of the CFI are based on a misapprehension of overall facts from which a conclusion should be drawn. The reliance of the CFI on the Rodriguez case is not in order. In La Mallorca and Pampanga Bus Co. v. De Jesus, et al. we held that: “Petitioner maintains that a tire blow-out is a fortuitous event and gives rise to no liability for negligence, citing the rulings of the Court of Appeals in Rodriguez v. Red Line Transportation Co. and People v. Palapad. These rulings, however, not only are not binding on this Court but were based on considerations quite different from those that obtain in the case at bar. The appellate court there made no findings of any specific acts of negligence on the part of the defendants and confined itself to the question of whether or not a tire blow-out, by itself alone and without a showing as to the causative factors, would generate liability.” In the case at bar, there are specific acts of negligence on the part of the respondents. The records show that the passenger jeepney turned turtle and jumped into a ditch immediately after its right rear tire exploded. The evidence shows that the passenger jeepney was running at a very fast speed before the accident. We agree with the observation of the petitioner that a public utility jeep running at a regular and safe speed will not jump into a ditch when its right rear tire blows up. There is also evidence to show that the passenger jeepney was overloaded at the time of the accident. The petitioner stated that there were 3 passengers in the front seat and 14 passengers in the rear. While it may be true that the tire that blew-up was still good because the grooves of the tire were still visible, this fact alone does not make the explosion of the tire a fortuitous event. No evidence was presented to show that the accident was due to adverse road conditions or that precautions were taken by the jeepney driver to compensate for any conditions liable to cause accidents. The

CIV LAW REVIEW - OBLICON DIGESTS sudden blowing-up, therefore, could have been caused by too much air pressure injected into the tire coupled by the fact that the jeepney was overloaded and speeding at the time of the accident. In a legal sense and, consequently, also in relation to contracts, a caso fortuito presents the following essential characteristics: (1) The cause of the unforeseen and unexpected occurrence, or of the failure of the debtor to comply with his obligation, must be independent of the human will. (2) It must be impossible to foresee the event which constitutes the caso fortuito, or if it can be foreseen, it must be impossible to avoid. (3) The occurrence must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner. And (4) the obligor (debtor) must be free from any participation in the aggravation of the injury resulting to the creditor. In the case at bar, the cause of the unforeseen and unexpected occurrence was not independent of the human will. The accident was caused either through the negligence of the driver or because of mechanical defects in the tire. Common carriers should teach their drivers not to overload their vehicles, not to exceed safe and legal speed limits, and to know the correct measures to take when a tire blows up thus insuring the safety of passengers at all times. Relative to the contingency of mechanical defects, we held in Necesito, et al. v. Paras, et al. that: “The preponderance of authority is in favor of the doctrine that a passenger is entitled to recover damages from a carrier for an injury resulting from a defect in an appliance purchased from a manufacturer, whenever it appears that the defect would have been discovered by the carrier if it had exercised the degree of care which under the circumstances was incumbent upon it, with regard to inspection and application of the necessary tests. For the purposes of this doctrine, the manufacturer is considered as being in law the agent or servant of the carrier, as far as regards the work of constructing the appliance. According to this theory, the good repute of the manufacturer will not relieve the carrier from liability'. “ ACE-AGRO DEV’T CORP. V. C.A. & COSMOS BOTTLING CORP. G.R. No. 119729 January 21, 1997 FACTS:  Private respondent Cosmos Bottling Corp. is engaged in the manufacture of soft drinks. Since 1979 petitioner Ace-Agro Development Corp. (Ace-Agro) had been cleaning soft drink bottles and repairing wooden shells for Cosmos, rendering its services within the company premises in San Fernando, Pampanga. The parties entered into service contracts which they renewed every year. In January 1990, they signed a contract covering the period January 1, 1990 to December 31, 1990. Private respondent had earlier contracted the services of Aren Enterprises in view of the fact that petitioner could handle only from 2,000 to 2,500 cases a day and could not cope with private respondent's daily production of 8,000 cases. Unlike petitioner, Aren Enterprises rendered service outside private respondent's plant.  On April 25, 1990, fire broke out in private respondent's plant, destroying, among other places, the area where petitioner did its work. As a result, petitioner's work was stopped. Petitioner asked private respondent to allow it to resume its service, but petitioner was advised that on account of the fire, which had "practically burned all old soft drink bottles and

wooden shells," private respondent was terminating their contract.  Petitioner expressed surprise at the termination of the contract and requested private respondent to reconsider its decision and allow petitioner to resume its work in order to "cushion the sudden impact of the unemployment of many of its workers." As it received no reply from private respondent, petitioner informed its employees of the termination of their employment. This led the employees to file a complaint for illegal dismissal before the Labor Arbiter against petitioner and private respondent.  Private respondent then advised petitioner that the latter could resume the repair of wooden shells under terms similar to those contained in its contract but work had to be done outside the company premises. Petitioner refused the offer, claiming that to do its work outside the company's premises would make it incur additional costs for transportation. In subsequent meetings with Cosmos’ representatives, Ace-Agro asked for an extension of the term of the contract in view of the suspension of work. But its request was apparently turned down.  Later, private respondent advised petitioner that the latter could then resume its work inside the plant in accordance with its original contract with Cosmos. Petitioner rejected private respondent's offer, this time, citing the fact that there was a pending labor case.  Subsequently, Ace-Agro brought a case against private respondent for breach of contract and damages. It complained that the termination of its service contract was illegal and arbitrary and that, as a result, it stood to lose profits and to be held liable to its employees for backwages, damages and/or separation pay.  A decision was rendered in the labor case, finding petitioner liable for the claims of its employees. Petitioner was ordered to reinstate the employees and pay them backwages. However, private respondent Cosmos was absolved from the employees' claims on the ground that there was no privity of contract between them and private respondent.  On the other hand, RTC found respondent guilty of breach of contract and ordered it to pay damages to petitioner. Petitioner's claim for reimbursement for what it had paid to its employees in the labor case was denied. ISSUE: WON COSMOS BOTTLING IS LIABLE FOR BREACH? HELD: NO. Petitioner claims that the appellate court erred "in ruling that respondent was justified in unilaterally terminating the contract on account of a force majeure." Quite possibly it did not understand the appellate court's decision, or it would not be contending that there was no valid cause for the termination of the contract but only for its suspension. The following is what the appellate court said: “Article 1231 of the New Civil Code on extinguishment of obligations does not specifically mention unilateral termination as a mode of extinguishment of obligation but, according to Tolentino, "there are other causes of extinguishment of obligations which are not expressly provided for in this chapter." He further said: “But in some contracts, either because of its indeterminate duration or because of the nature of the prestation which is its object, one of the parties may free himself from the contractual tie by his own will (unilateral extinguishment).” And that was just what defendant-appellant did when it unilaterally terminated the agreement it had with plaintiff-appellee. As per its letter, the reason given by defendant-appellant for unilaterally terminating the agreement was because the fire practically burned all

CIV LAW REVIEW - OBLICON DIGESTS of the softdrink bottles and wooden shells which plaintiff-appellee was working on under the agreement. What defendant-appellant was trying to say was that the prestation or the object of their agreement had been lost and destroyed in the above-described fire. Apparently, the defendant-appellant would like this situation to fall within what according to Tolentino would be: “Obligations may be extinguished by the happening of unforeseen events, under whose influence the obligation would never have been contracted, because in such cases, the very basis upon which the existence of the obligation is founded would be wanting.” Both parties admitted that the fire was a force majeure or unforeseen event and that the same even burned practically all the softdrink bottles and wooden shells which are the objects of the agreement. But the story did not end there. It is true that defendant-appellant still had other bottles that needed cleaning and wooden shells that needed repairing; therefore, the suspension of the work of the plaintiffappellee brought about by the fire is, at best, temporary as found by the trial court. Appellant sent its November 7, 1990 letter to appellee, this time specifically stating that plaintiff-appellee can now resume work in accordance with their existing agreement. This time, it could not be denied that by the tenor of the letter, appellant was willing to honor its agreement with appellee, that it had finally made a reconsideration of appellee's plea to resume work under the contract. But again, plaintiff-appellee refused this offer to resume work. Why did the appellee refuse to resume work? Its November 17, 1990 letter stated that it had something to do with the settlement of the NLRC case filed against it by its employees. But that was not the real reason. In his cross-examination, the witness for appellee stated that its real reason for refusing to resume work with the appellant was, as in its previous refusal, because it wanted an extension of the period or duration of the contract beyond December 31, 1991, to cover the period within which it was unable to work. The agreement between the appellee and the appellant is with a resolutory period, beginning from January 1, 1990 and ending on December 31, 1990. When the fire broke out, there resulted a suspension of the appellee's work as per agreement. But this suspension of work due to force majeure did not merit an automatic extension of the period of the agreement between them. According to Tolentino: “The stipulation that in the event of a fortuitous event or force majeure the contract shall be deemed suspended during the said period does not mean that the happening of any of those events stops the running of the period the contract has been agreed upon to run. It only relieves the parties from the fulfillment of their respective obligations during that time. If during six of the thirty years fixed as the duration of a contract, one of the parties is prevented by force majeure to perform his obligation during those years, he cannot after the expiration of the thirty-year period, be compelled to perform his obligation for six more years to make up for what he failed to perform during the said six years, because it would in effect be an extension of the term of the contract. The contract is stipulated to run for thirty years, and the period expires on the thirtieth year; the period of six years during which performance by one of the parties is prevented by force majeure cannot be deducted from the period stipulated.” In fine, the appellant withdrew its unilateral termination of its agreement with appellee in its letter dated November 7, 1990.

But the appellee's refusal to resume work was, in effect, a unilateral termination of the parties' agreement, an act that was without basis. When the appellee asked for an extension of the period of the contract beyond December 31, 1990 it was, in effect, asking for a new contract which needed the consent of defendantappellant. The appellee might be forgiven for its first refusal, but the second refusal must be construed as a breach of contract by plaintiffappellee. PHIL. COMMUNICATIONS SATELLITE CORP. V. GLOBE TELECOM, INC. G.R. No. 147324, May 25, 2004 FACTS:  Globe Telecom, Inc. (Globe), had been engaged in the coordination of the provision of various communication facilities for the military bases of the US in Clark Air Base and Subic Naval Base. Philcomsat and Globe entered into an Agreement whereby Philcomsat obligated itself to establish, operate and provide an IBS Standard B earth station (earth station) within Cubi Point for the exclusive use of the USDCA. The term of the contract was for 60 months, or 5 years. In turn, Globe promised to pay Philcomsat monthly rentals for each leased circuit involved.  At the time of the execution of the Agreement, both parties knew that the RP-US Military Bases Agreement, which was the basis for the occupancy of the Clark Air Base and Subic Naval Base in Cubi Point, was to expire in 1991.  Subsequently, Philcomsat installed and established the earth station at Cubi Point and the USDCA made use of the same. On 16 September 1991, the Senate passed and adopted Senate Resolution No. 141, expressing its decision not to concur in the ratification of the Treaty that was supposed to extend the term of the use by the US of Subic Naval Base, among others.  Globe notified Philcomsat of its intention to discontinue the use of the earth station in view of the withdrawal of US military personnel from Subic Naval Base after the termination of the RP-US Military Bases Agreement. Globe invoked as basis for the letter of termination Section 8 (Default) of the Agreement, which provides: ”Neither party shall be held liable or deemed to be in default for any failure to perform its obligation under this Agreement if such failure results directly or indirectly from force majeure or fortuitous event. Either party is thus precluded from performing its obligation until such force majeure or fortuitous event shall terminate. For the purpose of this paragraph, force majeure shall mean circumstances beyond the control of the party involved including, but not limited to, any law, order, regulation, direction or request of the Government of the Philippines, strikes or other labor difficulties, insurrection riots, national emergencies, war, acts of public enemies, fire, floods, typhoons or other catastrophies or acts of God.”  Philcomsat sent a reply letter, stating that "we expect [Globe] to know its commitment to pay the stipulated rentals for the remaining terms of the Agreement even after [Globe] shall have discontinue[d] the use of the earth station after November 08, 1992," citing Section 7 of the Agreement.  After the US military forces left Subic Naval Base, Philcomsat demanded payment from Globe of its outstanding obligations under the Agreement. However, Globe refused to heed Philcomsat’s demand. Philcomsat filed a Complaint against Globe, praying that the latter be ordered to pay liquidated damages under the Agreement, with legal interest, exemplary damages, attorney’s fees and costs of suit.

CIV LAW REVIEW - OBLICON DIGESTS ISSUE: WON THE TERMINATION OF THE RP-US MILITARY BASES AGREEMENT WAS A FORTUITOUS EVENT? HELD: YES. There is no merit is Philcomsat’s argument that Section 8 of the Agreement cannot be given effect because the enumeration of events constituting force majeure therein unduly expands the concept of a fortuitous event under Article 1174 of the Civil Code and is therefore invalid. In support of its position, Philcomsat contends that under Article 1174 of the Civil Code, an event must be unforeseen in order to exempt a party to a contract from complying with its obligations therein. It insists that since the expiration of the RP-US Military Bases Agreement, the nonratification of the Treaty of Friendship, Cooperation and Security and the withdrawal of US military forces and personnel from Cubi Point were not unforeseeable, but were possibilities known to it and Globe at the time they entered into the Agreement, such events cannot exempt Globe from performing its obligation of paying rentals for the entire five-year term thereof. However, Article 1174, which exempts an obligor from liability on account of fortuitous events or force majeure, refers not only to events that are unforeseeable, but also to those which are foreseeable, but inevitable. A fortuitous event under Article 1174 may either be an "act of God," or natural occurrences such as floods or typhoons,or an "act of man," such as riots, strikes or wars. The enumeration under Section 8 of the Contract are either unforeseeable, or foreseeable but beyond the control of the parties. There is nothing in the enumeration that runs contrary to, or expands, the concept of a fortuitous event. Not being contrary to law, morals, good customs, public order, or public policy, Section 8 of the Agreement which Philcomsat and Globe freely agreed upon has the force of law between them. In order that Globe may be exempt from non-compliance with its obligation to pay rentals under Section 8, the concurrence of the following elements must be established: (1) the event must be independent of the human will; (2) the occurrence must render it impossible for the debtor to fulfill the obligation in a normal manner; and (3) the obligor must be free of participation in, or aggravation of, the injury to the creditor. The Court agrees with the Court of Appeals and the trial court that the abovementioned requisites are present in the instant case. Philcomsat and Globe had no control over the non-renewal of the term of the RP-US Military Bases Agreement when the same expired in 1991, because the prerogative to ratify the treaty extending the life thereof belonged to the Senate. Neither did the parties have control over the subsequent withdrawal of the US military forces and personnel from Cubi Point in December 1992. Considering the foregoing, the Court finds and so holds that the afore-narrated circumstances constitute "force majeure or fortuitous event(s) as defined under paragraph 8 of the Agreement. From the foregoing, the Court finds that the defendant is exempted from paying the rentals for the facility for the remaining term of the contract. Moreover, it would be unjust to require Globe to continue paying rentals even though Philcomsat cannot be compelled to perform its corresponding obligation under the Agreement.

4.

USURIOUS TRANSACTIONS/OBLIGATIONS INSTALLMENTS (ARTS. 1175-1176)

LIAM LAW V. OLYMPIC SAWMILL CO. G.R. No. L-30771 May 28, 1984 FACTS:  Plaintiff loaned P10k, without interest, to Olympic Sawmill and defendant Elino Lee Chi, as the managing partner. The loan became ultimately due, but was not paid, with the debtors asking for an extension of three months.  Parties then executed another loan document. Payment of the P10k was extended to April 30, 1960, but the obligation was increased by P6k, to form part of the principal obligation to answer for attorney's fees, legal interest, and other cost incident thereto to be paid unto the creditor and his successors in interest upon the termination of this agreement.  Defendants again failed to pay their obligation and plaintiff instituted this collection case. Defendants admitted the P10k principal obligation, but claimed that the additional P6k constituted usurious interest.  RTC rendered decision ordering defendants to pay plaintiff the amount of P10,000.00 plus the further sum of P6,000.00 by way of liquidated damages with legal rate of interest on both amounts from April 30, 1960." It is from this judgment that defendants have appealed. ISSUE: WON DEFENDANT MAY EVADE PAYMENT OF THE 6K OBLIGATION ON THE CLAIM THAT SUCH INTEREST WAS USURIOUS? HELD: NO. The main thrust of defendants' appeal is the allegation in their Answer that the P6,000.00 constituted usurious interest. They insist the claim of usury should have been deemed admitted by plaintiff as it was "not denied specifically and under oath". Section 9 of the Usury Law (Act 2655) provided: “SEC.9. The person or corporation sued shall file its answer in writing under oath to any complaint brought or filed against said person or corporation before a competent court to recover the money or other personal or real property, seeds or agricultural products, charged or received in violation of the provisions of this Act. The lack of taking an oath to an answer to a complaint will mean the admission of the facts contained in the latter.” The foregoing provision envisages a complaint filed against an entity which has committed usury, for the recovery of the usurious interest paid. In that case, if the entity sued shall not file its answer under oath denying the allegation of usury, the defendant shall be deemed to have admitted the usury. The provision does not apply to a case, as in the present, where it is the defendant, not the plaintiff, who is alleging usury. Moreover, for sometime now, usury has been legally non-existent. Interest can now be charged as lender and borrower may agree upon. The Rules of Court in regards to allegations of usury, procedural in nature, should be considered repealed with retroactive effect.

6. DIFFERENT KINDS OF OBLIGATIONS 6.2 CONDITIONAL (ARTS. 11791180) 6.2.1 SUSPENSIVE CONDITION

FELIX I. GONZALES V. THE HEIRS OF THOMAS and PAULA CRUZ PAYABLE G.R.IN No. 131784 September 16, 1999 FACTS:

CIV LAW REVIEW - OBLICON DIGESTS



Paula Año Cruz together with the respondent heirs entered into a Contract of Lease/Purchase with the Petitioner Felix L. Gonzales, the sole proprietor and manager of Felgon Farms, of a half-portion of a parcel of land.  The contract of Lease/Purchase contains the following provisions: 1. The terms of this Contract is for a period of one year upon the signing thereof. After the period of this Contract, the LESSEE shall purchase the property on the agreeable price of P1M payable within 2 Years period with an interest of 12% per annum subject to the devalued amount of the Philippine Peso, according to the following schedule of payment: Upon the execution of the Deed of Sale 50% - and thereafter 25% every 6 months thereafter, payable within the first 10 days of the beginning of each period of 6 months. 2. The LESSEE shall pay by way of annual rental an amount equivalent to P2,500.00 per hectare, upon the signing of this contract on Dec. 1, 1983. 9. The LESSORS hereby commit themselves and shall undertake to obtain a separate and distinct T.C.T. over the herein leased portion to the LESSEE within a reasonable period of time which shall not in any case exceed 4 years, after which a new Contract shall be executed by the herein parties which shall be the same in all respects with this Contract of Lease/Purchase insofar as the terms and conditions are concerned.



Gonzales paid the P2,500.00 per hectare of P15k annual rental on the half-portion of the property in accordance with the second provision of the Contract of Lease/Purchase and thereafter took possession of the property. Gonzales did not, however, exercise his option to purchase the property immediately after the expiration of the 1year lease. He remained in possession of the property without paying the purchase price in the Contract of Lease/Purchase and without paying any further rentals thereon.  Ricardo Cruz informed Gonzales of the lessors' decision to rescind the Contract of Lease/Purchase due to a breach thereof committed by the petitioner. The letter also served as a demand on the defendant to vacate the premises within 10 days from receipt of said letter.  Gonzales refused to vacate the property and continued possession thereof. A final demand letter to vacate the premises was sent. Alleging breach of the provisions of the Contract of Lease/Purchase, the plaintiffs filed a complaint for recovery of possession with damages. ISSUE: WON CONTRACT COULD BE RESCINDED BY RESPONDENT HEIRS? HELD: NO, PAR. 9 WAS A SUSPENSIVE CONDITION. Alleging that petitioner has not purchased the property after the lapse of one year, respondents seek to rescind the Contract and to recover the property. Petitioner, on the other hand, argues that he could not be compelled to purchase the property, because respondents have not complied with paragraph nine, which obligates them to obtain a separate and distinct title in their names. He contends that paragraph nine was a condition precedent to the purchase of the property. Basic is the rule in the interpretation of contracts that if some stipulation therein should admit of several meanings, it shall be understood as bearing that import most adequate to render it effectual. Considering

the antecedents of the ownership of the disputed lot, it appears that petitioner's interpretation renders clause nine most effectual. Thus, the clear intent of the ninth paragraph was for respondents to obtain a separate and distinct TCT in their names. This was necessary to enable them to show their ownership of the stipulated portion of the land and their concomitant right to dispose of it. Absent any title in their names, they could not have sold the disputed parcel of land. In a contract of sale, the title to the property passes to the vendee upon the delivery of the thing sold. In this case, the respondent could not deliver ownership or title to a specific portion of the yet undivided property. True, they could have intended to sell their hereditary interest, but in the context of the Contract of Lease/Purchase, the parties under paragraph nine wanted the specific portion of the land to be segregated, identified and specifically titled. Hence, by the said Contract, the respondents as sellers were given a maximum of four years within which to acquire a separate TCT in their names, preparatory to the execution of the deed of sale and the payment of the agreed price in the manner described in paragraph nine. Because the ninth clause required respondents to obtain a separate and distinct TCT in their names and not in the name of petitioner, it logically follows that such undertaking was a condition precedent to the latter's obligation to purchase and pay for the land. Put differently, petitioner's obligation to purchase the land is a conditional one and is governed by Article 1181 of the Civil Code. Condition has been defined as "every future and uncertain event upon which an obligation or provision is made to depend. It is a future and uncertain event upon which the acquisition or resolution of rights is made to depend by those who execute the juridical act." Without it, the sale of the property under the Contract cannot be perfected, and petitioner cannot be obliged to purchase the property. "When the consent of a party to a contract is given subject to the fulfillment of a suspensive condition, the contract is not perfected unless that condition is first complied with." The Court has held that "[w]hen the obligation assumed by a party to a contract is expressly subjected to a condition, the obligation cannot be enforced against him unless the condition is complied with." Furthermore, "[t]he obligatory force of a conditional obligation is subordinated to the happening of a future and uncertain event, so that if that event does not take place, the parties would stand as if the conditional obligation had never existed." In this case, the obligation of the petitioner to buy the land cannot be enforced unless respondents comply with the suspensive condition that they acquire first a separate and distinct TCT in their names. The suspensive condition not having been fulfilled, then the obligation of the petitioner to purchase the land has not arisen.

6.2 CONDITIONAL OBLIGATIONS 6.2.2 RESOLUTORY CONDITION

AGAPITO B. DUCUSIN V. C.A. & VIRGILIO S. BALIOLA G.R. No. L-58286 May 16, 1983 FACTS:  Petitioner Agapito Ducusin leased to private respondent, Virgilio S. Baliola married to Lilia Baliola a one-door apartment unit. The contract of lease provides: 2. The term of this contract

CIV LAW REVIEW - OBLICON DIGESTS shall be in a month to month basis commencing on February 19,1975 until terminated by the lessor on the ground that his children need the premises for their own use or residence or upon any ground provided for in accordance with law.  The Baliola spouses occupied the apartment for almost 2 years when Ducusin sent a "Notice to Terminate Lease Contract," terminating the lease and giving them until March 15, 1977 within which to vacate the premises for the reason that his two children were getting married and will need the apartment for their own use and residence. A second letter was thereafter sent by Ducusin to respondents Baliolas making an inquiry on any action the latter had taken on the previous notice to terminate the lease contract. Respondents made no reply to the "Notice to Terminate Lease Contract".  So petitioners filed an action for ejectment against the Baliola spouses, alleging that having constructed the apartment complex for the use and residence of his children (each to a unit) if and when they decide to marry and live independently and that the apartment unit having been allotted to his son, Agapito Ducusin, Jr., the said unit is now needed by Agapito, Jr. who is getting married in the month of May, 1977 and that said Agapito, Jr. has decided to live independently. The complaint for eviction further alleged that the lessees have violated the terms of the contract by subleasing the premises; that the lessees have not used the premises solely for residential purposes but have used the same as factory and/or manufacturing premises for their commercial goods; and that they have neglected to undertake repairs of the apartment and the premises according to their agreement.  The lessees denied the allegations of the lessor and claimed in their Answer that the ejectment suit "is a well-planned scheme to rid the defendants and family out of their apartment, and to circumvent the law prohibiting raising the rental of apartments and houses."  Court decided in favor of the lessor Ducusin on the ground that the "defendants' contract with the plaintiff has already terminated with the notice of termination sent by the plaintiff to the defendants on the ground that he needs the premises for his own children." ISSUE: WON THE LEASE CONTRACT WAS SUBJECT TO A RESOLUTORY CONDITION? HELD: YES. We find for the petitioners. We do not agree with the holding of the respondent court that the petitioners have not proved by a preponderance of evidence the alleged need of the immediate members of his family for the use of the leased premises. The contention of the petitioner that the contract of lease in question is for a definite period, being on a month-to-month basis beginning February 19, 1975 and is, therefore, not covered by P.D. No. 20, is correct. Period relates to "length of existence; duration" or even a "series of years, months or days in which something is completed" Definite means "having distinct or certain limits; determinate in extent or character; limited fixed." A definite period, therefore, refers to a portion of time certain or ascertainable as to its beginning, duration and termination. In one case, it was held: “As to the duration and termination of the aforementioned contractual relations, the parties used the phrase "on a month to month basis" in the Agreement with reference to the length of time during which petitioner Rantael would have use and

occupancy of the leased premises. And month here should be construed, in like manner as in the interpretation of laws pursuant to the provisions of Article 12 of the Civil Code of the Philippines, there being no reason to deviate therefrom, as a period composed of thirty days. The contractual relations between petitioner Rantael and respondent Llave ceased after the expiration of the first thirty days reckoned from August 1, 1974 but continued for the next thirty-day period and expired after the last day thereof, repeating the same cycle for the succeeding thirty-day periods, until the Id respondent Llave exercised her express prerogative under the agreement to terminate the same. Xxx However, by express exception of P.D. No. 20, judicial ejectment lies "when the lease is for a definite period"or when the fixed or definite period agreed upon has expired. The lease in the case at bar having a definite period, it indubitably follows that the exception, rather than the general rule, applies and, therefore, respondent Llave's right to judicially eject petitioner Rantael from the premises may be duly enforced. This has been the consistent administrative interpretation of the Office of the President.” As to the holding of the respondent court that petitioner Ducusin, Sr. "did not show that the one-door apartment leased to the petitioners was the only place available for the use of his son, Agapito Ducusin, Jr.," on the contrary, We find in the records evidence that out of the eight doors apartment building belonging to the petitioner Ducusin Sr., three doors, now 31 years old, became untenantable due to wear and tear and the remaining five doors were all occupied by tenants; first door, 3319, is occupied by Mr. Coluso, 3319-A by the Baliola spouses, 3319-B by Mr. & Mrs. Magsano, 3319-C by Mr. & Mrs. de los Santos, and 3319-D by Videz. From this evidence may be deduced that there is no other place available for the use and residence of petitioner's son, Agapito Ducusin, Jr. Assuming that Agapito Ducusin, Sr. informed his tenant Virgilio Baliola that another apartment unit No. 3319, would soon be vacated, the alleged vacancy is nearly speculative and there is no showing that it actually became vacant and available. OSCAR A. JACINTO V. ROGELIO KAPARAZ G.R. No. 81158 May 22, 1992 FACTS:  Petitioners and private respondents entered into an agreement under which the private respondents agreed to sell and convey to petitioners a lot located in Davao Oriental for a total consideration of P1,800. A downpayment of P800 was paid upon execution of the Agreement. The balance of P1,000 was to be paid by petitioners on installment at the rate of P100 a month to the DBP to be applied to private respondents' loan accounts.  Upon the execution of the agreement, petitioners paid the downpayment of P800 and were placed in possession of the portion described therein. As to the P1,000 which was to be paid directly to the DBP, petitioners claim that they had even made an excess payment of P100.  In view of the refusal of private respondents to execute the deed of sale, petitioners filed a complaint for specific performance. Private respondents answered that the sale did not materialize because of the failure of petitioners to fulfill their promise to make timely payments on the stipulated price to the DBP; as a result of such failure, private respondents failed to secure the release of the mortgage on the property. ISSUE: WON THERE WAS A VALID RESCISSION? HELD: NO. ALTHOUGH THE AGREEMENT IS A CONTRACT OF SALE, TO WHICH NON-PAYMENT OF THE PURCHASE

CIV LAW REVIEW - OBLICON DIGESTS PRICE IS A RESOLUTORY CONDITION, PRIVATE RESPONDENTS FAILED TO FULFILL THE REQUIREMENTS OF ARTICLE 1592 TO EFFECT RESCISSION. Vital to the resolution of the controversy is the determination of the true nature of the questioned agreement. Is it a contract of sale or a contract to sell? The two are not, of course, the same. In the latter case, ownership is retained by the seller and is not to pass until full payment of the price. Such payment is a positive suspensive condition the failure of which is not a breach, casual or serious, but simply an event that prevents the obligation of the vendor to convey title from acquiring binding force. In such a situation, to argue that there was only a casual breach is to proceed from the assumption that the contract is one of absolute sale, where non-payment is a resolutory question. Otherwise stated, as capsulized in Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc., "there can be no rescission or resolution of an obligation as yet non-existent, because the suspensive condition did not happen." On the other hand, since in a contract of sale, the non-payment of the price is a resolutory condition, the remedy of the seller under Article 1191 of the Civil Code is to exact fulfillment or to rescind the contract. In respect, however, to the sale of immovable property, this Article must be read together with Article 1592 of the same Code. The agreement in the instant case has all the earmarks of a contract of sale. The possession of the portion sold was immediately delivered to the petitioners. They were granted the right to enjoy all the improvements therein effective from the date of the execution of the agreement. Private respondents unqualifiedly bound themselves to execute the final deed of sale "as soon as the settlement or partition of the estate of the deceased Narcisa R. Kaparaz shall have been consummated and effected, but not later than March 31, 1967" and only upon full payment of the unpaid portion of the purchase price. The private respondents did not reserve unto themselves the ownership of the property until full payment of the unpaid balance of P1,000. Finally, there is no stipulation giving the private respondents the right to unilaterally rescind the contract the moment the vendee fails to pay within a fixed period. In reality, the agreement was an absolute sale which allowed the petitioners to pay the remaining balance of the purchase price in installment. Thus, it has been held that a deed of sale is absolute in nature although denominated as a "Deed of Conditional Sale" where nowhere in the contract in question is a proviso or stipulation to the effect that title to the property sold is reserved in the vendor until full payment of the purchase price, nor is there a stipulation giving the vendor the right to unilaterally rescind the contract the moment the vendee fails to pay within a fixed period. As stated earlier, in a contract of sale, the remedy of an unpaid seller is either specific performance or rescission. The latter, with respect to the sale of immovables, is specifically governed by Article 1592 of the Civil Code. In the case at bar, there was non-compliance with the requirements prescribed in these provisions. It is not controverted that private respondents had neither filed an action for specific performance nor demanded the rescission of the agreement either judicially or by a notarial act before the filing of the complaint. It is only in their Answer that they belatedly raised the defense of resolution of the contract pursuant to Article 1191 by reason of petitioners' breach of their obligation. Even if the general law on resolution, Article 1191 of the Civil Code, is to be applied, Our decision would still be for the petitioners. It is not denied that petitioners made 2 payments in the sums of P200 and P300 at a time when what remained unsettled under the agreement

was only P400. There was then an excess payment of P100. These payments were made to the DBP which applied them to an outstanding account of the private respondents. Private respondents neither complained of the delay in these payments nor rejected their application to their account. They were, undoubtedly, benefited by the application because it either satisfied their account or correspondingly reduced it. The claim that the account to which it was applied was not the account stipulated in the agreement is without merit. In the first place, the agreement fails to disclose an express agreement that the monthly amortizations on the P1,000 unpaid balance of the purchase price to be made to the DBP should be applied exclusively to the agricultural loan indicated in the exordium of the agreement. The loan was mentioned only to lay the basis for private respondents' need for the downpayment. Second, to allow private respondents to reject the payment of P400, plus the excess of P100 after they benefited therefrom, would be unjust. Finally, the delay incurred by petitioners was but a casual or slight breach of the agreement, which did not defeat the object of the parties in entering into the agreement. A mere casual breach does not justify rescission. The prompt payment of the monthly amortizations of the unpaid balance of P1,000 was not a condition precedent to the execution of the final deed of sale. Besides, petitioners had already paid P1,400 of the total consideration of P1,800 within the period stipulated. Moreover, they had in fact overpaid the private respondents by P100.

6.2 CONDITIONAL OBLIGATIONS 6.2.3 POTESTATIVE, CASUAL MIXED

OR

SECURITY BANK & TRUST CO. V. C.A. & YSMAEL FERRER G.R. No. 117009 October 11, 1995 FACTS:  Private respondent Ysmael C. Ferrer was contracted by herein petitioners SBTC and Rosito C. Manhit to construct the building of SBTC in Davao City for the price of P1.7M. The contract provided that Ferrer would finish the construction in 200 working days. Respondent Ferrer was able to complete the construction of the building within the contracted period but he was compelled by a drastic increase in the cost of construction materials to incur eadditional xpenses of about P300k. The additional expenses were made known to SBTC and Supervising Architect Rudy de la Rama early on. Respondent Ferrer made timely demands for payment of the increased cost. Said demands were supported by receipts, invoices, payrolls and other documents proving the additional expenses.  SBTC and a representative of an architectural firm consulted by SBTC, verified Ferrer's claims for additional cost. A recommendation was then made to settle Ferrer's claim but only for P200k. SBTC, instead of paying the recommended additional amount, denied ever authorizing payment of any amount beyond the original contract price. SBTC likewise denied any liability for the additional cost based on Article IX of the building contract.  Ferrer then filed a complaint for breach of contract with damages. RTC ruled for Ferrer and ordered SBTC and Rosito C. Manhit to pay damages. ISSUE: WON SBTC IS LIABLE FOR THE ADDITIONAL EXPENSES?

CIV LAW REVIEW - OBLICON DIGESTS HELD: YES. In the present case, petitioners' arguments to support absence of liability for the cost of construction beyond the original contract price are not persuasive. Under Article IX of the construction contract, petitioners would make the appropriate adjustment to the contract price in case the cost of the project increases through no fault of the contractor (private respondent). Under Article 1182 of the Civil Code, a conditional obligation shall be void if its fulfillment depends upon the sole will of the debtor. In the present case, the mutual agreement, the absence of which petitioner bank relies upon to support its non-liability for the increased construction cost, is in effect a condition dependent on petitioner bank's sole will, since private respondent would naturally and logically give consent to such an agreement which would allow him recovery of the increased cost. Further, it cannot be denied that petitioner bank derived benefits when private respondent completed the construction even at an increased cost. Hence, to allow petitioner bank to acquire the constructed building at a price far below its actual construction cost would undoubtedly constitute unjust enrichment for the bank to the prejudice of private respondent. Such unjust enrichment, as previously discussed, is not allowed by law. RUSTAN PULP & PAPER MILLS, INC. V. I.A.C. & ILIGAN DIVERSIFIED PROJECTS, INC. G.R. No. 70789 October 19, 1992 FACTS:  Petitioner Rustan established a pulp and paper mill in Lano del Norte, to which Respondent Lluch, who is a holder of a forest products license, supplies wood materials. The contract provides: “That the BUYER shall have the right to stop delivery of the said raw materials by the seller covered by this contract when supply of the same shall become sufficient until such time when need for said raw materials shall have become necessarily provided, however, that the SELLER is given sufficient notice.”  In the installation of the plant facilities, the technical staff of Rustan Pulp and Paper Mills, Inc. recommended the acceptance of deliveries from other suppliers of the pulp wood materials for which the corresponding deliveries were made. But during the test run of the pulp mill, the machinery line thereat had major defects while deliveries of the raw materials piled up, which prompted the Japanese supplier of the machinery to recommend the stoppage of the deliveries. The suppliers were informed to stop deliveries and the letter of similar advice sent by petitioners to private respondents.  Private respondent Romeo Lluch sought to clarify the tenor of the letter as to whether stoppage of delivery or termination of the contract of sale was intended, but the query was not answered by petitioners. This alleged ambiguity notwithstanding, Lluch and the other suppliers resumed deliveries after the series of talks between Romeo S. Vergara and Romeo Lluch. A complaint for contractual breach was then filed. ISSUE: WON THE STOPPAGE OF DELIVERIES WAS PROPER? HELD: NO. Insofar as the express discretion on the part of petitioners is concerned regarding the right of stoppage, We feel that there is cogent basis for private respondent's apprehension on the illusory resumption of deliveries inasmuch as the prerogative suggests a condition solely dependent upon the will of petitioners. Petitioners can stop delivery of pulp wood from private

respondents if the supply at the plant is sufficient as ascertained by petitioners, subject to re-delivery when the need arises as determined likewise by petitioners. This is Our simple understanding of the literal import of paragraph 7 of the obligation in question. A purely potestative imposition of this character must be obliterated from the face of the contract without affecting the rest of the stipulations considering that the condition relates to the fulfillment of an already existing obligation and not to its inception. It is, of course, a truism in legal jurisprudence that a condition which is both potestative (or facultative) and resolutory may be valid, even though the saving clause is left to the will of the obligor like what this Court said in Taylor vs. Uy Tieng Piao and Tan Liuan. But the conclusion drawn from the Taylor case, which allowed a condition for unilateral cancellation of the contract when the machinery to be installed on the factory did not arrive in Manila, is certainly inappropriate for application to the case at hand because the factual milieu in the legal tussle conveys that the proviso relates to the birth of the undertaking and not to the fulfillment of an existing obligation. Petitioners are of the impression that they acted well within the right of stoppage guaranteed to them by paragraph 7 of the contract of sale which was construed by petitioners to be a temporary suspension of deliveries. There is no doubt that the contract speaks loudly about petitioners' prerogative but what diminishes the legal efficacy of such right is the condition attached to it which, as aforesaid, is dependent exclusively on their will for which reason, We have no alternative but to treat the controversial stipulation as inoperative (Article 1306, New Civil Code). It is for this same reason that We are not inclined to follow the interpretation of petitioners that the suspension of delivery was merely temporary since the nature of the suspension itself is again conditioned upon petitioner's determination of the sufficiency of supplies at the plant. Neither are We prepared to accept petitioners' exculpation grounded on frustration of the commercial object under Article 1267 of the New Civil Code, because petitioners continued accepting deliveries from the suppliers. This conduct will estop petitioners from claiming that the breakdown of the machinery line was an extraordinary obstacle to their compliance to the prestation. It was indeed incongruous for petitioners to have sent the letters calling for suspension and yet, they in effect disregarded their own advice by accepting the deliveries from the suppliers.

6.2 CONDITIONAL OBLIGATIONS 6.2.5 COUPLED WITH A TERM A. IF PERIOD INTENDED FOR FULFILLMENT (ART 1197)

PACIFICA MILLARE V. HON. HAROLD M. HERNANDO G.R. No. L-55480 June 30, 1987 FACTS:  A five-year Contract of Lease was executed between petitioner Pacifica Millare as lessor and private respondent Elsa Co, married to Antonio Co, as lessee. Under the written agreement, lessor-petitioner agreed to rent out to thelessee at a monthly rate of P350 the "People's Restaurant." Paragraph 13 of the Contract of Lease reads as follows: 13. This contract of lease is subject to the laws and regulations ofthe goverrunent; and that this contract of lease may be renewed after a period of 5 years under the terms and conditions as will be mutually agreed upon by the parties at the time of renewal.

CIV LAW REVIEW - OBLICON DIGESTS  According to the Co spouses, sometime during the last week of May 1980, the lessor informed them that they could continue leasing the People's Restaurant so long as they were amenable to paying increased rentals of P1,200 a month. In response, a counteroffer of P700 a month was made by the Co spouses. At this point, the lessor allegedly stated that the amount of monthly rentals could be resolved at a later time since "the matter is simple among us", which alleged remark was supposedly taken by the spouses Co to mean that the Contract of Lease had been renewed, prompting them to continue occupying the subject premises and to forego their search for a substitute place to rent. In contrast, the lessor flatly denied ever having considered, much less offered, a renewal of the Contract of Lease.  Mrs. Millare then requested the Co spouses to vacate the leased premises as she had no intention of renewing the Contract of Lease which had, in the meantime, already expirecl. In reply, the Co spouses reiterated their unwillingness to pay the Pl,200 monthly rentals supposedly sought bv Mrs. Millare which they considered "highly excessive, oppressive and contrary to existing laws". They also signified their intention to deposit the amount of rentals in court, in view of Mrs. Millare's refusal to accept their counter-offer.  CO spouses then filed a complaint seeking renewal of the Contract of Lease at a rental rate of P700/month and for a period of 10 years, and damages. ISSUE: WON THE CO SPOUSES MAY CLAIM RENEWAL OF THE CONTRACT HELD: NO. The first paragraph of Article 1197 is clearly inapplicable, since the Contract of Lease did in fact fix an original period of five years, which had expired. It is also clear from paragraph 13 of the Contract of Lease that the parties reserved to themselves the faculty of agreeing upon the period of the renewal contract. The second paragraph of Article 1197 is equally clearly inapplicable since the duration of the renewal period was not left to the wiu of the lessee alone, but rather to the will of both the lessor and the lessee. Most importantly, Article 1197 applies only where a contract of lease clearly exists. Here, the contract was not renewed at all, there was in fact no contract at all the period of which could have been fixed. Article 1670 of the Civil Code reads thus: “If at the end of the contract the lessee should continue enjoying the thing left for 15 days with the acquiescence of the lessor and unless a notice to the contrary by either party has previously been given. It is understood that there is an implied new lease, not for the period of the original contract but for the time established in Articles 1682 and 1687. The ther terms of the original contract shall be revived.” The respondents themselves, public and private, do not pretend that the continued occupancy of the leased premises after the date of expiration of the contract, was with the acquiescence of the lessor. Even if it be assumed that tacite reconduccion had occurred, the implied new lease could not possibly have a period of 5 years, but rather would have been a month-to-month lease since the rentals (under the original contract) were payable on a monthly basis. At the latest, an implied new lease (had one arisen) would have expired as of the end of July 1980 in view of the written demands served by the petitioner upon the private respondents to vacate the previously leased premises.

It follows that the respondent judge's decision requiring renewal of the lease has no basis in law or in fact. Save in the limited and exceptional situations envisaged in Articles ll97 and 1670 of the Civil Code, which do not obtain here, courts have no authority to prescribe the terms and conditions of a contract for the parties. As pointed out by Mr. Justice J.B.L. Reyes in Republic vs. PLDT: “[P]arties cannot be coerced to enter into a contract where no agreement is had between them as to the principal terms and conditions of the contract. Freedom to stipulate such terms and conditions is of the essence of our contractual system, and by express provision of the statute, a contract may be annulled if tainted by violence, intimidation or undue influence.” Contractual terms and conditions created by a court for two parties are a contradiction in terms. If they are imposed by a judge who draws upon his own private notions of what morals, good customs, justice, equity and public policy" demand, the resulting "agreement" cannot, by definition, be consensual or contractual in nature. It would also follow that such coerced terms and conditions cannot be the law as between the parties themselves. Contracts spring from the volition of the parties. That volition cannot be supplied by a judge and a judge who pretends to do so, acts tyrannically, arbitrarily and in excess of his jurisdiction. 19

6.3 RECIPROCAL OBLIGATIONS 6.3.1 NATURE; EFFECT – PERFORMANCE

CONDITION

FOR

SPOUSES HENRY AND ELIZABETH CO V. C.A & ADORACION CUSTODIO [G.R. No. 112330. August 17, 1999] FACTS:  Mrs. Adoracion Custodio entered into a verbal contract with the Spouses Co for her purchase of the latter’s house and lot, for and in consideration of the sum of $100k. One week thereafter, and shortly before she left for the US, Custodio paid to the Spouses Co the amounts of $1,000 and P40k as earnest money, in order that the same may be reserved for her purchase, said earnest money to be deducted from the total purchase price. The purchase price of $100k is payable in 2 payments $40k on December 4, 1984 and the balance of $60k on January 5, 1985. On January 25, 1985, although the period of payment had already expired, Custodio paid to the other petitioner Melody Co in the United States, the sum of $30k, as partial payment of the purchase price. Co’s counsel wrote a letter to Custodio demanding that she pay the balance of $70k and not receiving any response thereto, said lawyer wrote another letter to Custodio, informing her that she has lost her ‘option to purchase’ the property subject of this case and offered to sell her another property.  Counsel for Custodio then wrote Co’s counsel, informing him that Custodio ‘is now ready to pay the remaining balance to complete the sum of $100k, the agreed amount as selling price.’ On October 24, 1986, plaintiff filed the instant complaint.”  RTC ruled in favor of Custodio and ordered the petitioner spouses Henry and Elizabeth Co to refund the amount of $30k in Custodio’s favor, and ordered that the earnest money of $1k and P40k be forfeited in favor of the Sps. Co. ISSUE: WON THE ORDER TO RETURN THE $30K PAID BY CUSTODIO PURSUANT TO THE “OPTION” GRANTED, WAS PROPER?

CIV LAW REVIEW - OBLICON DIGESTS HELD: YES. The COs’ main argument is that CUSTODIO lost her “option” over the Beata property and her failure to exercise said option resulted in the forfeiture of any amounts paid by her. An option is a contract granting a privilege to buy or sell within an agreed time and at a determined price. It is a separate and distinct contract from that which the parties may enter into upon the consummation of the option. It must be supported by consideration. An option contract conforms with the second paragraph of Article 1479 of the Civil Code which reads: “An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if the promise is supported by a consideration distinct from the price.” However, the letter sent by the Cos through their lawyer to Custodio reveals that the parties entered into a perfected contract of sale and not an option contract. A contract of sale is a consensual contract and is perfected at the moment there is a meeting of the minds upon the thing which is the object of the contract and upon the price. From that moment the parties may reciprocally demand performance subject to the provisions of the law governing the form of contracts. The elements of a valid contract of sale under Article 1458 of the Civil Code are (1) consent or meeting of the minds; (2) determinate subject matter; and (3) price certain in money or its equivalent. Custodio’s offer to purchase the Beata property, subject of the sale at a price of $100k was accepted by the Cos. Even the manner of payment of the price was set forth in the letter. Earnest money in the amounts of US$1k and P40k was already received by the Cos. Under Article 1482 of the Civil Code, earnest money given in a sale transaction is considered part of the purchase price and proof of the perfection of the sale. Despite the fact that CUSTODIO’s failure to pay the amounts of $40k and $60k on or before December 4, 1984 and January 5, 1985 respectively was a breach of her obligation under Article 1191, the Cos did not sue for either specific performance or rescission of the contract. The Cos were of the mistaken belief that Custodio had lost her “option” over the Beata property when she failed to pay the remaining balance of $70k. In the absence of an express stipulation authorizing the sellers to extrajudicially rescind the contract of sale, the Cos cannot unilaterally and extrajudicially rescind the contract of sale. Accordingly, Custodio acted well within her rights when she attempted to pay the remaining balance of $70k to complete the sum owed of $100k as the contract was still subsisting at that time. When the Cos refused to accept said payment and to deliver the Beata property, Custodio immediately sued for the rescission of the contract of sale and prayed for the return of the $30k she had initially paid. Under Article 1385 of the Civil Code, rescission creates the obligation to return the things which were the object of the contract but such rescission can only be carried out when the one who demands rescission can return whatever he may be obliged to restore. This principle has been applied to rescission of reciprocal obligations under Article 1191 of the Civil Code. The Court of Appeals therefore did not err in ordering the COS to return the amount of $30k to Custodio after ordering the rescission of the contract of sale over the Beata property. Since it has been shown that Custodio was not in default, was willing to perform part of the contract while the Cos were not, rescission of the contract is in order. 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, (Article 1191). Rescission creates the obligation to return the things which

were the object of the contract, together with their fruits, and the price with its interest (Article 1385). In the case at bar, the property involved has not been delivered to the appellee. She has therefore nothing to return to the appellants. The price received by the appellants has to be returned to the appellee as aptly ruled by the lower court, for such is a consequence of rescission, which is to restore the parties in their former situations. CENTRAL BANK OF THE PHILIPPINES V. SPOUSES BICHARA G.R. No. 131074 March 27, 2000 FACTS:  Respondents Bichara were the former registered owners of 2 Lots. Respondents sold the two properties to petitioner Central Bank for the sum of P405k. The deed of sale further provided: “4. The VENDORS hereby likewise undertake at their expense to fill the parcels of land with an escombro free from waste materials compacted to the street level upon signing of the Deed of Sale to suit the ground for the construction of the regional office of the Central Bank of the Philippines thereat.”  The record discloses that despite respondents' failure to pay the capital gains tax and other transfer fees, a TCT was nonetheless issued in petitioner's name. Despite the issuance of the title, petitioner failed to pay respondent. On its part, respondents did not fill up the lot with escombro despite several demands made by petitioner. Petitioner was thus constrained to undertake the filling up of the said lots, by contracting the services of BGV Construction. The filling up of the lots cost petitioner P45l. Petitioner deducted the said amount from the purchase price payable to respondents.  Petitioner, however, still did not pay the respondents. Consequently, respondents filed for rescission or specific performance with damages. ISSUE: WON RESCISSION IS PROPER? HELD: NO. The right to rescind a contract involving reciprocal obligations is provided for in Article 1191 of the Civil Code. The law speaks of the right of the "injured party" to choose between rescission or fulfillment of the obligation, with the payment of damages in either case. Here, respondents claim to be the injured party and consequently seek the rescission of the deed of sale, or in the alternative, its fulfillment but on terms different from those previously agreed upon. Respondents aver that they are entitled to cancel the obligation altogether in view of petitioner's failure to pay the purchase price when the same became due. Petitioner disputes respondent's stand, claiming that if anyone was at fault, it was the latter who dismally failed to comply with their contractual obligations. Hence, it was entitled to withhold payment of the purchase price. An instance where the law clearly allows the vendee to withhold payment of the purchase price is Article 1590 of the Civil Code, which provides: “Should the vendee be disturbed in the possession or ownership of the thing acquired, or should he have reasonable grounds to fear such disturbance, by a vindicatory action or a foreclosure of mortgage, he may suspend the payment of the price until the vendor has cause the disturbance or danger to cease, unless the latter gives security for the return of the price in a proper case, or it has been stipulated that, notwithstanding any such contingency, the vendee shall be bound to make the payment. A mere act of trespass shall not authorize the suspension of the payment of the price.” This is not, however, the only justified cause for retention or

CIV LAW REVIEW - OBLICON DIGESTS withholding the payment of the agreed price. A noted authority on civil law states that the vendee is nonetheless entitled if the vendor fails to perform any essential obligation of the contract. Such right is premised not on the aforequoted article, but on general principles of reciprocal obligations. This view is consistent with our rulings in earlier cases that resolution is allowed only for substantial breaches and not for those which are slight or casual. Certainly, non-payment of the purchase price constitutes a very good reason to rescind a sale, for it violates the very essence of the contract of sale. By the contract of sale one of the contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent. Thus, nonpayment of the purchase price is a resolutory condition, for which the remedy is either rescission or specific performance under Article 1191. This is true for reciprocal obligations, where the obligation of one is a resolutory condition of the other. Petitioner contends that it was entitled to retain the purchase price due to respondents' failure to pay the capital gains and documentary stamp taxes and other transfer fees. Petitioner likewise insists that its delay in paying the purchase price was justified since a squatters occupied the premises, contravening the stipulation that the respondent vendors shall convey the properties free from liens and encumbrances. So far, what emerges as clear is that petitioner's obligation to pay was not subject to the foregoing "conditions," only its demandability is suspended until the opportune time. That arrived upon the registration of the deed of sale and issuance of a clean title in favor of the petitioner. Relative thereto, the notice of adverse claim and lis pendens became moot issues because they were cancelled less than a year after their inscription. As to petitioner's argument that it was not obliged to pay until respondents compact the lots to street level with escombro free from waste material, we find that particular argument of petitioner to be well-taken. The use to which the parcels of land was to be devoted was no secret between the parties. Thus, petitioner specified that the lots be filled up in the manner specified in the contract. The importance thereof could not have been lost on respondents. Evidently then, respondents were guilty of non-performance of said stipulation. The deed of sale expressly stipulated that the vendors were to undertake, at their expense, the filling up of the lots with escombro free from waste material compacted to the street level. This was to be accomplished upon the signing of the contract and insofar as petitioner was concerned, respondents obligation was demandable at once. Other than his testimony, Alfonso Bichara offered no proof tending to show that he had complied in the manner agreed upon. Although he did state that he saw no need to comply with the stipulation because the parcels of land were already level with the street, it was still not shown that the same were in a condition suitable for the construction of petitioner's regional office. We find it hard to believe that the deed of sale would have specified the nature, quantity and quality of the filling material were it not to prepare the lots for the construction. Where the terms of a contract are clear they should be fulfilled according to the literal tenor of their stipulation. If indeed it were true that the lots were already at street level, petitioner would not have incurred the additional cost of P45k for having them filled up by the BGV Corporation. On the other hand, respondent argue that as proof of petitioner's bad faith, the latter could have undertake the filling up of the lots as early as 1989, 36 when it would have cost only about P9k. We disagree. Petitioner was under no duty to have done, at the least cost to the

latter, what was clearly respondents’ obligation from the very beginning. If petitioner was forced to have the subject parcels of land filled up by another party, and subsequently bill respondents, the former was entitled to do so by right. Respondents are not in a position to question the resulting expense. Had they performed their obligation under the contract of sale at the proper time, the expense would surely have been even less than the P9k estimate in 1989. In this context, the appellate court erred in decreeing the rescission, otherwise called resolution, of the subject deed of sale. Respondents should not be allowed to rescind the contract where they themselves did not perform their essential obligation thereunder. It should be emphasized that a contract of sale involves reciprocity between the parties. Since respondents were in bad faith, they may not seek the rescission of the agreement they themselves breached. Consequently, the decision rendered by the trial court should be reinstated as being just and proper under the premises.

6.3 RECIPROCAL OBLIGATIONS 6.3.2 NECESSITY OF COURT APPROVAL

AGUSTINA LIQUETTE TAN V. C.A. & SPS. SINGSON G.R. No. 80479 July 28, 1989 FACTS:  Private respondents Singsons are the owners of a house and lot which were then for sale. Petitioner Tan together with her agent went to see said spouses at their residence regarding the property. After Singsons had shown Tan around the house and had conversation about the encumbrances and/or liens on the property, the parties finally agreed on the price of Pl.8M, with Tan to advance earnest money of P200k to enable Singsons to secure the cancellation of the mortgage and lien annotated on the title of the property and the balance of the price to be paid by Tan on June 21, 1984. Forthwith, Tan handed to Singsons a check for P200k.  In turn, appellants handed to appellee a xerox copy of the title and other papers pertaining to the property as well as an inventory of the furnishings of the house that are included in the sale. 3 days thereafter, Tan returned to Singsons' house together with her daughter Corazon and one Ines, to ask for a reduction of the price to Pl.75M and Singson spouses agreed, and so another receipt entitled "Agreement" was signed by the parties.  The very same day that Singsons received the earnest money of P 200k, they started paying their mortgage loan with the DBP to clear up the title of the subject property. DBP then executed a cancellation of mortgage, which was registered with the Registry of Property. Spouses also paid all the taxes due and in arrears on the property.  Appellee accompanied by her daughter Corazon and her lawyer, Atty. Vicente Quitoriano, went to Baguio City to inquire about the status of the property and Singsons told her that the DBP was taking some time processing their payments and preparing the deed of cancellation of the mortgage. On that occasion, the parties agreed on an extension of 2 weeks for the execution of the deed of sale. Here, the parties' respective versions on the matter parted ways. According to appellants, it was appellee who asked for the extension because she was not yet ready to pay the balance of P l.55M. On the other hand, appellee said that it was appellants who asked for it because the title of the property was not yet cleared. The court below believed appellee because on said date the DBP had not yet

CIV LAW REVIEW - OBLICON DIGESTS executed the deed of cancellation of mortgage, and no title has yet been issued for the driveway although already fully paid for.  Immediately, upon execution by the DBP of the deed of cancellation of mortgage, Singsons tried to contact Tan and/or her daughter Corazon to come to Baguio City for the formal execution of the deed of sale, but to no avail. Instead, appellants received a telegram from Atty. Quitoriano cancelling the sale and demanding the return of the P200k earnest money. Appellants countered with a letter of their lawyer, Atty. Tiofisto Rodes, calling on appellee to perform her part of the contract because "the title to the house and lot right now suffers no imperfection or doubt.  Tan then filed a case for recovery of sum of money with damages, ISSUE: WON THERE WAS SUBSTANTIAL BREACH BY THE SPOUSES, MERITING RESCISSION OF THE CONTRACT? HELD: NO. That 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 is clear from a reading of the Civil Code provisions. However, it is equally settled that, in the absence of a stipulation to the contrary, this power must be invoked judicially; it cannot be exercised solely on a party's own judgment that the other has committed a breach of the obligation. Where there is nothing in the contract empowering the petitioner to rescind it without resort to the courts, the petitioner's action in unilaterally terminating the contract in this case is unjustified. Petitioner, in rescinding the sale, claims that a substantial breach of the obligation has been committed by the private respondents. Nevertheless, the alleged breach of the obligation by the private respondents, which consists in a mere delay for a few days in clearing the title to the property, cannot be considered substantial enough to warrant rescission of the contract. A thorough review of the records clearly indicates that private respondents had substantially complied with their undertaking of clearing the title to the property. It is a settled principle of law that rescission will not be permitted for a slight or casual breach of the contract but only for such breaches as are so substantial and fundamental as to defeat the object of the parties in making the agreement. A court, in determining whether rescission is warranted, must exercise its discretion judiciously considering that the question of whether a breach of a contract is substantial depends upon the attendant circumstances. In this case, it is true that as of the date set for the execution of the final deed of sale, the mortgage lien in favor of DBP annotated in the title has not yet been cancelled as it took DBP some time in processing the papers relative thereto. However, just a few days after, the cancellation of the DBP mortgage was entered by the Register of Deeds and duly noted on the title. Time not being of the essence in the agreement, a slight delay on the part of the private respondents in the performance of their obligation, is not sufficient ground for the resolution of the agreement, more so when the delay was not totally attributable to them. Inasmuch as the private respondents are ready, willing and able to comply with their obligation to deliver title to the property subject of the sale and had already demanded that petitioner pay the full amount of the purchase price, the petitioner must be considered as having incurred in delay. This conclusion is warranted by the clear provision of Article 1169 of the Civil Code.

In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other begins. It is basic that the breach of a contract gives the aggrieved party under the law and even under general principles of fairness, the right to rescind the contract or to ask for specific performance. Petitioner having failed to comply with her obligation of paying the balance of the purchase price despite demands by private respondents, private respondents were clearly entitled to their counterclaim for specific performance, as correctly adjudged by the respondent court. One final point, the decision of the respondent Court of Appeals ordered execution by private respondents of the absolute deed of sale conveying the subject property to petitioner and payment by petitioner of the balance of the purchase price immediately upon finality of such judgment. However, under the third paragraph of Article 1191 of the Civil Code, the Court is given a discretionary power to allow a period within which a person in default may be permitted to perform his obligation. Considering the huge amount of money involved in this sale, the Court, in the exercise of its sound discretion, hereby fixes a period of 90 days within which petitioner shall pay the balance of the purchase price amounting to Pl.55M plus interest thereon at the legal rate from finality of this judgment until fully paid. After such payment has been made, the private respondents are ordered to sign and execute the necessary absolute deed of sale in favor of petitioner. ALFONSO L. IRINGAN V. C.A & ANTONIO PALAO [G.R. No. 129107. September 26, 2001] FACTS:  Private respondent Antonio Palao sold to petitioner Alfonso Iringan, a parcel of land. The parties executed a Deed of Sale on the same date with the purchase price of P295k, payable in 3 payments. When the second payment was due, Iringan paid only P40k. Thus, Palao sent a letter to Iringan stating that he considered the contract as rescinded and that he would not accept any further payment considering that Iringan failed to comply with his obligation to pay the full amount of the second installment.  Iringan through his counsel replied that they were not opposing the revocation of the Deed of Sale but asked for the reimbursement of the P50k received, geodetic engineer’s fees and attorney’s fee, plus interest.  Palao refused. Later, Iringan proposed that the P50,000 which he had already paid Palao be reimbursed or Palao could sell to Iringan, an equivalent portion of the land. Palao instead wrote Iringan that the latter’s standing obligation had reached P61,600, representing payment of arrears for rentals from October 1985 up to March 1989. The parties failed to arrive at an agreement. Thus, Palao filed a Complaint for Judicial Confirmation of Rescission of Contract and Damages against Iringan and his wife. ISSUE: WON THE CONTRACT OF SALE WAS VALIDLY RESCINDED? HELD: YES. Petitioner contends that no rescission was effected simply by virtue of the letter sent by respondent stating that he considered the contract of sale rescinded. Petitioner asserts that a judicial or notarial act is necessary before one party can unilaterally effect a rescission. Respondent Palao, on the other hand, contends

CIV LAW REVIEW - OBLICON DIGESTS that the right to rescind is vested by law on the obligee and since petitioner did not oppose the intent to rescind the contract, Iringan in effect agreed to it and had the legal effect of a mutually agreed rescission. Article 1592 of the Civil Code is the applicable provision regarding the sale of an immovable property. In the case of Villaruel v. Tan King, the Court said that the requirement of then Article 1504, “refers to a demand that the vendor makes upon the vendee for the latter to agree to the resolution of the obligation and to create no obstacles to this contractual mode of extinguishing obligations.” Clearly, a judicial or notarial act is necessary before a valid rescission can take place, whether or not automatic rescission has been stipulated. It is to be noted that the law uses the phrase “even though” emphasizing that when no stipulation is found on automatic rescission, the judicial or notarial requirement still applies. On the first issue, both the trial and appellate courts affirmed the validity of the alleged mutual agreement to rescind based on Article 1191 of the Civil Code. But in our view, even if Article 1191 were applicable, petitioner would still not be entitled to automatic rescission. In Escueta v. Pando, we ruled that under Article 1124 (now Article 1191), the right to resolve reciprocal obligations, is deemed implied in case one of the obligors shall fail to comply with what is incumbent upon him. But that right must be invoked judicially. The same article also provides: “The Court shall decree the resolution demanded, unless there should be grounds which justify the allowance of a term for the performance of the obligation.” This requirement has been retained in the third paragraph of Article 1191, which states that “the court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.” Consequently, even if the right to rescind is made available to the injured party, the obligation is not ipso facto erased by the failure of the other party to comply with what is incumbent upon him. The party entitled to rescind should apply to the court for a decree of rescission. The right cannot be exercised solely on a party’s own judgment that the other committed a breach of the obligation. The operative act which produces the resolution of the contract is the decree of the court and not the mere act of the vendor. Since a judicial or notarial act is required by law for a valid rescission to take place, the letter written by respondent declaring his intention to rescind did not operate to validly rescind the contract. Notwithstanding the above, however, in our view when private respondent filed an action for Judicial Confirmation of Rescission and Damages before the RTC, he complied with the requirement of the law for judicial decree of rescission. The complaint categorically stated that the purpose was 1) to compel appellants to formalize in a public document, their mutual agreement of revocation and rescission; and/or 2) to have a judicial confirmation of the said revocation/rescission under terms and conditions fair, proper and just for both parties. In Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., we held that even a crossclaim found in the Answer could constitute a judicial demand for rescission that satisfies the requirement of the law. The prescriptive period applicable to rescission under Articles 1191 and 1592, is found in Article 1144, which provides that the action upon a written contract should be brought within ten years from the time the right of action accrues. The suit was brought on July 1, 1991, or six years after the default. It was filed within the period for

rescission. Thus, the contract of sale between the parties as far as the prescriptive period applies, can still be validly rescinded.

6.3 RECIPROCAL OBLIGATIONS 6.3.3 RESOLUTION (ART. 1191) V. RESCISSION (ARTS. 1381-1384)

MARGARITA SURIA V. I.A.C. G.R. No. 73893 June 30, 1987 FACTS:  Respondents are the owners of a parcel of land. They entered into a contract denominated as DEED OF SALE WITH MORTGAGE, with herein petitioner Suria. They allege that the petitioners violated the terms and conditions of the contract by failing to pay the stipulated installments and in fact only one installment due in July 1975 (paid very late in the month of September, 1975) was made. Respondents claim that repeated verbal and written demands were made by them upon the petitioners for the payment of the installments, but petitioner for no justifiable reason failed to comply.  Petitioners filed a motion to disniiss complaint, alleging that respondents are not entitled to the subsidiary remedy of rescission because of the presence of remedy of foreclosure in the Deed of Sale with Mortgage ISSUE: WON RESCISSION IS PROPER? HELD: NO. The respondent court rejected the petitioners' reliance on paragraph (H) of the contract which grants to the vendors mortgagees the right to foreclose "in the event of the failure of the vendees-mortgagors to comply with any provisions of this mortgage." According to the appellate court, this stipulation merely recognizes the right of the vendors to foreclose and realize on the mortgage but does not preclude them from availing of other remedies under the law, such as rescission of contract and damages under Articles 1191 and 1170 of the Civil Code in relation to Republic Act No. 6552. The appellate court committed reversible error. Art. 1191 on reciprocal obligations is not applicable under the facts of this case. RESOLUTION V. RESCISSION The rescission on account of breach of stipulations is not predicated on injury to economic interests of the party plaintiff but on the breach of faith by the defendant, that violates the reciprocity between the parties. It is not a subsidiary action, and Article 1191 may be scanned without disclosing anywhere that the action for rescission thereunder is subordinated to anything other than the culpable breach of his obligations by the defendant. This rescission is a principal action retaliatory in character, it being unjust that a party be held bound to fulfill his promises when the other violates his. As expressed in the old Latin aphorism: "Non servanti fidem, non est fides servanda," Hence, the reparation of damages for the breach is purely secondary. On the contrary, in the rescission by reason of lesion or economic prejudice, the cause of action is subordinated to the existence of that prejudice, because it is the raison d 'etre as well as the measure of the right to rescind. Hence, where the defendant makes good the damages caused, the action cannot be maintained or continued, as expressly provided in Articles 1383 and 1384. But the operation of these two articles is limited to the cases of rescission for lesion enumerated in Article 1381 of the Civil Code of the Philippines, and does not apply to cases under Article 1191.

CIV LAW REVIEW - OBLICON DIGESTS The petitioners' breach of obligations in this case is not with respect to the perfected contract of sale but in the obligations created by the mortgage contract. The remedy of rescission is not a principal action retaliatory in character but becomes a subsidiary one which by law is available only in the absence of any other legal remedy. (Art. 1384, Civil Code). Foreclosure here is not only a remedy accorded by law but, as earlier stated, is a specific provision found in the contract between the parties. The petitioners are correct in citing this Court's ruling in Villaruel v. Tan King where we Stated: At the outset it must be said that since the subject-matter of the sale in question is real property, it does not come strictly within the provisions of article 1124 of the Civil Code, but is rather subjected to the stipulations agreed upon by the contracting parties and to the provisions of Article 1504 of the Civil Code. The "pacto comisorio" of "ley comisoria" is nothing more than a condition subsequent of the contract of purchase and sale. Considered carefully, it is the very condition subsequent that is always attached to all bilateral obligations according to article 1124; except that when applied to real property it is not within the scope of said article 1124, and it is subordinate to the stipulations made by the contracting parties and to the provisions of the article on which we are now commenting" (article 1504). Now, in the contract of purchase and sale before us, the parties stipulated that the payment of the balance of P1,000 was guaranteed by the mortgage of the house that was sold. This agreement has the two-fold effect of acknowledging indisputably that the sale had been consummated, so much so that the vendee was disposing of it by mortgaging it to the vendor, and of waiving the pacto comisorio, that is, the resolution of the sale in the event of failure to pay the P1,000 such waiver being proved by the execution of the mortgage to guarantee the payment, and in accord therewith the vendor's adequate remedy, in case of nonpayment, is the foreclosure of such mortgage. There is, therefore, no cause for the resolution of the sale as prayed for by the plaintiff. His action, at all events, should have been one for the foreclosure of the mortgage, which is not the action brought in this case. Article 1124 of the Civil Code, as we have seen, is not applicable to this case. JAIME G. ONG V. C.A & SPOUSES ROBLES [G.R. No. 97347. July 6, 1999] FACTS:  Petitioner Jaime Ong, on the one hand, and respondent spouses Miguel K. Robles and Alejandra Robles, on the other hand, executed an “Agreement of Purchase and Sale” respecting two parcels of land for the amount of P2M. The contract provided that P103K will be paid as a downpayment, then P496k will be paid directly to BPI to answer for a loan of the sellers. Then, the balance of P1.4M shall be paid to the sellers in 4 installments.  Petitioner Ong took possession of the subject parcels of land together with the piggery, building, ricemill, residential house and other improvements thereon. Pursuant to the contract they executed, petitioner paid respondent spouses the sum of P103k by depositing it with the UCPB. Subsequently, petitioner deposited sums of money with the BPI, in accordance with their stipulation that petitioner pay the loan of respondents with BPI.  To answer for his balance of P1.4M petitioner issued 4 post-dated Metro Bank checks payable to respondent spouses.

When presented for payment, however, the checks were dishonored due to insufficient funds. Petitioner promised to replace the checks but failed to do so. To make matters worse, out of the P496k loan of respondent spouses with the Bank of the Philippine Islands, which petitioner should have paid, petitioner only managed to dole out no more than P393k. When the bank threatened to foreclose the respondent spouses’ mortgage, they sold three transformers of the rice mill worth P51k to pay off their outstanding obligation with said bank, with the knowledge and conformity of petitioner. Petitioner, in return, voluntarily gave the spouses authority to operate the rice mill. He, however, continued to be in possession of the two parcels of land while private respondents were forced to use the rice mill for residential purposes.  Respondent spouses then sent petitioner a demand letter asking for the return of the properties. Their demand was left unheeded, so they filed a complaint for rescission of contract and recovery of properties with damages. ISSUE: WON THE CONTRACT MAY BE VALIDLY SET ASIDE? HELD: YES. Petitioner contends that Article 1191 of the New Civil Code is not applicable since he has already paid respondent spouses a considerable sum and has therefore substantially complied with his obligation. He cites Article 1383 instead, to the effect that where specific performance is available as a remedy, rescission may not be resorted to. RESCISSION V. RESOLTION Rescission, as contemplated in Articles 1380, et seq., of the New Civil Code, is a remedy granted by law to the contracting parties and even to third persons, to secure the reparation of damages caused to them by a contract, even if this should be valid, by restoration of things to their condition at the moment prior to the celebration of the contract. t implies a contract, which even if initially valid, produces a lesion or a pecuniary damage to someone. On the other hand, Article 1191 of the New Civil Code refers to rescission applicable to reciprocal obligations. Reciprocal obligations are those which arise from the same cause, and in which each party is a debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of the other. They are to be performed simultaneously such that the performance of one is conditioned upon the simultaneous fulfillment of the other. Rescission of reciprocal obligations under Article 1191 of the New Civil Code should be distinguished from rescission of contracts under Article 1383. Although both presuppose contracts validly entered into and subsisting and both require mutual restitution when proper, they are not entirely identical. While Article 1191 uses the term “rescission,” the original term which was used in the old Civil Code, from which the article was based, was “resolution.” Resolution is a principal action which is based on breach of a party, while rescission under Article 1383 is a subsidiary action limited to cases of rescission for lesion under Article 1381 of the New Civil Code, which expressly enumerates the rescissible contracts. In the case at bar, a careful reading of the parties’ “Agreement of Purchase and Sale” shows that it is in the nature of a contract to sell, as distinguished from a contract of sale. Respondents in the case at bar bound themselves to deliver a deed of absolute sale and clean title covering the two parcels of land upon full payment by the buyer

CIV LAW REVIEW - OBLICON DIGESTS of the purchase price of P2M. This promise to sell was subject to the fulfillment of the suspensive condition of full payment of the purchase price by the petitioner. Petitioner, however, failed to complete payment of the purchase price. The non-fulfillment of the condition of full payment rendered the contract to sell ineffective and without force and effect. It must be stressed that the breach contemplated in Article 1191 of the New Civil Code is the obligor’s failure to comply with an obligation already extant, not a failure of a condition to render binding that obligation. Failure to pay, in this instance, is not even a breach but merely an event which prevents the vendor’s obligation to convey title from acquiring binding force. Hence, the agreement of the parties in the case at bench may be set aside, but not because of a breach on the part of petitioner for failure to complete payment of the purchase price. Rather, his failure to do so brought about a situation which prevented the obligation of respondent spouses to convey title from acquiring an obligatory force.

6.4 OBLIGATIONS WITH A PERIOD 6.4.8 WHEN COURTS MAY FIX PERIOD

JOSE L. CHUA V. C.A. & RAMON IBARRA G.R. No. 109840 January 21, 1999 FACTS:  Petitioners were lessees of a commercial unit. The lease was for a period of five 5 years, from January 1, 1985 to December 31, 1989. The contract expressly provided for the renewal of the lease at the option of the lessees "in accordance with the terms of agreement and conditions set by the lessor." Prior to the expiration of the lease, the parties discussed the possibility of renewing it. They exchanged proposal and counterproposal, but they failed to reach agreement. The dispute was referred to the barangay captain for conciliation but still no settlement was reached by the parties. Consequently, private respondent filed a complaint for unlawful detainer against petitioners ISSUE: WON COURTS MAY FIX PERIOD FOR RENEWAL OF LEASE? HELD: NO. Petitioners claim that they are entitled to an estension of time to occupy the premises in question. This, too, is without merit. After the lease terminated on January 1, 1990 and without the parties thereafter reaching any agreement for its renewal, petitioners became deforciants subject to ejectment from the premises. Neither did the Court of Appeals err in ruling that petitioners are not entitled to a reasonable extension of time to occupy the premises on account of the fact that the lease contract between the parties has already expired. As there was no longer any lease to speak of which could be extended, the MTC was in effect making a contract for the parties which it obviously did not have the power to do. The potestative authority of the courts to fix a longer term for a lease under Art. 1687 of the Civil Code applies only to cases where there is no period fixed by the parties. To the contrary, in this case, the contract of lease provided for a fixed period of 5 years from January 1, 1985 to December 31, 1989. As the Court held in Bacolod-Murcia Milling Co., Inc. v. Banco Nacional Filipino: “It is not the province of the court to alter a contract by construction or to make a new contract for the parties; its duty is confined to the interpretation of the one which they have made for themselves, without regard to its wisdom or folly, as the court cannot supply material stipulations or read into contract words which it does not contain.”

Indeed, Art. 1675 of the Civil Code excludes cases falling under Art. 1673 (which provides among others, that the lessor may judicially eject the lessee when the period agreed upon or that which is fixed has expired) from the cases wherein, pursuant to Art. 1687, courts may fix a longer period of lease. For these reasons, we hold that the Court of Appeals did not err in ruling that petitioners were not entitled to an extension of the lease upon its expiration. EULOGIO "EUGUI" LO CHUA V. C.A. & ERIC CHUA G.R. No. 140886 April 19, 2001 FACTS:  A Complaint for Unlawful Detainer and Damages was filed by respondent Eric Chua against petitioner Eulogio "Eugui" Lo Chua. Respondent Eric Chua alleged that he was the former owner of a parcel of land with a 4-storey commercial building thereon known as National Business Center (NBC) Bldg. where 2 units were leased by petitioner on a month-to-month basis for P12k. Subsequently, respondent Eric Chua decided to sell the property. Through a letter, he offered petitioner a right of first refusal to be exercised within 5 days from receipt thereof. Petitioner failed to manifest his intention within the period. Thus, Chua sold the property to respondent MAGICAIRE for P25M subject to the condition stated in the Deed of Conditional Sale that P5M would be paid after the building was completely vacated by the tenants.  Respondent Chua through a letter informed petitioner about the sale transaction, the termination of their lease agreement, and demanded that petitioner vacate the premises after the end of the period, at the same time waiving the rentals for January to March 1996 in consideration of petitioner's understanding and cooperation. On 23 January 1996 petitioner tendered payment of the rental for that month but was declined by respondent Chua. Consequently, petitioner filed a Petition for Consignation. Respondent Chua made a final demand on petitioner to vacate the property but was refused.  Petitioner contended that he ignored the demand letters of respondent Chua because upon verification from the Register of Deeds of Manila petitioner learned that respondent Chua was no longer the owner of the property; that petitioner allowed the Petition for Consignation to be dismissed because respondent Chua was not the real party-in-interest; and, that petitioner made a counter offer to purchase the property but respondent Chua nonetheless proceeded with the sale to respondent MAGICAIRE. ISSUE: WON THE LEASE CONTRACT SHOULD BE RENEWED/EXTENDED? HELD: No, although the courts may fix the period for the contract, petitioner’s continued possession of the property pending this case, bar further extension of the contract. Petitioner contradicts himself by arguing that since he has been occupying the premises for more than 30 years, his lease contract should be understood as one for an indefinite period entitling him to an extension thereof pursuant to Article 1687 of the Civil Code. Article 1687 reads – “Article 1687. If the period for the lease has not been fixed. It is understood to be from year to year, if the rent agreed upon is annual; from month to month. if it is monthly; from week to week, if the rent is weekly; and from day to day, if the rent is to be paid daily. However, even though a monthly rent is paid, and no period for the lease has been set. the courts may fix a longer term for

CIV LAW REVIEW - OBLICON DIGESTS the lease after the lessee has occupied the premises for over one year. If the rent is weekly, the courts may likewise determine a longer period after the lessee has been in possession for over six months. In case of daily rent, the courts may also fix a longer period after the lessee has stayed in the place for over one month.” Article 1687, to the extent pertinent to the present case, is explicit that if the period for the lease has not been fixed, it is understood to be from month to month if the rent agreed upon is monthly. However, even though a monthly rent is paid, and no period for the lease has been set, the courts may fix a longer term for the lease after the lessee has occupied the premises for over a year. Thus, the provision contemplates 2 situations. One, where the period for the lease has not been fixed but the rent agreed upon is monthly, in which event the period is understood to be from month to month. In other words, the law itself fixes the period. Two, where no period for the lease has been set, a monthly rent is paid and the lessee has occupied the premises for over a year authorizing the courts to fix a longer period of lease. In this second situation, both circumstances mentioned in the first situation also exist and coupled with another circumstance, i.e., the lessee has occupied the premises for over a year. The law treats the matter differently in the second situation because the length of stay of the lessee in the premises may justify the courts to fix a longer period of lease. The second situation is understood thus: where no period for the lease has been set and a monthly rent is paid the law itself fixes the period as monthly; yet the circumstance that the lessee has occupied the premises for over a year warrants the fixing of a longer period by the courts. It is precisely the second situation that is involved in the present case, not the first situation, as all lower courts erroneously appreciated. Apparently, to them since the first sentence of Art. 1687 already fixed the period of lease, recourse to the second sentence is no longer relevant. Inasmuch as the existence in the present case of the circumstances that no period for the lease has been set, rent was being paid monthly, and petitioner has been occupying the premises for more than 30 years justify extending the period by the courts, it cannot be said that the period expired on 31 March 1996 when respondent Chua stated this date as the effectivity of the termination of their lease agreement in his 4 December 1995 letter. The unilateral act of the lessor in terminating the lease should not be recognized as writing finis to the agreement when the second situation in Art. 1687 is involved. A contrary view would result in barring recourse to judicial lengthening of the period and in allowing the utilization as subterfuge of the concept that "once a period had expired, nothing is left to extend." According to Mr. Justice Jose C. Vitug – “There are rulings to the effect that an extension of time may be sought by the lessee before, but not after, the termination or expiration of the lease. This statement should not be taken out of context; it is valid and sound where the lease, in fact, had been terminated or had expired. But where the term of the lease in understood to be that which is provided for in Article 1687 because the contract itself has failed to state the period thereof, the mere notice by the lessor, without concurrence by the lessee, to terminate the lease is not enough to consider the lease as having ex Fired that would thereby render powerless the courts to fix a term longer than the periods stated in the law. The periods set by Article 1687 are presumptive in nature and are clearly held subject to the potestative authority of the court in the event that the parties are unable to reach an agreement on a definitive term. If it were otherwise, then the power of the courts to grant an extended period becomes illusory since it is only when the

lessor decides not to grant a longer period or refuses to grant an extended term that the lessee should and can be expected to seek court relief. Considering that the authority of the court is predicated not only on the presumed intention of the parties but on equity as well, the application and interpretation of the provision must not be too restrictive and limitative to the point of rendering the remedy of seeking for extension meaningless and useless such as by the simple and expedient process of the lessor promptly giving notice of termination and making the lessor, rather than the Court, the final arbiter on the presumptive of the lease.“ The power of the courts to establish a grace period pursuant to Art. 1687 is potestative or discretionary, to be exercised or not depending on the particular circumstances of the case: a longer term to be granted where equities come into play demanding extension, to be denied where none appears, always with due deference to the parties' freedom to contract. Here, even as this Court has the discretion to fix a longer term for the lease, we find that petitioner's continuing possession as lessee of the premises from the supposed expiration of the lease on 31 March 1996 up to the present, or for a period now of more than 5 years, suffices as an extension of the period. There is no longer need to extend it any further.

6.6 JOINT OBLIGATIONS 6.6.1 CONCEPT

SPOUSES GEORGE TIU V. C.A. & JUAN GO G.R. No. 107481 November 18, 1993 FACTS:  George Tiu is the registered owner of 2 condominium units. He and Rosalina Tiu (his mother), negotiated a loan of P300k with Juan Go who then asked for a mortgage of the aforesaid Condo Units as security for the payment therefor and additional thereto, a pledge of jewelries and checks from Rosalina.  Go then prepared a document denominated as "Deed of Sale of a Condomimium with Right to Repurchase " and another as "Contract of Lease," the former was prepared in favor of Juanito Lim and Lim Lee Show Fong, while the latter was prepared in favor of George Tiu.  Later, George Tiu sought reformation of the contract, alleging that he merely agreed to mortgage the properties, in signing the Deed of Sale of a Condominium Unit with Right to Repurchase. He also alleged that the Deed, in law, was an equitable mortgage at the same time. ISSUE: WON GEORGE & ROSLINDA TIU ARE SOLIDARILY LIABLE? HELD: NO. We shall also not disturb the ruling of the Court of Appeals that George and Joaquin Tiu are not solidary liable with Rosalina Tiu on the amount of P1,060,000.00, for apt and correct are the findings of the appellate court on this point: “The various receipts clearly show that the appellant George Tiu never signed the receipts nor received any money from appellant Go while appellant Joaquin Tiu signed and received the money for an in behalf of Rosalina. Consequently, they are not liable solidarily for the said amounts even if the money were used for tobacco business. And even if they admitted that they received the money, both are not liable in solidum because there was no express provision in said receipts that appellants George and Joaquin Tiu should be liable in solidum. There is solidary obligation only when the obligation

CIV LAW REVIEW - OBLICON DIGESTS expressly so states or when the law or nature of the obligation requires solidarity (Article 1207, NCC). And there is no truth to the allegation that appellants George and Joaquin Tiu admitted that they are jointly and solidarily liable for said amount. What they admitted was that they received said money. Be it noted that appellants Tiu, in their reply and answer to the counterclaim of appellant Go, admitted that only appellant Rosalina Tiu received the monies. Assuming arguendo that they admitted their solidary liability, still they are not liable. As aptly held by the lower court: “At any rate, the doctrine laid down on the case of Un Fak Leang vs. Nigurra falls squarely on the point wherein the Supreme Court ruled that an admission of two debtors in their brief that their liability in the contract is a solidary one does not convert the joint character of their obligation as appearing in their contract, for what determines the nature of the obligation is the tenor of their contract itself, not the admission of the parties.” GIL M. CEMBRANO V. CITY OF BUTUAN, represented G.R. No. 163605 September 20, 2006 FACTS:  CVC Lumber Industries, Inc. (CVC) was a timber concession licensee. It was awarded the project for the supply of piles and poles which were to be used for the construction of the new City Hall of Butuan City. Due to some delay in the delivery, the City refused to grant an extension of the period of the contract and caused a new bidding to be held on the unexecuted portion of the contract. The re-bidding was held without notice to CVC.  CVC and Cembrano, through their counsel GO, filed a complaint for breach of contract and damages against respondent, claiming that CVC sustained damages.  RTC rendered judgment in favor of the defendants and ordered the dismissal of the complaint. CA reversed and ruled in favor of CVC and Cembrano. SC denied petition for review. Thus, the CA decision became final and executory.  Later, Cembrano, in his behalf and as attorney-in-fact of CVC, executed a Deed of Assignment covering part of the monetary award of the CA in favor of Go, his uncle. Go then wrote the City Mayor of Butuan City, requesting payment of the judgment award. However, CVC, through its Resident Manager Isidro B. Plaza, informed the City Mayor that it was laying claim to the money judgment and requested that the amount be remitted it.  During a meeting with the Sangguniang Panglungsod Chairman and Members of the Committee on Appropriation and Finance, Cembrano and Go agreed that under the decision, the amount due to CVC was P926,845.00 with 6% interest per year. The Sanggunian resolved to refer the matter to the City Budget Officer. The City Treasurer and the City Mayor signed a check for the said amount with "CVC LUMBER INDUSTRIES, INC/MONICO E. PAG-ONG [president of CVC]" as payee. The check was received by Pag-Ong for CVC, as evidenced by a disbursement voucher.  Thereafter, Atty. Go, acting as counsel for CVC and Cembrano, filed a "Alternative Motion for Issuance of a Writ of Execution or Entry of Judgment" in the RTC. The court issued an order granting the motion. The Sheriffs arrived in the Office of the City Mayor to enforce the writ, but were told that the City had already remitted the amount.

ISSUE: WON PAYMENT TO CVC THROUGH PAG-ONG RELEASED THE CITY OF BUTUAN FROM LIABILITY? HELD: NO. Respondent City, as judgment debtor, is burdened to prove with legal certainty that its obligation under the CA decision has been discharged by payment, which under Article 1240 of the Civil Code, is a mode of extinguishing an obligation. Article 1240 of the Civil Code provides that payment shall be made to the person in whose favor the obligation has been constituted, or his successor-ininterest, or any person authorized to receive it. Payment made by the debtor to the person of the creditor or to one authorized by him or by the law to receive it extinguishes the obligation. When payment is made to the wrong party, however, the obligation is not extinguished as to the creditor who is without fault or negligence even if the debtor acted in utmost good faith and by mistake as to the person of the creditor or through error induced by fraud of a third person. 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. When there is a concurrence of several creditors or of several debtors or of several creditors and debtors in one and the same obligation, it is presumed that the obligation is joint and not solidary. The most fundamental effect of joint divisible obligations is that each creditor can demand only for the payment of his proportionate share of the credit, while each debtor can be held liable only for the payment of his proportionate share of the debt. As a corollary to this rule, the credit or debt shall be presumed, in the absence of any law or stipulation to the contrary, to be divided into as many shares as there are creditors and debtors, the credits or debts being considered distinct from one another. It necessarily follows that a joint creditor cannot act in representation of the others. Neither can a joint debtor be compelled to answer for the liability of the others. The pertinent rules are provided in Articles 1207 and 1208 of the Civil Code. As gleaned from the complaint in Civil Case No. 3851, the plaintiffs therein are petitioner Gil Cembrano and respondent CVC; as such, the judgment creditors under the fallo of the CA decision are petitioner Cembrano and respondent CVC. Each of them is entitled to one-half (1/2) of the amount of P926,845.00 or P463,422.50 each. Since respondent CVC was entitled to only P490,605.955 under the CA decision but received P926,845.00, there was, in fine, an overpayment of P490,605.955 made by respondent City. Thus, respondent CVC is obliged to return the amount of P490,605.955 to respondent City. Since petitioner Cembrano had already assigned P490,609.955 to petitioner Go, the latter likewise had the right to receive the P490,609.955 from DBP. Petitioner Cembrano should thus be made to return the amount of P490,609.955 he received from the DBP to respondent City.

CIV LAW REVIEW - OBLICON DIGESTS 6.6 JOINT OBLIGATIONS 6.6.4 COURT DECISIONS

PH CREDIT CORPORATION V. C.A. & CARLOS M. FARRALES G.R. No. 109648 November 22, 2001 FACTS:  PH Credit Corp. filed a case against Pacific Lloyd Corp., Carlos Farrales, Thomas H. Van Sebille and Federico C. Lim, for a sum of money. After service of summons, defendants failed to file their answer, hence they were declared in default. RTC rendered judgment in favor of PH Credit and against defendants Pacific Lloyd Corporation, Thomas H. Van Sebille, Carlos M. Farrales, and Federico C. Lim, ordering the latter to pay damages.  The decision became final and executory, and a Writ of Execution was issued and implemented. Personal and real properties of defendant Carlos M. Farrales were levied and sold at public auction wherein PH Credit Corp. was the highest bidder. A motion for the issuance of a writ of possession was filed and granted. The writ of possession itself was issued on October 26, 1990. Said order and writ of possession are now the subject of this petition.  It appears that on January 31, 1991, respondent Judge issued an order considering the assailed Order dated October 12, 1990 as well as the writ of possession issued on October 26, 1990 as 'of no force and effect.' Hence, in another case, petitioner claims that the respondent Judge's Order dated January 31, 1991 was tainted with grave abuse of discretion, among the grounds cited were that Respondent Judge erred in applying the presumption of a joint obligation in the face of the conclusion of fact and law contained in the decision showing that the obligation is solidary. ISSUE: WON CA erred when it concluded that the obligation was merely a joint obligation due to the failure of the dispositive portion of the trial court’s decision to state that the obligation was joint and solidary? HELD: NO. Petitioner argues that the CA erred in relying on the failure of the dispositive portion of the Decision to state that the obligation was solidary. We are not impressed. 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. On the other hand, a joint obligation is one in which each debtors is liable only for a proportionate part of the debt, and the creditor is entitled to demand only a proportionate part of the credit from each debtor. The well-entrenched rule is that solidary obligations cannot be inferred lightly. They must be positively and clearly expressed. 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." Article 1207 of the Civil Code explains the nature of solidary obligations in this wise: "ARTICLE 1207. The concurrence of two or more creditors or of two or more debtors in one and the same obligation does not imply that each one of the former has a right to demand, or that each one of the latter is bound to render, entire compliance with the prestations. 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 the dispositive portion of the Decision of the trial court, the word solidary neither appears nor can it be inferred therefrom. The fallo merely stated that the following respondents were liable: Pacific Lloyd Corporation, Thomas H. Van Sebille, Carlos M. Farrales and Federico C. Lim. Under the circumstances, the liability is joint, as provided by the Civil Code, which we quote: "ARTICLE 1208. If from the law, or the nature or the wording of the obligations to which the preceding article refers[,] the contrary does not appear, the credit or debt shall be presumed to be divided into as many equal shares as there are creditors or debtors x x x" We should stress that respondent's obligation is based on the judgment rendered by the trial court. The dispositive portion or the fallo is its decisive resolution and is thus the subject of execution. The other parts of the decision may be resorted to in order to determine the ratio decidendi for the disposition. Where there is a conflict between the dispositive part and the opinion of the court contained in the text or body of the decision, the former must prevail over the latter on the theory that the dispositive portion is the final order, while the opinion is merely a statement ordering nothing. Hence the execution must conform with that which is ordained or decreed in the dispositive portion of the decision. Petitioner maintains that the Court of Appeals improper and incorrectly disregarded the body of the trial court's Decision, which clearly stated as follows: "To support the Promissory Note, a Continuing Suretyship Agreement was executed by the defendants, Federico C. Lim, Carlos M. Farrales and Thomas H. Van Sebille, in favor of the plaintiff corporation, to the effect that if Pacific Lloyd Corporation cannot pay the amount loaned by plaintiff to said corporation, then Federico C. Lim, Carlos M. Farrales and Thomas H. Van Sebille will hold themselves jointly and severally together with defendant Pacific Lloyd Corporation to answer for the payment of said obligation." As early as 1934 in Oriental Commercial Co. v. Abeto and Mabanag, this Court has already answered such argument in this wise: "It is of no consequence that, under the written contract of suretyship executed by the parties, the obligation contracted by the sureties was joint and several in character. The final judgment, which superseded the action brought for the enforcement of said contract, declared the obligation to be merely joint, and the same cannot be executed otherwise." Doctrinally, the basis of execution is the January 31, 1984 Decision rendered by the trial court, not the "written contract of suretyship" executed by the parties. As correctly observed by the trial judge: W]hat was stated in the body of the decision of January 31, 1984 was] only part of the narration of facts made by the Judge, and the dispositive portion is to prevail." The only exception when the body of a decision prevails over the fallo is when the inevitable conclusion from the former is that there was a glaring error in the latter, in which case the body of the decision will prevail. In this instance, there was no clear declaration in the body of the January 31, 1984 Decision to warrant a conclusion that there was an error in the fallo. Nowhere in the former can we find a definite declaration of the trial court that, indeed, respondent's liability was solidary. 6.7 SOLIDARY OBLIGATIONS 6.7.1 CONCEPT

SMITH, BELL & CO., INC. V. C.A. & JOSEPH BENGZON CHUA G.R. No. 110668 February 6, 1997 FACTS:

CIV LAW REVIEW - OBLICON DIGESTS  Chua, doing business under the style of Tic Hin Chiong, Importer, bought and imported to the Philippines from the firm Chin Gact Co., Ltd. of Taipei; Taiwan, 50 metric tons of Dicalcium Phosphate. Shipment was insured by the defendant First Insurance Co. for US$19,500.00 "against all risks" at port of departure, with the note "Claim, if any, payable in U.S. currency at Manila and with defendant Smith, Bell, and Co.” stamped at the lower left side of the policy as "Claim Agent."  The cargo arrived at the Port of Manila. Thereafter, the entire cargo was discharged to the local arrastre contractor, Metroport Services Inc. with a number of the cargo in apparent bad order condition.  Chua filed with Smith, Bell, and Co., Inc. a formal statement of claim with proof of loss and a demand for settlement of the corresponding value of the losses. After purportedly conveying the claim to its principal, Smith, Bell, and Co., Inc. informed the plaintiff that its principal offered only 50% of the claim, on the alleged ground of discrepancy between the amounts contained in the shipping agent's reply to the claimant with that of Metroport's. The offer not being acceptable to the plaintiff, the latter wrote Smith, Bell, & Co. expressing his refusal to the "redress" offer, contending that the discrepancy was a result of loss from vessel to arrastre to consignees' warehouse, which losses were still within the "all risk" insurance cover. No settlement of the claim having been made, the plaintiff then caused the instant case to be filed.  Denying any liability, defendant-appellant averred in its answer that it is merely a settling or claim agent of defendant insurance company and as such agent, it is not personally liable under the policy in which it has not even taken part of.  RTC rendered a decision against smith-Bell, ruling that since it is admittedly a claim agent of the foreign insurance firm doing business in the Philippines justice is better served if said agent is made liable without prejudice to its right of action against its principal, the insurance firm. ISSUE: WON a local settling or claim agent of a disclosed principal, a foreign insurance company, can be held jointly and severally liable with said principal under the latter's marine cargo insurance policy, given that the agent is not a party to the insurance contract? HELD: NO. Petitioner, undisputedly a settling agent acting within the scope of its authority, cannot be held personally and/or solidarily liable for the obligations of its disclosed principal merely because there is allegedly a need for a speedy settlement of the claim of private respondent. The scope and extent of the functions of an adjustment and settlement agent do not include personal liability. His functions are merely to settle and adjusts claims in behalf of his principal if those claims are proven and undisputed, and if the claim is disputed or is disapproved by the principal, like in the instant case, the agent does not assume any personal liability. The recourse of the insured is to press his claim against the principal. Private respondent's contention that petitioner is responsible because both agent and principal were impleaded and found solidarily liable is without merit. Such distinction is immaterial. The agent can not be sued nor held liable whether singly or solidarily with its principal. Every cause of action ex contractu must be founded upon a contract, oral or written, either express or implied. The only "involvement" of petitioner in the subject contract of insurance was having its name stamped at the bottom left portion of the policy as "Claim Agent." Without anything else to back it up, such stamp cannot even be

deemed by the remotest interpretation to mean that petitioner participated in the preparation of said contract. Hence, there is no privity of contract, and correspondingly there can be no obligation or liability, and thus no Cause of action against petitioner attaches. Under Article 1311 of the Civil Code, contracts are binding only upon the parties (and their assigns and heirs) who execute them. The subject cargo insurance was between the First Insurance Company, Ltd. and the Chin Gact Co., Ltd., both of Taiwan, and was signed in Taipei, Taiwan by the president of the First Insurance Company, Ltd. and the president of the Chin Gact Co., Ltd. 18 There is absolutely nothing in the contract which mentions the personal liability of petitioner. May then petitioner, in its capacity as resident agent be held solidarily liable with the foreign insurer? Article 1207 of the Civil Code clearly provides that "(t)here is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity." The well-entrenched rule is that solidary obligation cannot lightly be inferred. It must be positively and clearly expressed. The contention that, in the end, it would really be First Insurance Company, Ltd. which would be held liable is specious and cannot be accepted. Such a stance would inflict injustice upon petitioner which would be made to advance the funds to settle the claim without any assurance that it can collect from the principal which disapproved such claim, in the first place. More importantly, such position would have absolutely no legal basis. The Insurance Code is quite clear as to the Purpose and role of a resident agent. Such agent, as a representative of the foreign insurance company, is tasked only to receive legal processes on behalf of its principal and not to answer personally for any insurance claims. REPUBLIC GLASS CORP. and GERVEL, INC. V. LAWRENCE C. QUA G.R. No. 144413 July 30, 2004 FACTS:  Petitioners Republic Glass Corporation (RGC) and Gervel, Inc. together with respondent Lawrence C. Qua were stockholders of Ladtek, Inc. Ladtek obtained loans from Metrobank and Private Development Corporation of the Philippines (PDCP) with RGC, Gervel and Qua as sureties. Among themselves, RGC, Gervel and Qua executed Agreements for Contribution, Indemnity and Pledge of Shares of Stocks.  The Agreements states that in case of default in the payment of Ladtek’s loans, the parties would reimburse each other the proportionate share of any sum that any might pay to the creditors.  Under the same Agreements, Qua pledged stocks of General Milling Corporation (GMC) in favor of RGC and Gervel. The pledged shares of stock served as security for the payment of any sum which RGC and Gervel may be held liable under the Agreements.  Ladtek defaulted on its loan obligations to Metrobank and PDCP. Hence, Metrobank filed a collection case against Ladtek, RGC, Gervel and Qua. During the pendency of Collection Case, RGC and Gervel paid Metrobank P7M. Later, Metrobank executed a waiver and quitclaim in favor of RGC and Gervel.  RGC and Gervel’s counsel, Atty. Antonio C. Pastelero, demanded that Qua pay reimbursement of the total amount RGC and Gervel paid to Metrobank and PDCP. Qua refused to reimburse the amount to RGC and Gervel. Subsequently, RGC and Gervel furnished Qua with notices of foreclosure of Qua’s pledged shares.

CIV LAW REVIEW - OBLICON DIGESTS  Qua filed a complaint for injunction and damages with application for a temporary restraining order to prevent RGC and Gervel from foreclosing the pledged shares. Although it issued a temporary restraining order, RTC denied Qua’s "Urgent Petition to Suspend Foreclosure Sale." RGC and Gervel eventually foreclosed all the pledged shares of stock at public auction. ISSUE: WON RGC & GERVEL MAY SEEK REIMBURSEMENT FROM QUA? HELD: NO. RGC and Gervel assail the Court of Appeals’ ruling that the parties’ liabilities under the Agreements depend on the full payment of the obligation. RGC and Gervel insist that it is not an essential condition that the entire obligation must first be paid before they can seek reimbursement from Qua. RGC and Gervel contend that Qua should pay 42.22% of any amount which they paid or would pay Metrobank and PDCP. RGC and Gervels’ contention is partly meritorious. Payment of the entire obligation by one or some of the solidary debtors results in a corresponding obligation of the other debtors to reimburse the paying debtor. However, we agree with RGC and Gervel’s contention that in this case payment of the entire obligation is not an essential condition before they can seek reimbursement from Qua. The words of the Agreements are clear. RGC, GERVEL and QUA each covenant that each will respectively reimburse the party made to pay the Lenders to the extent and subject to the limitations set forth herein, all sums of money which the party made to pay the Lenders shall pay or become liable to pay by reason of any of the foregoing, and will make such payments within 5 days from the date that the party made to pay the Lenders gives written notice to the parties hereto that it shall have become liable therefor and has advised the Lenders of its willingness to pay whether or not it shall have already paid out such sum or any part thereof to the Lenders or to the persons entitled thereto. The Agreements are contracts of indemnity not only against actual loss but against liability as well. Whether the solidary debtor has paid the creditor, the other solidary debtors should indemnify the former once his liability becomes absolute. However, in this case, the liability of RGC, Gervel and Qua became absolute simultaneously when Ladtek defaulted in its loan payment. As a result, RGC, Gervel and Qua all became directly liable at the same time to Metrobank and PDCP. Thus, RGC and Gervel cannot automatically claim for indemnity from Qua because Qua himself is liable directly to Metrobank and PDCP. If we allow RGC and Gervel to collect from Qua his proportionate share, then Qua would pay much more than his stipulated liability under the Agreements. In addition to the amount claimed by RGC and Gervel, Qua would have to pay his liability of P6.2 million to Metrobank and more than P1 million to PDCP. Since Qua would surely exceed his proportionate share, he would then recover from RGC and Gervel the excess payment. This situation is absurd and circuitous. Contrary to RGC and Gervel’s claim, payment of any amount will not automatically result in reimbursement. If a solidary debtor pays the obligation in part, he can recover reimbursement from the codebtors only in so far as his payment exceeded his share in the obligation. This is precisely because if a solidary debtor pays an amount equal to his proportionate share in the obligation, then he in effect pays only what is due from him. If the debtor pays

less than his share in the obligation, he cannot demand reimbursement because his payment is less than his actual debt. Since they only made partial payments, RGC and Gervel should clearly and convincingly show that their payments to Metrobank and PDCP exceeded their proportionate shares in the obligations before they can seek reimbursement from Qua. This RGC and Gervel failed to do. RGC and Gervel, in fact, never claimed that their payments exceeded their shares in the obligations. Consequently, RGC and Gervel cannot validly seek reimbursement from Qua.

6.7.2 WHEN SOLIDARY LIABILITY EXISTS A. WHEN OBLIGATION SO STATES

VICENTE ONGKEKO V. BPI EXPRESS CARD CORPORATION [G.R. NO. 147275, March 31, 2006] FACTS:  Lina Lodovica applied for a credit card with BPI, with Vicente Ongkeko acting as surety. Her application was approved and she was originally given a P3k credit limit. When Lodovica’s card expired in 1991, it was renewed and her credit limit was increased to P10k. As of May 12, 1996, Lodovica had an outstanding balance of P22,476.61.  BPI brought an action for sum of money against Lodovica and Ongkeko. Ongkeko filed his Answer admitting his undertaking, but he maintained that he can only be liable for the original credit limit of P3,000.00, and that the renewal of the credit card without his consent extinguished his undertaking.  MTC rendered judgment finding Ongkeko liable. ISSUE: WON ONGKEKO IS LIABLE? HELD: YES. The nature and extent of petitioner’s obligations are set out in clear and unmistakable terms in the Surety Undertaking. Thus: (1) She bound herself jointly and severally with Danilo Alto to pay SDIC all obligations and charges in the use of the Diners Club Card, including fees, interest, attorney’s fees, and costs; (2) She declared that “any change or novation in the Agreement or any extension of time granted by SECURITY DINERS to pay such obligation, charges, and fees, shall not release (her) from this Surety Undertaking”; (3) “(S)aid undertaking is a continuous one and shall subsist and bind (her) until all such obligations, charges, and fees have been fully paid and satisfied”; and (4) “The indication of a credit limit to the cardholder shall not relieve (her) of liability for charges and all other amounts voluntarily incurred by the cardholder in excess of said credit limit.” We cannot give any additional meaning to the plain language of the subject undertaking. The extent of a surety’s liability is determined by the language of the suretyship contract or bond itself. Article 1370 of the Civil Code provides: “If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control.” Petitioner’s undertaking is clear and concise. He solidarily obliged himself to pay respondent all the liabilities incurred under the credit card account, whether under the principal, renewal, or extension card issued, regardless of the changes or novation in the terms and conditions in the issuance and use of the credit card. Petitioner’s liability shall be extinguished only when the obligations are fully paid and satisfied.

CIV LAW REVIEW - OBLICON DIGESTS Petitioner cannot seek sanctuary in his arguments considering that the terms and conditions of his undertaking are unambiguous and well defined; there is no room for any interpretation - only application. Given that Lodovica reneged on her obligations covered by the credit card account, petitioner is, therefore, liable. Indeed, petitioner’s surety undertaking partakes the nature of a contract of adhesion, in that the stipulations were unilaterally prepared and imposed by respondent on a take-it-or-leave-it basis; however, the Court has also ruled that such a contract is “as binding as ordinary contracts, the reason being that the party who adheres to the contract is free to reject it entirely.”[12] Petitioner is the employer of Lodovica. It is safe to assume that he takes great care of his affairs and he very well knows the potential consequences of his acts. He took on the responsibility freely and intelligently, and whatever liability he may have incurred in this case is one within bounds of the law. Finally, in the Molino case, the Court took time to exhort prospective sureties to exercise caution in signing surety undertakings prepared by credit card companies, and to read carefully the terms and conditions of the agreement. The Court finds the present case another opportune time to reiterate said exhortation, to wit: “Prospective sureties to credit card applicants would be welladvised to study carefully the terms of the agreements prepared by the credit card companies before giving their consent, and pay heed to stipulations that could lead to onerous effects.” STRONGHOLD INSURANCE CO., INC. V. REPUBLICASAHI GLASS CORP. G.R. No. 147561 June 22, 2006 FACTS:  Republic-Asahi Glass Corporation entered into a contract with Jose D. Santos, Jr., the proprietor of JDS Construction, for the construction of roadways and a drainage system in RepublicAsahi’s compound, for the amount of P5.3M inclusive of value added tax for said construction, which was supposed to be completed within a period of 240 days beginning May 8, 1989. In order to guarantee the faithful and satisfactory performance of its undertakings, JDS posted a performance bond of P795k. JDS executed, jointly and severally with Stronghold Insurance Co., Inc. (SICI) such performance bond.  Several times Republic’s engineers called the attention of JDS to the alleged alarmingly slow pace of the construction, which resulted in the fear that the construction will not be finished within the stipulated 240-day period. However, said reminders went unheeded by JDS. Dissatisfied with the progress of the work undertaken, Republic-Asahi extrajudicially rescinded the contract pursuant to Article XIII of said contract, and wrote a letter to JDS informing the latter of such rescission. Such rescission, according to Article XV of the contract shall not be construed as a waiver of Republic’s right to recover damages from JDS and the latter’s sureties.  Republic alleged that, as a result of JDS’s failure to comply with the provisions of the contract, which resulted in the said contract’s rescission, it had to hire another contractor to finish the project, for which it incurred an additional expense of P3.2M.  Republic sent a letter to Stronghold, filing its claim under the bond for not less than P795k. The demand went unheeded. Republic then filed a complaint against JDS and Stronghold. It sought from JDS payment of P3.2M representing the additional

expenses incurred for the completion of the project using another contractor, and from JDS and Stronghold, jointly and severally, payment of P750k as damages in accordance with the performance bond. Stronghold then filed its answer, alleging that the Republic’s money claims against it and JDS have been extinguished by the death of Jose D. Santos, Jr. (proprietor of JDS, who was the party to the Contract with Republic). ISSUE: WON STRONGHOLD IS LIABLE? HELD: YES. Petitioner contends that the death of Santos, the bond principal, extinguished his liability under the surety bond. Consequently, it says, it is automatically released from any liability under the bond. 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 persona 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. In the present case, whatever monetary liabilities or obligations Santos had under his contracts with respondent were not intransmissible by their nature, by stipulation, or by provision of law. Hence, his death did not result in the extinguishment of those obligations or liabilities, which merely passed on to his estate. Death is not a defense that he or his estate can set up to wipe out the obligations under the performance bond. Consequently, petitioner as surety cannot use his death to escape its obligation under its performance bond. The liability of petitioner is contractual in nature, because it executed a performance bond. As a surety, petitioner is solidarily liable with Santos in accordance with the Civil Code, which provides as follows: "Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. XXX 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." Also, "Art. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected." Elucidating on these provisions, the Court in Garcia v. Court of Appeals stated thus: “The surety’s obligation is not an original and direct one for the performance of his own act, but merely accessory or collateral to the obligation contracted by the principal. Nevertheless, although the contract of a surety is in essence secondary only to a valid principal obligation, his liability to the creditor or promisee of the principal is said to be direct, primary and absolute; in other words, he is directly and equally bound with the principal."

CIV LAW REVIEW - OBLICON DIGESTS Under the law and jurisprudence, respondent may sue, separately or together, the principal debtor and the petitioner herein, in view of the solidary nature of their liability. 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, respondent may still sue petitioner alone, in accordance with the solidary nature of the latter’s liability under the performance bond. TIU HIONG GUAN V. METROPOLITAN BANK & TRUST COMPANY G.R. No. 144339 August 9, 2006 FACTS:  Petitioners applied for a continuing credit facility for and in behalf of themselves and their corporation, Sunta Rubberized Industrial Corporation (Sunta), and executed in their personal and official capacities a Continuing Surety Agreement. In the said Agreement, petitioners jointly and severally obligated themselves to pay all loans and credit accommodations that they and Sunta may incur, supposedly not exceeding P3M. It was further stipulated therein that, in case of default in the payment thereof, notwithstanding Sunta's dissolution, failure in business, insolvency, and the filing of a petition for bankruptcy or suspension of payments in the proceeding related thereto, the whole obligation shall become due and payable without benefit of demand or notice of payment.  Petitioners then opened an irrevocable Commercial Letter of Credit (LC) for the purchase of raw materials amounting to P480k in favor of Sunta. These materials were delivered and custody thereof transferred to Sunta, after which a Trust Receipt Agreement was jointly and severally executed by petitioners in their personal capacities.  Later, Sunta and petitioners also in their personal capacities obtained a loan of P350k. After maturity of the obligation, there was both failure of payment and compliance with the surety and trust receipt agreements, sight draft, and promissory note. The total unpaid obligation came to P1.57M.  Prayed for by respondent in its complaint were the payments of P741k, with interest and penalties on the promissory note, with interest and penalties as stipulated in the Trust Receipt Agreement; and attorney's fees. In their Answer, petitioners admitted execution of the Continuing Surety Agreement not in their personal capacities but as officers of Sunta. It was also asserted therein that none of them personally benefited from the loan transaction, while two of them signed the LC as mere officers of Sunta.  The failure of Sunta to pay its obligation was attributed to both force majeure – when fire “gutted down” its factory buildings, equipment, machinery, raw materials and finished products – and the Order by the SEC suspending all actions for claims against Sunta that are pending before any court or tribunal.  It was contended that the real party-in-interest as far as the actionable documents herein were concerned was Sunta, not petitioners who merely acted as its agents and as guarantors of its obligation. Therefore, petitioners should not be compelled to pay the obligations of Sunta, because Sunta is solvent and its assets have not yet been exhausted. ISSUE: WON PETITIONERS CAN BE HELD LIABLE FOR THE UNPAID LOAN OF SUNTA CORP.?

HELD: YES. Petitioners should be held liable for their unpaid obligation of P1.57M, based on both the non-negotiable Promissory Note and Continuing Surety Agreement they executed. Under the Promissory Note, petitioners Tiu Hiong Guan and Juanito Rellera promised to pay respondent jointly and severally the single-payment loan of P350k at 28.92% interest per annum, binding themselves in both their personal and official capacities. In case of default inter alia in the payment of any installment, interest, or charges, it is stipulated that the entire principal, as well as the interest and charges, shall become due and payable at the option of and without notice by respondent. A penalty charge of 18% per annum and attorney's fees of 10% were also agreed upon therein. The Continuing Surety Agreement clearly states that the liability of all petitioners, as sureties, shall be solidary with Sunta, as their principal, for all of the latter's loans, credits, overdrafts, advances, discounts and/or other credit accommodations not exceeding P3M. In case of default inter alia in the payment of any obligation upon maturity or any amortization thereof, it is similarly stipulated that all instruments, indebtedness, or other obligations thereby secured shall become due and payable by the sureties, at the option of and without demand or notice by respondent. In fact, their liability is expressly stated to be direct and immediate, not contingent upon the pursuit by respondent of whatever remedies it may have against Sunta. All parties therein have agreed that the sureties shall at any time pay respondent, with or without demand upon Sunta, any of the loans, indebtedness, or other obligations secured, whether due or not. Any notice given by respondent to any of the sureties shall be sufficient notice to all. From these two documents, the liability of petitioners is joint and several in both their personal and official capacities. They are not mere guarantors, but sureties. They do not insure the solvency of the debtor, but rather the debt itself. They obligate themselves “to pay the debt if the principal debtor will not pay, regardless of whether or not the latter is financially capable to fulfill his obligation.” Time and again, the liability of a surety is determined strictly on the basis of the terms and conditions set out in the surety agreement. Solidary liability is one of its primary characteristics. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. Thus, respondent may proceed against Sunta alone or some or all of petitioners herein. Suretyship arises upon the solidary binding of a person, deemed the surety, with the principal debtor, for the purpose of fulfilling an obligation. A suretyship is merely an accessory to a principal obligation. Although a surety contract is secondary to the principal obligation, the liability of the surety is direct, primary and absolute; or equivalent to that of a regular party to the undertaking. A surety becomes liable to the debt and duty of the principal obligor even without possessing a direct or personal interest in the obligations constituted by the latter. Petitioners are considered “as being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and their liabilities are interwoven as to be inseparable.” It is irrelevant that none of petitioners personally benefited from the loan transaction between Sunta and respondent. The failure to pay attributable to either force majeure or the SEC Order does not veer away from the fact of liability as sureties. Even though ownership over the goods remains with respondent, the loss thereof has nothing to do with the loan that petitioners bound themselves to be solidarily liable with respondent. The Trust Receipt Agreement between them

CIV LAW REVIEW - OBLICON DIGESTS is a mere collateral agreement independent of the Continuing Surety Agreement, the purpose of which is to serve as additional security for the loan. Parties are bound by the terms of their contract, which is the law between them.

6.7.2 WHEN SOLIDARY EXISTS B. BY LAW

LIABILITY

SPOUSES HERNANDEZ V. SPOUSES DOLOR G.R. No. 160286 July 30, 2004 FACTS:  At about 3:00 p.m. of December 19, 1986, Lorenzo Menard "Boyet" Dolor, Jr. was driving an owner-type jeepney owned by his mother, Margarita, towards Anilao, Batangas. As he was traversing the road at Barangay Anilao East, Mabini, Batangas, his vehicle collided with a passenger jeepney driven by petitioner Juan Gonzales and owned by his co-petitioner Francisco Hernandez, which was travelling towards Batangas City. Boyet Dolor and his passenger, Oscar Valmocina, died as a result of the collision. Fred Panopio, Rene Castillo and Joseph Sandoval, who were also on board the owner-type jeep, which was totally wrecked, suffered physical injuries. The collision also damaged the passenger jeepney of Francisco Hernandez and caused physical injuries to its passengers, namely, Virgie Cadavida, Fiscal Artemio Reyes and Francisca Corona.  Consequently, respondents commenced an action for damages against petitioners before the RTC, alleging that driver Juan Gonzales was guilty of negligence and lack of care and that the Hernandez spouses were guilty of negligence in the selection and supervision of their employees.  Petitioners countered that the proximate cause of the death and injuries sustained by the passengers of both vehicles was the recklessness of Boyet Dolor, the driver of the owner-type jeepney, who was driving in a zigzagging manner under the influence of alcohol. Petitioners also alleged that Gonzales was not the driver-employee of the Hernandez spouses as the former only leased the passenger jeepney on a daily basis. The Hernandez spouses further claimed that even if an employeremployee relationship is found to exist between them, they cannot be held liable because as employers they exercised due care in the selection and supervision of their employee.  During the trial of the case, it was established that the drivers of the two vehicles were duly licensed to drive and that the road where the collision occurred was asphalted and in fairly good condition. The owner-type jeep was travelling uphill while the passenger jeepney was going downhill. It was further established that the owner-type jeep was moderately moving and had just passed a road bend when its passengers, private respondents Joseph Sandoval and Rene Castillo, saw the passenger jeepney at a distance of three meters away. The passenger jeepney was traveling fast when it bumped the owner type jeep. Moreover, the evidence presented by respondents before the trial court showed that petitioner Juan Gonzales obtained his professional driver's license only 3 months before the accident. Prior to this, he was holder of a student driver's permit.  RTC rendered a decision in favor of respondents, ordering the spouses Francisco Hernandez and Aniceta Abel Hernandez and Juan Gonzales to pay jointly and severally, to spouses Dolor, Valmocina, Panopio, and Fred Panopio.

ISSUE: WON SPOUSES HRNANDEZ MAY BE HELD SOLIDARILY LIABLE WITH DRIVER JUAN GONZALES? HELD: YES. Petitioners contend that the absence of the Hernandez spouses inside the passenger jeepney at the time of the collision militates against holding them solidarily liable with their copetitioner, Juan Gonzales, invoking Article 2184 of the Civil Code, which provides: “ARTICLE 2184. In motor vehicle mishaps, the owner is solidarily liable with his driver, if the former, who was in the vehicle, could have, by the use of the due diligence, prevented the misfortune. It is disputably presumed that a driver was negligent, if he had been found guilty of reckless driving or violating traffic regulations at least twice within the next preceding two months. xxx If the owner was not in the motor vehicle, the provisions of article 2180 are applicable.” The Hernandez spouses argue that since they were not inside the jeepney at the time of the collision, the provisions of Article 2180 of the Civil Code, which does not provide for solidary liability between employers and employees, should be applied. We are not persuaded. Articles 2180 and 2176 apply. While the above provisions of law do not expressly provide for solidary liability, the same can be inferred from the wordings of the first paragraph of Article 2180 which states that the obligation imposed by article 2176 is demandable not only for one's own acts or omissions, but also for those of persons for whom one is responsible. Moreover, Article 2180 should be read with Article 2194 of the same Code, which categorically states that the responsibility of two or more persons who are liable for quasi-delict is solidary. In other words, the liability of joint tortfeasors is solidary. Verily, under Article 2180 of the Civil Code, an employer may be held solidarily liable for the negligent act of his employee. The solidary liability of employers with their employees for quasidelicts having been established, the next question is whether Julian Gonzales is an employee of the Hernandez spouses. An affirmative answer will put to rest any issue on the solidary liability of the Hernandez spouses for the acts of Julian Gonzales. The Hernandez spouses maintained that Julian Gonzales is not their employee since their relationship relative to the use of the jeepney is that of a lessor and a lessee. They argue that Julian Gonzales pays them a daily rental of P150.00 for the use of the jeepney. In essence, petitioners are practicing the "boundary system" of jeepney operation albeit disguised as a lease agreement between them for the use of the jeepney. We hold that an employer-employee relationship exists between the Hernandez spouses and Julian Gonzales. Indeed to exempt from liability the owner of a public vehicle who operates it under the "boundary system" on the ground that he is a mere lessor would be not only to abet flagrant violations of the Public Service Law, but also to place the riding public at the mercy of reckless and irresponsible drivers, reckless because the measure of their earnings depends largely upon the number of trips they make and, hence, the speed at which they drive; and irresponsible because most if not all of them are in no position to pay the damages they might cause. BENITO ARATEA V. ESMERALDO P. SUICO G.R. No. 170284 March 16, 2007 FACTS:  Petitioners Aratea and Canonigo are the controlling stockholders of SAMDECO, a domestic corporation engaged in

CIV LAW REVIEW - OBLICON DIGESTS mining operations in Western Samar. Private respondent Suico is a businessman engaged in export and general merchandise. Suico entered into a MOA with SAMDECO. Armed with the proper board resolution, Aratea and Canonigo signed the MOA as the duly authorized representatives of the corporation. Under the MOA, Suico would extend loans and cash advances to SAMDECO in exchange for the grant of the exclusive right to market 50% of the total coal extracted by SAMDECO from its mining sites in San Isidro, Wright, Western Samar.  Suico was enticed into the aforementioned financing scheme because Aratea and Canonigo assured him that the money he would lend to SAMDECO would easily be paid with 5% monthly interest as the coals in said sites is easier to gather because it is excavated from open-pit mines. Aratea and Canonigo also promised to Suico that the loan the latter would extend to SAMDECO could easily be paid from the profits of his 50% share of the coal produced. Also reserved in favor of Suico was the right of first priority to operate the mining facilities in the event SAMDECO becomes incapable of coping with the work demands. By way of further incentive, Suico was actually appointed SAMDECO’s VP for Administration.  Pursuant to the same MOA, Suico started releasing loans and cash advances to SAMDECO, still through Aratea and Suico. SAMDECO started operations in its mining sites to gather the coal. As agreed in the MOA, 50% of the coals produced were offered by Suico to different buyers. However, SAMDECO, again through Aratea and Canonigo, prevented the full implementation of the marketing arrangement by not accepting the prices offered by Suico’s coal buyers even though such prices were competitive and fair enough, giving no other explanation for such refusal other than saying that the price was too low. Aratea and Canonigo did not also set any criterion or standard with which any price offer would be measured against. Because he failed to close any sale of his 50% share of the coalproduce and gain profits therefrom, Suico could not realize payment of the loans and advances to SAMDECO.  SAMDECO, on the other hand, successfully disposed of its 50% share of the coal-produce. Even with said coal sales, however, SAMDECO absolutely made no payment of its loan obligations to Suico, despite demands.  Aratea and Canonigo eventually sold the mining rights and passed on the operations of SAMDECO to Southeast Pacific Marketing, Inc. (SPMI). They also sold their shares in SAMDECO to SPMI’s President, Arturo E. Dy without notice to, or consent of Suico, in violation of the MOA.  Hence, Suico filed a complaint for a Sum of Money and Damages against SAMDECO, Aratea, Canonigo, and Seiko Philippines, Inc. (SEIKO, which was later substituted by SPMI and Arturo E. Dy). ISSUE: WON ARATEA & CANONIGO ARE SOLIDARILY LIABLE WITH SAMDECO? HELD: YES. The Court must determine whether, upon the same facts found by the two courts below, there is basis to pierce the veil of corporate fiction and hold SAMDECO’s stockholders and/or officers personally and solidarily liable with the corporation. Well-settled is the rule that a corporation has a personality separate and distinct from that of its officers and stockholders. Officers of a corporation are not personally liable for their acts as such officers unless it is shown that they have exceeded their authority. However, the legal fiction that a corporation has a personality separate and distinct from stockholders and members may be disregarded if it is used as a means to perpetuate fraud or an illegal act or as a vehicle

for the evasion of an existing obligation, the circumvention of statutes, or to confuse legitimate issues. A corporation is a juridical entity with legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it. The general rule is that obligations incurred by the corporation, acting through its directors, officers and employees, are its sole liabilities. There are times, however, when solidary liabilities may be incurred but only when exceptional circumstances warrant such as 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; (c) are guilty of conflict of interest to the prejudice of the corporation, its stockholders or members, and other persons; 2. When a director or officer has consented to the issuance of watered stocks or who, having knowledge thereof, did not forthwith file with the corporate secretary his written objection thereto; 3. When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and solidarily liable with the corporation; or 4. When a director, trustee or officer is made, by specific provision of law, personally liable for his corporate action. In labor cases, particularly, corporate directors and officers are solidarily liable with the corporation for the termination of employment of corporate employees done with malice or in bad faith. Petitioners Aratea and Canonigo, despite having separate and distinct personalities from SAMDECO may be held personally liable for the loans and advances made by Suico to SAMDECO which they represent on account of their bad faith in carrying out the business of the corporation. Canonigo, Aratea and SAMDECO prevented the full implementation of the marketing agreement concerning the coal produced from the mining site, specifically called the Arizona project, by not agreeing to the price of the coal offered by the buyers procured by Suico even though the prices offered were competitive and fair enough. By not acquiescing in to the proffered price, Suico was not able to obtain his share of 50% of the profits from the sale of the coal produced by the mining site. On the other hand, the petitioners were able to sell coal produced in the mining site in question. Hence, this undoubtedly exhibits their bad faith, malice and wanton disregard of the respondent’s rights in not complying with their part of the covenant. While the petitioners were able to market their share of the coal, they precluded the respondent from marketing his. Moreover, Canonigo and Aratea further violated the respondent’s rights when they without informing respondent sold their shares of SAMDECO to defendants Dy and SPMI thereby vesting on the latter the right to operate SAMDECO’s coal mining area. The Contract expressly states that Suico had the right of first priority in acquiring the coal area of SAMDECO. Thus, petitioners Aratea and Canonigo acted in bad faith when they, as officers of SAMDECO, unreasonably prevented Suico from selling his part of the coal-produce of the mining site, in gross violation of their MOA. This resulted in Suico not being unable to realize profits from his 50% share of the coal-produce, from which

CIV LAW REVIEW - OBLICON DIGESTS Suico could obtain part of the payment for the loans and advances he made in favor of SAMDECO. Moreover, petitioners also acted in bad faith when they sold, transferred and assigned their proprietary rights over the mining area in favor of SPMI and Dy, thereby causing SAMDECO to grossly violate its MOA with Suico. Suico suffered grave injustice because he was prevented from acquiring the opportunity to obtain payment of his loans and cash advances, while petitioners Aratea and Canonigo profited from the sale of their shareholdings in SAMDECO in favor of SPMI and Dy. These facts duly established Aratea and Canonigo’s personal liability as officers/stockholders of SAMDECO and their solidary liability with SAMDECO for its obligations in favor of Suico for the loans and cash advances received by the corporation.

6.7.2 WHEN SOLIDARY LIABILITY EXISTS C. WHEN NATURE OF OBLIGATION REQUIRES IT

METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM V. HON. REYNALDO B. DAWAY [G.R. No. 160732. June 21, 2004] FACTS:  MWSS granted Maynilad under a Concession Agreement a 20year period to manage, operate, repair, decommission and refurbish the existing MWSS water delivery and sewerage services in the West Zone Service Area, for which Maynilad undertook to pay the corresponding concession fees on the dates agreed upon in said agreement which, among other things, consisted of payments of petitioner’s mostly foreign loans. To secure the concessionaire’s performance of its obligations under the Concession Agreement, Maynilad was required under Section 6.9 of said contract to put up a bond, bank guarantee or other security acceptable to MWSS.  In compliance with this requirement, Maynilad arranged for a three-year facility with a number of foreign banks, led by Citicorp International Limited, for the issuance of an Irrevocable Standby Letter of Credit in the amount of $120M in favor of MWSS for the full and prompt performance of Maynilad’s obligations to MWSS as aforestated.  Sometime in September 2000, respondent Maynilad requested MWSS for a mechanism by which it hoped to recover the losses it had allegedly incurred and would be incurring as a result of the depreciation of the Philippine Peso against the US Dollar. Failing to get what it desired, Maynilad issued a Force Majeure Notice and unilaterally suspended the payment of the concession fees. In an effort to salvage the Concession Agreement, the parties entered into a MOA wherein Maynilad was allowed to recover foreign exchange losses under a formula agreed upon between them. Sometime in August 2001 Maynilad again filed another Force Majeure Notice and, since MWSS could not agree with the terms of said Notice, the matter was referred to the Appeals Panel for arbitration. This resulted in the parties agreeing to resolve the issues through an amendment of the Concession Agreement, known as Amendment No. 1, which was based on the terms set down in a MWSS Board of Trustees Resolution, which provided inter alia for a formula that would allow Maynilad to recover foreign exchange losses it had incurred or would incur under the terms of the Concession Agreement.  As part of this agreement, Maynilad committed, among other things, to: a) infuse the amount of UD$80.0 million as additional funding support from its stockholders; b) resume payment of the concession fees; and c) mutually seek the

dismissal of the cases pending before the Court of Appeals and with Minor Dispute Appeals Panel.  However, Maynilad later served upon MWSS a Notice of Event of Termination, claiming that MWSS failed to comply with its obligations under the Concession Agreement and Amendment No. 1 regarding the adjustment mechanism that would cover Maynilad’s foreign exchange losses. Maynilad filed a Notice of Early Termination of the concession, which was challenged by MWSS. This matter was eventually brought before the Appeals Panel, which ruled that there was no Event of Termination as defined under the Concession Agreement and therefore, Maynilad should pay the concession fees that had fallen due. ISSUE: WON THE PERFORMANCE BOND OBLIGATIONS OF THE BANKS WERE SOLIDARY IN NATURE? HELD: YES. Respondent Maynilad would persuade us that there is nothing in the Standby Letter of Credit nor in law nor in the nature of the obligation that would show or require the obligation of the banks to be solidary with the respondent Maynilad. We disagree. Respondent Maynilad’s claim that the banks are not solidarily liable with the debtor does not find support in jurisprudence. We held in Feati Bank & Trust Company v. Court of Appeals that the concept of guarantee vis-à-vis the concept of an irrevocable letter of credit are inconsistent with each other. The guarantee theory destroys the independence of the bank’s responsibility from the contract upon which it was opened and the nature of both contracts is mutually in conflict with each other. In contracts of guarantee, the guarantor’s obligation is merely collateral and it arises only upon the default of the person primarily liable. On the other hand, in an irrevocable letter of credit, the bank undertakes a primary obligation. We have also defined a letter of credit as an engagement by a bank or other person made at the request of a customer that the issuer shall honor drafts or other demands of payment upon compliance with the conditions specified in the credit. Letters of credit were developed for the purpose of insuring to a seller payment of a definite amount upon the presentation of documents and is thus a commitment by the issuer that the party in whose favor it is issued and who can collect upon it will have his credit against the applicant of the letter, duly paid in the amount specified in the letter. They are in effect absolute undertakings to pay the money advanced or the amount for which credit is given on the faith of the instrument. They are primary obligations and not accessory contracts and while they are security arrangements, they are not converted thereby into contracts of guaranty. What distinguishes letters of credit from other accessory contracts, is the engagement of the issuing bank to pay the seller once the draft and other required shipping documents are presented to it. They are definite undertakings to pay at sight once the documents stipulated therein are presented. Letters of Credits have long been and are still governed by the provisions of the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce. In the 1993 Revision it provides in Art. 2 that “the expressions Documentary Credit(s) and Standby Letter(s) of Credit mean any arrangement, however made or described, whereby a bank acting at the request and on instructions of a customer or on its own behalf is to make payment against stipulated document(s)” and Art. 9 thereof defines the liability of the issuing banks on an irrevocable letter of credit as a “definite undertaking of the issuing bank, provided that the

CIV LAW REVIEW - OBLICON DIGESTS stipulated documents are presented to the nominated bank or the issuing bank and the terms and conditions of the Credit are complied with, to pay at sight if the Credit provides for sight payment.” The participating banks’ obligation are solidary with respondent Maynilad in that it is a primary, direct, definite and an absolute undertaking to pay and is not conditioned on the prior exhaustion of the debtor’s assets. These are the same characteristics of a surety or solidary obligor. Being solidary, the claims against them can be pursued separately from and independently of the rehabilitation case, as held in Traders Royal Bank v. Court of Appeals, we said that property of the surety cannot be taken into custody by the rehabilitation receiver (SEC) and said surety can be sued separately to enforce his liability as surety for the debts or obligations of the debtor. The debts or obligations for which a surety may be liable include future debts, an amount which may not be known at the time the surety is given. The terms of the Irrevocable Standby Letter of Credit do not show that the obligations of the banks are not solidary with those of respondent Maynilad. On the contrary, it is issued at the request of and for the account of Maynilad Water Services, Inc., in favor of the Metropolitan Waterworks and Sewerage System, as a bond for the full and prompt performance of the obligations by the concessionaire under the Concession Agreement and herein petitioner is authorized by the banks to draw on it by the simple act of delivering to the agent a written certification substantially in the form Annex “B” of the Letter of Credit. It provides further in Sec. 6, that for as long as the Standby Letter of Credit is valid and subsisting, the Banks shall honor any written Certification made by MWSS in accordance with Sec. 2, of the Standby Letter of Credit regardless of the date on which the event giving rise to such Written Certification arose. Taking into consideration our own rulings on the nature of letters of credit and the customs and usage developed over the years in the banking and commercial practice of letters of credit, we hold that except when a letter of credit specifically stipulates otherwise, the obligation of the banks issuing letters of credit are solidary with that of the person or entity requesting for its issuance, the same being a direct, primary, absolute and definite undertaking to pay the beneficiary upon the presentation of the set of documents required therein.

6.7.3 WORDS SOLIDARITY

IMPORTING

ERNESTO V. RONQUILLO V. C.A. & ANTONIO P. SO G.R. No. L-55138 September 28, 1984 FACTS:  Petitioner Ernesto V. Ronquillo was one of 4 defendants in a Civil Case filed by private respondent Antonio P. So for the collection of sum of money. The other defendants were Offshore Catertrade Inc., Johnny Tan and Pilar Tan. The amount of P117,498.98 sought to be collected represents the value of the checks issued by said defendants in payment for foodstuffs delivered to and received by them. The said checks were dishonored by the drawee bank.  Lower court rendered its Decision based on the compromise agreement submitted by the parties. Private respondent filed a Motion for Execution on the ground that defendants failed to

make the initial payment of P55K on or before December 24, 1979 as provided in the Decision. Said motion for execution was opposed by herein petitioner (as one of the defendants) contending that his inability to make the payment was due to private respondent's own act of making himself scarce and inaccessible on December 24, 1979. Petitioner then prayed that private respondent be ordered to accept his payment in the amount of P13,750.  During the hearing of the Motion for Execution and the Opposition thereto, petitioner, as one of the four defendants, tendered the amount of P13,750.00, as his pro-rata share in the P55,000.00 initial payment. Another defendant, Pilar P. Tan, offered to pay the same amount. Because private respondent refused to accept their payments, demanding from them the full initial installment of P 55K, petitioner and Pilar Tan instead deposited the said amount with the Clerk of Court.  The lower court ordered the issuance of a writ of execution for the balance of the initial amount payable, against the other two defendants, Offshore Catertrade Inc. and Johnny Tan who did not pay their shares.  Private respondent moved for the reconsideration and/or modification of the aforesaid Order of execution and prayed instead for the "execution of the decision in its entirety against all defendants, jointly and severally." Petitioner opposed the said motion arguing that under the decision of the lower court being executed which has already become final, the liability of the 4 defendants was not expressly declared to be solidary, consequently each defendant is obliged to pay only his own prorata or 1/4 of the amount due. ISSUE: WON THE PETITIONER WAS LIABLE FOR THE FULL AMOUNT? HELD: YES. Article 1207 and 1208 of the Civil Code provides: “Art. 1207. The concurrence of two or more debtors in one and the same obligation does not imply that each one of the former has a right to demand, or that each one of the latter is bound to render, entire compliance with the prestation. Then is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity. XXX Art. 1208. If from the law,or the nature or the wording of the obligation to which the preceding article refers the contrary does not appear, the credit or debt shall be presumed to be divided into as many equal shares as there are creditors and debtors, the credits or debts being considered distinct from one another, subject to the Rules of Court governing the multiplicity of suits.” The decision of the lower court based on the parties' compromise agreement, provides: “1. Plaintiff agrees to reduce its total claim of P117,498.95 to only P110,000.00 and defendants agree to acknowledge the validity of such claim and further bind themselves to initially pay out of the total indebtedness of P110,000.00, the amount of P5,000.00 on or before December 24, 1979, the balance of P55,000.00, defendants individually and jointly agree to pay within a period of six months from January 1980 or before June 30, 1980.” Clearly then, by the express term of the compromise agreement and the decision based upon it, the defendants obligated themselves to pay their obligation "individually and jointly". The term "individually" has the same meaning as "collectively", "separately", "distinctively", respectively or "severally". An agreement to be "individually liable" undoubtedly creates a several obligation, and a

CIV LAW REVIEW - OBLICON DIGESTS "several obligation is one by which one individual binds himself to perform the whole obligation. In the case of Parot vs. Gemora, We therein ruled that "the phrase juntos or separadamente in the promissory note is an express statement making each of the persons who signed it individually liable for the payment of the full amount of the obligation contained therein." Likewise in Un Pak Leung vs. Negorra, We held that "in the absence of a finding of facts that the defendants made themselves individually hable for the debt incurred they are each liable only for one-half of said amount. The obligation in the case at bar being described as "individually and jointly", the same is therefore enforceable against one of the numerous obligors.

6.7.4 SOLIDARY DEBTOR V. SURETY

SALVADOR P. ESCAÑO VS. RAFAEL ORTIGAS, JR. [G. R. No. 151953, June 29, 2007] FACTS:  Private Development Corporation of the Philippines (PDCP) entered into a loan agreement with Falcon Minerals, Inc. whereby PDCP agreed to make available and lend to Falcon the amount of $320K, for specific purposes and subject to certain terms and conditions. On the same day, 3 stockholdersofficers of Falcon, namely: respondent Rafael Ortigas, Jr., George A. Scholey and George T. Scholey executed an Assumption of Solidary Liability whereby they agreed “to assume in their individual capacity, solidary liability with Falcon for the due and punctual payment” of the loan contracted by Falcon with PDCP. In the meantime, 2 separate guaranties were executed to guarantee the payment of the same loan by other stockholders and officers of Falcon, acting in their personal and individual capacities. One Guaranty was executed by petitioner Salvador Escaño, while the other by petitioner Mario M. Silos, Ricardo C. Silverio, Carlos L. Inductivo and Joaquin J. Rodriguez.  2 years later, an agreement developed to cede control of Falcon to Escaño, Silos and Joseph M. Matti. Thus, contracts were executed whereby Ortigas, George A. Scholey, Inductivo and the heirs of then already deceased George T. Scholey assigned their shares of stock in Falcon to Escaño, Silos and Matti. Part of the consideration that induced the sale of stock was a desire by Ortigas, et al., to relieve themselves of all liability arising from their previous joint and several undertakings with Falcon, including those related to the loan with PDCP. Thus, an Undertaking was executed by the concerned parties with Escaño, Silos and Matti identified in the document as “SURETIES,” on one hand, and Ortigas, Inductivo and the Scholeys as “OBLIGORS,” on the other.  Falcon eventually availed of the sum of $178k from the credit line extended by PDCP. It would also execute a Deed of Chattel Mortgage over its personal properties to further secure the loan. However, Falcon subsequently defaulted in its payments. After PDCP foreclosed on the chattel mortgage, there remained a subsisting deficiency of P5M, which Falcon did not satisfy despite demand.  In order to recover the indebtedness, PDCP filed a complaint for sum of money against Falcon, Ortigas, Escaño, Silos, Silverio and Inductivo. Ortigas filed together with his answer a cross-claim against his co-defendants Falcon, Escaño and Silos, and also manifested his intent to file a third-party complaint against the Scholeys and Matti. The cross-claim

lodged against Escaño and Silos was predicated on the 1982 Undertaking, wherein they agreed to assume the liabilities of Ortigas with respect to the PDCP loan.  Escaño, Ortigas and Silos each sought to seek a settlement with PDCP. The first to come to terms with PDCP was Escaño, who entered into a compromise agreement whereby he agreed to pay the bank P1M. In exchange, PDCP waived or assigned in favor of Escaño 1/3 of its entire claim in the complaint against all of the other defendants in the case. Then Ortigas entered into his own compromise agreement with PDCP, allegedly without the knowledge of Escaño, Matti and Silos. Thereby, Ortigas agreed to pay PDCP P1.3M as “full satisfaction of the PDCP’s claim against Ortigas.” Silos and PDCP entered into a Partial Compromise Agreement whereby he agreed to pay P500k in exchange for PDCP’s waiver of its claims against him. In the meantime, after having settled with PDCP, Ortigas pursued his claims against Escaño, Silos and Matti, on the basis of the 1982 Undertaking. He initiated a third-party complaint against Matti and Silos, while he maintained his cross-claim against Escaño.  RTC issued the Summary Judgment, ordering Escaño, Silos and Matti to pay Ortigas, jointly and severally, the amount of P1.3M, as well as P20K in attorney’s fees. The trial court ratiocinated that none of the third-party defendants disputed the 1982 Undertaking. ISSUE: WON PETITIONERS ARE SOLIDARILY LIABLE TO ORTIGAS? HELD: NO. Ortigas argues that petitioners, as well as Matti, are jointly and severally liable for the Undertaking, as the language used in the agreement “clearly shows that it is a surety agreement” between the obligors (Ortigas group) and the sureties (Escaño group). Ortigas points out that the Undertaking uses the word “SURETIES” although the document, in describing the parties. It is further contended that the principal objective of the parties in executing the Undertaking cannot be attained unless petitioners are solidarily liable “because the total loan obligation can not be paid or settled to free or release the OBLIGORS if one or any of the SURETIES default from their obligation in the Undertaking.” In case there is a concurrence of two or more creditors or of two or more debtors in one and the same obligation, Article 1207 of the Civil Code states that among them, “[t]here is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity.” Article 1210 supplies further caution against the broad interpretation of solidarity by providing: “The indivisibility of an obligation does not necessarily give rise to solidarity. Nor does solidarity of itself imply indivisibility.” These Civil Code provisions establish that in case of concurrence of two or more creditors or of two or more debtors in one and the same obligation, and in the absence of express and indubitable terms characterizing the obligation as solidary, the presumption is that the obligation is only joint. It thus becomes incumbent upon the party alleging that the obligation is indeed solidary in character to prove such fact with a preponderance of evidence. The Undertaking does not contain any express stipulation that the petitioners agreed “to bind themselves jointly and severally” in their obligations to the Ortigas group, or any such terms to that effect. Hence, such obligation established in the Undertaking is presumed only to be joint. Ortigas, as the party alleging that the obligation is in

CIV LAW REVIEW - OBLICON DIGESTS fact solidary, bears the burden to overcome the presumption of jointness of obligations. He has failed to discharge such burden. The term “surety” has a specific meaning under our Civil Code. As provided in Article 2047 in a surety agreement the surety undertakes to be bound solidarily with the principal debtor. Thus, a surety agreement is an ancillary contract as it presupposes the existence of a principal contract. It appears that Ortigas’s argument rests solely on the solidary nature of the obligation of the surety under Article 2047. In tandem with the nomenclature “SURETIES” accorded to petitioners and Matti in the Undertaking, however, this argument can only be viable if the obligations established in the Undertaking do partake of the nature of a suretyship as defined under Article 2047 in the first place. That clearly is not the case here, notwithstanding the use of the nomenclature “SURETIES” in the Undertaking. Again, as indicated by Article 2047, a suretyship requires a principal debtor to whom the surety is solidarily bound by way of an ancillary obligation of segregate identity from the obligation between the principal debtor and the creditor. The suretyship does bind the surety to the creditor, inasmuch as the latter is vested with the right to proceed against the former to collect the credit in lieu of proceeding against the principal debtor for the same obligation. At the same time, there is also a legal tie created between the surety and the principal debtor to which the creditor is not privy or party to. The moment the surety fully answers to the creditor for the obligation created by the principal debtor, such obligation is extinguished. At the same time, the surety may seek reimbursement from the principal debtor for the amount paid, for the surety does in fact “become subrogated to all the rights and remedies of the creditor.” Note that Article 2047 itself specifically calls for the application of the provisions on joint and solidary obligations to suretyship contracts. Article 1217 of the Civil Code thus comes into play, recognizing the right of reimbursement from a co-debtor (the principal debtor, in case of suretyship) in favor of the one who paid (i.e., the surety). However, a significant distinction still lies between a joint and several debtor, on one hand, and a surety on the other. Solidarity signifies that the creditor can compel any one of the joint and several debtors or the surety alone to answer for the entirety of the principal debt. The difference lies in the respective faculties of the joint and several debtor and the surety to seek reimbursement for the sums they paid out to the creditor. Dr. Tolentino explains the differences between a solidary co-debtor and a surety: “A guarantor who binds himself in solidum with the principal debtor under the provisions of the second paragraph does not become a solidary co-debtor to all intents and purposes. There is a difference between a solidary co-debtor and a fiador in solidum (surety). The latter, outside of the liability he assumes to pay the debt before the property of the principal debtor has been exhausted, retains all the other rights, actions and benefits which pertain to him by reason of the fiansa; while a solidary co-debtor has no other rights than those bestowed upon him in Section 4, Chapter 3, Title I, Book IV of the Civil Code.” The second paragraph of [Article 2047] is practically equivalent to the contract of suretyship. The civil law suretyship is, accordingly, nearly synonymous with the common law guaranty; and the civil law relationship existing between the co-debtors liable in solidum is similar to the common law suretyship.

In the case of joint and several debtors, Article 1217 makes plain that the solidary debtor who effected the payment to the creditor “may claim from his co-debtors only the share which corresponds to each, with the interest for the payment already made.” Such solidary debtor will not be able to recover from the co-debtors the full amount already paid to the creditor, because the right to recovery extends only to the proportional share of the other co-debtors, and not as to the particular proportional share of the solidary debtor who already paid. In contrast, even as the surety is solidarily bound with the principal debtor to the creditor, the surety who does pay the creditor has the right to recover the full amount paid, and not just any proportional share, from the principal debtor or debtors. Such right to full reimbursement falls within the other rights, actions and benefits which pertain to the surety by reason of the subsidiary obligation assumed by the surety. What is the source of this right to full reimbursement by the surety? We find the right under Article 2066 of the Civil Code, which assures that “[t]he guarantor who pays for a debtor must be indemnified by the latter,” such indemnity comprising of, among others, “the total amount of the debt.” Further, Article 2067 of the Civil Code likewise establishes that “[t]he guarantor who pays is subrogated by virtue thereof to all the rights which the creditor had against the debtor.” Articles 2066 and 2067 explicitly pertain to guarantors, and one might argue that the provisions should not extend to sureties, especially in light of the qualifier in Article 2047 that the provisions on joint and several obligations should apply to sureties. We reject that argument, and instead adopt Dr. Tolentino’s observation that “[t]he reference in the second paragraph of [Article 2047] to the provisions of Section 4, Chapter 3, Title I, Book IV, on solidary or several obligations, however, does not mean that suretyship is withdrawn from the applicable provisions governing guaranty.” For if that were not the implication, there would be no material difference between the surety as defined under Article 2047 and the joint and several debtors, for both classes of obligors would be governed by exactly the same rules and limitations. Accordingly, the rights to indemnification and subrogation as established and granted to the guarantor by Articles 2066 and 2067 extend as well to sureties as defined under Article 2047. These rights granted to the surety who pays materially differ from those granted under Article 1217 to the solidary debtor who pays, since the “indemnification” that pertains to the latter extends “only [to] the share which corresponds to each [co-debtor].” It is for this reason that the Court cannot accord the conclusion that because petitioners are identified in the Undertaking as “SURETIES,” they are consequently joint and severally liable to Ortigas. In order for the conclusion espoused by Ortigas to hold, in light of the general presumption favoring joint liability, the Court would have to be satisfied that among the petitioners and Matti, there is one or some of them who stand as the principal debtor to Ortigas and another as surety who has the right to full reimbursement from the principal debtor or debtors. No suggestion is made by the parties that such is the case, and certainly the Undertaking is not revelatory of such intention. If the Court were to give full fruition to the use of the term “sureties” as conclusive indication of the existence of a surety agreement that in turn gives rise to a solidary obligation to pay Ortigas, the necessary implication would be to lay down a corresponding set of rights and obligations as between the “SURETIES” which petitioners and Matti did not clearly intend.

CIV LAW REVIEW - OBLICON DIGESTS 6.7 SOLIDARY OBLIGATIONS 6.7.5 KINDS – B. PASSIVE IV. RELEASE OF SOLIDARY DEBTOR

GREAT ASIAN SALES CENTER CORP. V. C.A. & BANCASIA FINANCE G.R. No. 105774 April 25, 2002 FACTS:  Great Asian is engaged in the business of buying and selling general merchandise, in particular household appliances. Its board of directors approved a resolution authorizing its Treasurer and General Manager, Arsenio Lim Piat, Jr. to secure a loan from Bancasia in an amount not to exceed P1M. The board resolution also authorized Arsenio to sign all papers, documents or promissory notes necessary to secure the loan. Later, the board approved a second resolution authorizing Great Asian to secure a discounting line with Bancasia in an amount not exceeding P2M. The second board resolution also designated Arsenio as the authorized signatory.  Tan Chong Lin signed 2 Surety Agreements in favor of Bancasia to guarantee, solidarily, the debts of Great Asian to Bancasia.  Great Asian, through its Treasurer and General Manager Arsenio, signed 4 Deeds of Assignment of Receivables, assigning to Bancasia 15 postdated checks. Arsenio endorsed all the 15 checks by signing his name at the back of the checks. 8 of the dishonored checks bore the endorsement of Arsenio below the stamped name of "Great Asian Sales Center", while the rest of the dishonored checks just bore the signature of Arsenio. The drawee banks dishonored the 15 checks on maturity when deposited for collection.  Bancasia sent by registered mail to Tan Chong Lin a letter notifying him of the dishonor and demanding payment from him. Neither Great Asian nor Tan Chong Lin paid Bancasia the dishonored checks.  Great Asian filed for insolvency. Attached to the verified petition was a "Schedule and Inventory of Liabilities and Creditors," listing Bancasia as one of the creditors of Great Asian for P1.2M.  Bancasia filed a complaint for collection of a sum of money against Great Asian and Tan Chong Lin. Bancasia impleaded Tan Chong Lin because of the Surety Agreements he signed in favor of Bancasia. In its answer, Great Asian denied the material allegations of the complaint claiming it was unfounded, malicious, baseless, and unlawfully instituted since there was already a pending insolvency proceedings, although Great Asian subsequently withdrew its petition for voluntary insolvency. Great Asian further raised the alleged lack of authority of Arsenio to sign the Deeds of Assignment as well as the absence of consideration and consent of all the parties to the Surety Agreements signed by Tan Chong Lin. ISSUE: WON TAN CHONG LIM IS LIABLE? HELD: YES. Tan Chong Lin, the President of Great Asian, is being sued in his personal capacity based on the Surety Agreements he signed wherein he solidarily held himself liable with Great Asian for the payment of its debts to Bancasia. The Surety Agreements contain the following common condition: "Upon failure of the Principal to pay at maturity, with or without demand, any of the obligations above mentioned, or in case of the Principal?s failure promptly to respond to any other lawful demand made by the Creditor, its

successors, administrators or assigns, both the Principal and the Surety/ies shall be considered in default and the Surety/ies agree/s to pay jointly and severally to the Creditor all outstanding obligations of the Principal, whether due or not due, and whether held by the Creditor as Principal or agent, and it is agreed that a certified statement by the Creditor as to the amount due from the Principal shall be accepted by the Surety/ies as correct and final for all legal intents and purposes." Indisputably, Tan Chong Lin explicitly and unconditionally bound himself to pay Bancasia, solidarily with Great Asian, if the drawers of the checks fail to pay on due date. The condition on which Tan Chong Lin’s obligation hinged had happened. As surety, Tan Chong Lin automatically became liable for the entire obligation to the same extent as Great Asian. Tan Chong Lin maintains that the warranties in the Deeds of Assignment materially altered his obligations under the Surety Agreements, and therefore he is released from any liability to Bancasia. Under Article 1215 of the Civil Code, what releases a solidary debtor is a "novation, compensation, confusion or remission of the debt" made by the creditor with any of the solidary debtors. These warranties, however, are the usual warranties made by one who discounts receivables with a financing company or bank. The Surety Agreements, written on the letter head of "Bancasia Finance & Investment Corporation," uniformly state that "Great Asian Sales Center has obtained and/or desires to obtain loans, overdrafts, discounts and/or other forms of credits from" Bancasia. Tan Chong Lin was clearly on notice that he was holding himself as surety of Great Asian which was discounting postdated checks issued by its buyers of goods and merchandise. Moreover, Tan Chong Lin, as President of Great Asian, cannot feign ignorance of Great Asian’s business activities or discounting transactions with Bancasia. Thus, the warranties do not increase or enlarge the risks of Tan Chong Lin under the Surety Agreements. There is, moreover, no novation of the debt of Great Asian that would warrant release of the surety. In any event, the provisions of the Surety Agreements are broad enough to include the obligations of Great Asian to Bancasia under the warranties. Article 1207 of the Civil Code provides, "xxx There is a solidary liability only when the obligation expressly so states, or when the law or nature of the obligation requires solidarity." The stipulations in the Surety Agreements undeniably mandate the solidary liability of Tan Chong Lin with Great Asian. Moreover, the stipulations in the Surety Agreements are sufficiently broad, expressly encompassing "all the notes, drafts, bills of exchange, overdraft and other obligations of every kind which the PRINCIPAL may now or may hereafter owe the Creditor". Consequently, Tan Chong Lin must be held solidarily liable with Great Asian for the nonpayment of the fifteen dishonored checks, including penalty and attorney’s fees in accordance with the Deeds of Assignment.

SECURITY BANK AND TRUST COMPANY, Inc., V. RODOLFO M. CUENCA [G.R. No. 138544. October 3, 2000] FACTS:  Security Bank and Trust Co. granted Sta. Ines Melale Corporation [SIMC] a credit line in the amount of P8M to assist the latter in meeting the additional capitalization requirements of its logging operations. The Credit Approval Memorandum expressly stated that the P8M Credit Loan Facility shall be effective until 30 November 1981.

CIV LAW REVIEW - OBLICON DIGESTS  To secure the payment of the amounts drawn by appellant SIMC from the credit line, SIMC executed a Chattel Mortgage over some of its machinery and equipment in favor of SBTC. As additional security for the payment of the loan, Respondent Rodolfo Cuenca executed an Indemnity Agreement in favor of SBTC whereby he solidarily bound himself with SIMC.  4 days prior to the expiration of the period of effectivity of the P8M-Credit Loan Facility, SIMC made a first drawdown from its credit line with SBTC in the amount of P6.1M. To cover said drawdown, SIMC duly executed promissory note.  Sometime in 1985, Cuenca resigned as President and Chairman of the Board of Directors of SIMC. Subsequently, the shareholdings of Cuenca in SIMC were sold at a public auction. Said shares were bought by Adolfo Angala who was the highest bidder during the public auction.  Subsequently, SIMC repeatedly availed of its credit line and obtained 6 other loans from SBTC in the aggregate amount of P6.3M. Accordingly, SIMC executed Promissory Notes to cover the amounts of the additional loans.  SIMC, however, encountered difficulty in making the amortization payments on its loans and requested SBTC for a complete restructuring of its indebtedness. SBTC accommodated SIMC’s request and signified its approval in a letter wherein SBTC and SIMC, without notice to or the prior consent of Cuenca, agreed to restructure the past due obligations as embodied in a 1989 Loan Agreement. SBTC agreed to extend to SIMC loans of P8.8M to be applied to liquidate the principal portion of SIMC’s total outstanding indebtedness to SBTC, and a loan of P3.4M to be applied to liquidate the past due interest and penalty portion of the indebtedness.  In restructuring SIMC’s indebtedness, the P6.1M first loan (the only one covered by the Indemnity Agreement executed with Cuenca) was not segregated from, but was instead lumped together with, the other loans which were not secured by the Indemnity Agreement.  SIMC defaulted in the payment of its restructured loan obligations despite demands. Thus, SBTC filed a complaint for collection of sum of money. ISSUE: WON CUENCA IS LIABLE? HELD: NO. Original Obligation Extinguished by Novation. An obligation may be extinguished by novation, pursuant to Article 1292 of the Civil Code. Novation of a contract is never presumed. It has been held that “[i]n the absence of an express agreement, novation takes place only when the old and the new obligations are incompatible on every point.” Indeed, the following requisites must be established: (1) there is a previous valid obligation; (2) the parties concerned agree to a new contract; (3) the old contract is extinguished; and (4) there is a valid new contract. Clearly, the requisites of novation are present in this case. The 1989 Loan Agreement extinguished the obligation obtained under the 1980 credit accomodation. Since the 1989 Loan Agreement had extinguished the original credit accommodation, the Indemnity Agreement, an accessory obligation, was necessarily extinguished also, pursuant to Article 1296 of the Civil Code. While respondent held himself liable for the credit accommodation or any modification thereof, such clause should be understood in the context of the P8 million limit and the November 30, 1981 term. It did not give the bank or Sta. Ines any license to modify the nature and scope of the original credit accommodation, without informing or getting the consent of respondent who was solidarily liable. Taking the bank’s submission to the extreme, respondent (or his successors) would be liable for loans even amounting to, say, P100

billion obtained 100 years after the expiration of the credit accommodation, on the ground that he consented to all alterations and extensions thereof. Indeed, it has been held that a contract of surety “cannot extend to more than what is stipulated. It is strictly construed against the creditor, every doubt being resolved against enlarging the liability of the surety.” Iit is a well-settled legal principle that if there is any doubt on the terms and conditions of the surety agreement, the doubt should be resolved in favor of the surety. Ambiguous contracts are construed against the party who caused the ambiguity.” In the absence of an unequivocal provision that respondent waived his right to be notified of or to give consent to any alteration of the credit accommodation, we cannot sustain petitioner’s view that there was such a waiver. Contending that the Indemnity Agreement was in the nature of a continuing surety, petitioner maintains that there was no need for respondent to execute another surety contract to secure the 1989 Loan Agreement. This argument is incorrect. That the Indemnity Agreement is a continuing surety does not authorize the bank to extend the scope of the principal obligation inordinately. In Dino v. CA, the Court held that “a continuing guaranty is one which covers all transactions, including those arising in the future, which are within the description or contemplation of the contract of guaranty, until the expiration or termination thereof.” Accordingly, the surety of Cuenca secured only the first loan of P6.1 million obtained on November 26, 1991. It did not secure the subsequent loans, purportedly under the 1980 credit accommodation, that were obtained in 1986. Certainly, he could not have guaranteed the 1989 Loan Agreement, which was executed after November 30, 1981 and which exceeded the stipulated P8 million ceiling. It is a common banking practice to require the JSS (“joint and solidary signature”) of a major stockholder or corporate officer, as an additional security for loans granted to corporations. There are at least two reasons for this. First, in case of default, the creditor’s recourse, which is normally limited to the corporate properties under the veil of separate corporate personality, would extend to the personal assets of the surety. Second, such surety would be compelled to ensure that the loan would be used for the purpose agreed upon, and that it would be paid by the corporation. Following this practice, it was therefore logical and reasonable for the bank to have required the JSS of respondent, who was the chairman and president of Sta. Ines in 1980 when the credit accommodation was granted. There was no reason or logic, however, for the bank or Sta. Ines to assume that he would still agree to act as surety in the 1989 Loan Agreement, because at that time, he was no longer an officer or a stockholder of the debtor-corporation. Verily, he was not in a position then to ensure the payment of the obligation. Neither did he have any reason to bind himself further to a bigger and more onerous obligation. Indeed, the stipulation in the 1989 Loan Agreement providing for the surety of respondent, without even informing him, smacks of negligence on the part of the bank and bad faith on that of the principal debtor. Since that Loan Agreement constituted a new indebtedness, the old loan having been already liquidated, the spirit of fair play should have impelled Sta. Ines to ask somebody else to act as a surety for the new loan.

CIV LAW REVIEW - OBLICON DIGESTS In sum, we hold that the 1989 Loan Agreement extinguished by novation the obligation under the 1980 P8 million credit accommodation. Hence, the Indemnity Agreement, which had been an accessory to the 1980 credit accommodation, was also extinguished. Furthermore, we reject petitioner’s submission that respondent waived his right to be notified of, or to give consent to, any modification or extension of the 1980 credit accommodation.

6.10 OBLIGATIONS WITH A PENAL CLAUSE 6.10.3 COLLECTION OF PENALTY

GOVERNMENT SERVICE INSURANCE SYSTEM V. C.A. & NEMENCIO R. MEDINA G.R. No. L-52478 October 30, 1986 FACTS:  Private respondents spouses Medinas applied with the herein petitioner GSIS for a loan of P600k. The GSIS Board of Trustees approved only the amount of P350k, subject to the following conditions: that the rate of interest shall be 9% per annum compounded monthly; repayable in 10 years at a monthly amortization of P4,433.65 including principal and interest, and that any installment or amortization that remains due and unpaid shall bear interest at the rate of 9%/12% per month. The Office of the Economic Coordinator, in a 2nd Indorsement, further reduced the approved amount to P295k. The Medinas accepting the reduced amount, executed a promissory note and a real estate mortgage in favor of GSIS.  GSIS, upon request of the Medinas, then approved the restoration of the amount of P350k originally approved by the GSIS. Later, the Medinas executed in favor of GSIS an Amendment of Real Estate Mortgage, in light of the increase of the amount of the loan, providing: “That the mortgagor shall pay to the system P4,433.65 monthly including principal and interest.”  Upon application by the Medinas, the GSIS approved an additional loan (2nd loan) of P230k on the security of the same mortgaged properties and the additional properties.  Beginning 1965, the Medinas having defaulted in the payment of the monthly amortization on their loan, the GSIS imposed 9%/12% interest on installments due and unpaid. In 1967, the Medinas began defaulting in the payment of fire insurance premiums.  GSIS notified the Medinas that they had arrearages in the aggregate amount of P575k and demanded payment, otherwise, it would foreclose the mortgage. GSIS later filed an Application for Foreclosure of Mortgage with the Sheriff of the City of Manila. Under a Notice of Sale on Extra-Judicial Foreclosure, the real properties of the Medinas were sold at public auction to the GSIS as the highest bidder.  Medinas then filed an Amended Complaint with the trial court, praying for (a) the declaration of nullity of their two real estate mortgage contracts with the GSIS as well as of the extrajudicial foreclosure proceedings; and (b) the refund of excess payments, plus damages and attorney's fees. ISSUE: WON THE COMPOUNDED INTEREST STIPULATED IN THE AMENDED REM SHOULD BE APPLIED? HELD: YES. GSIS claims that the amendment of the real estate mortgage did not supersede the original mortgage contract which was being amended only with respect to the amount secured thereby, and the amount of monthly amortizations. All other provisions of

aforesaid mortgage contract including that on compounding of interest were deemed rewritten and thus binding on and enforceable against the respondent spouses. On the other hand the Medinas maintain that there is no express stipulation on compounded interest in the amendment of mortgage contract so that the compounded interest stipulation in the original mortgage contract which has been superseded cannot be enforced in the later mortgage. The difference in the computation lies in the inclusion of the compounded interest as demanded by the GSIS on the one hand and the exclusion thereof, as insisted by the Medinas on the other. There appears no ambiguity whatsoever in the terms and conditions of the amendment of the mortgage contract. As correctly stated by the GSIS, a careful perusal of the title, preamble and body of the Amendment of Real Estate Mortgage, taking into account the prior, contemporaneous, and subsequent acts of the parties, ineluctably shows that said Amendment was never intended to completely supersede the original mortgage contract. First, the title "Amendment of Real Estate Mortgage" recognizes the existence and effectivity of the previous mortgage contract. Second, nowhere in the aforesaid Amendment did the parties manifest their intention to supersede the original contract. On the contrary in the WHEREAS clauses, the existence of the previous mortgage contract was fully recognized and the fact that the same was just being amended as to amount and amortization is fully established as to obviate any doubt. Third, the Amendment of Real Estate Mortgage does not embody the act of conveyancing the subject properties by way of mortgage. In fact the intention of the parties to be bound by the unaffected provisions of the original mortgage contract expressed in unmistakable language is clearly evident in the last provision of the Amendment of Real Estate Mortgage. A review of prior, contemporaneous, and subsequent acts supports the conclusion that both contracts are fully subsisting insofar as the latter is not inconsistent with the former. The fact is the GSIS, as a matter of policy, imposes uniform terms and conditions for all its real estate loans, particularly with respect to compounding of interest. As shown in the case at bar, the original mortgage contract embodies the same terms and conditions as in the additional loan while the amendment carries the provision that it shall be subject to the same terms and conditions as the real estate mortgage except as to amount and amortization. Furthermore, it would be contrary to human experience and to ordinary practice for the mortgagee to impose less onerous conditions on an increased loan by the deletion of compound interest exacted on a lesser loan. As to whether or not the interest rates on the loan accounts of the Medinas are usurious, it has already been settled that the Usury Law applies only to interest by way of compensation for the use or forbearance of money. Interest by way of damages is governed by Article 2209 of the Civil Code of the Philippines which provides:”Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon.” In the Bachrach case the Supreme Court ruled that the Civil Code permits the agreement upon a penalty apart from the interest. Should there be such an agreement, the penalty does not include the interest, and as such the two are different and distinct things which may be demanded separately. Reiterating the same principle in the later case of Equitable Banking Corp., where this Court held that the stipulation about payment of such additional rate partakes of the nature of a penalty clause, which is sanctioned by law. Based on the finding that the GSIS had the legal right to impose an interest 9% per annum, compounded monthly, on the loans of the Medinas and an interest of 9%/12% per annum on all due and unpaid

CIV LAW REVIEW - OBLICON DIGESTS amortizations or installments, there is no question that the Medinas failed to settle their accounts with the GSIS and that the GSIS had a perfect right to foreclose the mortgage.

6.10 OBLIGATIONS WITH A PENAL CLAUSE 6.10.4 REDUCTION

NEWTON JISON V. C.A. & ROBERT 0. PHILLIPS & SONS, INC. G.R. No. L-45349 August 15, 1988 FACTS:  Petitioners, the spouses Jison, entered into a Contract to Sell with private respondent, Robert O. Phillips & Sons, Inc., whereby the latter agreed to sell to the former a lot for the agreed price of P55,000.00, with interest at 8,1965 per annum, payable on an installment basis. Pursuant to the contract, petitioners paid private respondents a down payment of P11k and from October 27, 1961 to May 8, 1965 a monthly installment of P533.85.  Thereafter, due to the failure of petitioners to build a house as provided in the contract, the stipulated penalty of P5.00 per square meter was imposed to the effect that the monthly amortization was increased to P707.24.  Petitioners failed to pay the monthly installments due for January to March, although petitioners subsequently paid the amounts due and these were accepted by private respondent. Again from October to December 1966 and January 1967, petitioners failed to pay. Private respondents made a demand and petitioners eventually paid in March 1967.  Petitioners again failed to pay from Feb to April 1967. Thus, private respondent returned petitioners' check and informed them that the contract was cancelled when petitioners failed to pay the monthly installment due, thereby making their account delinquent for three months.  Petitioners then tendered payment for all the installments due but the tender was refused. Thus, petitioners countered by filing a complaint for specific performance and consigning the monthly installments due with the court. ISSUE: WON THE PAYMENTS ALREADY MADE MAY BE FORFEITED AFTER RESCISSION OF THE CONTRACT? HELD: YES, BUT THE COURT REDUCED THE AMOUNT FOREFEITED. Since the contract was executed and cancelled prior to the effectivity of the Realty Installment Buyers' Protection Act and the Subdivision and Condominium Buyers' Protective Decree, it becomes necessary to resort to jurisprudence and the general provisions of law to resolve the controversy. In deciding whether the rescission of the contract to sell a subdivision lot after the lot buyer has failed to pay several installments was valid, well settled is the rule that judicial action for the rescission of a contract is not necessary where the contract provides that it may be cancelled for violation of any of its terms and conditions. However, even in the cited cases, there was at least a written notice sent to the degeneration, informing him of the rescission.The act of a party in treating a contract as cancelled should be made known to the other. In other words, resolution of reciprocal contracts may be made extrajudicially unless successfully impugned in Court. If the debtor impugns the declaration it shall be subject to judicial determination. There is no denying that in the instant case the resolution or rescission of the Contract to Sell was valid. Neither can it be said

that the cancellation of the contract was ineffective for failure of private respondents to give petitioners notice thereof as petitioners were informed cancelled private respondent that the contract was cancelled. As the Realty Installment Buyers’ Protection Act was not yet effective, the notice of cancellation need not be by notarial act, private respondent's letter being sufficient compliance with the legal requirement. While the resolution of the contract and the forfeiture of the amounts already paid are valid and binding upon petitioners, the Court is convinced that the forfeiture of the amount of P5.00 per square meter although it includes the accumulated fines for petitioners' failure to construct a house as required by the contract, is clearly iniquitous considering that the contract price is only P6,173.15 The forfeiture of 50% of the amount already paid, or P3,283.75 appears to be a fair settlement. In arriving at this amount the Court gives weight to the fact that although petitioners have been delinquent in paying their amortizations several times to the prejudice of private respondent, the cancellation of the contract leaves the private respondent free to resell it to another party. The Court's decision to reduce the amount forfeited finds support in the Civil Code. As stated in paragraph 3 of the contract, in case the contract is cancelled, the amounts already paid shall be forfeited in favor of the vendor as liquidated damages. The Code provides that liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable [Art. 2227] Further, in obligations with a penal clause, the judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. In this connection, the Court said: “It follows that, in any case wherein there has been a partial or irregular compliance with the provisions in a contract for special indemnification in the event of failure to comply with its terms, courts will rigidly apply the doctrine of strict construction and against the enforcement in its entirety of the industry.' where it is clear from the terms of the contract that the amount or character of the indemnity is fixed without regard to the probable damages which might be anticipated as a result of a breach of the terms of the contract; or, in other words, where the indemnity provided for is essentially a mere penalty having for its principal object the enforcement of compliance with the corporations; (Laureano v. Kilayco).

7. MODES OF EXTINGUISMENT OF OBLIGATIONS

7.2.8. COMPENSATION PNB v. Madecor v. Uy FACTS: This is a case on whether or not there can be legal compensation between PNEI’s receivables from PNB MADECOR and the latter’s obligation to the former because PNB MADECOR’s supposed debt to PNEI is the subject of attachment proceedings initiated by a third party (herein respondent Gerardo Uy). RULING: 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

CIV LAW REVIEW - OBLICON DIGESTS place when the parties agree to compensate their mutual obligations even in the absence of some requisites. Legal compensation requires the concurrence of the following conditions: (1) that each one of the obligors be bound principally, and that he be at the same time a principal creditor of the 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. Petitioner insists that legal compensation had taken place such that no amount of money belonging to PNEI remains in its hands, and, consequently, there is nothing that could be garnished by respondent. We find, however, that legal compensation could not have occurred because of the absence of one requisite in this case: that both debts must be due and demandable. BPI v. CA Citibank v. Sabeniano FACTS: Sabeniano claimed to have substantial deposits and money market placements with the bank Citibank and FNCB, as well as money market placements with the Ayala Investment and Development Corporation (AIDC), the proceeds of which were supposedly deposited automatically and directly to respondent’s accounts with petitioner Citibank. Sabeniano alleged that the banksrefused to return her deposits and the proceeds of her money market placements despite her repeated demands, thus, compelling respondent to file Civil Case. In their joint Answer and Answer to Amended Complaint, filed on 12 September 1985 and 6 November 1985, respectively, petitioners admitted that respondent had deposits and money market placements with them, including dollar accounts in the Citibank branch in Geneva, Switzerland (Citibank-Geneva). Banks further alleged that the respondent later obtained several loans from petitioner Citibank, for which she executed Promissory Notes (PNs), and secured by (a) a Declaration of Pledge of her dollar accounts in Citibank-Geneva, and (b) Deeds of Assignment of her money market placements with petitioner FNCB Finance. When respondent failed to pay her loans despite repeated demands by petitioner Citibank, the latter exercised its right to off-set or compensate respondent’s outstanding loans with her deposits and money market placements, pursuant to the Declaration of Pledge and the Deeds of Assignment executed by respondent in its favor. Petitioner Citibank supposedly informed respondent Sabeniano of the foregoing compensation through letters, dated 28 September 1979 and 31 October 1979. Petitioners were therefore surprised when six years later, in 1985, respondent and her counsel made repeated requests for the withdrawal of respondent’s deposits and money market placements with petitioner Citibank, including her dollar accounts with Citibank-Geneva and her money market placements with petitioner FNCB Finance. ISSUE: Whether or not compensation was proper? RULING:

Compensation proper only on the savings account with the bank and her money market placements with petitioner FNCB Finance; but illegal and void in so far as petitioner Citibank used respondent’s dollar accounts with Citibank-Geneva. There is little controversy when it comes to the right of petitioner Citibank to compensate respondent’s outstanding loans with her deposit account. As already found by this Court, petitioner Citibank was the creditor of respondent for her outstanding loans. At the same time, respondent was the creditor of petitioner Citibank, as far as her deposit account was concerned, since bank deposits, whether fixed, savings, or current, should be considered as simple loan or mutuum by the depositor to the banking institution. Both debts consist in sums of money. By June 1979, all of respondent’s PNs in the second set had matured and became demandable, while respondent’s savings account was demandable anytime. Neither was there any retention or controversy over the PNs and the deposit account commenced by a third person and communicated in due time to the debtor concerned. Compensation takes place by operation of law, therefore, even in the absence of an expressed authority from respondent, petitioner Citibank had the right to effect, on 25 June 1979, the partial compensation or off-set of respondent’s outstanding loans with her deposit account, amounting to P31,079.14. Things though are not as simple and as straightforward as regards to the money market placements and bank account used by petitioner Citibank to complete the compensation or off-set of respondent’s outstanding loans, which came from persons other than petitioner Citibank. Respondent’s money market placements were with petitioner FNCB Finance, and after several roll-overs, they were ultimately covered by PNs No. 20138 and 20139, which, by 3 September 1979, the date the check for the proceeds of the said PNs were issued, amounted to P1,022,916.66, inclusive of the principal amounts and interests. As to these money market placements, respondent was the creditor and petitioner FNCB Finance the debtor; while, as to the outstanding loans, petitioner Citibank was the creditor and respondent the debtor. Consequently, legal compensation, under Article 1278 of the Civil Code, would not apply since the first requirement for a valid compensation, that each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other, was not met. Commercial Bank & Trust v. BPI Francia v. IAC FACTS: Francia is the owner of the subj. property and a 2 storey house built on it. It was then expropriated for the sum of P4116.00. Since 1963 until 1977 inclusive, Francia failed to pay his real estate taxes. Thus his property was sold at a public auction in order to satisfy the tax delinquency of P2400.00 Ho Fernandez was the highest bidder for the prop. Francia was not present during the auction sale and discovered that a final bill of sale had been issued in favor of Ho on Dec. 11, 1978. Francia filed a complaint to annul the auction sale. ISSUE: WON, there can be a set-off of amounts between the tax delinquency and the amount due Francia due the expropriation. RULING: NO. Taxes cannot be the subject of compensation. They are not creditors and debtors of each other with respect to the amount due

CIV LAW REVIEW - OBLICON DIGESTS from each side. The tax is a legal obligation of every citizen that it can’t be made to wait to be paid. LEGAL COMPENSATION has no place in this situation. It has not been present because the requisites are lacking in the case at hand. Also the taxes are not in the nature of contracts but rather they are a duty imposed on every citizen to pay on time. Perez v. CA FACTS: COGENERIC issued promissory notes Bill 1298 and Bill 1419 in favor of MOJICA. Bill 1298 is in the amount of P111, 973.58 due on August 6, 1974. Bill 1419 is in the amount of P208, 666.67 due on August 13, 1974. MEVER films, Inc. borrowed P500, 000.00 from COGENERIC. MEVER issued promissory note NCI0352 in favor of COGENERIC due on August 5, 1974. The promissory note will bear an interest of 14% per annum only upon default. On August 6, 1974, Bill 1298 was rolledover to mature on October 4, 1974. On August 13, 1974, Bill 1419 was rolled-over to mature on October 11, 1974. On Sept, 9, 1974, MOJICA assigned Bill NO 1298 and 1419 to MEVER. On Oct. 3 , 1974, MEVER surrendered the 2 bills to COGENERIC and asked the latter to compensate the 2 bills to its debt with COGENERIC. ISSUE: Whether or not there can be compensation. 1 RULING: For legal compensation to take place, the debts must be due and demandable. In this case, the 2 bills surrendered by MEVER is not due since they were rolled over to Oct 4 and Oct 7 respectively. 7.2.9 NOVATION Fortune Motors v. CA Rillo v. CA Rillo entered into a contract to sell with Corb Realty. Rillo defaulted. A compromise agreement was entered into by the parties where the balance of Rillo was fixed down to P50,000. WON there was a novation through the compromise agreement No. The parties execute their compromise agreement precisely to give life to their “Contract to Sell”. It merely clarified the total sum owed by Rillo to Corb Realty with the view that the former would find it easier to comply with his obligations under the “Contract to Sell”. In order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in the unequivocal terms, or that the old and new obligations be on every point incompatible with each other. Espina v. CA FACTS: Diaz is a lessee of the condo unit owned by Espina. Later, they executed a Provisional Deed of Sale whereby Espina sold to Diaz the said condo unit for P100,000.

ISSUE: WON the “Provisional Deed of Sale” novated the existing contract of lease. RULING: No. The deed of cession of the right to repurchase a piece of land does not supersede a contract of lease over the same property. Novation must be clearly proved since its existence is not presumed – it must be proven as a fact either by express stipulation of the parties or by implication derived from an irreconcilable incompatibility between old and new obligations or contracts. Reyes v. BPI Family Bank FACTS: Reyes spouses executed a real estate mortgage on their property in Iloilo City in favor of respondent BPI Family Savings Bank, Inc. (BPI-FSB) to secure a P15,000,000 loan of Transbuilders Resources and Development Corporation (Transbuilders). When Transbuilders failed to pay its P15M loan within the stipulated period of one year, the bank restructured the loan through a promissory note executed by Transbuilders in its favor. Petitioners aver that they were not informed about the restructuring of Transbuilders’ loan. In fact, when they learned of the new loan agreement sometime in December 1996, they wrote BPI-FSB requesting the cancellation of their mortgage and the return of their certificate of title to the mortgaged property. They claimed that the new loan novated the loan agreement of March 24, 1995. Because the novation was without their knowledge and consent, they were allegedly released from their obligation under the mortgage. ISSUE: Whether there was a novation of the mortgage loan contract between petitioners and BPI-FSB that would result in the extinguishment of petitioners’ liability to the bank. RULING: We agree with the CA that there was none. Novation is defined as 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. In Garcia, Jr. v. Court of Appeals, we held that: In every novation there are four essential requisites:(1) a previous valid obligation; (2) the agreement of all the parties to the new contract; (3) the extinguishment of the old contract; and (4) validity of the new one. Thus, the well-settled rule is that, with respect to obligations to pay a sum of money, the obligation 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. BPI-FSB and Transbuilders only extended the repayment term of the loan from one year to twenty quarterly installments at 18% interest per annum. There was absolutely no intention by the parties to supersede or abrogate the old loan contract secured by the real estate mortgage executed by petitioners in favor of BPI-FSB. In fact, the intention of the new agreement was precisely to revive the old obligation after the original period expired and the loan remained unpaid. The novation of a contract cannot be presumed. In the

CIV LAW REVIEW - OBLICON DIGESTS absence of an express agreement, novation takes place only when the old and the new obligations are incompatible on every point. Ong v. Bognalbal FACTS: Ernesto Bogñalbal, an architect-contractor doing business under the name and style of E.B. Bogñalbal Construction, entered into an “Owner-Contractor Agreement” with Victoria Ong, a businesswoman, for the construction of a proposed boutique owned by the latter to be known as Les Galeries de Paris located at the 3rd Floor of the Shangri-La Plaza, Epifanio Delos Santos Avenue corner Shaw Boulevard, Mandaluyong City. The agreement provides that in consideration of the sum of two hundred thousand pesos (P200,000.00), the contractor agrees to furnish labor, tools and equipment to complete the work on the boutique as per specification within forty-five (45) days excluding Sundays from the date of delivery of the construction materials. Payment by the owner shall be made by progress billing to be collected every two (2) weeks based on the accomplishment of work value submitted by the contractor to the owner as certified for payment by the architect assigned on site. It is with respect to progress billing no. 4 that the present controversy arose. When [respondent Bogñalbal] submitted the fourth progress billing on March 31, 1995 for the period covering March 4 to 18, 1995, in the sum of P30,950.00 equivalent to 15.47% of the total job refused to pay the same. Petitioner Ong claims, as a defense against payment of the fourth progress billing, that “the only reason why the fourth billing was not paid was because [respondent Bogñalbal] himself agreed and committed to collect the fourth progress billing after he completed the Kenzo flooring.” Petitioner Ong claims that, because of this promise, her obligation to pay respondent Bogñalbal has not yet become due and demandable. The Court of Appeals rejected this argument, ruling that respondent Bogñalbal’s stoppage of work on the project prior to its completion cannot justify petitioner Ong’s refusal to pay the fourth progress billing and the value of respondent Bogñalbal’s accomplished work on the Kenzo flooring. On the contrary, according to the Court of Appeals, respondent Bogñalbal was justified to refuse to continue the project due to petitioner Ong’s failure to pay the fourth progress billing. ISSUE: Whether or not there was a novation? RULING: The Court of Appeals is in error. If the parties indeed had a verbal agreement that collection of said billing will be held on abeyance until after respondent Bogñalbal finished the work on the Kenzo flooring, there would have been a novation of petitioner Ong’s obligation to pay the price covered by the fourth billing by changing the principal conditions therefor. This falls under the first type of novation under Article 1291 of the Civil Code which provides: Article 1291. Obligations may be modified by: (1) Changing their object or principal conditions; (2) Substituting the person of the debtor; (3) Subrogating a third person in the rights of the creditor. While the subject of novation is, in the Civil Code, included in Book IV, Title I, Chapter 4, which refers to extinguishment of obligations, the effect of novation may be partial or total. There is partial novation when there is only a modification or change in some

principal conditions of the obligation. It is total, when the obligation is completely extinguished. Also, the term principal conditions in Article 1291 should be construed to include a change in the period to comply with the obligation. Such a change in the period would only be a partial novation, since the period merely affects the performance, not the creation of the obligation. Novation is never presumed. Unless it is clearly shown either by express agreement of the parties or by acts of equivalent import, this defense will never be allowed. The evidence preponderates in favor of respondent Bogñalbal that there had been no novation of the contract. At best, what was proven was a grudging accommodation on the part of respondent Bogñalbal to continue working on the project despite petitioner Ong’s failure to pay the fourth progress billing. Respondent Bogñalbal’s fourth partial billing demand letters dated 21 April 1995 and 15 May 1995, both of which were served upon petitioner Ong after the alleged 20 April 1995 meeting, is inconsistent with the theory that the meeting had produced a novation of the petitioner Ong’s obligation to pay the subject billing. More importantly, assuming that there was indeed a novation of the obligation of petitioner Ong to pay the fourth billing so as to include as additional condition the completion of the Kenzo flooring, such new condition would, nevertheless, be deemed fulfilled. This is pursuant to Article 1186 of the Civil Code, which provides that the condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment. Ongs obligation has become a pure obligation. Inc. v. IAC Ajax Marketing v. CA FACTS: Ylang-Ylang Merchandising Company obtained a loan in the amount of P250K from Metropolitan Bank secured by a REM of a property in Paco. Mortgage was annotated at the back of the title. The partnership then changed its name to Ajax Marketing Company with the same owners and obtained another loan of P150K secure by the same REM. The partnership was converted into a corporation (Ajax Corp), with original partners plus 3 incorporators, which loaned P600K under the same REM The 3 loans. Amounting to P1M was re-structured and consolidated into one loan and Ajax Corporation executed a promissory note. Ajax was not able to pay the loan and the Metrobank moved to foreclose the REM. Ajax said there was ISSUE: Whether or no the consolidation of the loans constituted novation, thereby releasing the mortgaged property from liability. . RULING NO. The promissory note merely re-structured and renewed the previous loans to expediently make them current. There was no change in the object of the prior obligations. The consolidation did not release the mortgaged real estate property from any liability because the mortgage annotations at the back of the title remain uncancelled, thus indicating the continuing subsistence of the REMs. There was also no change or substitution or change in the persons of either the debtor or creditor. The debtor’s conversion from partnership to a corporation without sufficient evidence that they

CIV LAW REVIEW - OBLICON DIGESTS were released from their obligations did not make Ajax, with its new corporate personality, a third person or new debtor. To effect a subjective novation by the change in the person of the debtor, it is necessary that the old debtor be released expressly from the obligation, and the third person or new debtor assumes his place in the relation. There is no novation without such release as the third person who has assumed the debtor’s obligation becomes merely a co-debtor or surety. Licaros v. Gatmaitan FACTS: Licaros, a businessman, invested in Anglo-Asean Bank. Afterhaving invested, he encountered tremendous difficulties in retrieving the interest and the investment itself. Liicaros sought the help of Gatmaitan whovoluntarily offered to aasume the payment of Anglo-Asean’s indebtedness to Licaros. They entered into a memorandum agreement stating the Licaros would be entitled to the dividends of his stocks in case he could not pay P3.2M, which represented Licaros’ investment. Gatmaitan was not able to collect so he did not pay Licaros. Licaros went to court contending that the agreement was an assignment of credit. ISSUE: Whether or not the agreement was an assignment of credit or a conventional subrogation. 1 RULING: The nature of the agreement was a conventional subrogation which requires the consent of the debtor, Anglo-Asean Bank, for its validity. Both parties intended their agreement as conventional subrogation borne by the stipulation in the agreement that it required “the express conformity of the third parties concerned”, which admittedly is Anglo-Asean Bank. The agreement was conditioned on the express conformity of the Bank. Without the consent, the contract is incomplete and unenforceable. Assignment of Credit The process of transferring the right of the assignor to the assignee who would then have the right to proceed against the debtor. Consent of the debtor is not necessary, only notice. Subrogation The transfer of all the rights of the creditor to a third person, who substitutes him in all his rights. Requires consent of the creditor, debtor and new creditor. 